[Federal Register Volume 73, Number 73 (Tuesday, April 15, 2008)]
[Proposed Rules]
[Pages 20201-20203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-8031]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124590-07]
RIN 1545-BG11


Guidance Regarding Foreign Base Company Sales Income; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to a notice of proposed rulemaking.

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SUMMARY: This document contains corrections to a notice of proposed 
rulemaking (REG-124590-07) that was published in the Federal Register 
on Thursday, February 28, 2008 (73 FR 10716) providing guidance 
relating to foreign base company sales income, as defined in section 
954(d), in cases in which personal property sold by a controlled 
foreign corporation (CFC) is manufactured, produced, or constructed 
pursuant to a contract manufacturing arrangement or by one or more 
branches of the CFC.

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

SUPPLEMENTARY INFORMATION:

Background

    The correction notice that is the subject of this document is under 
section 954 of the Internal Revenue Code.

Need for Correction

    As published, a notice of proposed rulemaking (REG-124590-07) 
contains errors that may prove to be misleading and are in need of 
clarification.

Correction of Publication

    Accordingly, the publication of a notice of proposed rulemaking 
(REG-124590-07), which was the subject of FR Doc. E8-3557, is corrected 
as follows:
    1. On page 10717, column 1, in the preamble, under the paragraph 
heading ``B. The Branch Rule'', line 7 from the bottom of the 
paragraph, the language ``CFC and constitutes FBCSI of the CFC.'' is 
corrected to read ``CFC and constitutes FBCSI of the CFC. See section 
954(d)(2).''.
    2. On page 10718, column 1, in the preamble, under the paragraph 
heading ``C. Legal Developments'', line 4 from the bottom of the first 
paragraph, the language ``considered the activities of a separate'' is 
corrected to read ``treated as the activities of a separate''.
    3. On page 10718, column 2, in the preamble, under the paragraph 
heading ``Explanation of Provisions'', line 11 from the bottom of the 
column, the language ``and/or a branch of the CFC, is involved'' is 
corrected to read ``and/or a branch of the CFC, is otherwise 
involved''.
    4. On page 10718, column 3, in the preamble, under the paragraph 
heading ``A. Application of the Manufacturing Exception Where the 
Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is 
Involved in the Manufacturing Process--Substantial Contribution to 
Manufacturing'', lines 2 and 3 of the first paragraph, the language 
``income from the purchase of personal property from any person and

[[Page 20202]]

``its'' sale'' is corrected to read ``income derived in connection with 
the purchase of personal property from a related person and ``its'' 
sale to any person, and income derived in connection with the purchase 
of personal property from any person and ``its'' sale''.
    5. On page 10718, column 3, in the preamble, under the paragraph 
heading ``A. Application of the Manufacturing Exception Where the 
Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is 
Involved in the Manufacturing Process--Substantial Contribution to 
Manufacturing'', line 4 from the bottom of the second paragraph, the 
language ``purchase or sales and manufacturing'' is corrected to read 
``purchasing or selling and manufacturing''.
    6. On page 10719, column 2, in the preamble, under the paragraph 
heading ``A. Application of the Manufacturing Exception Where the 
Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is 
Involved in the Manufacturing Process--Substantial Contribution to 
Manufacturing'', first paragraph of the column, lines 6 and 7, the 
language ``for the manufacturing exception from FBCSI only if the CFC, 
acting through'' is corrected to read ``for the manufacturing exception 
only if the CFC, acting through''.
    7. On page 10719, column 2, in the preamble, under the paragraph 
heading ``A. Application of the Manufacturing Exception Where the 
Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is 
Involved in the Manufacturing Process--Substantial Contribution to 
Manufacturing'', line 9 from the bottom of the second paragraph of the 
column, the language ``proposed Sec.  1.954-3(a)(4)(iv)(b), a CFC'' is 
corrected to read ``proposed Sec.  1.954-3(a)(4)(iv)(a), a CFC''.
    8. On page 10719, column 3, in the preamble, under the paragraph 
heading ``A. Application of the Manufacturing Exception Where the 
Physical Manufacturing Test Is Not Satisfied by the CFC but the CFC Is 
Involved in the Manufacturing Process--Substantial Contribution to 
Manufacturing'', first paragraph of the column, lines 4 through 8, the 
language ``principles of Sec.  1.954-3(a)(4)(ii) and (iii); (2) 
performance of manufacturing activities that are considered in, but 
insufficient to satisfy the tests provided in Sec.  1.954-3(a)(4)(ii) 
or (iii); (3) control'' is corrected to read ``principles of Sec.  
1.954-3(a)(4)(ii) or (iii); (2) performance of activities that are 
considered in applying, but insufficient to satisfy, the tests provided 
in Sec.  1.954-3(a)(4)(ii) and (iii); (3) control''.
    9. On page 10721, column 2, in the preamble, under the paragraph 
heading ``2. Modification of Sec.  1.954-3(b)(2)(ii)(e)'', second 
paragraph of the column, lines 1 through 4, the language ``In addition, 
consistent with the clarification regarding the scope of the branch 
rule contained in proposed Sec.  1.954-3(b)(1), Sec.  1.954-
3(b)(2)(ii)(e) is'' is corrected to read ``In addition, consistent with 
Sec.  1.954-3(b)(2)(ii)(f), Sec.  1.954-3(b)(2)(ii)(e) is''.
    10. On page 10722, column 1, in the preamble, under the paragraph 
heading ``3. Modification of Sec.  1.954-3(b)(2)(i)(b), (b)(2)(ii)(b) 
and (b)(4), Example 3'', first paragraph of the column, last line, the 
language ``the branch's country is FBCSI.'' is corrected to read ``the 
branch's country result in FBCSI.''.


Sec.  1.954-3  [Corrected]

    11. On page 10723, column 3, Sec.  1.954-3(a)(4)(i), lines 16 and 
17, the language ``provisions of paragraphs (a)(ii), (a)(iii), or 
(a)(iv) of this section through the'' is corrected to read ``provisions 
of paragraphs (a)(4)(ii), (a)(4)(iii), or (a)(4)(iv) of this section 
through the''.
    12. On page 10724, column 1, Sec.  1.954-3(a)(4)(iv)(a), line 16, 
the language ``respect to the property prior to sale were'' is 
corrected to read ``respect to that property prior to sale were''.
    13. On page 10724, column 2, Sec.  1.954-3(a)(4)(iv)(c), first 
line, the language ``The rules of this paragraph (a)(iv)'' is corrected 
to read ``The rules of this paragraph (a)(4)(iv)''.
    14. On page 10724, column 2, Sec.  1.954-3(a)(4)(iv)(c) Example 1. 
(i), line 6 of the paragraph, the language ``paragraph (a)(4)(iii)) of 
this section into'' is corrected to read ``paragraph (a)(4)(iii) of 
this section) into''.
    15. On page 10724, column 3, Sec.  1.954-3(a)(4)(iv)(c) Example 3. 
(ii), lines 2 through 4, the language ``undertaken with respect to 
Product X between the time the raw materials were purchased and the 
time Product X was sold'' is corrected to read ``undertaken with 
respect to Product X prior to sale''.
    16. On page 10725, column 2, Sec.  1.954-3(b)(1)(ii)(c)(2), line 12 
from the bottom of the paragraph, the language ``corporation and as if 
any such other'' is corrected to read ``corporation and as if any 
other''.
    17. On page 10725, column 3, Sec.  1.954-3(b)(1)(ii)(c)(2) Example. 
(i), line 9, the language ``property (Product X and Y respectively)'' 
is corrected to read `` property (Product X and Product Y 
respectively)''.
    18. On page 10725, column 3, Sec.  1.954-3(b)(1)(ii)(c)(3), line 6, 
the language ``construct, grow, or extract the same'' is corrected to 
read ``construct, grow, or extract the same item of personal''.
    19. On page 10726, column 2, Sec.  1.954-3(b)(1)(ii)(c)(3)(c), last 
sentence of the paragraph, the language ``The location of any 
particular activity (that is, for purposes of deciding whether that 
activity is conducted in a particular branch or in the remainder of the 
controlled foreign corporation) will be determined by applying the 
principles of paragraph (b)(1)(ii)(c)(3)(d) of this section.'' is 
removed.
    20. On page 10727, column 1, Sec.  1.954-3(b)(1)(ii)(c)(3)(f) 
Example 1.(i), first line of the column, the language ``Branch A and B 
do not satisfy either'' is corrected to read ``Branch A and Branch B do 
not satisfy either''.
    21. On page 10727, column 2, Sec.  1.954-3(b)(1)(ii)(c)(3)(f) 
Example 3.(i), line 11 from the bottom of the paragraph, the language 
``country M but who regularly travel to'' is corrected to read 
``Country M but who regularly travel to''.
    22. On page 10728, column 1, Sec.  1.954-3(b)(1)(ii)(c)(3)(f) 
Example 4.(ii), lines 1 through 8 from the bottom of the paragraph, the 
language ``The remainder of FS does not qualify for the manufacturing 
exception from foreign base company sales income contained in paragraph 
(a)(4)(iv) of this section. Because Product X is sold for use, 
consumption, or disposition outside of Country M, the income from the 
sale of Product X is foreign base company sales income.'' is corrected 
to read ``The remainder of FS must therefore independently qualify for 
the manufacturing exception contained in paragraph (a)(4) of this 
section or income from the sale of Product X will be foreign base 
company sales income.''
    23. On page 10728, column 2, Sec.  1.954-3(b)(1)(ii)(c)(3)(f) 
Example 5.(ii), lines 8 through 25, the language ``Accordingly, 
paragraph (b)(1)(ii)(b) of this section is applied by comparing the 
effective rate of tax imposed on the income from the sales of Product X 
against the effective rate of tax that would apply to the sales income 
in Branch A, which is located in the jurisdiction that would impose the 
highest effective rate of tax on the sales income (30%). Because the 
effective rate of tax in Country B with respect to the sales income 
(0%) 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 A 
(30%), the seller, Branch B, is treated as selling on behalf of Branch 
A, which is treated as the remainder of FS pursuant to paragraph 
(b)(1)(ii)(c) of this section.

[[Page 20203]]

Further, for purposes of determining'' is corrected to read 
``Accordingly, pursuant to paragraph (b)(2)(ii)(c)(3)(e), Branch A is 
treated as the location of manufacturing for purposes of applying 
paragraph (b)(1)(ii)(b) of this section. Therefore, the effective rate 
of tax imposed on the income from the sales of Product X is compared 
against the effective rate of tax that would apply to that income if it 
were earned in Country A, which would impose the highest effective rate 
of tax on the sales income (30%). Because the effective rate of tax in 
Country B with respect to the sales income (0%) 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 A (30%), Branch B, treated 
as the remainder of FS pursuant to paragraph (b)(1)(ii)(c) of this 
section, is treated as selling on behalf of Branch A. Further, for 
purposes of determining''.
    24. On page 10728, column 2, Sec.  1.954-3(b)(1)(ii)(c)(3)(f) 
Example 5.(ii), lines 1 through 12 from the bottom of the paragraph, 
the language ``company sales income. Since the location of 
manufacturing of Product X is considered to be the location of Branch A 
rather than Branch B, Branch B, treated as the remainder of FS, does 
not qualify for the manufacturing exception from foreign base company 
sales income contained in paragraph (a)(4) of this section. Since the 
sale of Product X is for use, consumption, or disposition outside of 
Country B, the income from the sale of Product X is foreign base 
company sales income.'' is corrected to read ``company sales income. 
Branch B, treated as the remainder of FS, must therefore independently 
qualify for the manufacturing exception from foreign base company sales 
income contained in paragraph (a)(4) of this section or the income from 
the sale of Product X will be foreign base company sales income.''.
    25. On page 10729, column 1, Sec.  1.954-3(b)(2)(ii)(a), lines 1 
through 7 from the bottom of the paragraph, the language ``tested 
against the effective rate of tax that would apply to such income if it 
were earned in the jurisdiction of such other branch or similar 
establishment or the remainder of the controlled foreign corporation 
under Sec.  1.954-3(b)(1)(i)(b) or (ii)(b) of this section.'' is 
corrected to read ``tested under the principles of Sec.  1.954-
3(b)(1)(i)(b) or (ii)(b) of this section against the effective rate of 
tax that would apply to such income if it were earned in the 
jurisdiction of such other branch or similar establishment or the 
remainder of the controlled foreign corporation.''.
    26. On page 10729, column 2, Sec.  1.954-3(b)(2)(ii)(c)(2) Example 
1.(ii), line 6, the language ``Branch A (30%), the seller, the 
remainder of'' is corrected to read ``Branch A (30%), the remainder 
of''.
    27. On page 10729, column 3, Sec.  1.954-3(b)(2)(ii)(c)(2) Example 
3.(i), line 7 from the bottom of the column, the language ``persons. 
100 percent of the articles sold'' is corrected to read ``persons. One 
hundred percent of the articles sold''.
    28. On page 10730, column 1, Sec.  1.954-3(b)(2)(ii)(c)(2) Example 
3.(i), first paragraph of the column, line 10, the language ``Country, 
but the income of Branch B for 1964'' is corrected to read ``country, 
but the income of Branch B for 1964''.
    29. On page 10730, column 1, Sec.  1.954-3(b)(2)(ii)(d), line 10, 
the language ``the last sentence of paragraph (a)(6), the'' is 
corrected to read ``paragraph (a)(6)(i), the''.

LaNita Van Dyke,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel (Procedure and Administration).
[FR Doc. E8-8031 Filed 4-14-08; 8:45 am]
BILLING CODE 4830-01-P