tax notes international - Tuck School of Business - Dartmouth College

SPECIAL REPORTS
are performed in Country C are not taken into consideration
in determining whether Country M, the jurisdiction
under the laws of which FS is organized, is the
location of manufacture. The activities of employees of
FS performed in Country M do not provide a demonstrably
greater contribution to the manufacture of
Product X than the activities of employees of FS located
in Country A. Therefore, the location of manufacture
is Country A. (See Figure 8.)
Employees Employee travel
FS
20%
A
Location
of Mfg MFG
Some design
controls materials
CM
Country C
Figure 8
Product design, etc.
10%
employees
Employees
travel for QC
and oversight
9. Example 3 — Figure 9
This is an example in the current regulations that is
modified in the temporary regulations. CFC E, incorporated
under the laws of Country X, is a wholly
owned subsidiary of CFC D, also incorporated under
the laws of Country X. E maintains Branch B in
Country Y. E’s sole activity, carried on through Branch
B, consists of the purchase of articles manufactured in
Country X by Corporation D and the sale of those
articles through Branch B to unrelated persons. Branch
B is treated as a wholly owned subsidiary corporation
of E because of a tax rate disparity. Income derived by
Branch B, treated as a separate corporation, constitutes
FBCSI.
If instead D were unrelated to E, none of the income
would be FBCSI because E’s branch would be
purchasing from and selling to unrelated persons, and
if Branch B were treated as a separate corporation, it
likewise would be purchasing from and selling to unrelated
persons. Alternatively, if D were related to E, but
Branch B manufactured the articles before sale, the income
would not be FBCSI because Branch B, treated
as a separate corporation, would qualify for the manufacturing
exception. (See Figure 9.)
10. Example 8 — Figure 10
Figure 9
Dx
Ex
By
FS operates one branch, Branch A, that physically
manufactures Product X. Raw materials used in the
manufacture of Product X are purchased by FS from
an unrelated person. FS engages in activities in Country
M to sell Product X to a related person for use outside
Country M. Employees of FS located in Country
M perform only sales functions. The effective rate imposed
in Country M on the income from the sale of
Product X is 10 percent. Country A generally imposes
an effective rate of tax on income of 20 percent, but
imposes a uniformly applicably incentive rate of tax of
10 percent on manufacturing income and related sales
income. The use of Branch A to manufacture Product
X does not have substantially the same tax effect as if
Branch A were a wholly owned subsidiary corporation
of FS, because the effective rate of tax on FS’s sales
income from the sale of Product X in Country M (10
percent) is not less than 90 percent of, and at least 5
percentage points less than, the effective rate of tax
that would apply to that income in the country in
which Branch A is located (10 percent). Branch A is
not treated as a separate corporation. (See Figure 10.)
458 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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