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Proposed Section 199 regulations
Taxand USA explores the proposed Section 199 regulations.
The DPD was designed to protect United States jobs and replace the extraterritorial income exclusion. It covers a broad range of production activities, including the manufacture of tangible personal property; the production of computer software, sound recordings and certain films; the production of electricity, natural gas and water; and construction, engineering and architectural services.
The Section 199 regulations broadly describe manufacturing as “manufacturing, producing, growing, extracting, installing, developing, improving, and creating.” This includes “making qualified property out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles.” Unfortunately, Section 199 does not provide a definition of manufactured, produced, grown or extracted (MPGE).
However, the regulations also provide that if a taxpayer packages, repackages, labels or performs minor assembly of qualified property and the taxpayer engages in no other MPGE activity with respect to that qualified property, then the taxpayer's packaging, repackaging, labeling or minor assembly does not qualify for the deduction. These terms — packaging, repackaging, labeling and minor assembly — are not defined in the regulations, except for an example stating that customising automobiles by adding roof racks, sunroofs, etc., is minor assembly and not an MPGE activity.
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We feel the proposed Section 199 regulations should be improved prior to being finalised. We recommend that the final regulations adopt the standard applied by the Dean and Precision Dose courts in determining whether a taxpayer’s production activities satisfies Section 1.199-3(e)(1)’s MPGE requirement.