The Commissioner may, in his discretion, consent to a revocation even if none of the foregoing subdivisions (i) through (vi) is applicable. If an election has been revoked with respect to an elected country, a subsequent election to apply the safe harbor method with respect to such elected country may be made only with the consent of the Commissioner and upon such terms and conditions as the Commissioner in his discretion may require.
(A - B - C) * D / (1 - D)
where (except as otherwise provided in paragraph (e)(5) of this section):
A = the amount of gross receipts as determined under paragraph (e)(2) of this section
B = the amount of costs and expenses as determined under paragraph (e)(2) of this section
C = the total amount paid in the taxable year by the dual capacity taxpayer pursuant to the qualifying levy (the "actual payment amount")
D = the tax rate as determined under paragraph (e)(3) of this section
In no case, however, shall the qualifying amount exceed the actual payment amount; and the qualifying amount is zero if the safe harbor formula yields a qualifying amount less than zero. The safe harbor formula is intended to yield a qualifying amount that is approximately equal to the amount of generally imposed income tax within the meaning of paragraphs (a) and (b)(1) of § 1.903-1 ("general tax") of the foreign country that would have been required to be paid in the taxable year by the dual capacity taxpayer if it had not been a dual capacity taxpayer and if the base of the general tax had allowed a deduction in such year for the amount ("specific economic benefit amount") by which the actual payment amount exceeds the qualifying amount. See, however, paragraph (e)(5) of this section if an elected country has no general tax. The specific economic benefit amount is considered to be the portion of the actual payment amount that is paid pursuant to the distinct portion of the qualifying levy that imposes an obligation in exchange for a specific economic benefit. The specific economic benefit amount is therefore considered to be an amount paid by the dual capacity taxpayer in exchange for such specific economic benefit, which amount must be treated for purposes of chapter 1 of the Internal Revenue Code as provided in paragraph (b)(1) of this section.
A = the amount of gross receipts as determined under the qualifying levy;
B = the amount of deductions for costs and expenses as determined under the qualifying levy;
C = the actual payment amount; and
D = the lower of the rate of the qualifying levy, or the rate of tax specified in section 11(b)(5) (or predecessor or successor section, as the case may be) of the Internal Revenue Code as applicable to the taxable year in which the actual payment amount is paid.
A is a U.S. corporation that is engaged in country X in exploitation of mineral K. Natural deposits of mineral K in country X are owned by country X, and A has been allowed to extract mineral K in consideration of payment of a bonus and of royalties to an instrumentality of country X. Therefore, A is a dual capacity taxpayer. In 1984, A does business in country X within the meaning of the levy. A has validly elected the safe harbor method for country X for 1984. In 1984, as determined in accordance with the country X income tax as applied to A, A has gross receipts of 120u (units of country X currency), deducts 20u of costs and expenses, and pays 40u (40% of (120u-20u)) to country X pursuant to the levy. A also incurs in 1984 10u of nondeductible expenditures for exploration for mineral K and 2u of nondeductible interest costs attributable to an advance of funds from a related party to finance an undertaking relating to the exploration for mineral K for which normal commercial financing was unavailable because of the substantial risk inherent in the undertaking. A establishes that the country X income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) , that it is the generally imposed income tax of country X and hence the general tax, and that all of the criteria of section 903 are satisfied with respect to the country X income tax as applied to dual capacity taxpayers, except for the determination of the distinct element of the levy that is a tax and of A's qualifying amount with respect thereto. (No conclusion is reached whether the country X income tax as applied to dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) . Such a determination would require, among other things, that the country X income tax as so applied, judged on the basis of its predominant character, meets the net income requirement of § 1.901-2(b)(4) notwithstanding its failure to permit recovery of exploration expenses.) A has therefore demonstrated that the country X income tax as applied to dual capacity taxpayers is a qualifying levy.
In applying the safe harbor formula, in accordance with paragraph (e)(2), the amount of A's costs and expenses includes the 10u of nondeductible exploration expenses. The failure to permit recovery of interest in excess of arm's length amounts, a provision of both the general tax and the qualifying levy, does not cause the qualifying levy to fail to satisfy the net income requirement of § 1.901-2(b)(4) ; therefore, the amount of A's costs and expenses does not include the 2u of nondeductible interest costs. Thus, under the safe harbor method, A's qualifying amount with respect to the levy is 33.33u ((120u-30u-40u) * .40/(1-.40)). A's specific economic benefit amount is 6.67u (A's actual payment amount (40u) less A's qualifying amount (33.33u)). Under paragraph (a) of this section, this 6.67u is considered to be consideration paid by A for the right to extract mineral K. Pursuant to paragraph (b) of this section, this amount is characterized according to the nature of A's transactions with country X and its instrumentality and of the specific economic benefit received (the right to extract mineral K), as an additional royalty or other business expense paid or accrued by A and is so treated for all purposes of chapter 1 of the Internal Revenue Code, except that if an allowance for percentage depletion is allowable to A under sections 611 and 613 with respect to A's interest in mineral K, the determination whether this 6.67u is tax or royalty for purposes of computing the amount of such allowance shall be made under sections 611 and 613 without regard to the determination that under the safe harbor formula such 6.67u is not tax for purposes of section 901 or 903.
B is a corporation incorporated in country Y that is engaged in construction activities in country Y. B has a contract with the government of country Y to build a hospital in country Y for a fee that is not made available on substantially the same terms to substantially all persons who are subject to the general tax of country X. Accordingly, B is a dual capacity taxpayer. B has validly elected the safe harbor method for country Y for 1985. In 1985, as determined in accordance with the country Y income tax as applied to B, B has gross receipts of 10,000u, deducts 6,000u of costs and expenses, and pays 1900u ((1,000u * 40%) + (3,000u * 50%)) to country Y pursuant to the levy.
It is assumed that B has established that the country Y income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) and is the general tax. It is further assumed that B has demonstrated that all of the criteria of section 901 are satisfied with respect to the country Y income tax as applied to dual capacity taxpayers, except for the determination of the distinct element of such levy that is a tax and of B's qualifying amount with respect to that levy, and therefore that the country Y income tax as applied to dual capacity taxpayers is a qualifying levy.
In applying the safe harbor formula, in accordance with paragraph (e)(3), the 50 percent rate is not used because it does not apply in practice to persons other than dual capacity taxpayers. The next lowest rate of the general tax that does apply in practice to such persons, 40 percent, is used. Accordingly, under the safe harbor formula, B's qualifying amount with respect to the levy is 1400u ((10,000u-6000u-1900u) * .40/(1-.40)). B's specific economic benefit amount is 500u (B's actual payment amount (1900u) less B's qualifying amount (1400u)). Pursuant to paragraph (b) of this section, B's specific economic benefit amount is characterized according to the nature of B's transactions with country Y and of the specific economic benefit received, as a reduction of B's proceeds of its contract with country Y; and this amount is so treated for all purposes of chapter 1 of the Code, including the computation of B's accumulated profits for purposes of section 902.
In accordance with § 1.901-2(f)(2)(i) , the country Y income tax which country Y is, under the contract, required to bear is considered to be paid by country Y on behalf of B. B's proceeds of its contract, for all purposes of chapter 1 of the Code (including the computation of B's accumulated profits for purposes of section 902), therefore, are increased by the additional 500u (1900u computed as in example 2 less 1400u as computed above) of B's liability under the country Y income tax that is assumed by country Y and such 500u is considered to be paid pursuant to the levy by country Y on behalf of B. In applying the safe harbor formula, therefore, the computation is exactly as in example 2 and the results are the same as in example 2.
J is a U.S. corporation that is engaged in country L in the exploration and extraction of petroleum and therefore is a dual capacity taxpayer. J has validly elected the safe harbor method for country L for the year 1983, the year that J commenced activities in country L, and has not revoked such election. For the years 1983 through 1986, J's gross receipts, deductions and net income before application of the carryover provisions, determined in accordance with the April 11 decree, are as follows:
Year | Gross receipts (105 percent of actual gross receipts) | Deductions other than wages | Wages paid other than to officers (amortizable at 20 percent) | Wages paid to officers (amortizable at 2 percent) | Nondeductible exploration interest expense | Net income (loss) (B-C-amortization of cumulative D-amortization of cumulative E) |
A. | B. | C. | D. | E. | F. | G. |
1983 | 0 | 13,000u | 100u | 50u | 1,000u | (13,021u) |
1984 | 0 | 17,000u | 100u | 50u | 2,800u | (17,042u) |
1985 | 42,000u | 15,000u | 100u | 50u | 2,800u | 26,937u |
1986 | 105,000u | 20,000u | 100u | 50u | 2,800u | 84,916u |
After application of the carryover provisions, J's net income and actual payment amounts pursuant to the April 11 levy are as follows:
Year | Net income (loss) | Actual payment amount (I * 75 percent) |
H. | I. | J. |
1983 | (13,021u) | 0 |
1984 | (17,042u) | 0 |
1985 | 22,896u | 17,172u |
1986 | 72,179u | 54,134u |
Pursuant to paragraph (a)(1) of this section, the April 11 decree as applied to corporations engaged in the exploration or extraction of petroleum in country L is a separate levy from the April 11 decree as applied to all other corporations. J establishes that the April 11 decree, as applied to such other corporations, is an income tax within the meaning of § 1.901-2(a)(1) and that the decree as so applied is the general tax.
The April 11 decree as applied to corporations engaged in the exploration or extraction of petroleum in country L does not meet the gross receipts requirement of § 1.901-2(b)(3) ; therefore, irrespective of whether it meets the other requirements of § 1.901-2(b)(1) , it is not an income tax within the meaning of § 1.901-2(a)(1) . However, the April 11 decree as applied to such corporations is a qualifying levy because J has demonstrated that all of the criteria of section 903 are satisfied with respect to the April 11 decree as applied to such corporations, except for the determination of the distinct element of such levy that imposes a tax and of J's qualifying amount with respect thereto.
In applying the safe harbor formula, in accordance with paragraph (e)(2), gross receipts are computed by reference to the general levy, and thus are 100%, not 105%, of actual gross receipts. Similarly, costs and expenses include exploration interest expense. In accordance with paragraph (e)(2)(i) of this section the difference between the general tax and the qualifying levy in the timing of the deduction for wages, other than wages of officers, is not considered to increase the liability of dual capacity taxpayers because the general tax would not have failed to be an income tax within the meaning of § 1.901-2(a)(1) if it had provided for 5-year amortization of such wages instead of for current deduction. See§ 1.901-2(b)(4)(i) . However, amortization of wages paid to officers over a 50-year period is such a deferred recovery of such wages that it effectively is a denial of the deduction of the excess of such wages paid in any year over the amortization of such cumulative wages permitted in such year. See § 1.901-2(b)(4)(i) . The different treatment of wages paid to officers under the general tax and the qualifying levy is thus not merely a difference in timing within the meaning of paragraph (e)(2)(i) of this section. Accordingly, the difference between the amount of wages paid by J to officers in any year and J's deduction (in computing the actual payment amount) for amortization of such cumulative wages allowed in such year is, pursuant to paragraph (e)(2) of this section, treated as a cost and expense in computing J's qualifying amount for such year with respect to the April 11 decree. The differences in the consolidation and carryover provisions between the general tax and the qualifying levy are of the types described in paragraph (e)(2)(ii) of this section and, pursuant to paragraphs (b)(4)(ii) and (b)(4)(iii) of § 1.901-2 , the general tax would not fail to be an income tax within the meaning of § 1.901-2(a)(i) even if it contained the consolidation and carryover provisions of the qualifying levy. Thus, such differences are not considered to increase the liability of dual capacity taxpayers pursuant to the qualifying levy as compared to the general tax liability of persons other than dual capacity taxpayers.
Accordingly, in applying the safe harbor formula to the qualifying levy for 1985 and 1986, gross receipts and costs and expenses are computed as follows:
Gross receipts
1985: 42,000u * (100/105) - 40,000u
1986: 105,000u * (100/105) - 100,000u
costs and expenses
Item | 1985 | 1986 |
1. Deductions other than wages (column C in the preceding chart) | 15,000u | 20,000u |
2. Amortization of cumulative wages paid in 1983 and thereafter other than to officers | 60u | 80u |
3. Deduction of wages to officers paid in current year, instead of amortization allowed in current year of such cumulative wages paid in 1983 and thereafter | 50u | 50u |
4. Deduction of exploration interest expense | 2,800u | 2,800u |
5. Costs and expenses before carryover of net loss (sum of lines 1 through 4) | 17,910u | 22,930u |
6. Recalculation of loss carryover by recalculating 1983 and 1984 net income (loss) to reflect current deduction of wages to officers and exploration interest expense: 1983 adjusted net loss carryover: (13,021u) + (49u) + (1000u) = (14,070u); 1984 adjusted net loss carryover: (17,042u) + (48u) + (2800u) = (19,890u) | ||
7. Recalculation of limitation on use of net loss carryover deduction: | ||
Gross receipts | 40,000u | 100,000u |
Less costs and expenses | (17,910u) | (22,930) |
Total | 22,090u | 77,070u |
Times 15 percent limitation | 3,314u | 11,561u |
8. Costs and expenses including net loss carryover deduction (line 5 plus line 7) | 21,224u | 34,491u |
In years after 1986, costs and expenses for purposes of determining the qualifying amount would reflect net loss carryforward deductions based on the recomputed losses carried forward from 1983 and 1984 (14,070u and 19,890u, respectively) less the amounts thereof that were utilized in determining costs and expenses for 1985 and 1986 (3,314u and 11,561u, respectively). The 1983 and 1984 loss carryforwards would be considered utilized in accordance with the order of priority in which such losses are utilized under the terms of the qualifying levy.
In applying the safe harbor formula, the tax rate to be used, in accordance with paragraph (e)(3) of this section, is .50.
Accordingly, under the safe harbor method, J's qualifying amounts with respect to the April 11 decree for 1985 and 1986 are computed as follows:
1985: (40,000u - 21,224u - 17,172u) * .50 / (1 - .50) = 1604u
1986: (100,000u - 34,491u - 54,134u) * .50 / (1 - .50) = 11,375u
Under the safe harbor method J's qualifying amounts with respect to the April 11 decree for 1985 and 1986 are thus 1604u and 11,375u, respectively; and its specific economic benefit amounts are 15,568u (17,172u-1604u) and 42,759u, (54,134u-11,375u), respectively. Pursuant to paragraph (b) of this section, J's specific economic benefit amounts are characterized according to the nature of J's transactions with country L and of the specific economic benefit received by J as additional royalties paid to country L with respect to the petroleum extracted by J in country L in 1985 and 1986, and these amounts are so treated for all purposes of chapter 1 of the Code.
A is a U.S corporation that carries on the banking business through a branch in country E. B is a U.S. corporation (unrelated to A) that is engaged in the extraction of petroleum in country E. In 1984 A receives interest on loans it has made to 160 borrowers in country E, seven of which are agencies and instrumentalities of the government of country E. The economic benefits received by A and B (i.e., the interest received by A from the government and B's license to extract petroleum owned by the government) are not made available on substantially the same terms to the population of country E in general.
A and B are dual capacity taxpayers. Each of them has validly elected the safe harbor method for country E for 1984. A demonstrates that the country E income tax as applied to it (a dual capacity taxpayer) is not different by its terms or in practice from the country E income tax as applied to persons (in this case other banks) that are not dual capacity taxpayers. A has therefore established pursuant to paragraph (a)(1) of this section and § 1.901-2(d) that the country E income tax as applied to it and the country E income tax as applied to persons other than dual capacity taxpayers are together a single levy. A establishes that such levy is an income tax within the meaning of § 1.901-2(a)(1) . In accordance with paragraph (a)(1) of this section, no portion of the amount paid by A pursuant to such levy is considered to be paid in exchange for a specific economic benefit. Thus, the entire amount paid by A pursuant to this levy is an amount of income tax paid.
B does not demonstrate that the country E income tax as applied to corporations engaged in the extraction of petroleum in country E (dual capacity taxpayers) is not different by its terms or in practice from the country E income tax as applied to persons other than dual capacity taxpayers (i.e., banks that are not dual capacity taxpayers). Accordingly, pursuant to paragraph (a)(1) of this section and § 1.901-2(d) , the country E income tax as applied to corporations engaged in the extraction of petroleum in country E is a separate levy from the country E income tax as applied to other persons.
B demonstrates that all of the criteria of section 901 are satisfied with respect to the country E income tax as applied to corporations engaged in the exploration of petroleum in country E, except for the determination of the distinct element of such levy that imposes a tax and of B's qualifying amount with respect to the levy. Pursuant to paragraph (e)(5) of this section, in applying the safe harbor formula to B, "A" is the amount of B's gross receipts as determined under the country E income tax as applied to B; "B" is the amount of B's costs and expenses as determined thereunder; "C" is B's actual payment amount; and "D" is .29, the lower of the rate (29 percent) of the qualifying levy (the country E income tax as applied to corporations engaged in the extraction of petroleum in country E) or the rate (46 percent) of tax specified for 1984 in section 11(b)(5) of the Internal Revenue Code. Thus, B's qualifying amount is equal to its actual payment amount.
The country E interest tax applies at the 20 percent rate by its terms and in practice to persons other than dual capacity taxpayers. The country E interest tax as applied at the 25 percent rate to special corporations applies only to dual capacity taxpayers; therefore, the country E interest tax as applied to special corporations is a separate levy from the country E interest tax as applied at the 20 percent rate.
A is a U.S. corporation which is a special corporation subject to the 25 percent rate of the country E interest tax. A does not have any insurance income that is subject to the country E insurance tax. A, a dual capacity taxpayer, has validly elected the safe harbor formula for 1984. In 1984 A receives 100u (units of country E currency) of gross interest income subject to the country E interest tax and pays 25u to country E.
A establishes that the country E income tax is the generally imposed income tax of country E; that all of the criteria of section 903 are satisfied with respect to the country E interest tax as applied to special corporations except for the determination of the distinct element of the levy that is a tax and of A's qualifying amount with respect thereto. A has therefore demonstrated that the country E interest tax as applied to special corporations is a qualifying levy. A establishes that the country E interest tax at the 20 percent rate is a tax in lieu of an income tax within the meaning of § 1.903-1(a) . Pursuant to paragraph (e)(6) of this section the country E interest tax at the 20 percent rate is treated as if it were an application of the general tax for purposes of the safe harbor formula of this paragraph (e), since that tax would actually have been required to have been paid by A with respect to its interest income had A not been a dual capacity taxpayer (special corporation) instead subject to the qualifying levy (the country E interest tax at the 25 percent rate).
Even if the country E insurance tax is a tax in lieu of an income tax within the meaning of § 1.903-1(a) , that tax is not treated as if it were an application of the general tax for purposes of applying the safe harbor formula to A since A had no insurance income in 1984 and hence such tax would not actually have been required to be paid by A had A not been a dual capacity taxpayer.
A is a U.S. corporation engaged in country S in the exploitation of mineral K, and A has been allowed to extract mineral K under a concession agreement with an instrumentality of country S. Therefore, A is a dual capacity taxpayer. In accordance with a term of the concession agreement, certain of A's income (net of expenses attributable thereto) is exempted from the income tax and surtax.
The results for A in 1984 are as follows:
Income Tax | Surtax | |
Gross Receipts: | ||
Realized-Taxable | 120u | - |
Realized-Exempt | 15u | - |
Posted Price-Taxable | - | 145u |
Costs: | ||
Attributable to Taxable Receipts | 20u | 20u |
Attributable to Exempt Receipts | 5u | - |
Taxable Income | 100u | 125u |
Tentative Surtax (60 percent) | - | 75u |
Petroleum Levy at 50 percent | 50u | 50u |
Surtax | - | 25u |
Because of the difference (nondeductibility of the surtax) in the country S income tax as applied to dual capacity taxpayers from its application to other persons, the country S income tax as applied to dual capacity taxpayers and the country S income tax as applied to persons other than dual capacity taxpayers are separate levies. Moreover, because A's concession agreement provides for a modification (exemption of certain income) of the country S income tax and surtax as they otherwise apply to other persons engaged in the exploitation of mineral K in country S, those levies (contractual levies) as applied to A are separate levies from those levies as applied to other persons engaged in the exploitation of mineral K in country S.
A establishes that the country S income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) and is the general tax. A demonstrates that all the criteria of section 903 are satisfied with respect to the country S income tax as applied to A and with respect to the surtax as applied to A, except for the determination of the distinct elements of such levies that are taxes and of A's qualifying amounts with respect to such levies. Therefore, both the country S income tax as applied to A and the surtax as applied to A are qualifying levies.
In applying the safe harbor formula, in accordance with paragraph (e)(2), the amount of A's gross receipts includes the exempt realized income, and the amount of A's costs and expenses includes the costs attributable to such exempt income. In accordance with paragraph (e)(7)(i), the amount of the qualifying levy for purposes of the formula is the sum of A's liability for the country S income tax and A's liability for the surtax. Accordingly, under the safe harbor formula, A's qualifying amount with respect to the country S income tax and the surtax is 35u ((135u-25u-75u) * .50/(1-.50)). A's specific economic benefit amount is 40u (A's actual payment amount (75u) less A's qualifying amount (35u)).
C and D are affiliated U.S. corporations engaged in country T in the exploitation of mineral L. Natural deposits of mineral L in country T are owned by country T, and C and D have been allowed to extract mineral L in consideration of certain payments to an instrumentality of country T. Therefore, C and D are dual capacity taxpayers.
The results for C and D in 1984 and 1985 are as follows:
1984 | 1985 | |||
C | D | C | D | |
Gross Receipts | 120u | 0 | 120u | 120u |
Costs | 20u | 50u | 20u | 20u |
Loss Carryforward | 50u | |||
Net Income (Loss) | 100u | (50u) | 100u | 50u |
Income Tax | 50u | 50u | 25u |
C and D establish that the country T income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) and is the general tax. C and D demonstrate that all of the criteria of section 901 are satisfied with respect to the country T income tax as applied to dual capacity taxpayers, except for the determination of the distinct element of such levy that is a tax and of C and D's qualifying amounts with respect to that levy. Therefore, the country T income tax as applied to dual capacity taxpayers is a qualifying levy.
In applying the safe harbor formula, in accordance with paragraphs (e)(2)(ii) and (e)(7)(iii), the gross receipts, costs and expenses, and actual payment amounts of C and D are aggregated, except that in D's loss year (1984) its gross receipts and costs and expenses are disregarded. The results of any loss year are disregarded since the country T income tax as applied to dual capacity taxpayers does not allow consolidation, and, pursuant to paragraph (e)(2)(ii), differences in consolidation provisions between such levy and the country T income tax as applied to persons that are not dual capacity taxpayers are not considered. Accordingly, in 1984 the qualifying amount with respect to the country T income tax is 50u ((120u-20u-50u) * .50/(1-.50)), all of which is considered paid by C. In 1985 the qualifying amount is 75u ((120u + 120u-20u-20u-50u (loss carry forward)-50u-25u) * .50/(1-.50)), of which 50u is considered to be paid by C and 25u by D.
A is a U.S. corporation engaged in country W in exploitation of mineral M and is subject to the 80 percent levy. Natural deposits of mineral M in country W are owned by country W, and A has been allowed to extract mineral M in consideration of certain payments to an instrumentality of country W. Therefore, A is a dual capacity taxpayer. B, a U.S. corporation affiliated with A, also is engaged in business in country W, but has no transactions with country W. B is subject to the country W income tax. B is a dual capacity taxpayer within the meaning of § 1.901-2(a)(2)(ii)(A) by virtue of its affiliation with A.
The results for A and B in 1984 are as follows:
A | B | |
Gross Receipts | 120u | 100u |
Costs | 20u | 40u |
Net Income | 100u | 60u |
Tax Rate | .80 | .50 |
Tax | 80u | 30u |
A and B establish that the country W income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) and is the general tax. It is assumed that B has demonstrated that the country W income tax as applied to B does not differ by its terms or in practice from the country W income tax as applied to persons other than dual capacity taxpayers and hence that the country W income tax as applied to B, a dual capacity taxpayer, and the country W income tax as applied to such other persons is a single levy. Thus, with respect to B, the country W income tax is not a qualifying levy by reason of the last sentence of paragraph (c)(1) of this section. A demonstrates that all the criteria of section 901 are satisfied with respect to the 80 percent levy, except for the determination of the distinct element of such levy that is a tax and of A's qualifying amount with respect thereto. Accordingly, the 80 percent levy as applied to A is a qualifying levy.
In applying the safe harbor formula in accordance with paragraphs (e)(7)(i) and (e)(7)(iii) in the instant case, it is not necessary to incorporate B's results in the safe harbor formula because B's taxation in country W is identical to the taxation of persons other than dual capacity taxpayers and because neither A's and B's results nor their taxation in country W interact in any way to change A's taxation. All of the amount paid by B, 30u, is an amount of income tax paid by B within the meaning of § 1.901-2(a)(1) . Accordingly, under the safe harbor formula, the qualifying amount for A with respect to the 80 percent levy is 20u ((120u-20u-80u) * .50/(1-.50)). The remaining 60u paid by A (80u - 20u) is A's specific economic benefit amount.
In applying the safe harbor formula in accordance with paragraphs (e)(7)(i) and (e)(7)(iii), the results of A and B are aggregated. Accordingly, under the safe harbor formula, the aggregate qualifying amount for A and B with respect to the country W income tax and 80 percent levy is 50u ([(120u + 100u)-(20u + 40u)-(80u + 30u)] * .50/(1-.50)).
C, a wholly-owned country Y subsidiary of D, a U.S. corporation, is engaged in country Y in the exploitation of mineral K. Natural deposits of mineral K in country Y are owned by country Y, and C has been allowed to extract mineral K in consideration of certain payments to an instrumentality of country Y. Therefore, C is a dual capacity taxpayer. D has elected the safe harbor method for country Y for 1984. In 1984, C's gross receipts are 120u (units of country Y currency), its costs and expenses are 20u, and its liability under the 75 percent levy is 75u. C distributes the amount that remains, 25u, as a dividend to D.
D establishes that the country Y income tax as applied to persons other than dual capacity taxpayers is an income tax within the meaning of § 1.901-2(a)(1) and the general tax, and that all the criteria of section 901 are satisfied with respect to the 75 percent levy, except for the determination of the distinct element of such levy that is tax and of C's qualifying amount with respect thereto. Accordingly, the 75 percent levy is a qualifying levy.
Pursuant to paragraph (e)(7), D (which is not subject to a levy of country Y but is considered to receive a specific economic benefit by reason of § 1.901-2(a)(2)(ii)(E) ) is treated as a dual capacity taxpayer in applying paragraph (e)(7)(ii). D demonstrates that the withholding tax is a tax in lieu of an income tax within the meaning of § 1.903-1 , which tax applies in practice to persons other than dual capacity taxpayers, and that such tax actually would have applied to D had D not been a dual capacity taxpayer (i.e., had C not been a dual capacity taxpayer, in which case D also would not have been one). Accordingly, the withholding tax is treated for purposes of the safe harbor formula as if it were an application of the general tax.
In applying the safe harbor formula to this situation in accordance with paragraph (e)(7)(ii), the rates of the country Y income tax and the withholding tax are aggregated into a single effective general tax rate. In this case, the rate is .60 (.50 + [(1-.50) * .20]). Accordingly, under the safe harbor formula, C's qualifying amount with respect to the 75 percent levy is 37.5u [(120u-20u-75u) * .60/(1-.60)], the aggregate amount that C and D would have paid if C had been subject to the country Y income tax and had distributed to D as a dividend subject to the withholding tax the entire amount that remained for the year after payment of the country Y income tax. Because C is in fact the only taxpayer, the entire qualifying amount is paid by C.
D, which is a dual capacity taxpayer, demonstrates that the withholding tax as applied to D does not differ by its terms or in practice from the withholding tax as applied to persons other than dual capacity taxpayers and hence that the withholding tax as applied to D and that levy as applied to such other persons is a single levy. D demonstrates that all of the criteria of section 903 are satisfied with respect to the withholding tax. The withholding tax is not a qualifying levy by reason of the last sentence of paragraph (c)(1) of this section.
Paragraphs (e)(7)(i), (e)(7)(ii) and (e)(7)(iii) all apply in this situation. As in example 10, it is not necessary to incorporate the withholding tax into the safe harbor formula. All of the amount paid by D, 5u, is an amount of tax paid by D in lieu of an income tax. In applying the safe harbor formula to C, therefore, with respect to the 75 percent levy, "A" is 120, "B" is "20", "C" is 75 and "D" is .50. Accordingly, C's qualifying amount with respect to the 75 percent levy is 25u; the remaining 50u that it paid is its specific economic benefit amount.
The only difference between the withholding tax and the 10 percent withholding tax applicable only to dual capacity taxpayers (including D) is that a lower rate (but the same base) applies to dual capacity taxpayers. Although the withholding tax and the 10 percent withholding tax are together a single levy, this difference makes it necessary, when dealing with multiple levies, to incorporate the withholding tax and D's payment pursuant to the 10 percent withholding tax in the safe harbor formula. Accordingly, as in example 12, the safe harbor formula is applied by aggregation.
The aggregate effective rate of the general taxes for purposes of the safe harbor formula is .60 (.50 + [(1-.50) * .20]). Pursuant to paragraph (e)(7), the aggregate actual payment amount of the qualifying levies for purposes of the formula is the sum of C and D's liability for the 75 percent levy and the 10 percent withholding tax. Accordingly, under the safe harbor formula, the aggregate qualifying amount with respect to the 75 percent levy on C and the 10 percent withholding tax on D is 33.75u ((120u-20u-[75u + 2.5u]) * .60/(1-.60)), which is the aggregate amount of tax that C and D would have paid if C had been subject to the country Y income tax and had paid out its entire amount remaining after payment of that tax to D as a dividend subject to the withholding tax.
The reasoning of example 5 with regard to the country E income tax as applied to A and B, respectively, applies equally with regard to the local tax as applied to A and B, respectively. Accordingly, the entire amount paid by A pursuant to each of the country E income tax and the local tax is an amount of income tax paid, and both the country E income tax as applied to B and the local tax as applied to B are qualifying levies.
Pursuant to paragraph (e)(7), in applying the safe harbor formula to B, "A" is the amount of B's gross receipts as determined under the (identical) country E income tax and local tax as applied to B; "B" is the amount of B's costs and expenses thereunder; and "C" is the sum of B's actual payment amounts with respect to the two levies. Pursuant to paragraph (e)(7), in applying the safe harbor formula to B, B's aggregate qualifying amount with respect to the two levies is limited to the amount determined in accordance with paragraph (e)(5) where "D" is the rate of tax specified in section 11(b)(5) of the Internal Revenue Code. Accordingly, "D" is .46, which is the lower of the aggregate rate (55 percent) of the qualifying levies or the section 11(b)(5) rate (46 percent). B's aggregate qualifying amount is, therefore, identical to B's qualifying amount in example 6, which is less than its aggregate actual payment amount, and the difference is B's specific economic benefit amount.
26 C.F.R. §1.901-2A
Approved by the Office of Management and Budget under control number 1545-0746