AC559: International Tax Planning and Issues

AC559: International Tax Planning and Issues

Now
assume that the facts are the same as in part (a), except that the Canadian
factory is structured as a wholly- owned Canadian subsidiary, rather than a
branch. Engo’s sales of semi-finished engines to the Canadian subsidiary (which
still represent one-third of its output) were $6 million during the year and
the related cost of goods sold was $4 million. The Canadian subsidiary’s total
sales of finished engines to Canadian customers (which represents all of its
output) was $10 million and the related cost of goods sold is $7 million. The
average value of property, plant and equipment is still $30 million at the U.S.
plant, and $5 million at the Canadian plant, and Engco sells all goods with
title passing at its U.S. plant. How much of Engco’s export gross profit of $2
million is classified as foreign source for U.S. tax purposes?

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