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International Practice Unit: I.R.S. Releases Subpart F Sales and Manufacturing Rules

Beate Erwin, Kenneth Lobo, and Stanley C. Ruchelman explain how the branch rule works when a C.F.C. operates a manufacturing or selling branch in another country. While the concept is easy to explain, the computations are somewhat confusing. The article explains all.

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Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

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I.R.S. Defines Measure for Tax Rate Disparity Test

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In order to reduce its overall foreign tax rate, a company may attempt to separate its foreign manufacturing from its foreign sales operations. If a foreign manufacturing entity sells products at a low margin to a related foreign sales entity in a lowtax jurisdiction, less foreign taxes are paid than if the foreign manufacturing entity sold the products directly to customers. This type of transaction would generally trigger foreign base company sales income (“F.B.C.S.I.”) for the sales entity, while the manufacturing entity could rely on the exception whereby income produced by certain manufacturing activities is not included in F.B.C.S.I. (the “Manufacturing Exception”).