E8-8031. Guidance Regarding Foreign Base Company Sales Income; Correction

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correction to a notice of proposed rulemaking.

SUMMARY:

This document contains corrections to a notice of proposed rulemaking (REG-124590-07) that was published in the Federal Register on Thursday, February 28, 2008 (73 FR 10716) providing guidance relating to foreign base company sales income, as defined in section 954(d), in cases in which personal property sold by a controlled foreign corporation (CFC) is manufactured, produced, or constructed pursuant to a contract manufacturing arrangement or by one or more branches of the CFC.

FOR FURTHER INFORMATION CONTACT:

Ethan Atticks at [phone] (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The correction notice that is the subject of this document is under section 954 of the Internal Revenue Code.

Need for Correction

As published, a notice of proposed rulemaking (REG-124590-07) contains errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of a notice of proposed rulemaking (REG-124590-07), which was the subject of FR Doc. E8-3557, is corrected as follows:

1. On page 10717, column 1, in the preamble, under the paragraph heading “B. The Branch Rule”, line 7 from the bottom of the paragraph, the language “CFC and constitutes FBCSI of the CFC.” is corrected to read “CFC and constitutes FBCSI of the CFC. See section 954(d)(2).”.

2. On page 10718, column 1, in the preamble, under the paragraph heading “C. Legal Developments”, line 4 from the bottom of the first paragraph, the language “considered the activities of a separate” is corrected to read “treated as the activities of a separate”.

3. On page 10718, column 2, in the preamble, under the paragraph heading “Explanation of Provisions”, line 11 from the bottom of the column, the language “and/or a branch of the CFC, is involved” is corrected to read “and/or a branch of the CFC, is otherwise involved”.

4. On page 10718, column 3, in the preamble, under the paragraph heading “A. Application of the Manufacturing Exception Where the Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is Involved in the Manufacturing Process—Substantial Contribution to Manufacturing”, lines 2 and 3 of the first paragraph, the language “income from the purchase of personal property from any person and “its” sale” is corrected to read “income derived in connection with the purchase of personal property from a related person and “its” sale to any person, and income derived in connection with the purchase of personal property from any person and “its” sale”.

5. On page 10718, column 3, in the preamble, under the paragraph heading “A. Application of the Manufacturing Exception Where the Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is Involved in the Manufacturing Process—Substantial Contribution to Manufacturing”, line 4 from the bottom of the second paragraph, the language “purchase or sales and manufacturing” is corrected to read “purchasing or selling and manufacturing”.

6. On page 10719, column 2, in the preamble, under the paragraph heading “A. Application of the Manufacturing Exception Where the Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is Involved in the Manufacturing Process—Substantial Contribution to Manufacturing”, first paragraph of the column, lines 6 and 7, the language “for the manufacturing exception from FBCSI only if the CFC, acting through” is corrected to read “for the manufacturing exception only if the CFC, acting through”.

7. On page 10719, column 2, in the preamble, under the paragraph heading “A. Application of the Manufacturing Exception Where the Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is Involved in the Manufacturing Process—Substantial Contribution to Manufacturing”, line 9 from the bottom of the second paragraph of the column, the language “proposed § 1.954-3(a)(4)(iv)(b), a CFC” is corrected to read “proposed § 1.954-3(a)(4)(iv)(a), a CFC”.

8. On page 10719, column 3, in the preamble, under the paragraph heading “A. Application of the Manufacturing Exception Where the Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is Involved in the Manufacturing Process—Substantial Contribution to Manufacturing”, first paragraph of the column, lines 4 through 8, the language “principles of § 1.954-3(a)(4)(ii) and (iii); (2) performance of manufacturing activities that are considered in, but insufficient to satisfy the tests provided in § 1.954-3(a)(4)(ii) or (iii); (3) control” is corrected to read “principles of § 1.954-3(a)(4)(ii) or (iii); (2) performance of activities that are considered in applying, but insufficient to satisfy, the tests provided in § 1.954-3(a)(4)(ii) and (iii); (3) control”.

9. On page 10721, column 2, in the preamble, under the paragraph heading “2. Modification of § 1.954-3(b)(2)(ii)(e)”, second paragraph of the column, lines 1 through 4, the language “In addition, consistent with the clarification regarding the scope of the branch rule contained in proposed § 1.954-3(b)(1), § 1.954-3(b)(2)(ii)(e) is” is corrected to read “In addition, consistent with § 1.954-3(b)(2)(ii)(f), § 1.954-3(b)(2)(ii)(e) is”.

10. On page 10722, column 1, in the preamble, under the paragraph heading “3. Modification of § 1.954-3(b)(2)(i)(b), (b)(2)(ii)(b) and (b)(4), Example 3”, first paragraph of the column, last line, the language “the branch's country is FBCSI.” is corrected to read “the branch's country result in FBCSI.”.

§ 1.954-3

[Corrected]

11. On page 10723, column 3, § 1.954-3(a)(4)(i), lines 16 and 17, the language “provisions of paragraphs (a)(ii), (a)(iii), or (a)(iv) of this section through the” is corrected to read “provisions of paragraphs (a)(4)(ii), (a)(4)(iii), or (a)(4)(iv) of this section through the”.

12. On page 10724, column 1, § 1.954-3(a)(4)(iv)(a), line 16, the language “respect to the property prior to sale were” is corrected to read “respect to that property prior to sale were”.

13. On page 10724, column 2, § 1.954-3(a)(4)(iv)(c), first line, the language “The rules of this paragraph (a)(iv)” is corrected to read “The rules of this paragraph (a)(4)(iv)”.

14. On page 10724, column 2, § 1.954-3(a)(4)(iv)(c) Example 1. (i), line 6 of the paragraph, the language “paragraph (a)(4)(iii)) of this section into” is corrected to read “paragraph (a)(4)(iii) of this section) into”.

15. On page 10724, column 3, § 1.954-3(a)(4)(iv)(c) Example 3. (ii), lines 2 through 4, the language “undertaken with respect to Product X between the time the raw materials were purchased and the time Product X was sold” is corrected to read “undertaken with respect to Product X prior to sale”.

16. On page 10725, column 2, § 1.954-3(b)(1)(ii)(c)(2), line 12 from the bottom of the paragraph, the language “corporation and as if any such other” is corrected to read “corporation and as if any other”.

17. On page 10725, column 3, § 1.954-3(b)(1)(ii)(c)(2) Example. (i), line 9, the language “property (Product X and Y respectively)” is corrected to read “ property (Product X and Product Y respectively)”.

18. On page 10725, column 3, § 1.954-3(b)(1)(ii)(c)(3), line 6, the language “construct, grow, or extract the same” is corrected to read “construct, grow, or extract the same item of personal”.

19. On page 10726, column 2, § 1.954-3(b)(1)(ii)(c)(3)(c), last sentence of the paragraph, the language “The location of any particular activity (that is, for purposes of deciding whether that activity is conducted in a particular branch or in the remainder of the controlled foreign corporation) will be determined by applying the principles of paragraph (b)(1)(ii)(c)(3)(d) of this section.” is removed.

20. On page 10727, column 1, § 1.954-3(b)(1)(ii)(c)(3)(f) Example 1.(i), first line of the column, the language “Branch A and B do not satisfy either” is corrected to read “Branch A and Branch B do not satisfy either”.

21. On page 10727, column 2, § 1.954-3(b)(1)(ii)(c)(3)(f) Example 3. (i), line 11 from the bottom of the paragraph, the language “country M but who regularly travel to” is corrected to read “Country M but who regularly travel to”.

22. On page 10728, column 1, § 1.954-3(b)(1)(ii)(c)(3)(f) Example 4. (ii), lines 1 through 8 from the bottom of the paragraph, the language “The remainder of FS does not qualify for the manufacturing exception from foreign base company sales income contained in paragraph (a)(4)(iv) of this section. Because Product X is sold for use, consumption, or disposition outside of Country M, the income from the sale of Product X is foreign base company sales income.” is corrected to read “The remainder of FS must therefore independently qualify for the manufacturing exception contained in paragraph (a)(4) of this section or income from the sale of Product X will be foreign base company sales income.”

23. On page 10728, column 2, § 1.954-3(b)(1)(ii)(c)(3)(f) Example 5.(ii), lines 8 through 25, the language “Accordingly, paragraph (b)(1)(ii)(b) of this section is applied by comparing the effective rate of tax imposed on the income from the sales of Product X against the effective rate of tax that would apply to the sales income in Branch A, which is located in the jurisdiction that would impose the highest effective rate of tax on the sales income (30%). Because the effective rate of tax in Country B with respect to the sales income (0%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country A (30%), the seller, Branch B, is treated as selling on behalf of Branch A, which is treated as the remainder of FS pursuant to paragraph (b)(1)(ii)(c) of this section. Further, for purposes of determining” is corrected to read “Accordingly, pursuant to paragraph (b)(2)(ii)(c)(3)(e), Branch A is treated as the location of manufacturing for purposes of applying paragraph (b)(1)(ii)(b) of this section. Therefore, the effective rate of tax imposed on the income from the sales of Product X is compared against the effective rate of tax that would apply to that income if it were earned in Country A, which would impose the highest effective rate of tax on the sales income (30%). Because the effective rate of tax in Country B with respect to the sales income (0%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country A (30%), Branch B, treated as the remainder of FS pursuant to paragraph (b)(1)(ii)(c) of this section, is treated as selling on behalf of Branch A. Further, for purposes of determining”.

24. On page 10728, column 2, § 1.954-3(b)(1)(ii)(c)(3)(f) Example 5.(ii), lines 1 through 12 from the bottom of the paragraph, the language “company sales income. Since the location of manufacturing of Product X is considered to be the location of Branch A rather than Branch B, Branch B, treated as the remainder of FS, does not qualify for the manufacturing exception from foreign base company sales income contained in paragraph (a)(4) of this section. Since the sale of Product X is for use, consumption, or disposition outside of Country B, the income from the sale of Product X is foreign base company sales income.” is corrected to read “company sales income. Branch B, treated as the remainder of FS, must therefore independently qualify for the manufacturing exception from foreign base company sales income contained in paragraph (a)(4) of this section or the income from the sale of Product X will be foreign base company sales income.”.

25. On page 10729, column 1, § 1.954-3(b)(2)(ii)(a), lines 1 through 7 from the bottom of the paragraph, the language “tested against the effective rate of tax that would apply to such income if it were earned in the jurisdiction of such other branch or similar establishment or the remainder of the controlled foreign corporation under § 1.954-3(b)(1)(i)(b) or (ii)(b) of this section.” is corrected to read “tested under the principles of § 1.954-3(b)(1)(i)(b) or (ii)(b) of this section against the effective rate of tax that would apply to such income if it were earned in the jurisdiction of such other branch or similar establishment or the remainder of the controlled foreign corporation.”.

26. On page 10729, column 2, § 1.954-3(b)(2)(ii)(c)(2) Example 1.(ii), line 6, the language “Branch A (30%), the seller, the remainder of” is corrected to read “Branch A (30%), the remainder of”.

27. On page 10729, column 3, § 1.954-3(b)(2)(ii)(c)(2) Example 3.(i), line 7 from the bottom of the column, the language “persons. 100 percent of the articles sold” is corrected to read “persons. One hundred percent of the articles sold”.

28. On page 10730, column 1, § 1.954-3(b)(2)(ii)(c)(2) Example 3.(i), first paragraph of the column, line 10, the language “Country, but the income of Branch B for 1964” is corrected to read “country, but the income of Branch B for 1964”.

29. On page 10730, column 1, § 1.954-3(b)(2)(ii)(d), line 10, the language “the last sentence of paragraph (a)(6), the” is corrected to read “paragraph (a)(6)(i), the”.

LaNita Van Dyke,

Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration).