Foreign sales corporations.

On March 27, 1992, Tax Executives Institute filed the following comments with the U.S. Department of the Treasury, the chairs of the congressional tax-writing committees, and the staff of the Joint Committee on Taxation on two issues relating to foreign sales corporations (FSCS): (i) the requirement for Joint Committee review of FSC refund claims; and (ii) the effect of the estimated tax provisions on FSCS and their related suppliers. The Institute's comments were prepared under the aegis of its International Tax Committee, whose chair is Raymond G. Rossi of Intel Corp.

I am writing on behalf of Tax Executives Institute concerning two issues relating to foreign sales corporations (FSCs): (i) the requirement for Joint Committee review of FSC refund claims; and (ii) the effect of the estimated tax provisions on FSCs and their related suppliers.

Joint Committee Review

Procedure

As you know, section 6405(a) of the Internal Revenue Code provides that no refund of any income tax in excess of $1 million may be made until after the expiration of 30 days of the date upon which a report, giving the name of the taxpayer, the amount of the refund, and a summary of the facts and decision by the Secretary of the Treasury, is submitted to the Joint Committee on Taxation. Although the Joint Committee has streamlined its procedures over the last few years and Congress has raised the statutory threshold for review, delays invariably result from the IRS's preparation and processing of the materials for review. The requirement for Joint Committee review of refund claims creates special problems for FSCs. The problems stem from the manner in which the incomes of the FSC and its related supplier are calculated under the Code.

In general, a portion of a FSC's income 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 based on either optional administrative rules or the arm's-length pricing rules under section 482 of the Code. Under the administrative pricing rules, transfer prices must be set so 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 property by the FSC. A decrease...