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IRS Unveils Rules on Branch-Related Foreign Base Company Sales Income

By Alison Bennett
Publication Date: 12/16/2011

The Internal Revenue Service Dec. 15 unveiled final rules (T.D. 9563) providing guidance relating to foreign base company sales income (FBCSI) when personal property sold by a controlled foreign corporation (CFC) is purchased, sold, manufactured, produced, constructed, grown, or extracted by one or more branches of the CFC.

The regulations finalize proposed regulations (REG-124590-07) and withdraw temporary regulations (T.D. 9438) published in December 2008.

In general, the rules affect CFCs and their U.S. shareholders.

The regulations amend the provisions of Treasury Regulation Section 1.954-3(b) that address the application of the foreign base company sales income rules to CFCs with branches or similar establishments, and, in particular, manufacturing branches.

Branch Rules Addressed

These final regulations provide guidance on the application of the branch rule, in particular with respect to a CFC that has multiple branches.

For example, the regulations set forth rules on how to determine whether a CFC earns FBCSI if purchase and sales activities are conducted by multiple branches and if multiple branches are involved in the manufacture of either a single or multiple items of personal property that is sold by the CFC.

The final regulations delete paragraph (d) of Treasury Regulation Section 1.954-3(b)(2)(ii), which provided that income that is FBCSI as a result of the application of Treasury Regulation Section 1.954-3(b)(1)(i) (purchasing or selling branch rules) is not again classified as FBCSI as a result of the application of Treasury Regulation Section1.954-3(b)(1)(ii) (manufacturing branch rules).

Paragraph No Longer Needed

IRS said this paragraph is no longer needed as a result of the addition of the rule in Treasury Regulation Section 1.954-3(b)(1)(ii)(c)(1), which provides that if one or more sales or purchasing branches are used in addition to a manufacturing branch, then only the manufacturing branch rules apply.

IRS said it continues to study additional FBCSI issues, and is considering whether to issue additional guidance, including guidance regarding when a branch should be treated as a separate corporation under Section 954(d)(2), and the scope of, and relationship between, FBCSI and foreign base company services income.

The agency said it welcomes comments on these issues.

The regulations are effective Dec. 19, the date they will be published in the Federal Register. The rules apply to taxable years of CFCs beginning after June 30, 2009, and for taxable years of U.S. shareholders in which or with which such taxable years of the CFCs end.

The complete text of this article can be found in the BNA Daily Tax Report, December 16, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

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