IRS practice unit: Substantial contribution test | KPMG | GLOBAL
close
Share with your friends

IRS practice unit: Substantial contribution test for CFC manufacturing exception

IRS practice unit: Substantial contribution test

The IRS Large Business and International (LB&I) division today publicly released a “practice unit”—one of a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices about tax concepts in general and specific types of transactions.

1000

Related content

The title of the practice unit is: Substantial contribution test for CFC manufacturing exception

 

Text of the practice unit is available on the IRS practice unit webpage.

Summary

The practice unit explains that a U.S. shareholder of a foreign corporation generally is not subject to tax on the income of the corporation until the shareholder receives a distribution from the corporation. However, under subpart F, certain types of income earned by a controlled foreign corporation (CFC) are included in the current income of the CFC's U.S. shareholders even if the CFC does not distribute the income to its shareholders in that year.

One such type of income is foreign base company sales income (FBCSI)—income derived by a CFC in connection with a purchase or sale of personal property involving a related party in which the goods are manufactured and sold for use/consumption outside the CFC’s country of organization. The provisions of subpart F generally require a U.S. shareholder to include its pro-rata share of the CFC’s FBCSI in its current income. However, when Congress enacted the FBCSI rules, it was focused on “income from the purchase and sale of property, without any appreciable value being added to the product by the selling corporation.” Reg. section 1.954-3(a)(4) provides that FBCSI does not include income in connection with the purchase or sale of property manufactured, produced, or constructed by the CFC itself (that is, the “CFC manufacturing exception”).

The CFC is generally eligible for the CFC manufacturing exception if it satisfies one of the three tests—the substantial transformation test, the component parts test, and the substantial contribution test. The first two tests are known as the “physical manufacturing tests.” The practice unit focuses on the substantial contribution test—the test that may apply when a CFC is involved in the manufacturing process but does not satisfy the physical manufacturing tests.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit