The New Proposed Contract Manufacturing Regulations Under Subpart F

New Proposed Regulations from the IRS attempt to walk a very difficult line between upholding the policy behind the manufacturing exception and the branch rule crafted by the framers of Subpart F in 1962 versus promoting the competitiveness of US multinationals doing global business in a much more sophisticated commercial environment than existed in 1962. The IRS and the Treasury have made a very admirable attempt to craft regulations that are helpful to US multinationals doing business in a more complicated international environment, while at the same time giving appropriate deference to the original intent of Subpart F, which was to disallow deferral where the selling or purchasing function was artificially separated from the manufacturing functions without adding appreciable value. While improvements can be made, if these Regulations are finalized roughly as proposed, it would put a great deal of pressure on the government and tax advisors alike to administer and enforce these Regulations properly in an area that is fraught with factual fluidity. As indicated, a streamlined pre-filing procedure would require focus on the factual and legal issues early to arrive at fair results, avoiding what would otherwise give rise to endless disputes and litigation.