Guidance Regarding Foreign Base Company Sales Income; Correction

Federal Register: March 20, 2009 (Volume 74, Number 53)

Rules and Regulations

Page 11843-11847

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr20mr09-4

DEPARTMENT OF THE TREASURY

Internal Revenue Service 26 CFR Part 1

TD 9438

RIN 1545-BI50

Guidance Regarding Foreign Base Company Sales Income; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to final and temporary regulations.

SUMMARY: This document contains corrections to final and temporary regulations that were published in the Federal Register on Monday,

December 29, 2008 (73 FR 79334) relating to foreign base company sales income.

DATES: The corrections are effective July 1, 2009.

FOR FURTHER INFORMATION CONTACT: Ethan Atticks, (202) 622-3840 (not a toll-free number).

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SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations that are subject to these corrections are under section 954 of the Internal Revenue Code.

Need for Correction

As published the final and temporary regulations (TD 9438) contain errors that may prove to be misleading and are in need of correction.

Correction of Publication

Accordingly, the publication of the final and temporary regulations

(TD 9438) that were the subject of FR Doc. E8-30727 is corrected as follows: 1. On page 79340, column 2, in the preamble under paragraph caption

Determination of Hypothetical Effective Tax Rate, the first paragraph, line 8 of the paragraph, the language ``effective tax rate of tax.'' is corrected to read ``effective tax rate.''. 2. On page 79340, column 3, in the preamble under paragraph caption

Determination of Hypothetical Effective Tax Rate, lines 2, 3, and 4, the language ``In contrast, if a sales affiliate in the country of manufacturing can theoretically receive certain tax relief by'' is corrected to read ``In contrast, if a manufacturing branch could receive tax relief with respect to sales income derived from sources within the country in which the manufacturing branch is located by''. 3. On page 79341, column 3, in the preamble, the first paragraph, the language ``Under the temporary regulations, if a demonstrably greater amount of manufacturing activity with respect to the personal property occurs in jurisdictions without tax rate disparity relative to the sales or purchase branch, the location of the sales or purchase branch will be deemed to be the location of manufacture of the personal property. In that case, the purchase or sales activities with respect to the property purchased or sold by or through the sales or purchase branch of the CFC will not, for purposes of determining FBCSI in connection with the sale of that property, be deemed to have substantially the same tax effect as if a branch were a wholly owned subsidiary corporation of the CFC. Otherwise, the location of manufacture of the personal property will be deemed to be the location of a manufacturing branch (or remainder) that has tax rate disparity relative to the sales or purchase branch. In that case, the purchase or sales activities with respect to the property purchased or sold by or through the sales or purchase branch of the CFC will be deemed to have substantially the same tax effect as if a branch were a wholly owned subsidiary corporation of the CFC, and that branch will be treated as a separate corporation for purposes of applying the regulations.'' is corrected to read ``Under the temporary regulations, if a demonstrably greater amount of manufacturing activity with respect to the income derived by a sales or purchase branch with respect to the personal property occurs in jurisdictions without tax rate disparity relative to that sales or purchase branch, the location of that sales or purchase branch will be deemed to be the location of manufacture of the personal property with respect to the income derived by that sales or purchase branch from the purchase or sale of the property. In that case, the use of the purchase or sales branch for purchase or sales activities with respect to the property purchased or sold by or through that sales or purchase branch of the CFC will not, for purposes of determining FBCSI in connection with the income derived by that sales or purchase branch from the purchase or sale of that property, be deemed to have substantially the same tax effect as if a branch were a wholly owned subsidiary corporation of the CFC. Otherwise, the location of manufacture of the personal property with respect to the income derived by that sales or purchase branch from the purchase or sale of that property will be deemed to be the location of a manufacturing branch

(or remainder) that has tax rate disparity relative to that sales or purchase branch. In that case, the use of the purchase or sales branch for purchase or sales activities with respect to the property purchased or sold by or through that sales or purchase branch of the CFC will, for purposes of determining FBCSI in connection with the income derived by that sales or purchase branch from the purchase or sale of that property, be deemed to have substantially the same tax effect as if a branch were a wholly owned subsidiary corporation of the CFC, and that branch will be treated as a separate corporation for purposes of applying the regulations.''. 4. On page 79342, column 1, in the preamble under the paragraph caption Clarifying Application of the Rule for Determining the

Remainder of the CFC When Activities are Performed in Multiple

Locations, the first paragraph, line 18 of the paragraph, the language

``the CFC when activities are preformed'' is corrected to read ``the

CFC when activities are performed''.

Sec. 1.954-3 [Corrected] 0 5. On page 79344, column 1, under amendatory instruction paragraph 2, item 3, line 5, the language ``Example (3).'' is corrected to read

``Examples (3), (6), and (7).''. 0 6. On page 79345, column 3, paragraph (a)(4)(iv)(d), Example 1 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 7. On page 79346, column 1, paragraph (a)(4)(iv)(d), Example 2 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 8. On page 79346, column 1, paragraph (a)(4)(iv)(d), Example 3 (i), line 11, the language ``FS for use outside of FS's country of'' is corrected to read ``FS to a related person for use outside of FS's country of''. 0 9. On page 79346, column 1, paragraph (a)(4)(iv)(d), Example 3 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 10. On page 79346, column 2, paragraph (a)(4)(iv)(d), Example 4 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 11. On page 79346, column 3, paragraph (a)(4)(iv)(d), Example 5 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 12. On page 79346, column 3, paragraph (a)(4)(iv)(d), Example 6 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 13. On page 79347, column 1, paragraph (a)(4)(iv)(d), Example 7 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 14. On page 79347, column 2, paragraph (a)(4)(iv)(d), Example 8 (ii), line 1, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 15. On page 79347, column 2, paragraph (a)(4)(iv)(d), Example 8 (ii), line 9, the language ``X, it is irrelevant to the substantial'' is corrected to read ``X, it is not important to the substantial''. 0 16. On page 79347, column 2, paragraph (a)(4)(iv)(d), Example 9 (ii),

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line 3, the language ``to sale were undertaken by FS1 or FS2'' is corrected to read ``to sale had been undertaken by FS1 or FS2''. 0 17. On page 79347, column 3, paragraph (a)(4)(iv)(d), Example 10 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 18. On page 79348, column 1, paragraph (a)(4)(iv)(d), Example 11 (ii), line 3, the language ``to sale were undertaken by FS through the'' is corrected to read ``to sale had been undertaken by FS through the''. 0 19. On page 79348, column 1, paragraph (b)(2)(i)(d), the language

``[Reserved]. For further guidance, see Sec. 1.954-3(b)(2)(i)(d).'' is corrected to read ``[Reserved].''. 0 20. On page 79348, column 2, following the language ``Example (3).

Reserved

. For further guidance, see Sec. 1.954-3(b)(4) Example

(3).'', the language ``Example (6). [Reserved].'' is added on the next line. 0 21. On page 79348, column 2, following the new language ``Example (6).

Reserved

.'', the language ``Example (7). [Reserved].'' is added on the next line. 0 22. On page 79348, column 2, paragraph (d), the last two lines, the language ``subsequent taxable years of the taxpayer.'' is corrected to read ``subsequent taxable years.''.

Sec. 1.954-3T [Corrected] 0 23. On page 79349, column 2, in paragraph (b)(1)(ii)(c)(2), Example

(i), line 18, the language ``effective rate imposed in Country M on the'' is corrected to read ``effective rate of tax imposed in Country M on the''. 0 24. On page 79349, column 3, paragraph (b)(1)(ii)(c)(3)(i), a new sentence is added after the first sentence to read ``This paragraph

(b)(1)(ii)(c)(3) is applied separately with respect to the income derived by each purchasing or selling branch (or similar establishment) or purchasing or selling remainder of the controlled foreign corporation as provided under paragraphs (b)(1)(i) and (b)(1)(ii) of this section and Sec. Sec. 1.954-3(b)(1)(i) and (b)(1)(ii).''. 0 25. On page 79350, column 2, line 2, in paragraph

(b)(1)(ii)(c)(3)(iii), the language ``construction with respect to that'' is corrected to read ``construction with respect to the income derived by a purchasing or selling branch (or similar establishment) or the purchasing or selling remainder of the controlled foreign corporation in connection with the purchase or sale of that''. 0 26. On page 79350, column 2, line 15, in paragraph

(b)(1)(ii)(c)(3)(iii), the language ``any, and that would, after applying'' is corrected to read ``any, that would, after applying''. 0 27. On page 79350, column 2, the second full sentence, in paragraph

(b)(1)(ii)(c)(3)(iii), the language ``The tested sales location is the location where the branch (or similar establishment) or the remainder of the controlled foreign corporation purchases or sells the personal property.'' is corrected to read ``The tested sales location is the location of the purchasing or selling branch (or similar establishment) or the remainder of the controlled foreign corporation by or through which the purchasing or selling activities are carried on with respect to the personal property.''. 0 28. On page 79350, column 2, the last line, in paragraph

(b)(1)(ii)(c)(3)(iii), the language ``(b)(1)(ii)(c)(3)(v) Examples 4, 5, and 6 of'' is corrected to read ``(b)(1)(ii)(c)(3)(v) Examples 3, 4, 5, and 6 of''. 0 29. On page 79350, column 3, lines 13, 14, and 15, in paragraph

(b)(1)(ii)(c)(3)(iii), the language ``apply with respect to the sales income related to that property and the use of the purchasing or selling branch (or'' is corrected to read ``apply with respect to the income derived by the tested sales location in connection with the purchase or sale of that property and the use of that purchasing or selling branch (or''. 0 30. On page 79351, column 1, line 4, in paragraph (b)(1)(ii)(c)(3)(v),

Example 1 (i), the language ``branches. Employees of FS located in'' is corrected to read ``branches. The activities of the remainder of FS in

Country M do not independently satisfy Sec. 1.954-3(a)(4)(i).

Employees of FS located in''. 0 31. On page 79351, column 2, paragraph (b)(1)(ii)(c)(3)(v), Example 3

(ii), lines 14, 15, 16, and 17, the language ``(b)(1)(ii)(c)(3)(iii) of this section The tested sales location is Country M because the remainder of FS performs the selling activities with respect to Product

X. The'' is corrected to read ``(b)(1)(ii)(c)(3)(iii) of this section.

The tested sales location is Country M because the selling activities with respect to Product X are carried on by the remainder of FS. The''. 0 32. On page 79351, column 3, paragraph (b)(1)(ii)(c)(3)(v), Example 4, the paragraph heading, the language ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities performed by remainder of the controlled foreign corporation, remainder contribution includes branch manufacturing activities.'' is corrected to read ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities carried on by remainder of the controlled foreign corporation, remainder contribution includes branch manufacturing activities.''. 0 33. On page 79351, column 3, paragraph (b)(1)(ii)(c)(3)(v), Example 4

(ii), the fourth sentence, the language ``The tested sales location is

Country M because the remainder of FS performs the selling activities with respect to Product X.'' is corrected to read ``The tested sales location is Country M because the selling activities with respect to

Product X are carried on by the remainder of FS.''. 0 34. On page 79351, column 3, paragraph (b)(1)(ii)(c)(3)(v), Example 4

(ii), the last sentence, the language ``Therefore, the rules of paragraph (b)(1)(ii)(a) of this section will not apply and neither

Branch A nor Branch B will be treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section and Sec. 1.954- 3(b)(2)(ii).'' is corrected to read ``Therefore, the rules of paragraph

(b)(1)(ii)(a) of this section will not apply with respect to the income derived by the remainder of FS in connection with the sale of Product

X, and neither Branch A nor Branch B will be treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section and

Sec. 1.954-3(b)(2)(ii).''. 0 35. On page 79351, column 3, paragraph (b)(1)(ii)(c)(3)(v), Example 5, the paragraph heading, the language ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities performed by remainder of the controlled foreign corporation and a sales branch.'' is corrected to read ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities carried on by remainder of the controlled foreign corporation and a sales branch.''. 0 36. On page 79352, column 1, paragraph (b)(1)(ii)(c)(3)(v), Example 5

(i), the first sentence, the language ``The facts are the same as

Example 3, except that selling activities are also performed by Branch

D in Country D, and Country D imposes a 16% effective rate of tax on sales income.'' is corrected to read ``The facts are the same as

Example 3, except that sales of Product X are also carried on through

Branch D in Country D, and Country D imposes a 16% effective rate of tax on sales income.''. 0 37. On page 79352, column 1, paragraph (b)(1)(ii)(c)(3)(v), Example 5

(ii), the fifth sentence, the language

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``The results with respect to the remainder of FS in this Example 6 are the same as in Example 3.'' is corrected to read ``The results with respect to income derived by the remainder of FS in connection with the sale of Product X in this Example 5 are the same as in Example 3.''. 0 38. On page 79352, column 1, in paragraph (b)(1)(ii)(c)(3)(v), Example 5 (ii), the sixth sentence, the language ``However, paragraph

(b)(1)(ii)(c)(3)(iii) of this section must also be applied with respect to Branch D because Branch D performs selling activities with respect to Product X.'' is corrected to read ``However, paragraph

(b)(1)(ii)(c)(3)(iii) of this section must also be applied with respect to Branch D because the sale of Product X is also carried on through

Branch D.''. 0 39. On page 79352, column 1, paragraph (b)(1)(ii)(c)(3)(v), Example 5

(ii), line 29, the language ``rate of tax imposed on the Branch D's sales'' is corrected to read ``rate of tax imposed on Branch D's sales''. 0 40. On page 79352, column 1, paragraph (b)(1)(ii)(c)(3)(v), Example 5

(ii), the last sentence, the language ``Therefore, the rules of paragraph (b)(1)(ii)(a) of this section will not apply to Branch D and neither Branch A nor Branch D will be treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section and Sec. 1.954- 3(b)(2)(ii).'' is corrected to read ``Therefore, the rules of paragraph

(b)(1)(ii)(a) of this section will not apply with respect to the income derived by Branch D in connection with the sale of Product X and the use of Branch D to sell Product X will not result in a branch being treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section and Sec. 1.954-3(b)(2)(ii).''. 0 41. On page 79352, column 2, paragraph (b)(1)(ii)(c)(3)(v), Example 6

(ii), the fourth sentence, the language ``The tested sales location is

Country M because the remainder of FS performs the selling activities with respect to Product X.'' is corrected to read ``The tested sales location is Country M because the selling activities with respect to

Product X are carried on by the remainder of FS.''. 0 42. On page 79352, column 3, paragraph (b)(2)(i)(b) is corrected to read as follows:

``(b) Activities treated as performed on behalf of the remainder of corporation. (1) With respect to purchasing or selling activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property manufactured, produced, constructed, grown, or extracted by the remainder of the controlled foreign corporation, be treated as performed on behalf of the remainder of the controlled foreign corporation.

(2) With respect to purchasing or selling activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property (other than property described in paragraph (b)(2)(i)(b)(1) of this section) purchased or sold, or purchased and sold, by the remainder of the controlled foreign corporation (or any branch treated as the remainder of the controlled foreign corporation), be treated as performed on behalf of the remainder of the controlled foreign corporation.''. 0 43. On page 79352, column 3, paragraph (b)(2)(i)(c), the language ``(c)

Reserved

. For further guidance, see Sec. 1.954-3(b)(2)(i)(c).'' is corrected to read ``(c) through (e) [Reserved]. For further guidance, see Sec. 1.954-3(b)(2)(i)(c) and (e).''. 0 44. On page 79352, column 3, paragraph (b)(2)(i)(d) is removed. 0 45. On page 79353, column 1, paragraph (b)(2)(i)(e) is removed. 0 46. On page 79353, columns 1 and 2, paragraph (b)(2)(ii)(b) is corrected to read as follows:

``(b) Activities treated as performed on behalf of the remainder of corporation. (1) With respect to purchasing or selling activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property manufactured, produced, constructed, grown, or extracted by the remainder of the controlled foreign corporation, be treated as performed on behalf of the remainder of the controlled foreign corporation.

(2) With respect to purchasing or selling activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property (other than property described in paragraph (b)(2)(ii)(b)(1) of this section) purchased or sold, or purchased and sold, by the remainder of the controlled foreign corporation (or any branch treated as the remainder of the controlled foreign corporation), be treated as performed on behalf of the remainder of the controlled foreign corporation.''. 0 47. On page 79353, column 3, paragraph (b)(4), Examples (4) through

(7), the language ``[Reserved]. For further guidance, see Sec. 1.954- 3(b)(4) Examples (4) through (7).'' is corrected to read ``[Reserved].

For further guidance, see Sec. 1.954-3(b)(4) Examples (4) and (5).''. 0 48. On page 79353, column 3, paragraph (b)(4), Example 8 (i), line 13, the language ``located in Country M perform only sales'' is corrected to read ``located in Country M carry on only sales''. 0 49. On page 79354, column 1, paragraph (b)(4), Example 9, the paragraph heading, the language ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities performed by remainder of the controlled foreign corporation, branch manufacturing activities included in remainder contribution.'' is corrected to read ``Manufacturing activities performed by multiple branches, no branch independently satisfies Sec. 1.954-3(a)(4)(i), selling activities carried on by remainder of the controlled foreign corporation, some branch manufacturing activities included in remainder contribution.''. 0 50. On page 79354, column 1, paragraph (b)(4), Example 9 (i), the first sentence, the language ``FS, a controlled foreign corporation organized in Country M, has two branches, Branch A and Branch B, located in

Country A and Country B respectively.'' is corrected to read ``FS, a controlled foreign corporation organized in Country M, has three branches, Branch A, Branch B, and Branch C, located in Country A,

Country B, and Country C respectively.''. 0 51. On page 79354, column 1, paragraph (b)(4), Example 9 (i), line 33, the language ``Country B, provides quality control and'' is corrected to read ``Country B, provides quality control. Branch C, through the activities of employees of FS located in Country C, provides''. 0 52. On page 79354, column 1, paragraph (b)(4), Example 9 (i), the eleventh sentence, the language ``Country A imposes an effective rate of tax on sales income of 12%, and Country B imposes an effective rate of tax on sales income of 24%.'' is corrected to read ``Country A imposes an effective rate of tax on sales income of 12%, Country B imposes an effective rate of tax on sales income of 24%, and Country C imposes an effective rate of tax on sales income of 25%.''. 0 53. On page 79354, column 1, paragraph (b)(4), Example 9 (i), the twelfth sentence, the language ``None of the remainder of FS, Branch A, or Branch B independently satisfies Sec. 1.954-3(a)(4)(i).'' is corrected to read ``None of the remainder of FS, Branch A, Branch B, or

Branch C independently satisfies Sec. 1.954-3(a)(4)(i).''.

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0 54. On page 79354, column 1, paragraph (b)(4), Example 9 (i), the fourteenth sentence, the language ``Under the facts and circumstances of the business, the activities of the remainder of FS and Branch A, if considered together, would not provide a demonstrably greater contribution to the manufacture of Product X than the activities of

Branch B.'' is corrected to read ``Under the facts and circumstances of the business, the activities of the remainder of FS and Branch A, if considered together, would not provide a demonstrably greater contribution to the manufacture of Product X than the activities of

Branch B and Branch C, if considered together.''. 0 55. On page 79354, columns 1 and 2, paragraph (b)(4), Example 9 (ii), the second sentence, the language ``The remainder of FS, Branch A, and

Branch B each provide a contribution through the activities of employees to the manufacture of Product X.'' is corrected to read ``The remainder of FS, Branch A, Branch B, and Branch C each provide a contribution through the activities of employees to the manufacture of

Product X.''. 0 56. On page 79354, column 2, paragraph (b)(4), Example 9 (ii), the fourth sentence, the language ``The tested sales location is Country M because the remainder of FS performs the selling activities with respect to Product X.'' is corrected to read ``The tested sales location is Country M because the selling activities with respect to

Product X are carried on by the remainder of FS.''. 0 57. On page 79354, column 2, paragraph (b)(4), Example 9 (ii), the fifth sentence, the language ``The location of Branch B is the tested manufacturing location because the effective rate of tax imposed on

FS's sales income by Country M (10%) 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 B (24%): and Branch B is the only manufacturing branch that would, after applying Sec. 1.954- 3(b)(1)(ii)(b), be treated as a separate corporation.'' is corrected to read ``The location of Branch B is the tested manufacturing location because the effective rate of tax imposed on FS's sales income by

Country M (10%) 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 B (24%), and Country B has the lowest effective rate of tax among the manufacturing branches that would, after applying Sec. 1.954-3(b)(1)(ii)(b), be treated as a separate corporation.''. 0 58. On page 79354, column 2, paragraph (b)(4), Example 9 (ii), line nineteen from the top of the column, the language ``Country A will be included in the'' is corrected to read ``Country A by Branch A, will be included in the''. 0 59. On page 79354, column 2, paragraph (b)(4), Example 9 (ii), a new sentence is added between the sixth and seventh sentences to read ``The manufacturing activities performed in Country C by Branch C will be included in the contribution of Branch B for purposes of determining the location of manufacture of Product X because the effective rate of tax imposed on the sales income by Country M (10%) 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 C (25%).''. 0 60. On page 79354, column 2, paragraph (b)(4), Example 9 (ii), the seventh sentence, the language ``Under the facts and circumstances of the business, the manufacturing activities of the remainder of FS and

Branch A, considered together, would not provide a demonstrably greater contribution to the manufacture of Product X than the activities of

Branch B.'' is corrected to read ``Under the facts and circumstances of the business, the manufacturing activities of the remainder of FS and

Branch A, considered together, would not provide a demonstrably greater contribution to the manufacture of Product X than the activities of

Branch B and Branch C, considered together.''

Guy R. Traynor,

Federal Register Liaison, Publications & Regulations Br., Associate

Chief Counsel, Procedure & Administration.

FR Doc. E9-5894 Filed 3-19-09; 8:45 am

BILLING CODE 4830-01-P