For the requirement that the overall United States and foreign income tax incurred in respect of a minimum distribution from a chain or group must equal or exceed either 90 percent of the United States corporate tax rate applied against pretax and predistribution consolidated earnings and profits or, with the application of the special rules set forth therein, must equal or exceed the overall United States and foreign income tax which would have resulted from a pro rata minimum distribution, see paragraph (a)(1) of § 1.963-4 .
Example. Domestic corporation M owns all the one class of stock in controlled foreign corporation A. Corporation M uses the calendar year as its taxable year, and A Corporation uses a fiscal year ending August 31. For 1964, M Corporation makes a first-tier election in order to exclude from gross income for such year the subpart F income of A Corporation for its taxable year ending on August 31, 1964. Although, such election applies to the taxable year of A Corporation beginning on September 1, 1963, the applicable table, for purposes of determining the statutory percentages to be used under paragraph (a) of this section for the taxable year, is that set forth in section 963(b)(2), which relates to taxable years of United States shareholders beginning in 1964. Thus, if for the taxable year of A Corporation ending August 31, 1964, the effective foreign tax rate is 30 percent, A Corporation would have to distribute 72 percent of its earnings and profits for such year in order for M Corporation to be entitled to an exclusion under section 963 for 1964.
In the event that the foreign income tax of a corporation included in a chain or group depends upon the extent to which distributions are made by such corporation, the amount of foreign income tax referred to in subdivision (ii) of this subparagraph shall, only for purposes of determining the effective foreign tax rate, be the amount which would have been paid or accrued if no distributions had been made. For the rules in other cases involving corporations whose foreign income tax varies with distributions, see § 1.963-5 . For the manner of computing the earnings and profits of a foreign branch treated as a wholly owned foreign subsidiary corporation see paragraph (f)(4)(ii) of § 1.963-1 .
the earnings and profits of such foreign corporation for the taxable year which are taken into account in determining such shareholder's proportionate share thereof shall be an amount of such earnings and profits, determined as provided in subparagraph (1) of this paragraph, which bears to the total of such earnings and profits the same ratio which the part (computed on a daily basis) of such year during which such corporation is a controlled foreign corporation (or, in case such corporation is not a controlled foreign corporation, during which such other corporation is a controlled foreign corporation) bears to the total taxable year. If the United States shareholder by sufficient records and accounts establishes to the satisfaction of the district director the gross income received or accrued, and the deductions paid or accrued, for the part of such year during which such corporation is a controlled foreign corporation (or, in case such corporation is not a controlled foreign corporation, during which such other corporation is a controlled foreign corporation), the amount of earnings and profits based on such records and accounts may be used in lieu of the amount determined under the preceding sentence. The application of this subdivision may be illustrated by the following examples:
Dividend | $28.98 |
Gross-up under section 78 ($28.98/ $70 * $30) | 12.42 |
Taxable income | 41.40 |
U.S. tax before foreign tax credit ($41.40 * 0.48) | 19.87 |
Foreign tax credit ($12.42 + [0.06 * $28.98]) | 14.16 |
U.S. tax payable | 5.71 |
Controlled foreign corporations | |||
A | B | C | |
Predistribution and pretax earnings and profits | $100 | $100 | $100.00 |
Foreign income tax | 15 | 25 | 35.00 |
Predistribution earnings and profits | 85 | 75 | 65.00 |
M Corporation's proportionate share of earnings and profits: | |||
(0.80 * $85) | 68 | ||
(0.60 * $75) | 45 | ||
(0.70 * $65) | 45.50 | ||
Consolidated earnings and profits with respect to M Corporation ($68 + $45 + $45.50) | 158.50 | ||
M Corporation's proportionate share of foreign income tax: | |||
($15 * [$68/$85]) | 12 | ||
($25 * [$45/$75]) | 15 | ||
($35 * [$45.50/$65]) | 24.50 | ||
Consolidated foreign income taxes with respect to M Corporation ($12 + $15 + $24.50) | 51.50 |
The effective foreign tax rate for 1966 is 24.5 percent ($51.50/[$158.50 + $51.50]) and the statutory percentage under section 963(b)(3) for such year is 76 percent. Thus, the amount of the minimum distribution which M Corporation must receive from the 1966 consolidated earnings and profits of the group is $120.46 (0.76 * $158.50).
Controlled foreign corporations | ||||
A | B | C | Total | |
Pretax earnings and profits | $160.00 | $145.50 | $100.00 | |
Reduction for intercorporate dividends: | ||||
(0.60 * $100) | 60.00 | |||
(0.70 * $65) | 45.50 | |||
Pretax and predistribution earnings and profits | 100.00 | 100.00 | 100.00 | |
Reduction for foreign income tax on such pretax and predistribution earnings and profits: | ||||
(0.15 * $100) | 15.00 | |||
(0.25 * $100) | 25.00 | |||
(0.35 * $100) | 35.00 | |||
Predistribution earnings and profits | 85.00 | 75.00 | 65.00 | |
Reduction for foreign income tax on intercorporate distributions of 1966 earnings and profits: | ||||
(0.15 * $60) | 9.00 | |||
(0.25 * $45.50) | 11.38 | |||
76.00 | 63.62 | 65.00 | ||
Consolidated earnings and profits with respect to M Corporation: | ||||
(0.80 * $76) | 60.80 | |||
(0.80 * 0.60 * $63.62) | 30.54 | |||
(0.80 * 0.60 * 0.70 * $65) | 21.84 | $113.18 | ||
Consolidated foreign income taxes with respect to M Corporation: | ||||
($60.80/$76 * [$15 + $9]) | 19.20 | |||
($30.54/$63.62 * [$25 + $11.38]) | 17.46 | |||
($21.84/$65 * $35) | 11.76 | $48.42 | ||
Effective foreign tax rate ($48.42/[$113.18 + $48.42]) | 29.96% | |||
Statutory percentage under section 963(b) | 69% | |||
Amount of minimum distribution which M Corporation must receive from 1966 consolidated earnings and profits (0.69 * $113.18), no amount of the tax on intercorporate distributions being counted toward the minimum distribution | $78.0 |
The facts are the same as in example 7 except that M Corporation does not choose under paragraph (d)(1)(iii) of this section to take into account, in determining the effective foreign tax rate, the foreign income tax paid by the recipient corporations on the intercorporate distributions. The consolidated earnings and profits, the consolidated foreign income taxes, of the chain, and the amount of the minimum distribution which M Corporation must receive, for 1966 are determined as follows:
Controlled foreign corporations | ||||
A | B | C | Total | |
Pretax earnings and profits | $160.00 | $145.50 | $100.00 | |
Reduction for intercorporate dividends: | ||||
(0.60 * $100) | 60.00 | |||
(0.70 * $65) | 45.50 | |||
Pretax and predistribution earnings and profits | 100.00 | 100.00 | 100.00 | |
Reduction for foreign income tax on such pretax and predistribution earnings and profits: | ||||
(0.15 * $100) | 15.00 | |||
(0.25 * $100) | 25.00 | |||
(0.35 * $100) | 35.00 | |||
Predistribution earnings and profits | 85.00 | 75.00 | 65.00 | |
Consolidated earnings and profits with respect to M Corporation: | ||||
(0.80 * $85) | 68.00 | |||
(0.80 * 0.60 * $75) | 36.00 | |||
(0.80 * 0.60 * 0.70 * $65) | 21.84 | $125.84 | ||
Consolidated foreign income taxes with respect to M Corporation: | ||||
($68/$85 * $15) | 12.00 | |||
($36/$75 * $25) | 12.00 | |||
($21.84/$65 * $35) | 11.76 | $35.76 | ||
Effective foreign tax rate ($35.76/[$125.84 + $35.76]) | 22.13% | |||
Statutory percentage under section 963(b) | 76% | |||
Amount of minimum distribution to be made from 1966 consolidated earnings and profits with respect to M Corporation: (0.76 * $125.84) | $95.64 | |||
Foreign income tax on intercorporate distributions of 1966 earnings and profits which is counted toward the minimum distribution (see § 1.963-3(b)(2) ): | ||||
($68/$85 * [0.15 * $60]) | 7.20 | |||
($36/$75 * [0.25 * $45.50]) | 5.46 | $12.66 | ||
Amount of minimum distribution which M Corporation must actually receive from the chain ($95.64-$12.66) | $82.98 |
26 C.F.R. §1.963-2