USA Update: IRS Confirms Year-End Guidance on US-Inventory Income Sourcing, What International Sellers Must Know

by Ariful | Sep 20, 2026 | US Updates

TITLE: IRS Guidance on US Inventory Sold Abroad: What International Sellers Need to Know

Why the IRS timing matters for international sellers

If your business produces inventory in the United States but sells it through a foreign branch or overseas operation, the timing of this IRS update matters.

On Friday 18 September 2026, an IRS official reportedly said that the IRS hopes to issue guidance by the end of 2026 on sourcing income from inventory produced in the United States and sold outside the country. The guidance is expected to explain how the 2025 One Big Beautiful Bill Act changes interact with existing foreign tax credit rules.

This is an important development for international sellers, US LLC owners, Amazon FBA businesses, and companies using US inventory or fulfilment networks.

The guidance is not final yet. Until it is published, you must continue to apply the existing sourcing framework and keep clear records that support your position.

The key issue is not simply where your customer is located.

The US tax analysis can depend on:

• Where the inventory was produced.
• Where the sale was managed and completed.
• Whether the business maintains a foreign branch or fixed place of business.
• Whether a US office, warehouse, or other facility contributes to the sale.
• Whether the inventory was produced or purchased.
• How the income is allocated for foreign tax credit limitation purposes.

The IRS guidance project appears in the IRS 2025–2026 Priority Guidance Plan. The plan refers to guidance on income from inventory produced in the United States and sold outside the United States through a foreign branch.

The September announcement confirms the expected timing. It does not replace the current rules or create a filing extension. You should therefore prepare your 2026 records using the rules available today, while building a process that can be updated when the final guidance arrives.

What changed under Section 904(b)(6)?

Before the 2025 legislation, income from selling inventory produced in the United States was generally treated as US-source income for the relevant foreign tax credit limitation analysis, even where the sale took place through a foreign branch.

The 2025 law added Section 904(b)(6). The new provision allows a taxpayer to treat up to 50% of income from the sale of US-produced inventory as foreign-source income for foreign tax credit limitation purposes.

The rule applies where:

1. The taxpayer is a US person.
2. The inventory was produced in the United States.
3. The inventory was sold outside the United States.
4. The taxpayer maintains an office or other fixed place of business in a foreign country.
5. The income from the sale is attributable to that foreign location.

The change applies to taxable years beginning after 31 December 2025.

This is a targeted rule. It applies for the Section 904 foreign tax credit limitation. It does not automatically change the source of the income for every other US tax purpose.

The statutory baseline is available in Section 904 of the Internal Revenue Code. The IRS and Treasury guidance should clarify how the new rule operates alongside existing inventory sourcing regulations.

Continue using the existing sourcing framework

Until the new guidance is issued, your business must still consider the established rules under IRC Section 865 and Treasury Regulation Section 1.865-3.

These rules are particularly relevant where a nonresident maintains an office or other fixed place of business in the United States.

Produced inventory may use a 50/50 or books-and-records method

Under Treasury Regulation Section 1.865-3, income from produced inventory attributable to a US office may generally be allocated using:

• The 50/50 method; or
• An eligible books-and-records method.

Under the 50/50 method, 50% of the gross income, gain, or loss is allocated to the US office or fixed place of business. The remaining 50% is allocated to production activities and sourced under the applicable production rules.

The books-and-records method requires more detailed support. Your records must show, in good faith and without being influenced by tax considerations, how income relates to sales activities and production activities. You must also maintain the supporting explanation and records when the return is filed.

Purchased inventory is treated differently

If the inventory is purchased rather than produced by the nonresident seller, all income from sales attributable to the US office is generally treated as properly allocable to that US office.

That means you cannot automatically apply a 50/50 split to purchased inventory.

Foreign offices can affect the result

The regulations also contain an exception for certain inventory sold for use, disposition, or consumption outside the United States where a foreign office materially participates in the sale.

This is why you should document the actual functions performed in each location. Do not rely only on the location of your customer, warehouse, or marketplace account.

How this affects Amazon FBA and international sellers

Many businesses use Amazon FBA, third-party logistics providers, or US fulfilment centres. However, FBA activity alone is not a blanket safe harbour or automatic US office determination.

The analysis is fact-specific.

You should consider:

• Whether your business owns or controls inventory in the United States.
• Whether you are the importer of record.
• Who arranges customs clearance and transportation.
• Whether Amazon or another provider performs only logistics functions.
• Whether your business has employees, agents, or contractors carrying out sales activities in the United States.
• Where pricing, contracting, customer management, and sales decisions are made.
• Whether you maintain a foreign branch with genuine operational activity.

For UK sellers, this issue should sit alongside your wider ecommerce accounting and tax records. Your US activity may also need to be reviewed separately from UK VAT, customs, corporation tax, and year-end reporting.

A business can have US sales without meeting the conditions for the new Section 904(b)(6) treatment. Similarly, a US LLC owner may have reporting obligations that are separate from the foreign tax credit analysis.

For example, a foreign-owned US disregarded LLC may need to consider Form 5472 reporting and the related Form 1120 filing process. Form 5472 penalties can be significant, so do not assume that inventory sourcing is your only US compliance responsibility.

Worked example: a foreign branch selling US-produced inventory

Assume a US corporation:

• Produces goods in a US factory.
• Sells those goods to customers in Germany and France.
• Uses a properly established German branch to manage European sales.
• Earns $300,000 of gross income from the relevant inventory sales.
• Pays $45,000 of foreign income tax on the related foreign activity.

Under the new Section 904(b)(6) rule, the corporation may potentially treat up to $150,000, or 50% of the $300,000 income, as foreign-source income

USA Update: IRS Proposes New CFC Pro Rata Share Rules. Daily Ownership Allocation Changes Form 5471 Reporting for International Sellers

by Ariful | Sep 19, 2026 | US Updates

TITLE: IRS Proposes Major Changes to CFC Income Allocation After Mid-Year Ownership Changes

IRS Proposes Major Changes to CFC Income Allocation After Mid-Year Ownership Changes

The IRS has proposed major changes to how U.S. shareholders calculate controlled foreign corporation income after a mid-year ownership change.

The central change is simple to describe but operationally significant: CFC income allocations would follow ownership during the year, rather than relying mainly on who owns shares on the final day.

This matters to international sellers, ecommerce brands, SaaS companies, digital agencies and growing groups connected to the United States. It can also affect foreign-owned structures with U.S. operations, including groups using Delaware, Wyoming, California, Texas or New Jersey entities and FBA inventory held in the United States.

First, correct the publication reference

The relevant CFC proposal is REG-115646-25, published in the Federal Register on 26 August 2026. You can read the official proposal through the Federal Register.

The Federal Register document numbered 2026-18645, published on 11 September 2026, concerns separate section 250 and section 904 foreign-source income rules. It is not the CFC pro rata share proposal.

This distinction matters when you update your compliance files, internal tax calendars and filing instructions. The CFC proposal is still proposed, but it is already important for planning Form 5471 data collection for foreign corporation tax years beginning after 31 December 2025.

What the IRS is changing

The proposal implements changes made by the One Big Beautiful Bill Act to sections 951 and 951A of the Internal Revenue Code.

It would revise how a U.S. shareholder determines its share of:

• Subpart F income.
• Tested income.
• Tested loss.
• Related ownership and stock information reported on Form 5471.

Under the previous approach, ownership on the last day of the CFC’s taxable year often drove the calculation. The proposed rules instead look at ownership during the relevant period.

A shareholder that owns stock on any day during a CFC year may need to calculate an inclusion for that ownership period. This means a shareholder can no longer assume that selling before year-end automatically removes its allocation.

The IRS has also proposed expanded reporting under section 6038. Form 5471 reporting would need to support the underlying ownership calculation, including stock classes, share movements and ownership changes during the annual accounting period.

Track ownership daily to avoid inaccurate allocations

The proposed rules introduce daily proration.

In a simple one-class structure with a constant number of shares, the calculation generally considers:

1. The shareholder’s percentage of shares.
2. The number of days the shareholder owned those shares.
3. The days when the shareholder was a U.S. shareholder.
4. The days when the foreign corporation was a CFC.

Where a shareholder holds different blocks of shares for different periods, each block is treated as a separate CFC year block.

This creates a practical issue for international sellers. The tax allocation may not match the commercial economics agreed between the parties.

For example, suppose a U.S.-incorporated ecommerce group owns a foreign CFC. A shareholder holds 40% of the CFC until 30 June and sells half of its holding to a new investor. The selling shareholder may still receive a share of the CFC’s annual tested income or Subpart F income for the days it held the shares.

The buyer may also receive an allocation for the remaining days. The CFC’s annual income is therefore divided by ownership period, even if the purchase agreement assumed that profits would be allocated only at completion or based on year-end ownership.

This is why you should not rely solely on closing accounts or a year-end shareholder register.

Close the CFC year when its status changes

The proposal would require a foreign corporation to close its taxable year for U.S. federal income tax purposes when a status change event occurs.

Broadly, this happens when the foreign corporation:

• Becomes a CFC; or
• Ceases to be a CFC.

The year closes at the end of the day on which the status change occurs.

This creates a clear dividing line for income, tested items, ownership and foreign tax calculations. It also means that a change in control can create more than a legal or commercial event. It can create an additional U.S. tax reporting period.

The proposal also allows an elective year closing when there is a significant ownership variance. Broadly, this involves specified transfers under the same plan that reduce section 958(a) U.S. shareholder ownership by more than 50 percentage points.

The election is not automatic. It includes procedural requirements:

• Enter into a written, binding agreement before filing the election statement.
• File an Elective Section 951 Year-Closing Statement with a timely original U.S. federal income tax return, including extensions.
• Apply the election consistently to all CFCs involved in significant ownership variances under the same plan.

You should identify this issue before a transaction closes. Waiting until Form 5471 preparation may leave insufficient time to obtain shareholder agreements or reconstruct the required ownership evidence.

Update Form 5471 workpapers before filing

The proposed section 6038 changes would require more detailed ownership information for Form 5471.

Your compliance file should be able to show:

• Each class of CFC stock.
• The number of shares outstanding on the first day of the annual accounting period.
• The date and description of every issuance, redemption or other share-count change.
• The balance of shares after each change.
• Each direct owner and relevant indirect U.S. shareholder.
• The date and description of acquisitions, receipts, redemptions, dispositions or other changes.
• The ownership balance immediately after each event.

This is a significant shift from collecting a final ownership percentage at year-end.

For international sellers trading from the United Kingdom, European Union, Canada or Australia into the United States, the first step is to identify whether a U.S. person, U.S. corporation or U.S. group member owns or controls a foreign corporation. Selling into the United States alone does not automatically make a foreign seller a CFC or create a Form 5471 filing obligation.

However, a U.S. group with foreign subsidiaries, a U.S. founder with foreign-company ownership, or a cross-border restructuring can create reporting requirements.

Check foreign tax allocations after a short U.S. tax year

A U.S. tax year closing may not close the foreign taxable year under local law.

Where that happens, the proposal would allocate part of the foreign income tax accruing in the following U.S. taxable year back to the short U.S. year. The allocation would use closing-of-the-books principles.

Withholding taxes are excluded from this rule.

This point is especially important where a group pays corporate income tax outside the United States. Your bookkeeping and tax workpapers should distinguish:

• Foreign income tax imposed on the CFC.
• Withholding taxes.
• The foreign taxable period.
• The shortened U.S. tax period.
• Income attributable to each closing date.

Doing this will help prevent foreign tax credit calculations from becoming disconnected from the underlying ownership and income periods.