Notice 2007-13: loosening the rules surrounding substantial assistance.

• Author: Combs, Joe Ben

The global marketplace has undergone a dramatic transformation since the regulations governing foreign base company services income were issued in 1968. As this change continues, the IRS must give serious consideration to the relevance of existing statutes that originated when American commerce was far more domesticated than it is today,

Fortunately, Treasury is taking note of the need for reform. Notice 2007-13 was released in January 2007 in response to a growing segment of businesses with foreign subsidiaries that use certain domestically centralized support functions. The notice will provide welcome relief to those U.S. corporations that have been forced either to pay tax on foreign base company services income or to employ a suboptimal corporate structure to avoid the tax.

In general, under Sec. 367(b), the earnings of a controlled foreign corporation (CFC) are not taxed in the United States until they are repatriated to its U.S. parent company. As a result, before the enactment of subpart F (Secs. 951-965), a corporation could generate earnings through a CFC incorporated in a low-tax jurisdiction and avoid (or at least defer) U.S. taxation on those earnings. Subpart F was enacted in response, making certain types of income generated by CFCs subject to taxation in the United States in the tax year the income is earned, regardless of whether the income is repatriated. This item focuses on one such type of income: foreign base company services income (FBCSI).

Sec. 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. Services are deemed to be performed for, or on behalf of, a related person if that person provides substantial assistance contributing to the performance of such services. The determination of substantial assistance is the primary focus of Notice 2007-13.

The notice announces several amendments that will be made to Regs. Sec. 1.954-4(b)(2). Under current law, taxpayers may use either a subjective test or an objective cost test to determine whether substantial assistance is provided in connection with services performed. The subjective test, which provides that assistance is substantial if it is a "principal element" of the services performed, will be eliminated under the updated regulations, and the objective test will be revised drastically to limit the level...