Grouping Rules for Foreign Sales
Corporation Transfer Pricing
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8944] RIN 1545-AX41
TITLE: Grouping Rules for Foreign Sales Corporation Transfer Pricing
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
SUMMARY: This document contains final regulations and amendments to
temporary regulations that provide guidance to taxpayers that have
made an election to be treated as a foreign sales corporation (FSC).
These regulations permit the grouping of transactions for purposes
of applying the administrative pricing (including marginal costing)
rules to determine FSC transfer prices and provide a time for filing
for the election to group transactions.
DATES: Effective date: These regulations are effective March 2,
2001. Applicability: For dates of applicability, see
§1.925(a)-1(c)(8)(i).
FOR FURTHER INFORMATION CONTACT: Christopher J. Bello (202) 874-
1490 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 3, 1987, the IRS and Treasury published temporary
regulations (TD 8126, 1978-1 C.B. 184) in the Federal Register (52
FR 6428) to provide (among other things) rules for grouping
transactions for purposes of applying the FSC transfer pricing
rules. A notice of proposed rulemaking (INTL-153-86, 1987-1 C.B.
799) cross-referencing the temporary regulations and inviting
comments and requests for a public hearing was published on the same
day in the Federal Register (52 FR 6467). Written comments
concerning the proposed regulations were received and a public
hearing was held.
On March 3, 1998, the IRS and Treasury amended the above temporary
regulations by publishing temporary regulations (TD 8764, 1998-1
C.B. 844) in the Federal Register (63 FR 10305) that (among other
things) modified the time for filing the election to group
transactions for purposes of applying the administrative pricing
(including marginal costing) rules to determine FSC transfer prices.
A notice of proposed rulemaking (REG-102144-98, 1998-1 C.B. 860)
cross-referencing the temporary regulations and notice of public
hearing was published on the same day in the Federal Register (63 FR
10351). Written comments concerning the proposed regulations were
received and, on June 24, 1998, a public hearing was held.
After consideration of all the comments, certain proposed
regulations relating to grouping of transactions for FSC transfer.
pricing are adopted as revised by this Treasury decision.
Explanation of Provisions
Section 927(d)(2)(B) of the Internal Revenue Code provides generally
that FSCs and their related suppliers may, to the extent provided in
regulations, elect to apply the FSC transfer pricing provisions
under section 925 on the basis of groups of transactions based on
product lines or recognized industry or trade usage, rather than on
a transaction-by-transaction basis. Sections 1.925(a)-1T(c)(8)(i)
and 1.925(b)-1T(b)(3)(i) of the temporary regulations permit
taxpayers, at their annual choice, to group transactions in applying
the administrative pricing (including marginal costing) rules to
determine FSC transfer prices. Such grouping elections must be
evidenced on a Schedule P of the FSC's timely filed (including
extensions) U.S. income tax return for the taxable year. No untimely
or amended returns are allowed to make a grouping election, change a
grouping basis, or change from a grouping basis to a transaction-by-
transaction basis (collectively
Section 1.925(a)-1T(c)(8)(i) of the temporary regulations also
contains a transition rule that requires grouping redeterminations
for any taxable year beginning before January 1, 1998, to be made no
later than the due date of the FSC's timely filed (including
extensions) U.S. income tax return for the FSC's first taxable year
beginning after December 31, 1997 (transition rule).
Conforming changes are reflected in §§1.925(a)-1T(e)(4)
and 1.925(b)-1T(b)(3)(i) of the temporary regulations. Commentators
requested that the rule limiting grouping elections to timely filed
returns be removed to allow taxpayers to maximize FSC benefits and
correct grouping errors. Other commentators requested that the time
limit for grouping elections be replaced by a case-by-case analysis
that would disallow only those grouping redeterminations that are
abusive. Commentators also suggested alternative time limits that
would allow taxpayers to file amended returns to reflect grouping
redeterminations within a specified time limit (for example, one
year from the extended due date of the original return). In response
to these comments, the Treasury and the IRS have revised the time
limits for filing grouping elections under §1.925(a)-1T(c)(8)
(i). Accordingly, these regulations permit grouping redeterminations
no later than one year after the due date of the FSC's timely filed
(including extensions) U.S. income tax return for taxable years
beginning after December 31, 1999. For any taxable year beginning
before January 1, 2000, a grouping redetermination may be made no
later than the due date of the FSC's timely filed (including
extensions) U.S. income tax return for the FSC's first taxable year
beginning on or after January 1, 2000.
Commentators also suggested that the transition rule be extended by
two or more years to enable taxpayers to assemble data and determine
the most advantageous groupings for taxable years beginning before
January 1, 1998. In response, the IRS on May 17, 1999, published
Notice 99-24 (1999-1 C.B. 1069). Notice. 99-24 notified taxpayers
that the IRS and Treasury intended to extend by one year the
transition rule for such years. These regulations provide a further
extension of the transition rule time limit.
These regulations also provide an additional time period for certain
taxpayers to make grouping redeterminations notwithstanding the time
limits for filing grouping redeterminations otherwise specified in
these regulations. In particular, a grouping redetermination may be
made at any time during the one-year period commencing upon
notification of the related supplier by the Internal Revenue Service
of an examination, provided that both the FSC and the related
supplier agree to extend their respective statutes of limitations
for assessment by one year. The IRS and Treasury anticipate the IRS
and taxpayers to plan and conduct examinations in a manner
consistent with the foregoing provision so as to facilitate
efficient and fair administration of the FSC grouping rules for
transfer pricing.
Finally, these regulations provide that the requirements under
§1.925(a)-1T(e)(4) with respect to redeterminations other than
grouping also apply to grouping redeterminations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the.6 Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulation does not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, the temporary regulations and notice of proposed rule-
making preceding these regulations were submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal author of these regulations is Christopher J. Bello of
the Office of the Associate Chief Counsel (International). Other
personnel from the IRS and Treasury Department also participated in
the development of these regulations.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirement. Adoption of
Amendments to the Regulations Accordingly, 26 CFR part 1 is amended
as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order for section 1.925(a)-1 to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.925(a)-1 also issued under 26 U.S.C. 925(b)(1) and (2) and
927(d)(2)(B). * * *
Par. 2. Section 1.925(a)-1 is added to read as follows:
§1.925(a)-1 Transfer pricing rules for FSCs.
(a) through (c)(7) [Reserved] For further guidance, see
§1.925(a)-1T(a) through (c)(7). (c)(8) Grouping transactions.
(i) The determinations under this section are to be made on a
transaction-by-transaction basis. However, at the annual choice made
by the related supplier if the administrative pricing methods are
used, some or all of these determinations may be made on the basis
of groups consisting of products or product lines. The election to
group transactions shall be evidenced on Schedule P of the FSC's
U.S. income tax return for the taxable year. No untimely or amended
returns filed later than one year after the due date of the FSC's
timely filed (including extensions) U.S. income tax return will be
allowed to elect to group, to change a grouping basis, or to change
from a grouping basis to a transaction-by-transaction basis
(collectively grouping redeterminations)
The rule of the previous sentence is applicable to taxable years
beginning after December 31, 1999. For any taxable year beginning
before January 1, 2000, a grouping redetermination may be made no
later than the due date of the FSC's timely filed (including
extensions) U.S. income tax return for the FSC's first taxable year
beginning on or after January 1, 2000. Notwithstanding the time
limits for filing grouping redeterminations otherwise specified in
the previous three sentences, a grouping redetermination may be made
at any time during the one-year.8 period commencing upon
notification of the related supplier by the Internal Revenue Service
of an examination, provided that both the FSC and the related
supplier agree to extend their respective statutes of limitations
for assessment by one year. In addition, any grouping
redeterminations made under this paragraph must meet the
requirements under §1.925(a)-1T(e)(4) with respect to
redeterminations other than grouping. The language is removed from
the fourth sentence of §1.925(a)-1T(e)(4), applicable to
taxable years beginning after December 31, 1997. See also
§1.925(b)-1T( b)(3)(i). (c)(8)(ii) through (f) [Reserved] For
further guidance, see §1.925(a)-1T(c)(8)(ii) through (f).
(g) Effective date. The provisions of this section apply on or after
March 2, 2001. Par. 3. Section 1.925(a)-1T is amended as follows:
1. Paragraph (c)(8)(i) is revised.
2. The last sentence of paragraph (e)(4) is removed. The revision
reads as follows: §1.925(a)-1T Temporary regulations; transfer
pricing rules for FSCs.
* * * * *
(c) * * *
(8) * * * (i) * * * [Reserved] For further guidance, see
§1.925(a)-1(c)(8)(i). §1.925(b)-1T [Amended]
Par. 4. Section 1.925(b)-1T is amended by removing the last sentence
of paragraph (b)(3)(i).
Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: February 28, 2001
Pamela F. Olson
Acting Assistant Secretary of the Treasury
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