H. David Rosenbloom (Caplin & Drysdale; NYU), The Branch Rule: An Unhurried Read of the Statute, 175 Tax Notes Fed. 87 (Apr. 4, 2022):

In this article, Rosenbloom considers the language of the branch rule of subpart F and whether it should apply to both sales and manufacturing branches.

No one is likely to nominate the IRS for a writing award, but some of the Internal Revenue Code’s provisions are especially perplexing. One such provision is the branch rule of subpart F, found in section 954(d)(2):

CERTAIN BRANCH INCOME: — For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation. …

The fact remains that the statute fairly can apply to any situation in which a CFC’s foreign branch has substantially the same effect as in the sales branch situation. That invites regulations to apply the analysis outlined in the statutory text to indistinguishable situations. Congress did not describe a manufacturing branch, but it intuited that the sales branch situation was not the only one for which a statutory remedy was needed.