part4-299

Whether an opportunity exists for the improper diversion of income from
entities subject to U.S. income taxes to related foreign entities that are
not. Such diversions of income may have arisen from, but are not limited to,
the following situations between a domestic entity and a controlled or controlling
foreign entity: Purchases or sales of stock in trade or depreciable property;
Compensation paid or received for technical, managerial, engineering, construction,
scientific or other services; Commissions, rents, and royalties received or
paid; Constructive dividends received from a foreign corporation; Amounts
borrowed from a controlled foreign corporation (excluding ordinary trade accounts
that are settled timely); Premiums paid or received for insurance or reinsurance;
Sale, exchange, assignment or capital contribution of intangible property
by a taxpayer to a related foreign entity; Transactions under IRC section
269, IRC section 367, or IRC section 482.

If the taxpayer has a branch, subsidiary, or controlled entity in any
form in a tax haven country, particular care should be exercised in evaluating
a referral since there may be greater incentive for the improper diversion
of income.

For purposes of (a) and (b) above,
“controlled”
or
“controlling”
includes generally, any kind of control, direct
or indirect, whether or not legally enforceable, and however exercisable or
exercised. It is the reality of control that is decisive, not its form or
mode of exercise. This would include control of brother–sister, and
grandfather–grandson entities. See IRC section 482.

Subpart F Income; Whether the taxpayer has reported any Subpart F income;
Whether operations of the controlled foreign corporation may generate Subpart
F income; Whether foreign tax credit applicable to Subpart F income has materially
reduced the effect of reporting Subpart F income; Whether distributions received
have been excluded as previously taxed Subpart F income.

The impact of allocation of income and expenses between U.S. companies
and their affiliates in Puerto Rico.

Significant amount of foreign tax credit claimed.

Significant foreign activity or losses related to foreign investments.

Significant extraterritorial income exclusion claimed.

The impact of penalties per IRC section 6038A and IRC section 6038C as
they apply to 25-percent foreign-owned corporations and foreign corporations
engaged in a U.S. trade or business.