Presenting a live 110 ‐ minute teleconference with interactive Q&A Subpart F Income: Navigating the Revised Branch and Contract Manufacturing Rules WEDNESDAY, JUNE 20, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert J. Misey, Jr., Shareholder, Reinhart Boerner Van Deuren , Milwaukee y, , , , Frederick Chilton, Partner, McDermott Will & Emery , Silicon Valley, Calif. James Sams, Principal, KPMG , McLean, Va. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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Subpart F Income: Navigating the R Revised Branch and Contract i d B h d C t t Manufacturing Rules Seminar June 20, 2012 Robert J. Misey Jr. Reinhart Boerner Van Deuren Frederick Chilton, McDermott Will & Emery rmisey@reinhartlaw.com fchilton@ mwe.com James Sams, KPMG jksams@ kpmg.com
Today’s Program Origin Of Branch, Contract Manufacturing Regulations Slide 7 – Slide 17 [Robert J. Misey Jr.] Contract Manufacturing Regulations Slide 18 – Slide 42 [Robert . J. Misey Jr., Frederick Chilt on] Branch Office Regulations Slide 43 – Slide 64 [James S ams and Frederick Chilt on]
Robert J. Misey Jr., Reinhart Boerner Van Deuren ORIGIN OF BRANCH ORIGIN OF BRANCH, CONTRACT MANUFACTURING REGULATIONS
Foreign ‐ Based Company Sales Income 1. CFC buys from or sells to a related person. 2. Property manufactured outside the CFC’s country by someone ot her t han t he CFC 3. Sold for use outside the CFC’s country 8
Th FBCSI S The FBCSI Scenario i USCo product d t US F CFC 3 rd- Country product Customer 9
The Branch Rule: Manufacturing Branch USCo US F CFC CFC Sales p product 4 Country 4 th- Country Customers 3 rd- Country Manufacturing Branch 10 10
Th B The Branch Rule: Sales Branch h R l S l B h USCo US F CFC CFC Manufacturing 4 th- Country 4 Country product product Customer 3 rd- Country Sales Branch Branch 11 11
H How We Got Here: Rev. Rul. 75 ‐ 7 W G H R R l USCo US US F Unrelated Unrelated Title to metal ore concentrate – ForCo CFC control over conversion process Conversion process 4 th- Country 4 th- Country Customers ferroalloy — CFC manufactures — CFC has a branch 12 12
How We Got Here: P Post ‐ Rev. Rul. 75 ‐ 7 Planning R R l Pl i — Taxpayers claimed contract manufacturers resulted in the CFC manufacturing. — Taxpayers claimed the contract manufacturers were not branches of the CFC. 13 13
H How We Got Here: Ashland Oil W G H A hl d Oil USCo US US F Unrelated Unrelated ForCo CFC conversion process 4 th Country 4 th- Country Customers product Tax Court: Unrelated contract manufacturer wasn’t a branch of the CFC. 14 14
H How We Got Here: Vetco W G H V USCo US F CFC 4 th- Country Customers product 3 rd- Country y CFC Conversion process Tax Court: Wholly owned manufacturing subsidiary of a CFC isn’t a branch Tax Court: Wholly owned manufacturing subsidiary of a CFC isn t a branch. 15 15
How We Got Here: Rev. Rul. 97 ‐ 48 l — Revoked Rev. Rul. 75-7 — St t d th t Stated that a contract manufacturer’s activities can’t be t t f t ’ ti iti ’t b attributed to a CFC unless a branch exists 16 16
How We Got Here: P Post ‐ Rev. Rul. 97 ‐ 48 Planning R R l 8 Pl i The it s argument: • ― FBCSI is "income derived in connection with the purchase of property from a related purchaser and it s sale to any of property from a related purchaser and it s sale to any person." 17 17
R b Robert J. Misey Jr., Reinhart Boerner Van Deuren J Mi J R i h B V D Frederick Chilton, McDermott Will & Emery CONTRACT MANUFACTURING CONTRACT MANUFACTURING REGULATIONS
Th R The Recent Regulations R l i — Eliminate the " it s " defense — E Expand the manufacturing exception with subst ant ial d th f t i ti ith b t t i l cont ribut ion t o manufact uring — Substantially reinvigorate the branch rule 19 19
Four Tests For Manufacturing F T F M f i 1. Substantial transformation 2. Generally considered manufacturing in the industry 2 G ll id d f t i i th i d t 3 3. Safe harbor of conversion costs constituting 20% of the cost of Safe harbor of conversion costs constituting 20% of the cost of goods sold 4. Substantial contribution to manufacturing 20 20
S b Substantial Transformation i l T f i USCo US fresh tuna F CFC 3 rd- Country canned tuna Customers 21 21
Generally Considered To Constitute Manufacturing C i M f i USCo sunglass sunglass US components F CFC 3 rd- Country sunglasses Customer 22 22
Safe Harbor Of 20% Of Cost Of Goods Sold USCo US WIP F $30,000 direct material costs CFC $10,000 conversion costs 3 rd- Country Customer completed products 23 23
Substantial Contribution To Manufacturing — Results in manufacturing without what is traditionally considered manufacturing — Facts-and-circumstances test — No minimum performance threshold — Require that activities be conducted by employees — Deals with automated manufacturing 24 24
Seven Factors Of Substantial Contribution S b i l C ib i 1. Oversight of physical manufacturing 2. Physical activities are less than full physical manufacturing. 3. Control of raw materials 3 C t l f t i l 4. Managing manufacturing costs or capacities 5 5. Control of manufacturing logistics Control of manufacturing logistics 6. Quality control 7. Development of manufacturing intangibles 7. Development of manufacturing intangibles 25 25
Contract Manufacturing: L Lessons From The Examples F Th E l — Mere contractual rights, legal title, tax ownership or assumption of risk of loss are not considered in determining whether the CFC has substantially contributed. — Contractual claims to oversight without actual oversight mean nothing nothing. 26 26
Contract Manufacturing: Lessons From The Examples (Cont.) h l ( ) USCo US US F 3 rd Country 3 Country KM CFC Substantial 4 th- Country transformation Customer Power to control product and oversee is not exercised. No substantial contribution No substantial contribution 27 27
Contract Manufacturing: Lessons From The Examples (Cont.) h l ( ) The actual exercise of direction and oversight of the manufacturing activities constitute a substantial contribution. 28 28
Contract Manufacturing: Lessons From The Examples (Cont.) h l ( ) A CFC must consider the activities of its employees in determining whether the CFC manufactures the property sold. 29 29
Contract Manufacturing: Lessons From The Examples (Cont.) h l ( ) USCo US US F 3 rd- Country 3 Country KM CFC Substantial 4 th- Country transformation Customer Employees conduct product R&D, QC and logistics. Substantial contribution Substantial contribution 30 30
Contract Manufacturing: Lessons From The Examples (Cont.) h l ( ) USCo US US F 3 rd- Country 3 Country KM CFC 4 th- Country Substantial transformation Customer Employees select buys raw materials buys raw materials materials, oversee mfg. process, and schedule. Substantial contribution Substantial contribution 31 31
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