Foreign operating corporations; determination of percentage of
business activity outside United States
Sec. 2.4. (a) For purposes of section 2(o) of this chapter, a
corporation is a foreign operating corporation for a particular taxable
year if it has eighty percent (80%) or more of its total business
activity occurring outside the United States during the taxable year.
(b) For purposes of determining the amount of a corporation's
business activity that occurs within the United States, the department
shall determine the sum of that corporation's United States property
factor and its United States payroll factor and divide that sum by two
(2). If the quotient exceeds two-tenths (0.2), then less than eighty
percent (80%) of the corporation's business shall be considered to
have occurred outside the United States. If the quotient equals or is
less than two-tenths (0.2), then eighty percent (80%) or more of the
corporation's business shall be considered to have occurred outside
the United States. If a corporation's United States property factor or
its United States payroll factor has a denominator of zero (0), then
the sum of the two (2) factors shall be divided by one (1) and not by
two (2).
(c) The United States property factor of a corporation is a
fraction. The numerator of the fraction is the average value of the
corporation's real and tangible personal property owned or rented and
used in the United States during the taxable year, and the
denominator of the fraction is the average value of all the
corporation's real and tangible personal property owned or rented and
used anywhere in the world during the taxable year. Property owned
by the corporation shall be valued at its original cost. Property rented
by the corporation shall be valued at eight (8) times the net annual
rental rate. The corporation's net annual rental rate is the annual
rental rate paid by the corporation less any annual rental rate
received by the corporation from subrentals. The average value of
property shall be determined by averaging the values at the beginning
and ending of the taxable year, but the department may require the
averaging of monthly values during the taxable year if reasonably
required to reflect properly the average value of the corporation's
property.
(d) The United States payroll factor of a corporation is a fraction.
The numerator of the fraction is the total compensation to individuals
paid in the United States during the taxable year by the corporation,
and the denominator of the fraction is the total compensation to
individuals paid anywhere in the world during the taxable year by the
corporation. Compensation to an individual is paid in the United
States if:
(1) the individual's service is performed entirely within the
United States;
(2) the individual's service is performed both within and outside
the United States, but the service performed outside the United
States is incidental to the individual's service within the United
States; or
(3) the individual is a resident of the United States, some of the
service is performed in the United States, and:
(A) the base of operations or, if there is no base of
operations, the place from which the service is directed or
controlled is in the United States; or
(B) the base of operations or, if there is no base of
operations, the place from which the service is directed or
controlled is not in a jurisdiction that is outside the United
States and that is where some part of the service is
performed.
As added by P.L.75-1985, SEC.5.
Last modified: May 28, 2006