4.60.7  Guidelines for Evaluating International Referrals

Manual Transmittal

December 17, 2015

Purpose

(1) This transmits revised IRM 4.60.7, International Procedures, Guidelines for Evaluating International Referrals.

Material Changes

(1) Text previously contained in IRM 4.60.7, Guidelines for Evaluating International Referrals, has been revised and reorganized to reflect additional criteria for evaluating referrals including abusive tax shelters and listed transactions.

Effect on Other Documents

This IRM supersedes IRM 4.60.7, dated September 1, 2004.

Audience

LB&I, SB/SE, TE/GE management and examiners

Effective Date

(12-17-2015)

Sharon R. Porter
Acting Director, International Business Compliance
Large Business and International Division

4.60.7.1  (09-01-2004)
Guidelines for Evaluating Referrals

  1. This section outlines international referral recipient (IRR) responsibilities in the evaluation of international referrals for acceptance or rejection.

4.60.7.2  (12-17-2015)
Evaluation Procedures

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

    1. If the taxpayer has a branch, subsidiary, or controlled entity in any form in a tax haven country

      Note:

      Determination of the tax haven country should be made and provided by the submitter. Determination should also be made and provided by the submitter if an abusive tax shelter or a listed transaction is present. Particular care should be exercised in evaluating a referral since there may be greater incentive for the improper shifting of income.

    2. Transactions relating to cost sharing arrangements including platform contribution transactions and the sharing of R&D costs

      Reminder:

      Did the taxpayer include a 481-7 statement on the return?

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

    4. Significant amount of foreign tax credit claimed

      Note:

      Consider the taxpayer’s methods of allocating and apportioning income and expenses for purposes of computing foreign tax credit.

    5. Significant foreign activity or losses related to foreign investments

    6. Significant extraterritorial income exclusion (ETI) claimed using Form 8873

      Note:

      Although ETI was repealed in 2004, there are transitional rules where Form(s) 8873 may still be filed for grandfathered transactions.

    7. The impact of penalties under IRC 6038(a) (Form 5471 penalties), IRC 6038A (25-percent foreign owned domestic corporations) and IRC 6038C (foreign corporations engaged in a U.S., trade or business) for failure to file certain information returns

      Note:

      The examiner should identify Form(s) 5471 and 5472 that are blank, incomplete, or state "information available on request" .

    8. If Form 1042 was filed and if there are material issues regarding withholding at source issues

  2. The IRR will also review the information provided to determine whether additional information may need to be gathered from the taxpayer including disclosures not made or required forms not filed based on the information already provided on the return.

4.60.7.2.1  (12-17-2015)
Income Shifting

  1. The IRR will consider whether an opportunity exists for the improper shifting of income from entities subject to U.S. income taxes to related foreign entities. Such shifting 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:

    1. Purchases or sales of stock in trade or depreciable property

    2. Compensation paid or received for technical, managerial, engineering, construction, scientific or other services

    3. Commissions, rents, and royalties received or paid

    4. Constructive dividends received from a foreign corporation

    5. Amounts borrowed from a controlled foreign corporation (excluding ordinary trade accounts that are settled timely)

    6. Premiums paid or received for insurance or reinsurance

    7. Sale, exchange, assignment or capital contribution of intangible property by a taxpayer to a related foreign entity

    8. Transactions under IRC 269, IRC 367, or IRC 482

4.60.7.2.2  (12-17-2015)
Subpart F Income

  1. The IRR will consider the following when evaluating Subpart F income:

    1. Whether the taxpayer has reported any Subpart F income

    2. Whether operations of the controlled foreign corporation may generate Subpart F income

    3. Whether foreign tax credit applicable to Subpart F income has materially reduced the effect of reporting Subpart F income

    4. Whether distributions received have been excluded as previously taxed Subpart F income

    5. Whether a proper amount of Section 1248 gain or loss was recognized on the sale of a CFC


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