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IT Industry Group Comments on Proposed Contract Manufacturing Regs

JUN. 27, 2008

IT Industry Group Comments on Proposed Contract Manufacturing Regs

DATED JUN. 27, 2008
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June 27, 2008

 

 

Internal Revenue Service

 

CC:PA:LPD:PR (REG-124590-07)

 

P.O. Box 7604 Ben Franklin Station

 

Washington, DC 20044

 

 

Re: Comments on Proposed Contract Manufacturing Regulations

Dear Sir or Madam:

As the leading voice of the high-tech industry, ITI is submitting this letter in connection with Treasury and the Internal Revenue Service's request in REG-124590-07 for comments on the proposed foreign base company sales income regulations related to contract manufacturing arrangements (the "Proposed Regulations").

We applaud the goal of the Treasury Department and the Internal Revenue Service (the "IRS") of "moderniz[ing] the [foreign base company sales income] regulations in light of current business structures and practices" and the express recognition that "updated rules in this area are important to the continued competitiveness of U.S. businesses operating abroad."1 We recognize that this is a complex task. While we believe that the Proposed Regulations provide a useful starting point in providing much-needed guidance regarding the application of the subpart F foreign base company sales income ("FBCSI") rules to taxpayers that use contract manufacturing arrangements, the Proposed Regulations create significant ambiguities and unintended results for certain taxpayers that cannot be justified on any policy grounds.

Our comments identify several of those issues and recommend solutions consistent with both the goal of modernizing subpart F and the policy underpinnings of section 954(d).

First, we recommend that the substantial contribution test provided in Prop. Reg. § 1.954-3(a)(4)(iv) should be elective. Making the substantial contribution test elective avoids the inadvertent application of the manufacturing branch rule to taxpayers who purchase and sell products from unrelated parties and who don't perform physical manufacturing. Consistent with over 40 years of subpart F guidance, these taxpayers do not derive FBCSI. If the substantial contribution test were mandatorily applicable, these taxpayers may be treated as deriving FBCSI as a result of now having a deemed manufacturing branch, even though there is no technical or policy justification for creating FBCSI in that context.

Second, the regulations should eliminate the predominant amount rules of Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(c) and (e). These rules are arbitrary and unreasonable. Instead, the regulations should provide an objective standard to measure which location makes the greatest contribution to manufacturing and use that location as the tested manufacturing branch for purposes of the tax rate disparity tests in the branch rule. These changes would make the branch rule much more administrable, provide certainty to taxpayers, reduce the administrative burden on both taxpayers and the IRS in applying the branch rule and substantially reduce the amount of controversies over the application of this rule.

Third, the regulations should clarify that only profits from sales and purchasing activity can be treated as FBCSI. The examples should be revised to show for example, that income allocable to a branch that does not engage in any selling or purchasing activity does not constitute FBCSI.

Each of these points is discussed in greater detail below.

The Substantial Contribution Test Should be Elective

ITI appreciates the Treasury Department and the IRS's recognition that a controlled foreign corporation ("CFC") should not be treated as deriving FBCSI in certain contract manufacturing arrangements. The substantial contribution test included in Prop. Reg. § 1.954-3(a)(4)(iv) is a useful concept to provide guidance regarding when a CFC's participation in a contract manufacturing arrangement is sufficient to prevent the CFC from deriving FBCSI when purchasing property from or selling property to a related party.

The substantial contribution test as currently provided in the Proposed Regulations, however, has too many variables and is too subjective to provide any meaningful guidance. The test will impose substantial administrative burdens on taxpayers as well as the IRS; fail to provide any certainty for taxpayers, which has become especially problematic in light of FIN 48; lead to significant controversies; and impose unintended penalties on certain taxpayers which today do not engage in related party transactions.

We have offered below some specific suggestions to improve: the administrability and certainty of the substantial contribution test. Even with these improvements, it will still be nearly impossible to craft a test that will fairly accommodate taxpayers in every industry on every set of facts while simultaneously providing certainty and ease of application. Thus, we recommend that taxpayers should be entitled to elect whether to apply the substantial contribution test. If elected, the substantial contribution test should apply for all purposes of the FBCSI regulations, including the branch rule.

If the substantial contribution test is not made elective, the test will create unintended and potentially severe adverse results for many taxpayers that have structured their offshore business operations such that their CFCs neither purchase property from, nor sell property to, any related party. In the cases which would be adversely impacted, the CFCs do not satisfy the physical manufacturing tests under the current FBCSI regulations, and thus the taxpayer has no potential FBCSI exposure as a result of activities performed in real or check-the-box branches of the CFC. By lowering the threshold for "manufacturing" for purposes of Prop. Reg. § 1.954-3(a)(4), the substantial contribution test will result in a proliferation of potential manufacturing branches for CFCs with real and/or check-the-box branch operations in many jurisdictions. As a result, taxpayers who have never had FBCSI before will now have to expend significant resources to determine whether their R&D teams in India and intellectual property lawyers in France might inadvertently create FBCSI under the manufacturing branch rule. If the substantial contribution test were elective, taxpayers could simply opt out of the inadvertent application of the branch rule. This approach would conserve valuable resources both for the taxpayer and the IRS in the planning, compliance, enforcement and controversy contexts, as well as avoiding an unjustified penalty for taxpayers which have structures today engaging solely in unrelated party transactions.

As an example, assume CFC A, a Dutch company, has a disregarded subsidiary in France that has a large R&D center of several hundred engineers, finance personnel, and a legal team (including individuals who make determinations regarding intellectual property enforcement). CFC A compensates the French company on an arm's length basis for the services it provides to CFC A. CFC A engages an unrelated, turnkey contract manufacturer to manufacture products using the intellectual property developed in France. CFC A purchases the product from the unrelated manufacturer and sells the product to unrelated customers for use, consumption and disposition outside the Netherlands. Assume that the effective tax rate for sales income in the Netherlands is 24% and in France, is 33.3%. Under the Proposed Regulations, CFC A might satisfy the substantial contribution test, even though it does not need to rely on a manufacturing defense to avoid its sales income from being treated as FBCSI. In this example, if the Dutch head office does not make a "predominant amount" of the CFC's contribution to manufacturing, then the French disregarded subsidiary could be treated as the manufacturing branch.2 If so, the Dutch head office could be treated as selling on behalf of the French disregarded subsidiary because the CFC satisfies the rate disparity test.

The regulations should not treat an entity that neither conducts any physical manufacturing nor has any related party purchase or sales transactions as having both so as to create FBCSI. Deeming a CFC to manufacture and then deeming a related party transaction, where neither exists, would not serve any policy objectives. Instead it would create needless confusion, ambiguity and controversy. To quote the preamble to the Proposed Regulations: "The purpose of the branch rule is to prevent a CFC from using a foreign branch to avoid the application of the FBCSI rules."3 The branch rule should not be used to expand section 954(d) to create subpart F income where none exists under current law and regulations. A rule that creates FBCSI simply because a CFC, for example, conducts R&D activity in a high tax jurisdiction such as India or France through a branch is most likely unintended and would create numerous traps for the unwary. The question is even more complex when the taxpayer has one entity per country and treats all foreign entities as disregarded branches of a single holding company. If numerous foreign entities contribute to the manufacturing process in a small way, in the aggregate they may substantially contribute. Yet, it may be very difficult for a taxpayer in such a case to know whether there is an exposure, much less how to address it. Any legal restructuring to minimize the issue by dividing all of the legal entities in half could end up being an expensive, wasteful endeavor that creates new issues to resolve an exposure that did not exist in the first place. The regulations should not create such a difficult choice when there is no exposure under current law. To avoid such untenable results, the substantial contribution test, which Treasury and the Service have touted as taxpayer-favorable, must be elective.

II. Recommended Improvements to Substantial Contribution Test

A. List of Factors

We agree in concept with the approach that the listed factors should not be an exclusive list as it is hard to capture every meaningful contribution to manufacturing in every industry/fact pattern. There are some obvious contributions to manufacturing that are absent from the list -- namely, demand planning and forecasting, capacity management, production scheduling, providing intangible property and bearing economic risk. The regulations should add these factors to the list.

Many of the listed factors also require clarification. For example, it is not clear what "management of risk of loss" means in connection with the oversight and direction factor.4 Clarification is also required as to what is meant by "control" of raw materials, work-in-process and finished goods.5

B. "Substantiality"

The Proposed Regulations provide that a CFC will be treated as satisfying the substantial contribution test "only if the facts and circumstances evidence that the [CFC] makes a substantial contribution through the activities of its employees" to the manufacturing activities of the property sold and that such determination "will involve, but not necessarily be limited to, consideration of the nine listed factors.6

"Substantial" is not defined in the Proposed Regulations. It is not clear whether "substantial" is meant to be a relative term or an absolute term. If the Proposed Regulation means to impose a relative standard, the Proposed Regulation should indicate what the relevant comparison is for evaluating a CFC's functions under the substantial contribution test. Whether or not the Proposed Regulations intend to impose an absolute standard, an objective threshold or safe harbor(s) would be very useful guidance to taxpayers, and as practical matter could be the difference between a rule that is administrable and one that is not.

We believe that "substantial" should connote an absolute, rattier than a relative, standard. The first definition of "substantial" listed in Merriam-Webster's Dictionary is "consisting of or relating to substance . . . not imaginary or illusory."7 Another definition is "considerable in quantity: significantly great."8 Listed synonyms of "substantial" include "real," "true," "important," and "essential."9 Thus, "substantial" is best understood as something akin to "meaningful" and requires some threshold or quantity of substance. The substantial contribution test should specify some minimum amount of activity a CFC must perform to be treated as a substantial contributor to manufacturing. The Proposed Regulations, unfortunately, do not provide any guidance regarding what this threshold is and when it is achieved.

If the threshold (or relevant standard for comparison, in the case of a relative standard) for "substantial contribution" is not clarified in the final regulations, taxpayers will not have sufficient notice of the tax consequences that ensue as a result of the various functions their CFCs perform. The Proposed Regulations' "we know it when we see it" approach will result in increased administrative burdens for taxpayers and the IRS, inconsistent application of the rules by similarly situated taxpayers and substantial controversies. This will be particularly true in the critical years just after these regulations are promulgated, as during that period neither taxpayers nor the IRS will have a track record of experience to "know" what they are "seeing."

The regulations should provide an objective standard and more instructive examples to allow taxpayers to benchmark their CFCs' activities against the regulations. The current examples consider circumstances in which only a few or most of the nine factors are met.10 As the Proposed Regulations make clear that there is no number of factors that is required,11 the examples are not useful unless they explain the priority and weight given to each factor and why. The examples also should include more details (e.g., number of employees engaged in each activity or costs of CFC to engage in each particular contribution) and analysis regarding whether the quantum of activities necessary to satisfy the substantial contribution test is present.

ITI recognizes the difficulties in providing an objective threshold or safe harbor(s) to determine whether the substantial contribution test is satisfied. It would be impossible to fashion a standard that both provides certainty yet reaches an equitable result in each fact pattern. We believe that making the substantial contribution test elective would reduce the number of taxpayers that would be prejudiced by an objective threshold that might not fairly address the vagaries of their particular circumstances.

C. Weighting

For purposes of determining whether a CFC makes a substantial contribution to manufacturing, "[t]he weight given to any activity (whether or not set forth [on the list of nine]) will vary with the facts and circumstances of the particular business." Further, the Proposed Regulation provides that "the presence or absence of any activity, or a particular number of activities, is not determinative."12

The Proposed Regulations offer no guidance regarding how the various factors should be weighted. Many taxpayers have speculated that oversight and direction of the contract manufacturer's activities should be a "superfactor." The regulations should expressly provide that this is the case. The factors could be divided into tier 1, tier 2 and perhaps tier 3 factors to indicate which should be given more weight. If Treasury and the IRS's reluctance to do this is because the relevance of these factors varies by industry, some concrete (and non-obvious) examples should be provided. For example, for companies in a commodity goods business with thin margins and lean inventories, strategic purchasing, control of raw materials, WIP and finished goods, and logistics would seem to be important factors. For companies that sell high-margin devices or products that are subject to strict regulatory controls, quality control, vendor selection and oversight of regulatory matters should be the most important factors.

D. Sole Focus on Employees is Too Narrow to Adequately Measure Contributions to Manufacturing

The sole focus in the substantial contribution test on the contributions of the CFC's employees is not appropriate. The test should instead focus on both contributions of capital and employees. Assets are important contributions to manufacturing activity. In many cases, manufacturing of a product cannot occur without assets provided by principals to their contract manufacturers. For instance, consider a fact pattern in which the principal to at hired party contract manufacturer arrangement provides significant intangibles and design specifications to the contract manufacturer. The product could not be manufactured without the intangible assets or design specifications, which unequivocally demonstrates that these assets make a significant contribution. It simply is not reasonable to count some contributions and not others.

Moreover, too much significance should not be placed on the number of employees the CFC has in determining whether the substantial contribution test is satisfied. The evaluation should be qualitative rather than quantitative. Example 4, the "automated manufacturing" example, is misguided and does not reflect modern business models. First, the example diminishes the value of the employees of the CFC who "monitor the software and network systems to ensure that they are running smoothly and to apply any necessary patches or fixes."13 Even if there are only a few of these people, the amount of value they add to manufacturing could be enormous. If these individuals are not able to keep the manufacturing operations running properly, the CFC may be required to purchase substandard product, exposing it to substantial losses.

Second, automation of various manufacturing activities is often demanded by business exigencies or efficiencies and should not be equated with substanceless paper companies. In industries where manufacturing is particularly sophisticated, or where the product is very small or particularly vulnerable to contamination, automated oversight may be required or preferable. There can be no justification for the regulations to favor remote monitoring by telephone over remote oversight using sophisticated networking and test monitoring equipment. Further, this example ignores the contributions to manufacturing attributable to the features and functions in the remote testing software. This example in particular, and the narrow focus solely and exclusively on activities the employees of the CFC perform in general, are inconsistent with the stated goal of the Proposed Regulations to update the FBCSI rules to account for modern manufacturing and would unfairly prejudice taxpayers in the high-technology, bio-technology and pharmaceutical industries.

Multiple Manufacturing Branch Rule Issues

A. The Predominant Amount Rules

The Proposed Regulations provide that where a CFC as a whole satisfies the substantial contribution test, but none of the manufacturing branches satisfies either of the "physical manufacturing" tests, the location that makes "the predominant amount" of the CFC's contributions to manufacturing will be treated as the manufacturing location for purposes of applying the tax rate disparity tests in the branch rule.14 Further, where a CFC makes a substantial contribution, but there is no location that makes a 'predominant" contribution to manufacturing, the location with the highest effective tax rate ("ETR") is the single manufacturing location for purposes of applying the rate disparity test (the "No Predominant Amount Rule").15

These rules are arbitrary and unreasonable and should be eliminated. First, the standard for determining whether a location has made a "predominant" contribution to manufacturing is too high. The Proposed Regulations require a particular location to make a "significantly greater contribution" than any other location to be treated as making a "predominant" contribution.16There is no justifiable reason to impose on taxpayers such a high burden to avoid a rule that by its terms tips the scale in favor of finding FBCSI. The tested manufacturing location for purposes of applying the branch should flow from the quality and quantity of manufacturing contributions provided by that branch. If one branch contributes approximately 55%17 of the CFC's substantial contribution activities and one branch contributes approximately 45% of such activities, the first branch should be the tested location.

In fact, a simpler "greater than" test is much easier to administer than the proposed "significantly greater" rule. Taxpayers should be able to assess the relative significance of various contributions and determine which is the greatest, when the only task is to determine which one is greater than the others. In contrast, there is no way to precisely quantify how much more than that a "significantly" greater amount will be, which inevitably will lead to subjectivity in applying the rule and greater potential for controversy.

Second, whether a particular location makes a "predominant' contribution to manufacturing is a subjective determination. The Proposed Regulations fail to provide any guidance as to when a location would be treated as making a "significantly greater" contribution than any other location. The examples provided demonstrate that the "predominant amount" test will be very difficult for taxpayers to satisfy in many cases, and in any event relies on subjective determinations which can be avoided with the simpler rule.18 The only positive example included in the Proposed Regulations in which that test is satisfied is in Example 3, in which all the substantial contribution activities except "supplemental design work" an; provide by the head office's employees.

Third, the potential consequence that flows from whether the "predominant contribution" test is satisfied will be extreme for many taxpayers. Whether that test is satisfied in many cases will determine whether the highest ETR jurisdiction is treated as; the manufacturing location for purposes of applying the tax rate disparity test, which likely will mean that the CFC will derive FBCSI. That important conclusion should not teeter on the extremely subjective determination of whether a particular location makes "significantly greater" contributions than the others. The determination of the tested manufacturing location should be based on the contributions made by that branch, not the ETR of the branch.

Fourth, the rule that deems the location with the highest ETR as the tested manufacturing location is entirely arbitrary and, in every instance, will increase the likelihood of adverse tax consequences for the taxpayer. Consider an example in which a CFC organized under the laws of Singapore has four subsidiaries (Hong Kong, Germany, UK and France), each of which is disregarded for U.S. federal income tax purposes. Assume for sake of argument that it would be possible to determine the percentage of the total contributions to manufacturing that each disregarded subsidiary provides. The Singapore head office employees provide logistics, management of manufacturing profits, and oversight and direction of the manufacturing (roughly 40% of the total CFC contributions to manufacturing). The Hong Kong company's employees assist with vendor selection (roughly 8% of the total CFC contributions to manufacturing). The German employees are engineers engaged in R&D activities that contribute to manufacturing processes (roughly 15% of the total CFC contributions to manufacturing). The UK company employees perform European headquarters functions, quality control, oversight and direction of manufacturing, and warehousing functions (roughly 35% of the total CFC contributions to manufacturing). Finally, there is a handful of engineers in the French company that perform R&D activities (roughly, 2% contribution of the total CFC contributions to manufacturing). Assume the effective tax rates for each location are as follows: Singapore: 18%; Hong Kong: 16.5%; Germany: 30%; UK: 28%; France: 33.3%.

In this example, assume that the CFC as a whole is treated as making a substantial contribution to manufacturing, but that none of the locations is treated as making a "significantly greater" contribution than the others. Thus, the No Predominant A mount Rule would require that the French company, because it makes some (albeit modest) contribution to manufacturing, should be the location of manufacturing for purposes of the branch rule. The No Predominant Amount Rule seems to apply regardless of how minor the contributions to manufacturing by highest ETR location may be. Because the difference between the Singapore and French tax rates is more than the 90%/5% disparity permitted provided in the rate disparity test,19 the Singapore head office would be deemed to be selling on behalf of the small French branch, and all of the sales income of the head office would be treated as subpart F income unless the Singapore head office and the Hong Kong branch together would be treated as a making a substantial contribution to manufacturing.20

For no principled reason, the predominant amount rules penalize taxpayers that have structured their offshore operations according to efficient business models. Enterprises typically allocate functions among various locations to achieve business efficiencies, with the various locations collaborating to design, manufacture and support the product. Taxpayers that try to optimize business efficiencies by allocating functions according to the location with the best talent to perform these functions likely will not satisfy the predominant amount test. If the Proposed Regulations were finalized in their current form, the tested manufacturing location for purposes of applying the manufacturing branch rule would be the location with the highest effective tax rate, regardless of how small the contributions by that branch might be.

The general purpose of the Proposed Regulations is to acknowledge that CFCs that make a substantial contribution to manufacturing should not be viewed as deriving FBCSI. The predominant contribution limitation undercuts the helpful purpose of the Proposed Regulations by creating capricious FBCSI exposure for CFCs which do, in fact, make substantial contributions to manufacturing. The No Predominant Amount Rule is results-oriented in that it substantially increases the chances that the CFC will derive FBCSI. To eliminate that bias, if the No Predominant Amount Rule is retained, it should require a default to the lowest tax jurisdiction consistent with the helpful purpose of the Proposed Regulations.

For the reasons just stated, both the "significantly greater" standard and the No Predominant Amount Rule should be eliminated from the regulations. Instead, the regulations should provide that the tested location is simply the location of the largest contribution, as measured according to an objective standard. We recommend that the standard for determining the location of the largest contribution be the total operating expenses attributable to all "substantial contribution" activities that are provided by that location. Such a standard would be administrable and provide much more certainty for taxpayers. If Treasury and the Service disagree with that standard, an alternative objective standard should be provided to determine the location that makes the greatest contribution to manufacturing to avoid potentially' absurd results.

B. Measure of FBCSI Under the Branch Rule

The Proposed Regulations do not settle many of the most difficult questions taxpayers face in trying to apply the FBCSI sales and manufacturing branch rules. The examples provide assumptions that do not offer any guidance as to how to apply the rules.

In particular, the Proposed Regulations do not indicate how to determine the amount of FBCSI that results where a manufacturing branch satisfies the rate disparity test. The rules should focus on the income attributable to the function Congress intended to isolate in enacting section 954(d) -- sales and purchasing activity. There is no policy reason to cause inclusion of any other income that is embedded in the sale of the property for tax purposes. The regulations should confirm, consistent with the legislative history to section 954(d), that only profits from purchasing and selling activities could potentially be treated as FBCSI under the branch rule. The Proposed Regulations, therefore, should not speak of "income from the sales" of a particular product,21 which is particularly confusing and ambiguous, but rather in terms of profits arising from the sales function. The regulations should clarify that income properly booked in other branches or the remainder is not included in the scope of activity that gives rise to the FBCSI inclusion.

Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(f) Example 4 must be clarified. In that example, there is no explanation of which income is FBCSI as a result of Branch B satisfies the rate disparity test. The example should be corrected to indicate that Branch A's income is not FBCSI as a result of Branch B satisfying the rate disparity test. Consistent with Congress's intent in drafting section 954(d), only the profits attributable to FS's selling activity constitute foreign base company sales income. Branch A's manufacturing income and any other income earned by FS related to non-selling activities (e.g., manufacturing functions) are not FBCSI.

One sentence in Example 4 is particularly confusing. After discussing the rule that, when applied to the facts of the example, means that for purposes of determining whether the remainder of the CFC qualifies for an exception to FBCSI, the activities of Branch A are excluded, the sentence provides: "Therefore, for purposes of determining [FBCSI], the remainder of FS does not include the activities of Branch A" (emphasis added). The italicized language should be corrected to instead provide: "for purposes of determining whether an exception to FBCSI is met."

Otherwise, this language confusingly suggests that Branch A's manufacturing income is somehow treated as FBCSI. It would be patently unfair not to count Branch A's activities to determine whether the substantial contribution test is satisfied with respect to the remainder, but that disregarded payments to Branch A could constitute FBCSI. Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(f) Example 5 similarly requires clarification.

We appreciate this opportunity to provide our comments on the proposed regulations.

Sincerely,

 

 

Rhett Dawson

 

President and CEO

 

Information Technology

 

Industry Council

 

FOOTNOTES

 

 

1 [footnote omitted in original document]

2 Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(c) (emphasis added).

3 73 Fed. Reg. 10717 (Feb. 28, 2008).

4 Prop. Reg. § 1.954-3(a)(4)(iv)(b)(1).

5 Prop. Reg. § 1.954-3(a)(4)(iv)(b)(3).

6 Prop. Reg. § 1.954-3(a)(4)(iv)(a).

7 "Substantial," Merriam-Webster OnLine, available at http://www.inerriam-webster.com/dictionary/substantial.

8Id.

9Id.

10See, e.g., Prop. Reg. § 1.954-3(a)(4)(iv)(c) Example 3, in which the CFCs employees perform all of activities related to manufacturing other than the physical conversion.

11 Prop. Reg. § 1.954-3(a)(4)(iv)(a).

12Id.

13 Prop. Reg. § 1.954-3(a)(4)(iv)(c) Example 4.

14 Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(c).

15 Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(e).

16 Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(c).

17 We note that realistically, it would be extremely difficult to estimate percentages of contributions given the subjective nature of the test.

18 Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(f) Examples 3-5.

19 We note that the current 90%/5% threshold for the rate disparity test can create some absurd results. For example, a CFC organized in the UK (with a 28% ETR) with a disregarded subsidiary in France (with a 33.3% ETR) that satisfied the substantial contribution test could satisfy the rate disparity test, potentially subjecting the CFCs sales income to FBCSI treatment. The narrow 90%/5% rate disparity test means that the UK in this example is effectively treated as a low-tax jurisdiction, a result which is surprising and for which we question the policy rationale.

20See Prop. Reg. § 1.954-3(b)(2)(ii)(a).

21See, e.g., Prop. Reg. § 1.954-3(b)(1)(ii)(c)(3)(f) Example 4(ii).

 

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