A U.S.-based manufacturer of CD-rom map and tour products is considering the establishment of some type of production facility in Europe, preferably a low-tax environment such as Ireland. The firm's senior management is exploring the possibility of positioning profits in the low-tax area in order to reduce the total tax liability of the firm. However, because the "production" which is to take place in the new subsidiary will not meet U.S. Internal Revenue Service requirements, the income will likely not qualify for tax deference. The remaining option, the establishment of a Foreign Sales Corporation (FSC), is cost-effective.
The case uses a conversational format between managers to explain the complexity of U.S. taxation principles of foreign-source income. It can be used as the basis for in-class discussion, or simply used as a reading for students. The numerical evaluation of the Foreign Sales Corporation option is helpful in teaching the basics of marginal benefits and the responsibility of management to pursue and evaluate all legal options available for the reduction of the firm's tax liabilities.