During its audit, the IRS determined that the transfer price was based on a CTI calculation that did not include total costs, thereby violating the FSC
administrative pricing rules and resulting in an understatement of P&G income of $86,201,700.
To compute the income from export sales attributable to an IC-DISC (i.e., the DISC commission), certain
administrative pricing rules have to be followed.
The European Union also alleged that the
administrative pricing rules of the FSC provisions constituted a separate violation of the SCM Agreement.
These are the requirement for 50% US content, and the Special
Administrative Pricing Rules (SAPR).
For corporate-owned FSC's that use
administrative pricing rules, 15/23 (or 65.217 percent) of the foreign trade income derived from transactions are exempt from U.S.
The determination depends on whether the FSC uses
administrative pricing rules, as well as whether it has noncorporate shareholders.
One of the most important but difficult aspects of using a FSC comes with attempting to qualify for the
administrative pricing rules of Section 925(a).
These new rules retain many of the familiar attributes of the FSC, such as determination of profits on a transactional basis, marginal costing principles, foreign economic process requirements (FEP) and safe-haven
administrative pricing rules. The percentages of excluded income are practically identical to the results under the FSC rules.
Beyond this, we do not rule."Crucially, the Body declined to examine a number of issues, including
administrative pricing rules. "We wish to emphasise that our ruling is on the FSC measure only", the report said.
The transfer prices are based on either of two optional
administrative pricing rules or the arm's-length pricing rules of section 482 of the Code.
The reduction is based on a stated percentage (15/23 for corporate-owned FSCs, 16/23 for all others) of the FSC's earnings, computed using allowable
administrative pricing rules. Dividends paid by a FSC to a C shareholder can be offset completely by the dividends-received deduction (DRD).
Under the
administrative pricing rules, transfer prices must be set so that the FSC's taxable income will not exceed the greater of (i) 23 percent of the combined taxable income (CTI) of the FSC and its related supplier (generally its U.S.
