REG-100956-19 - Submission to Treasury and IRS re Source of Income from Certain Sales of Personal Property

Abstract

In late December 2019, the Treasury and IRS released proposed regulations (REG-100956-19) in connection with the TCJA change to §863(b), under which property produced and sold by a taxpayer would be sourced solely at the location of production.

This submission to the Treasury and IRS makes suggestions regarding these proposed regulations that are necessary to appropriately reflect modern business models used by multinationals. These business models typically include centralized management of operations that are spread around the world within group members that operate not as independent entities, but rather as cogs within an integrated worldwide business. They also often involve unrelated contract manufacturers.

The areas discussed include:

• Expanding the format of the sourcing regulations so that production activities conducted by MNC group members other than the group member taxpayer are included, and

• Amending the current allocation approach that uses the adjusted basis of production assets because for MNCs its use causes skewed and nonsensical results

The proposed regulations include Prop Reg §1.865-3, which applies the new sourcing rule to nonresident taxpayers affected by §865(e)(2). This proposed regulation needs to provide additional guidance (which is suggested within the submission) for the determination of whether a nonresident taxpayer has “purchased and sold” or has “produced and sold” the relevant inventory property.

The submission includes several additional suggestions.

Keywords: source, MNC, contract manufacturer, effectively connected income, profit shifting, BEPS,

JEL Classification: H21, H25, K34, E62