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IRS Official Reviews Impact of New Subpart F Contract Manufacturing Regulations with Leading Tax Practitioners

NEWS RELEASE

Contacts:
Mark Carrington
(703) 341.5880
mcarrington@bna.com

Arlington, Va. (March 16, 2009) – In a recent audioconference sponsored by BNA Tax & Accounting,  a senior IRS official and two prominent practitioners analyzed the principal consequences of the recently issued Subpart F contract manufacturing regulations. The participants stressed the importance of the contract manufacturing rules under Subpart F of the Internal Revenue Code, which now provides clear and practical guidance as to how a controlled foreign corporation can defer its profits from entering into contract manufacturing arrangements.

Panelists were Michael DiFronzo, Deputy Associate Chief Counsel (International) at the IRS, one of the primary drafters of the regulations; Joseph Calliano at the National Tax Office of Grant Thornton LLP in Washington, D.C.; and Alan Granwell, moderator, an international tax attorney and partner at DLA Piper in Washington, D.C.  

DiFronzo noted that the regulations replaced rules that were written in 1964 and that the latest effort was an attempt to “bring them [the regulations] into the modern world.” Granwell said that the new rules were drafted to accommodate the increasing use of a centralized supply chain model by U.S. multinationals and that “these regulations accommodate this new business model”.

Among the topics covered were:

• The substantial contribution test for determining whether the controlled foreign corporation’s contract manufacturing  arrangements qualify for the manufacturing exception to foreign base company sales income
• The seven indicia of manufacturing
• The definition of employer for purposes of the application of the substantial contributions test under the regulations
• The application of the foreign base sales income rules to controlled foreign corporations with branches, including the rate disparity test
• The risk of inadvertently creating a foreign branch under the contract manufacturing rules
• The effective date provisions, and why some taxpayers may want to elect into the use of the former proposed regulations

Harold W. Pskowski, senior tax analyst for U.S. International at BNA Tax & Accounting, noted that with the latest guidance and its relaxed effective date provisions "U.S. multinationals now will have adequate time to plan for implementation of the 'substantial contribution' test that the IRS and Treasury unveiled with the proposed regulations in February 2008. With the certainty provided by these final regulations, U.S. businesses, such as those in the electronics and pharmaceutical industries that rely heavily upon offshore contract manufacturers, must examine existing supply chains to assure compliance with the regulations."

A CD transcription of the February 26 may be purchased on the BNA Tax & Accounting store. Go to http://tmstore.bna.com/PastConference.aspx?productId=5167

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