Comments on foreign sales corporations, March 2, 1990.

Comments on Foreign Sales Corporations

On March 2, 1990, Tax Executives Institute filed the following comments with the Internal Revenue Service on various issues relating to foreign sales corporations (FSCs). The comments were prepared under the aegis of the International Tax Committee, whose chair is Bernard J. Jerlstrom, and addressed three issues - estimated taxes, Notice 89-84, and Rev. Rul. 89-93.

This letter discusses three issues in respect of foreign sales corporations (FSCs) and makes the following recommendations:

* Estimated tax: Developed a procedure

whereby a FSC and its

related supplier would be permitted

to aggregate its tax

payments for purposes of determining

whether a penalty

was due under sections 6651

and 6655 of the Internal Revenue

Code.

* Notice 89-84: Clarify that

Notice 89-94, relating to sections

267(a)(3) and 163(a)(3) of

the Internal Revenue Code,

does not apply to FSCs.

* Rev. Rul. 89-93: Clarify Rev.

Rul. 89-93, relating to the

sourcing of a related supplier's

income, to take into account

the differences in computation

of combined taxable income

under the FSC rules and taxable

income under section 863

of the Code.

Estimated Tax Rules

In general, a portion of the income of a foreign sales corporation (FSC) is exempt from tax if certain conditions are met. The exemption is available with respect to income allocated to the FSC under special transfer-pricing rules. The transfer prices are based on either optional administrative rules or arm's-length pricing under section 482 of the Code. Under the administrative pricing rules, transfer prices shall be such that the FSC's taxable income will not exceed the greater of (i) 23 percent of the combined taxable income (CTI) of the FSC and its related supplier (generally, its U.S. parent) attributable to foreign trading gross receipts derived from the sale of property by the FSC, or (ii) 1.83 percent of the gross receipts derived from the sale of the property by the FSC.

Although FSCs must file U.S. tax returns, as foreign corporations they cannot join their U.S. parent in filing a consolidated return. Thus, a FSC must separately file a corporate tax return and separately pay estimated taxes. The estimated tax rules effectively operate as a "Catch-22" for FSCs and their related suppliers.

The problems in the FSC estimated tax area are twofold. First, CTI is often not susceptible to accurate calculation until after the close of the taxable year, particularly if grouping or marginal costing is used. Temp. Reg. [Sub-section] 1.925(a)-1T(e)(4) permits a FSC and its related supplier to recalculate the amount of foreign trading gross receipts at...