TAX 9869 Lecture Notes - Lecture 52: Personal Property, W. M. Keck Observatory, Only Time

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11 Aug 2020
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Category II:
Foreign Base Company Sales Income:
ØIncome from the sale of property for use, consumption or disposition outside of a CFC’s
country of organization.
ØSales income derived from products sold to or on behalf of a related party or income from
products purchased from or on behalf of a related party.
ØIncludes profits, commissions, fees and other income.
ØAlways involves the purchase or sale of personal property.
Subpart F income that is taxed to the USSH
Subpart F generally taxed bc we don’t want people to push profits to CFCs that you
control and defer/wait to pay US tax until bring earnings back
So they said, no certain types of income is taxed right away to USSH, even
before you bought it back
Certain types of income- Subpart F- taxed immediately
o Will you pay tax twice on that income? Answer= no
Keep in mind: if biz purpose to it, you have exception to Subpart F//otherwise, USSH has to pick
up income
For FBCSI to apply, requires 3 countries
Test: income from sale of ppty for use… (bullet 2)
o If CFC organized in Netherlands, foreign income sold/used outside of the
Netherlands
o Important: sale has to be for products sold to/on behalf of related party
outside country on behalf of/sold to related party
o Can be any type of income generated w/respect to a sale
o If CFC receives commission from related party- common ownership & control,
related party for this purpose means that it’s 50% or more owned by same
person, you have control= related
o If related parties, performing something on behalf of another- i.e., one CFC is
doing services of sales and get a commission for sale, if product sold outside
CFC country, even though might be payment for service for trying to find
customer and things like that, it also goes into category of FBCSI b/c I look to the
essence of the income which is a sale and somewhere, there has to be
purchasing sale of personal ppty which can be inventory
o There are 4 basic t-actions that give rise
Foreign Base Company Sales Income:
Four Basic Transactions give rise to foreign base company sales income:
1)Controlled foreign corporation buys personal property from a related person.
2)Controlled foreign corporation sells personal property to a related person.
3)Controlled foreign corporation buys personal property on behalf of a related person.
4)Controlled foreign corporation sells personal property on behalf of a related person.
· You need to be on behalf of related person for it to apply
· Have to have 3 countries
Exclusions of Property Produced in Country of Incorporation:
The purchase or sale of property does not result in foreign base company sales
income if the property is produced, manufactured, grown or extracted in the country of
the CFC.
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Example of why we say that we need to have 3 countries (bc of exceptions more than
anything)
Let’s say US manufactures and sells property- sells inventory to UK and the UK dude
sells to China and China sells to a China customer
Have to have 3 countries
o Subpart F income and FBCSI
Three countries in this case: US= manufacturer, UK= entity (CFC) 100% owned by
USSH buying personal ppty (inventory from related party- US corp), happens to be
selling to related party to China
- Income that the UK earns on this sale to China is Subpart F income
- If UK buys property for 100 and sells it for 120:
- UK shows 120 sale to China
- 100 of COGS
- And 20 of profit= Subpart F income
- USSH on top has to pay tax on Subpart F (20 profit earned by UK,
subject to tax by US, subpart F income)
- FBCSI= why is the US selling to the UK? It’s pointless. Going ultimately to
a Chinese customer
- They can sell directly to Chinese customer or directly to the Chinese
subsidiary who sells to Chinese customer, but for our purposes, example
of Sub F
20 earned by UK= Subpart F
Let’s say China buys it for 120, (cost), but let’s say sells for 140, gets 20 of profit as well
Is that 20 of profit Sub F?
- Well, China bought from a related party so related party on one side, bought from
UK, brought to Chinese co (2 countries).
- Do I have 3 countries? When China sells it, selling to Chinese customer. This
Chinese customer is in same country CFC organized- THAT IS AN EXCEPTION
TO FBCSI!!!
- The sale to Chinese customer is NOT subpart F income
- So even if US sold to China and China sold to the Chinese customer, that is also
not Subpart F income because it’s the same country
- FBCSI has the same country exception- you only have 2 countries (US and
China- China selling to Chinese customer is NOT Sub F)
o What if China also sells to a customer in HK and also sells to a
customer in Thailand? Those sales would be Sub F, even if bought it from
US- you have a purchase of ppty from a related party (from US owner
and sold outside CFC’s country of organization-to HK and Thailand)
o Any income earned on that is subject to tax as Sub F to USSH
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