According to Law360, Whirlpool's Luxembourg subsidiary generated foreign base company sales income, or FBCSI, taxable by the U.S. because that sales income was not taxed in any jurisdiction outside the affiliate's country, attorneys representing the Internal Revenue Service said in a brief.
The government asked the appeals court to affirm the Tax Court's ruling, according to the brief. If the Sixth Circuit were to find the Tax Court's ruling flawed, it should remand the case for further proceedings to determine whether the Luxembourg affiliate's sale income constituted FBCSI under another part of the Internal Revenue Code, the U.S. said.
In November, Whirlpool told the appeals court that its offshore income shouldn't be considered taxable by the U.S. because it was generated by two foreign affiliates manufacturing different products. The U.S. Tax Court incorrectly characterized Whirlpool's $50 million in offshore earnings as FBCSI, according to the company's brief.
The company contested on appeal that its foreign affiliate income shouldn't be considered FBCSI under Section 954(d)(2), arguing that the income is nontaxable because the operations in the Mexico subsidiary were contractually controlled by the Luxembourg affiliate and the rights to sell finished products were transferred to separate branches within Whirlpool, according to the company's brief.
But the government said that the Tax Court was correct to reject Whirlpool's argument that the U.S. Department of Treasury's so-called manufacturing branch rule would allow the company's Luxembourg subsidiary to avoid paying U.S. tax. The Tax Court correctly applied Treasury rules to determine that the Luxembourg affiliate generated FBSCI when it used a third-country branch to conduct its manufacturing, the U.S. said in its brief.
Under Section 954(d)(1), a CFC's income constitutes FBCSI when the earnings involve transactions with a "related person" if the property is manufactured outside the country in which the CFC is organized and sold for consumption or use outside that jurisdiction.
Pushing back, the IRS argued that genuine disputes of material fact existed as to whether the Luxembourg CFC actually manufactured the products, according to court papers.
Read more at: Tax Times blog