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Private Letter Ruling 9234019

May 22, 1992

Symbol: CC:INTL:Br2-INTL-0304-92

Uniform Issue List No.: 0924.00-00

This is in reply to a request dated March 23, 1992 for a ruling as to certain federal income tax consequences of sales of qualified export property between members of the same controlled group.

 

The rulings contained in this letter are predicated upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. Verification of the factual information, representations, and other data may be required as part of the audit process.

 

Company X and Company V belong to the same affiliated group which files a consolidated return under section 1502 of the Code. Company Z, organized in Country C as a wholly owned foreign subsidiary of Company X, has elected under section 927(f) of the Code to be treated as a foreign sales corporation as defined under section 922(a) of the Code.

 

Company X conducts Business B which includes the creation of Q. Taxpayer represents that Q constitutes export property as defined in section 927(a) of the Code and section 1.927(a)-1T(a) of the temporary regulations. Company X sells Q to Company V which markets and sells Q to unrelated customers. Company X and Company Y have a commission agreement with Company Z wherein Company Z will receive commission income from Company X and Company V for transactions by members of the affiliated group that generate foreign trading gross receipts under section 924(a) of the Code and the regulations thereunder.

 

Company X and Company Y will accrue a commission expense payable to Company Z for the sales of Q. Company X's commission expense will not exceed 23% of the combined taxable income derived from its sale of Q to Company V. Company V's commission expense will not exceed 23% of the combined taxable income it derives from the sale of Q to an unrelated customer. The commissions paid by Company X and Company Y will comply with the transfer pricing rules of section 925(a)(2) of the Code and the regulations thereunder.

 

Taxpayer represents that Company Z will satisfy the foreign management requirements of section 924(c) of the Code. With regard to the sales of Q from Company X to Company Y and from Company Y to an unrelated customer, the taxpayer represents that Company Z will fulfill the foreign economic process requirements of section 924(d).

 

Foreign trading gross receipts include gross receipts from the sale of export property by a principal for which a foreign sales corporation (hereinafter "FSC") acts as a commission agent, pursuant to a contract entered into prior to the shipment of the property to the purchaser. Section 1.924(a)-1T(b) of the regulations. The seller or its corporate commission agent must be a FSC at the time the property is shipped to the purchaser in order for the sale to create foreign trading gross receipts. Section 1.924(a)-1T(b) of the regulations. Additionally, the FSC must be managed and conduct specified economic processes outside the United States in order to have foreign trading gross receipts. Sections 924(c) and (d) of the Code; Section 1.924(a)-1T(a) of the regulations.

 

The gross receipts and combined taxable income transfer pricing methods of section 925(a)(1): and (2), respectively, may be used for transactions in which a FSC acts as a commission agent for a related supplier on sales of export property to third parties which can be other related parties. Sections 1.924(a)-1T(i)(1) and 1.925(a)-1T(b)(2)(iii)(A) of the regulations. To apply the administrative pricing rules of section 925(a) when a FSC acts as a commission agent, the FSC must satisfy the requirements of section 925(c). Section 1.924(a)-1T(i)(1) of the regulations. The allowable commission paid to the FSC is determined under one of three transfer pricing methods: gross receipts; combined taxable income; or sales price determined under section 482 of the Code. Section 925(a) of the Code; Section 1.925(a)-1T(a)(1) of the regulations.

 

Section 1.924(a)-1T(g)(6)(B) of the regulations, enacted before the technical corrections made by the Tax Reform Act of 1986, prevents revenues derived from related party sales from comprising foreign trading gross receipts where both related parties pay a commission to FSC in the controlled group. This prohibition precludes companies from pyramiding benefits under the gross receipts method of section 925(a)(1) to calculate income. This prohibition applies to taxpayers using either the combined taxable income or gross receipts method.

 

The Tax Reform Act of 1986 amended section 924(f)(1) of the Code to remove the prohibition on FSCs from treating receipts from related FSCs as foreign trading gross receipts under certain circumstances. Section 1876(1) of the Tax Reform Act of 1986. As long as no FSC in the controlled group uses the gross receipts method of section 925(a)(1) to calculate income, a FSC may treat receipts from another FSC in the same controlled group as foreign trading gross receipts. Section 924(f)(1) of the Code.

 

Company X and Company Y are related suppliers which both use Company Z, a FSC, as a commission agent in the disposition of Q, a type of export property. Section 1.927(d)-2T of the regulations. Company Z receives a commission on sales of Q from Company X to Company Y and from Company Y to unrelated customers. Company X and Company Y have chosen the combined taxable income method of section 925(a)(2) of the Code to calculate income. The gross receipts from the sales of Q constitute foreign trading gross receipts if they derive from sales of export property in which the FSC acts as a commission agent and no FSC in the controlled group uses the gross receipts method to calculate income. Section 924(0(1) of the Code.

 

Based solely on the information submitted and the representations set forth above, it is held as follows:

 

(1) The sales of Q from Company X to Company Y and from Company Y to an unrelated person through the same commission FSC, Company Z, will each give rise to foreign trading gross receipts if Q is qualified export property and if the provisions of sections 921 through 927 are otherwise satisfied.

 

No opinion is expressed as to whether Q qualifies as export property as defined in section 927(a) of the Code and section 1.927(a)-1T(a) of the temporary regulations.

 

No opinion is expressed as to whether Company Z satisfies the requirements outlined in section 922 of the Code and the regulations thereunder.

 

No opinion is expressed as to whether Company Z satisfies the foreign management and economic process requirements of sections 924(c) and (d) of the Code and the regulations thereunder with respect to the sale of Q from Company X to Company Y and with the respect to the sale of Q from Company Y to an unrelated customer.

 

A copy of this letter must be attached to any federal income tax return to which it is relevant.

 

This ruling is directed only to the taxpayer who requested it. As provided in section 6110(j)(3) of the Code, this letter may not be used or cited as precedent.

 

Sincerely yours, Jacob Feldman Senior Reviewer, Branch 2 Office of Associate Chief Counsel (International)