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A possession product is an item of property which is the
result of a production process carried on in a possession. Sec.
1.936-5(a), A-1, Income Tax Regs. Possession products encompass
component products, integrated products, and end-product forms.
Id. A component product is a product which is subject to further
processing before sale to an unrelated party. Id. An integrated
product is (1) a product not subject to any further processing
before sale to an unrelated party and (2) a product which
includes all component products from which it is produced. Id.
A possessions corporation may treat a component product or an
integrated product as its possession product even though the
final stage or stages of production occur outside the possession.
Id. Further processing includes transformation, incorporation,
assembly, or packaging. Id. For our purposes, the integrated
product is syrup or soft drinks, the component product is
concentrate, and the possession product is the component
concentrate. Again, CRI is both the possessions corporation and
the electing corporation within the meaning of section 936.
CRI incurs costs in producing and shipping concentrate to
the United States. Production costs include direct labor costs
and overhead incident to and necessary for production but do not
include direct material costs and interest. Secs. 1.936-6(b)(1),
Q&A 12, 1.936-5(b)(4), 1.471-11(b), Income Tax Regs. USA and the
CBO's incur expenses in selling the syrup and soft drinks. U.S.
affiliate expenses allocable and apportionable to the integrated
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