Proposed amendment of export-source rule.

• Position: Tax Executives Institute's International Tax Committee

Tax Executives Institute (TEI) understands that there is a proposal in pending Uruguay Round GATT funding legislation that would amend the export-source rule under section 863(b) of the Internal Revenue Code. The proposal, which reportedly has been approved by the House Ways and Means Committee, would effectively reverse the Tax Court's 1993 pro-taxpayer decision in Intel Corp. v. Commissioner.

As the principal association of corporate tax executives in North America, TEI opposes the proposal. The Institute urges the House and Senate conferees to reject the proposal on the following grounds: the proposal has not been the subject of legislative hearings; it would increase administrative complexity and uncertainty in respect of taxation of international business and thereby threatens to significantly impair U.S. competitiveness; it is premature inasmuch as the Intel case is still pending in the courts; and it would undermine a core purpose of the GATT agreement--ensuring that U.S. business can compete effectively in the global marketplace.

Background

Section 863 of the Internal Revenue Code provides special rules for determining the source (whether foreign or domestic) of a taxpayer's income. The Treasury Regulations under section 863 provide two examples, one using an "independent factory price" (Example 1) and another using the so-called 50-50 method for sourcing foreign and domestic income (Example 2). Specifically, Treas. Reg. [sections] 1.863-3(b) permits taxpayers to apportion 50 percent of the income derived from the sale outside the United States of products manufactured within the United States on the basis of the location of the assets held to produce the income; the other 50 percent of the income is sourced under the title-passage rule (i.e., where title to the goods shifts to the purchaser and hence where the place of sale is determined to occur).

In Intel Corp. v. Commissioner,(1) the United States Tax Court rejected an argument by the Internal Revenue Service that the taxpayer was required to use an independent factory price (IFP) analysis to determine its foreign-source income. The court held that the regulations under section 863(b) mandate the use of the IFP method only where (i) an IFP can be established and (ii) the taxpayer has a sales or distribution branch in a foreign country; the court confirmed that the 50-50 method is to be used where taxpayers sell their U.S.-manufactured products directly to either unrelated...