CHANROBLES VIRTUAL LAW LIBRARY

ChanRobles™ Virtual Law Library | chanrobles.com™  
Main Index ChanRobles LawTube - Social Network Chan Robles Virtual Law Library Latest Legal Updates Philippine Legal Resources Significant Philippine Legal Resources Worldwide Legal Resources Philippine Supreme Court Decisions United States Supreme Court Jurisprudence United States Laws, Statutes & Codes

US LAWS, STATUTES & CODES ON-LINE

ChanRobles On-Line Bar Review

supreme.chanrobles.com


google search for chanrobles.comSearch for www.chanrobles.com


   Combined taxable income_full costing:  F's foreign trading gross receipts........................    $950.00  R's cost of goods sold....................................    (650.00)                                                             -----------    Combined gross income...................................     300.00                                                             -----------  Less:    R's direct selling expenses.............................     100.00    F's expenses............................................     120.00                                                             -----------      Total.................................................    (220.00)                                                             -----------  Combined taxable income (loss)............................      80.00                                                             =========== 

F's profit under the full costing combined taxable income method is $18.40, i.e., 23% of full costing combined taxable income ($80). F's profit under the gross receipts method will be $17.39, i.e., 1.83% of F's foreign trading gross receipts ($950). However, under the marginal costing rules, F would have a profit attributable to the export sale in the amount of $38.24, i.e., 23% of combined taxable income as determined under the marginal costing rules (23% of $166.25). As shown by the computation below, the combined taxable income under marginal costing is limited to the overall profit percentage limitation ($166.25) since that amount is less than the maximum combined taxable income amount ($350):

   Maximum combined taxable income (determined under paragraph (b)(1) of this section):  F's foreign trading gross receipts........................    $950.00                                                             -----------  Less:    R's direct materials....................................     400.00    R's direct labor........................................     200.00                                                             -----------      Total.................................................    (600.00)                                                             -----------  Maximum combined total income.............................     350.00                                                             =========== 
   Overall profit percentage limitation calculation (determined under paragraph (c)(2) of this section):  Gross receipts of R and F from all domestic and foreign     $4,000.00   sales...................................................  R's cost of goods sold...................................   (2,730.00)                                                            ------------      Combined gross income................................    1,270.00                                                            ------------  Less:    R's expenses...........................................      450.00    F's expenses...........................................      120.00                                                            ------------      Total................................................     (570.00)                                                            ------------      Total taxable income from all sales computed on a          700.00       full costing method.................................                                                            ============  Overall profit percentage (total taxable income ($700)          17.5%   divided by total gross receipts ($4,000)................                                                            ============  Overall profit percentage limitation Overall profit           $166.25   percentage times F's foreign trading gross receipts   (17.5% times $950.00)...................................                                                            ============ 

The transfer price from R to F may be set at $791.76, computed as follows:

   Transfer price to F:  F's foreign trading gross receipts.......................     $950.00                                                            ------------Less:  F's expenses.............................................      120.00  F's profit...............................................       38.24                                                            ------------      Total................................................     (158.24)                                                            ------------  Transfer price...........................................      791.76                                                            ============ 

Example 2.  Assume the same facts as in Example 1 except that F's expenses are $170. Under full costing, the combined taxable income will be $30, computed as follows:

   Combined taxable income_full costing:  F's foreign trading gross receipts.........................   $950.00  R's cost of goods sold.....................................   (650.00)                                                              ----------      Combined gross income..................................    300.00                                                              ----------Less:  R's expenses...............................................    100.00  F's expenses...............................................    170.00                                                              ==========      Total..................................................   (270.00)                                                              ----------      Combined taxable income (loss).........................     30.00                                                              ---------- 

F's profit under the full costing combined taxable income method is $6.90, i.e., 23% of combined taxable income, $30. Under the marginal costing rules, F may earn a profit attributable to the export sale in the amount of $35.51, i.e., 23% of combined taxable income as determined under the marginal costing rules (23% of $154.38). Had the transaction occurred in 1987, F would have had a profit attributable to the export sale under these marginal costing rules of only $30, i.e., 23% of combined taxable income as determined under the marginal costing rules (23% of $154.38) limited, for FSC taxable years beginning after December 31, 1986, to combined taxable income determined under full costing ($30), see paragraph (b)(4) of this section. F's profit under the gross receipts method will be $17.39 i.e., 1.83% of F's foreign trading gross receipts ($950). The computations are as follows:

   Maximum combined taxable income (determined under paragraph (b)(1) of this section):  F's foreign trading gross receipts.......................     $950.00                                                            ------------  Less:    R's direct materials...................................      400.00    R's direct labor.......................................      200.00                                                            ------------      Total................................................     (600.00)                                                            ------------  Maximum combined taxable income                                350.00                                                            ============Overall profit percentage limitation calculation (determined under paragraph (c)(2) of this section):  Gross receipts of R and F from all domestic and foreign      4,000.00   sales...................................................  R's cost of goods sold...................................   (2,730.00)                                                            ------------  Combined gross income....................................    1,270.00                                                            ------------  Less:    R's expenses...........................................      450.00    F's expenses...........................................      170.00                                                            ------------      Total................................................     (620.00)                                                            ------------  Total taxable income from all sales computed on a full         650.00   costing method..........................................                                                            ============Overall profit percentage (total taxable income ($650)           16.25% divided by total gross receipts ($4,000)).................                                                            ============Overall profit percentage limitation Overall profit              154.38 percentage times F's foreign trading gross receipts (16.25% times $950.00)....................................                                                            ============The transfer price from R to F may be set at $744.49, computed as follows:  Transfer price to F:    F's foreign trading gross receipts.....................      950.00                                                            ------------    Less:      F's expenses.........................................      170.00      F's profit...........................................       35.51                                                            ------------        Total..............................................     (205.51)                                                            ------------    Transfer price.........................................      744.49                                                            ============ 

Example 3.  Assume the same facts as in Example 1 except that the transaction occurs in 1987 and that F incurs expenses in the amount of $250. Since a $50 combined loss, as computed below, is incurred, F will not have any profit under either the full costing combined taxable income method, the gross receipts method or the marginal costing rules:

     Combined taxable income_full costing:    F's foreign trading gross receipts.....................     $950.00    R's cost of goods sold.................................     (650.00)                                                            ------------      Combined gross income................................      300.00                                                            ------------    Less:      R's expenses.........................................      100.00      F's expenses.........................................      250.00                                                            ------------        Total..............................................     (350.00)                                                            ------------    Combined taxable income (loss).........................      (50.00)                                                            ============ 

The transfer price to R may be set at $700 so that F may recover its expenses.

Example 4.  R and F are calendar year taxpayers. R, a domestic manufacturing company, owns all the stock of F, a FSC for the taxable year. During 1985, R manufactures export property A. R enters into a written agreement with F whereby F will receive a commission with respect to sales of export property A by R which result in gross receipts to R which would have been foreign trading gross receipts had F and not R been the principal on the sale. F will receive commissions with respect to such export sales equal to the maximum amount permitted to be received under the transfer pricing rules of section 925. The maximum commission may be earned by F under these marginal costing rules. In this example, R received $950 from the sale of export property A. R's cost of goods sold for that property was $620. R incurred direct selling expenses of $20. Also, it is assumed that R incurred total general and administrative expenses, in addition to those incurred relating to its contract to perform on behalf of F the functions and activities of section 924 (c), (d) and (e), of $50. R incurred direct and indirect expenses of $130 in performing those functions and activities on behalf of F. During 1985, R had gross receipts from all domestic and foreign sales of $3,500, total cost of goods sold and total expenses relating to the domestic and foreign sales of $1,600 and $259, respectively. The election provided for in §1.925(a)–1T(b)(2)(ii) was not made by R and F.

     Combined taxable income_full costing:    R's gross receipts from the sale of the export  .......     $950.00     property.....................................    R's cost of goods sold........................  .......     (620.00)                                                   ---------------------      Combined gross income.......................  .......      330.00                                                   ---------------------    Less:      R's direct selling expenses.................  .......       20.00      F's expenses................................  .......      130.00    Apportionment of R's general and     administrative expenses:      R's total G/A expenses......................      $50  ...........      Combined gross income.......................      330  ...........      R's total gross income......................    1,900  ...........      Apportionment of G/A expenses $50 x $330/     .......        8.68       $1,900.....................................                                                            ------------        Total.....................................  .......     (158.68)                                                            ------------    Combined taxable income (loss)................  .......      171.32                                                            ============ 
   Maximum combined taxable income (determined under paragraph (b)(1) of this section):  R's gross receipts from the sale of the export property..     $950.00                                                            ------------  Less:    R's direct materials...................................      450.00    R's direct labor.......................................      100.00                                                            ------------      Total................................................     (550.00)                                                            ------------  Maximum combined taxable income..........................      400.00                                                            ============Overall profit percentage limitation calculation (determined under paragraph (c)(2) of this section):  Gross receipts of R from all domestic and foreign sales..    3,500.00  R's cost of goods sold...................................   (1,600.00)                                                            ------------    Combined gross income..................................    1,900.00                                                            ------------  Less:    R's total expenses.....................................      259.00    F's total expenses.....................................      130.00                                                            ------------      Total................................................     (450.00)                                                            ------------  Total taxable income from all sales computed on a full       1,511.00   costing method..........................................                                                            ============Overall profit percentage (total taxable income ($1,511)         43.17% divided by total gross receipts ($3,500)).................                                                            ============Overall profit percentage limitation Overall profit              410.12 percentage times R's gross receipts from the sale of export property (i.e., 43.17% times $950.00)..............                                                            ============ 

Since the overall profit percentage limitation ($410.12) is greater than the maximum combined taxable income ($400), combined taxable income under marginal costing and for purposes of computing F's commission is limited to $400. Under these marginal costing rules, F will have a profit attributable to the sale of $92, i.e., 23% of combined taxable income as determined under the marginal costing rules (23% of $400). Accordingly, the commission F receives from R is $222, i.e., F's expenses ($130) plus F's profit ($92).

Example 5.  Assume the same facts as in Example 4, except that R's gross receipts from the sale of export property which would have been foreign trading gross receipts had F been the principal on the sale are $1,050 and gross receipts from all sales, domestic and foreign, remain at $3,500. For purposes of applying the combined taxable income method, R and F may compute their combined taxable income attributable to the product line of export property under the marginal costing rules as follows:

     Combined taxable income_full costing:  R's gross receipts from the sale of the export property..   $1,050.00  R's cost of goods sold...................................     (620.00)                                                            ------------    Combined gross income..................................      430.00                                                            ------------  Less:    R's direct selling expenses............................       20.00    F's expenses...........................................      130.00    Apportionment of R's G/A expenses $50 x $430/$1,900....       11.32                                                            ------------      Total................................................     (161.32)                                                            ------------  Combined taxable income (loss)...........................      268.68                                                            ============ 
   Maximum combined taxable income (determined under paragraph (b)(1) of this section):  R's gross receipts from the sale of export property...   $1,050.00                                                         ---------------Less:  R's direct materials..................................      450.00  R's direct labor......................................      100.00                                                         ---------------      Total.............................................     (550.00)                                                         ---------------  Maximum combined taxable income.......................      500.00                                                         ===============  Overall profit percentage (see example 4).............       43.17%                                                         ===============  Overall profit percentage limitation (determined under      453.29   paragraph (c)(2) of this section) (R's gross receipts   from sale ($1,050.00) times the overall profit   percentage (43.17%)).................................                                                         =============== 

Since maximum combined taxable income ($500) is greater than the overall profit percentage limitation ($453.29), combined taxable income under marginal costing and for purposes of computing F's commission is limited to $453.29. Under these marginal costing rules, F will have a profit attributable to the sales of $104.26, i.e., 23% of combined taxable income (23% of $453.29). Accordingly, the commission F receives from R is $234.26, i.e., F's expenses ($130) plus F's profit ($104.26).

Example 6.  Assume the same facts as in Example 5, except that F has expenses of $140 and R's cost of goods sold for the export sale was $900. R does not incur any direct selling expenses. Since cost of goods sold has increased by $280, R's total gross income has been reduced from $1,900 to $1,620. For purposes of applying the combined taxable income method, R and F may compute their combined taxable income under the marginal costing rules as follows:

   Combined taxable income_full costing:  R's gross receipts from the sale of export property.....   $1,050.00  R's cost of goods sold..................................     (900.00)                                                           -------------    Combined gross income.................................      150.00                                                           -------------Less:  F's expenses............................................      140.00  Apportionment of R's G/A expenses $50 x $150/$1,620.....        4.63                                                           -------------      Total...............................................     (144.63)                                                           -------------  Combined taxable income (loss)..........................        5.37                                                           =============Maximum combined taxable income (determined under paragraph (b)(1) of this section):  R's gross receipts from the sale of export property.....   $1,050.00                                                           -------------Less:  R's direct materials....................................      630.00  R's direct labor........................................      200.00                                                           -------------      Total...............................................     (830.00)                                                           -------------  Maximum combined taxable income.........................      220.00                                                           ============= 
   Overall profit percentage limitation calculation (determined under paragraph (c)(2) of this section):  Gross receipts of R and F from all domestic and foreign    $3,500.00   sales..................................................  R's cost of goods sold..................................   (1,880.00)                                                           -------------      Combined gross income...............................    1,620.000                                                           -------------Less:  R's total expenses......................................      259.00  F's total expenses......................................      140.00                                                           -------------      Total...............................................     (399.00)                                                           -------------  Total taxable income from all sales computed on a full     $1,221.00   costing method.........................................                                                           -------------  Overall profit percentage (total taxable income ($1,221)       34.89%   divided by total gross receipts ($3,500))..............                                                           =============  Overall profit percentage limitation_overall profit          $366.35   percentage times R's gross receipts from the sale of   export property (i.e., 34.89% times $1,050)............                                                           ============= 

Since the overall profit percentage limitation ($366.35) is greater than the maximum combined taxable income ($220), combined taxable income under marginal costing and for purposes of computing F's commission is limited to $220. Under these marginal costing rules, F will have a profit attributable to the sale of $50.60, i.e., 23% of combined taxable income as determined under the marginal costing rules (23% of $220). If the transaction occurred in 1987, F's profit would be limited, however, by paragraph (b)(4) of this section to the full costing combined taxable income of $5.37.

[T.D. 8126, 52 FR 6455, Mar. 3, 1987, as amended by T.D.8764, 63 FR 10306, Mar. 3, 1998; T.D. 8944, 66 FR 13429, Mar. 6, 2001]

Browse Previous |  Browse Next



Back

Chan Robles Virtual Law Library

google search for chanrobles.com Search for www.chanrobles.com









cralaw

  Copyright©1998- present | chanrobles.com   Disclaimer   E-mail Restrictions
ChanRobles™ Virtual Law Library | chanrobles.com™
 
nad