Special Reports conducts activities that are not "related - PDF document

Special Reports conducts activities that are not "related activities" under reg. section 1.482-8(a)(3)(ii)(B) -e.g., back office activities -does not appear to alter its status as a participant.) A is a participant because it is a member of a controlled group that includes a "regular dealer" (B), and it conducts "related activities" (pricing and risk management) within the meaning of reg. section 1.482-8(a)(2)(ii)(B). Income from A's and B's global dealing opera- tion therefore must be allocated and sourced under the proposed regulations. O n March 2, 1998, the U .8. interpretive questions posed by Allocation First, Then IR8 issued proposed regu- the regulations. Sourcing lations goveming the allocation Suppose that A, a country A The proposed regulations seem and sourcing of income derived corporation, and B, a country B to require that income be from a "global dealing operation." corporation related to A, conduct allocated under reg. section (For prior coverage, see Tax a dealing operation in swaps. B, 1.482-8 before it is sourced under Notes Int'l, Mar. 16, 1998, p. 837, which acts as the counterparty for reg. section 1.863-3(h). Thus, in or Doc 98-9254 (9 pages); for the all transactions with customers, Example 5(v) ofreg. section 1.482- full text of the global trading records 2,000 of income from 8(e)(8), taxpayers are instructed regs, see Doc 98-7970 (115 pages).) those transactions. B also incurs to "see reg. section 1.863-3(h) for The proposals includ.e reg. 100 of expense in operating the the source of income allocated" to section 1.482-8 (all section back office, which is elaborate a controlled entity using a profit- references are to the proposed and essential to the dealing split method set forth in reg. Treasury regulations), which operation, plus 1,000 of interest section 1.482-8. And reg. section provides rules for allocating such expense. B employs one trader at 1.863-3(h) provides rules for income among controlled tax- a cost of 100, and A employs four "sourcing income. ..from a payers, and reg. section 1.863- traders at a total cost of 400. global dealing operation that, 3(h), which provides rules for Assume for the sake of simplicity under the rules of reg. section sourcing the income thus that there are no separate 1.482-8, is earned by or allocated allocated. Amendments to other marketers. to a controlled taxpayer ." The regulations are proposed to bring first step, then, is to allocate The proposed regulations apply them into conformity with the income from the global dealing to A and B only if they are new section 482 and section 863 operation to A and B using one of "participants" in a "global dealing provisions; for example, reg. the methods set forth in reg. operation." The swaps operation sections 1.864-4, 1.894-1, and section 1.482-8. The source of the in question appears to be a 1.988-4. income thus allocated to each "global dealing operation" within A preamble to the proposed entity is determined subsequently the meaning ofreg. section 1.482- under reg. section 1.863-3(h). regulations describes the results 8(a)(2)(i) because pricing and risk they intend to achieve and the management activities with Allocation principles that the IR8 appar- respect to the execution of ently believes should guide their customer activities are conducted Assume that, given the inte- application. In places, however , grated nature of the AIB global in more than one tax jurisdiction. the mechanisms by which the dealing operation, a profit-split In addition, A and B both appear regulations accomplish these method is selected as the best to be "participants" in the global results and effectuate these prin- method for allocating income dealing operation within the ciples are unclear. In other meaning of reg. section 1.482- under reg. section 1.482-8. A places, the regulations them- profit split allocates the 8(a)(2)(ii). B qualifies as a selves are ambiguous and subject participant because it is a "combined operating profit" (or to varying interpretations. A loss) of a global dealing activity to "regular dealer in securities" as participants based on the simple hypothetical fact pattern defined in reg. section 1.482- will serve to illustrate some of the "relative value of each partici- 8(a)(iii). (The fact that B also March 23, 1998 .943 Tax Notes International