(16) The IRS has stated the purpose of the substantial assistance rules is to treat the following as FBCSI
: income received by a CFC from rendering services to an unrelated person if in rendering those services a related person substantially contributes to the CFC's performance of such services "in a manner that suggests that the CFC, rather than the related party, entered into the contract to obtain a lower rate of tax on the service income." (17)
For purposes of determining FBCSI
, if a CFC operates a foreign branch outside the CFCs country of incorporation, income attributable to the branch's activities can be treated as if it were derived by a wholly owned subsidiary of the CFC (the branch rule) (Sec.
TEI is concerned, however, that the grouping provision may also be interpreted as grouping the income of those branches for purposes of determining the actual amount of FBCSI
. Part of the uncertainty arises because Temp.
If, under the software regulations, the transfer of software is treated as a sale of property, the transaction must be analyzed to determine if the FBCSI
rules of Sec.
The branch rule will not cause income to be FBCSI
if that income otherwise would not be FBCSI
Arguably, another basis for claiming the manufacturing exception is available under the statute, which provides that FBCSI
is defined as "income ...
The question of whether a controlled foreign corporation (CFC) may enter into a contract manufacturing arrangement while still meeting the manufacturing exception to the FBCSI
rules has been a matter of contention between taxpayers and the IRS for over three decades.
The proposed regulations, however, could deem the branch a CFC, potentially giving rise to FBCSI
. Thus, the application of the new rule could result in the treatment of the branch as a manufacturer when the taxpayer merely purchases from and sells to unrelated parties.
Treatment of European Union as One Country for FBCSI
In the preamble and, implicitly, in the language of the proposed regulations themselves, the IRS dismissed the "its" argument, under which taxpayers take the position that no FBCSI
would result when a CFC sells different property than the property it buys.
If the above three explicit exceptions were the only exceptions from FBCSI
characterization, the contract manufacturing issue would not be so contentious.
954(e)(i) defines FBCSI
as income of a CFC generated from the performance of services that (1) are performed for, or on behalf of, a related person and (2) are performed outside the country in which the CFC is organized.