Tax Type
Corporation Income Tax
Description
Domestic International Sales Corporations
Topic
Computation of Income
Date Issued
10-17-1997
October 17, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear**********
This will respond to your letter in which you seek correction of corporate income tax assessments for ******* (the "Taxpayer").
FACTS
The Taxpayer was field audited resulting in numerous adjustments. The adjustment in dispute resulted from the consolidation of the Taxpayer with its foreign sales corporation (the "FSC"). The Taxpayer avers that this consolidation was improper since the Taxpayer and the FSC did not enter into any transactions that would justify the department to consolidate pursuant to Code of Virginia § 58.1-446.
DETERMINATION
The Taxpayer paid certain commissions on foreign sales to its FSC. The amounts shifted to the FSC do not necessarily have to reflect the amount under arm's length pricing guidelines which are relaxed on these transactions between affiliated corporations. These transactions have the effect of reducing the Taxpayer's Virginia income tax liability. In such cases, the department has historically consolidated corporations when such transactions occur.
The FSC replaced the Domestic International Sales Corporation (DISC) in 1985. Prior to the FSC, the department had held that a DISC improperly reflected income taxable in Virginia and required that the affiliates file a consolidated report of income pursuant to Code of Virginia § 58.1 446. This authority was upheld in Commonwealth v. General Electric Co., 236 Va. 54 (1988).
Effective for taxable years beginning before January 1,1993, Virginia Regulation (VR) 630-3-446.1 (copy enclosed) exempted a FSC from any adjustments deemed necessary pursuant to Code of Virginia § 58.1-446 relating to price manipulation and intercorporate transactions. This regulation was in effect for the years in question, 1991 and 1992. Accordingly, the audit adjustment consolidating the Taxpayer and the FSC will be removed from the audit.
The enclosed schedules illustrate the revised audit report. The balance due**** , should be remitted within the next thirty days to avoid the accrual of additional interest. Your payment should be sent to***** Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12272P
Rulings of the Tax Commissioner