Instructions For Schedule P (Form 1120-Fsc) - Transfer Price Or Commission


Schedule P (Form 1120-FSC) 1998
General Instructions
2. Group of transactions. By checking box
Under the marginal costing rules, the
2, the FSC’s related supplier elects to group
combined taxable income of the FSC and its
Section references are to the Internal
transactions that consist of products or
related supplier is figured by subtracting from
Revenue Code unless otherwise noted.
product lines. If the group basis is elected, it
foreign trading gross receipts the direct
applies to all transactions for that product or
material and direct labor costs of producing a
Purpose of Schedule
product line completed during the tax year. If
particular item, product, or product line. See
Use Schedule P to figure the transfer price to
the election is not made, the supplier checks
Regulations section 1.471-11(b)(2)(ii). The
charge the FSC or the commission to pay to
box 1. Do not group sales and lease
combined taxable income also may be limited
the FSC under the administrative pricing rules
to the overall profit percentage (line 10)
discussed below. The transfer price or
multiplied by the foreign trading gross
Election to group transactions. For tax
commission is used to allocate foreign trading
receipts of the FSC (line 4).
years beginning after December 31, 1997, see
gross receipts from the sale of export
Temporary Regulations section
See Temporary Regulations section
property or certain services between the FSC
1.925(a)-1T(c)(8) regarding the election to
1.925(b)-1T for more information on the
and its related supplier.
group transactions and the transition rule
marginal costing rules. Also see section
Related supplier. Under Regulations section
applicable to tax years beginning before
1.925(a)-1T for information on the transfer
1.482-1(a), a related supplier is an entity that
January 1, 1998.
pricing rules.
is owned or controlled directly or indirectly by
C—Principal business
Section B—23% of
the same interests as the FSC.
Combined Taxable Income
activity codes
Filing the Schedule
Under this method, the related supplier
See page 16 of the Instructions for Form
File the schedule for a FSC that has foreign
figures an allowable transfer price to charge
1120-FSC for the list of “Schedule P (Form
trading gross receipts during the tax year
the FSC (or an allowable commission to pay
1120-FSC) Codes for Principal Business
from either of the following sources.
to the FSC) so that the FSC will profit on the
Activity” that are to be used to group
The resale of export property or certain
activities. Enter the code number that relates
to the product or product line reported on
The profit is limited to 23% of the FSC’s
line A.
The disposition of export property or
and the supplier’s combined taxable income
services in which the FSC served as
attributable to the foreign trading gross
Part I
commission agent for a related supplier.
receipts from the sale. Also see incomplete
transactions under When Not To File.
Section A—Combined Taxable Income
When Not To File
Under the administrative pricing rules, the
Section C—1.83% of
Do not complete Schedule P in the following
methods discussed below may be used in the
Foreign Trading Gross Receipts
same tax year of the FSC for separate
The section 482 method of transfer pricing
transactions (or separate groups of
Under this method, the related supplier
figures an allowable transfer price to charge
is used. If the 23% and 1.83% methods do
the FSC (or an allowable commission to pay
not apply to a sale or if the related supplier
Full Costing
does not use the methods, the transfer price
to the FSC) so that the FSC will profit on the
for a sale by the related supplier to the FSC
Foreign trading gross receipts are the
is figured on the basis of the sales price
The profit is limited to 1.83% of the FSC’s
gross receipts of a FSC (other than a small
actually charged but is subject to section 482
foreign trading gross receipts. It is further
FSC) that has met the foreign management
and its regulations and to Temporary
and foreign economic process rules. The
limited to twice the profit determined under
Regulations section 1.925(a)-1T(a)(3)(ii).
either (a) the 23% of combined taxable
receipts are included on lines 1 and 4 and
income or (b) the marginal costing rules
The arm’s-length pricing method is used. If
must be from the sale, lease, or rental of
the transaction is with an unrelated supplier,
export property for use outside the United
(described above). Also see incomplete
the FSC bases its profit on the arm’s-length
States or for engineering or architectural
transactions under When Not To File.
services for a construction project located
Limit on FSC Income (No-loss Rules)
outside the United States. For details, see the
Transactions are incomplete at year’s end.
Instructions for Form 1120-FSC beginning on
If export property bought by the FSC from
If there is a loss on line 3 or line 12, the FSC
page 2 and section 924.
may not earn a profit under either the 23%
the related supplier during the tax year is
method or the 1.83% method. Under the
unsold by the end of the FSC’s tax year or
Under the full costing rules in which the
the related supplier’s tax year in which the
FSC is the principal in the sale of export
1.83% method, the FSC’s profit on line 17
may not exceed the full costing combined
property was transferred, the 23% and 1.83%
property, the combined taxable income of the
taxable income reported on line 3. The related
methods (discussed below) cannot be used.
FSC and its related supplier is the excess of
Instead, the transfer price of the property
supplier may, however, set a transfer price or
the FSC’s foreign trading gross receipts from
rental payment or pay a commission in an
bought by the FSC is the supplier’s cost of
the sale over the total costs of the FSC and
amount that will enable the FSC to recover its
goods sold for the property. See Temporary
related supplier. These costs include the
Regulations section 1.925(a)-1T(c)(5)(i)(C) for
costs, if any, even if the result is a loss for
supplier’s cost of goods sold, and the
rules regarding the transfer price of property
supplier’s and the FSC’s noninventoriable
the related supplier.
resold during the subsequent tax year.
costs that relate to the foreign trading gross
If the FSC recognizes income while the
receipts. See Regulations section
related supplier recognizes a loss on a sale
Specific Instructions
1.471-11(c)(2)(ii). Also see Temporary
under the section 482 method, neither the
Regulations section 1.925(a)-1T(c)(6)(iii) for
23% method nor the 1.83% method may be
A—Product or product line
special rules regarding gross receipts and
used by the FSC and the related supplier (or
total costs.
Enter the product or product line that meets
by a FSC in the same controlled group and
one of the two standards below.
Line 2b. Enter an apportionment of
the related supplier) for any other sale, or
group of sales, during the tax year that falls
deductions that are not definitely allocable,
1. The major group or groups (or any
within the same SIC codes as the subject
such as interest expense and stewardship
classification or combination within a major
expenses. See Temporary Regulations
group or groups) of the Standard Industrial
sections 1.861-11T(f) and 1.861-14T(f) for
Classification (SIC) codes (see page 16 of the
Part II
details on the apportionment.
Instructions for Form 1120-FSC for the list of
codes and related product or product line), or
Line 20. If the transfer price from the related
Marginal Costing
supplier to the FSC is entered on more than
2. A recognized industry or trade use.
one line on Form 1120-FSC, attach an
The related supplier may elect to use the
B—Type of transaction
explanation indicating the portion of line 20
marginal costing rules to figure its and the
FSC’s combined taxable income provided the
that applies to each line.
Check the applicable box to indicate the sale,
FSC is treated as seeking to establish or
lease, or commission transaction that applies
Part III
maintain a foreign market for sales of export
to the FSC.
property and the sales produce foreign
Line 23. If the FSC commission from the
1. Transaction-by-transaction. Check
trading gross receipts. See Temporary
related supplier is entered on more than one
box 1 if the FSC makes pricing
Regulations sections 1.925(b)-1T(c)(1) and
line on Form 1120-FSC, attach an explanation
determinations based on each transaction.
1.927(a)-1T for information that defines a
indicating the portion of line 23 that applies to
File a Schedule P for each transaction.
“foreign market” and “export property.”
each line.


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