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New Inventory Sourcing Rule

Income from the sale of inventory by a domestic corporation generally is sourced based on where title and risk of loss to the property pass to the buyer. Thus, income from the sale of inventory where title passes outside the United States (e.g., at a foreign port) generally would be foreign source income. Source is important because if the sales income is foreign source, the US tax on it generally can be reduced by excess foreign tax credits on other business income in the same foreign tax credit basket. 

If a domestic corporation manufactures inventory in the United States and passes title and risk of loss outside the United States, prior law provided that 50 percent of the income would be US source (based on the location of manufacture) and 50 percent would be foreign source (based on where title passes). The 2017 tax reform legislation modified this rule to provide that 100 percent of the income from the sale of property manufactured by the corporation in the United States is US source, regardless of where title passes. 

On the other hand, if the domestic corporation manufactures the inventory outside the United States, 100 percent of the income from the sale would be foreign source, regardless of where title passes and regardless of whether the products are sold to US or foreign customers. If instead the domestic corporation purchases the inventory it sells, the sales income would be sourced based on where title and risk of loss pass to the buyer. 

Because of the relatively low 21 percent corporate tax rate after tax reform, foreign tax credit planning has increased in importance. Thus, a domestic taxpayer should review its supply chain and consider options for increasing its foreign source income. 

One final note: the income from sales of inventory to foreign customers generally should be eligible for the 13.125 percent tax rate applicable to foreign-derived intangible income, regardless of whether the income is US source or foreign source. US tax can be reduced with foreign tax credits to the extent the income is foreign source.

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 131



About this Author

Lowell D. Yoder, International Tax Planning, Attorney, McDermott Will, Law Firm

Lowell D. Yoder is a partner in the law firm of McDermott Will & Emery LLP and is based in the Chicago office.  He is head of the U.S. & International Tax Practice Group. Lowell’s practice focuses on international tax planning for multinational companies.   He handles cross-border acquisitions, dispositions, mergers, reorganizations, joint ventures and financings.  He advises concerning multi-jurisdictional business structures and the use of special purpose foreign entities.  He also works with an extensive network of foreign lawyers on developing structures that minimize...

David G. Noren, International Tax Planning Attorney, McDermott Will Emery Law firm Washington DC

David G. Noren is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office.  He focuses his practice on international tax planning for multinational companies.  David’s work in this area covers a wide range of both “outbound” and “inbound” issues, with a particular focus on the “subpart F” anti-deferral rules, the application of bilateral income tax treaties, and the treatment of cross-border flows of services and intellectual property rights under transfer pricing and other rules.  He has been ranked as a leading international tax lawyer by The Legal 500 United States.

Prior to joining the Firm, David served as legislative counsel to the Joint Committee on Taxation in the US Congress where he advised the House Ways & Means Committee, the Senate Finance Committee and other members of Congress on proposed international tax legislation. He played a major role in the development of several international tax bills, including those culminating in the American Jobs Creation Act of 2004.

David also advised the Senate Foreign Relations Committee on the review and ratification of several tax treaties and protocols, carried out the international tax aspects of special investigations and studies requested by members of Congress, and assisted in the Joint Committee staff's review of large tax refunds in the international area. Prior to working in Congress, David taught in the tax program at the New York University School of Law.

David has testified in congressional hearings on international tax issues and is a frequent writer and speaker on such topics. While in law school, David was an editor of the Harvard Law Review.

Elizabeth Chao, International Tax Matters Attorney, McDermott Will, Law firm

Elizabeth Chao focuses her practice on US and international tax matters.

Previously, Elizabeth worked at the University of Chicago Law School as the chief research assistant to Judge Richard A. Posner and Professor William M. Landes. She also served a project associate with Innovations for Poverty Action in Nairobi, Kenya.

While in law school, Elizabeth served as a features editor for the Yale Law Journal.