4.60.7  Guidelines for Evaluating International Referrals  (09-01-2004)
Guidelines for Evaluating Referrals

  1. This section outlines International Referral Recipients (IRR) responsibilities in the evaluation of international referrals for acceptance or rejection.  (09-01-2004)
Evaluation Procedures

  1. The IRR will consider the following when evaluating international referrals.

    1. Whether an opportunity exists for the improper diversion of income from entities subject to U.S. income taxes to related foreign entities that are not. Such diversions of income may have arisen from, but are not limited to, the following situations between a domestic entity and a controlled or controlling foreign entity: Purchases or sales of stock in trade or depreciable property; Compensation paid or received for technical, managerial, engineering, construction, scientific or other services; Commissions, rents, and royalties received or paid; Constructive dividends received from a foreign corporation; Amounts borrowed from a controlled foreign corporation (excluding ordinary trade accounts that are settled timely); Premiums paid or received for insurance or reinsurance; Sale, exchange, assignment or capital contribution of intangible property by a taxpayer to a related foreign entity; Transactions under IRC section 269, IRC section 367, or IRC section 482.

    2. If the taxpayer has a branch, subsidiary, or controlled entity in any form in a tax haven country, particular care should be exercised in evaluating a referral since there may be greater incentive for the improper diversion of income.

    3. For purposes of (a) and (b) above, "controlled" or "controlling" includes generally, any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised. It is the reality of control that is decisive, not its form or mode of exercise. This would include control of brother–sister, and grandfather–grandson entities. See IRC section 482.

    4. Subpart F Income; Whether the taxpayer has reported any Subpart F income; Whether operations of the controlled foreign corporation may generate Subpart F income; Whether foreign tax credit applicable to Subpart F income has materially reduced the effect of reporting Subpart F income; Whether distributions received have been excluded as previously taxed Subpart F income.

    5. The impact of allocation of income and expenses between U.S. companies and their affiliates in Puerto Rico.

    6. Significant amount of foreign tax credit claimed.

    7. Significant foreign activity or losses related to foreign investments.

    8. Significant extraterritorial income exclusion claimed.

    9. The impact of penalties per IRC section 6038A and IRC section 6038C as they apply to 25-percent foreign-owned corporations and foreign corporations engaged in a U.S. trade or business.

More Internal Revenue Manual