The reduction required by this subparagraph must be made on a country-by-country basis whether the taxpayer uses for the taxable year the per-country limitation under section 904(a)(1), or the overall limitation under section 904(a)(2), on the amount of taxes allowed as credit under section 901(a).
For purposes of this subdivision the tax is to be determined without regard to any credits against the tax and without taking into account any tax against which a credit is not allowed under section 901(a). For purposes of (b) of this subdivision, the foreign mineral income is to be reduced only by expenses, losses, and other deductions properly allocable under chapter 1 of the Code to such income and is to be computed without any deduction for personal exemptions under section 151 or 642(b).
Any income of the taxpayer derived from an activity described in either subdivision (i), (ii), or (iii) of this subparagraph is foreign mineral income, since it is not necessary that the taxpayer extract, process, and transport, distribute, or sell minerals or their primary products for the income derived from any such activity to be foreign mineral income. Thus, for example, an integrated oil company must treat as foreign mineral income from sources within a foreign country or possession of the United States all income from such sources derived from the production of oil, the refining of crude oil into gasoline, the distribution of gasoline to marketing outlets, and the retail sale of gasoline. Similarly, income from such sources from the refining, distribution, or marketing of fuel oil by the taxpayer is foreign mineral income, whether or not the crude oil was extracted by the taxpayer. In further illustration, income from sources within a foreign country or possession of the United States derived from the processing of minerals into their primary products by the taxpayer is foreign mineral income, whether or not the minerals were extracted, or the primary products were sold, by the taxpayer. Section 901(e) and this section apply whether or not the extraction, processing, transportation, distribution, or selling of the minerals or primary products is done by the taxpayer. Thus, for example, an individual who derives royalty income from the extraction of oil from an oil well in a foreign country has foreign mineral income for purposes of this paragraph. Income from the manufacture, distribution, and marketing of petrochemicals is not foreign mineral income. Foreign mineral income is not limited to gross income from the property within the meaning of section 613(c) and § 1.613-3 .
Example.
Foreign mineral income from country X | $100,000 | |
Less: | ||
Intangible drilling and development costs | $21,000 | |
Cost depletion | 3,000 | 24,000 |
Taxable income from country X | 76,000 | |
Income tax rate of country X | * 50% | |
Tax paid to country X | 38,000 | |
Income from country Y | 100,000 | |
Less deductions | 25,000 | |
Taxable income from country Y | 75,000 | |
Income tax rate of country Y | * 60% | |
Tax paid to country Y | 45,000 | |
Total taxable income | 151,000 | |
Less total foreign income taxes | 83,000 | |
Total earnings and profits | 68,000 | |
Taxable income from foreign mineral income | 76,000 | |
Less: Tax paid on foreign mineral income | 38,000 | |
Earnings and profits from foreign mineral income | 38,000 |
Portion of dividend from country Y attributable to foreign mineral income (subdivision (i)(a) of this subparagraph) ($40,000 * $38,000/$68,000) | $22,352.94 |
Foreign income tax deemed paid by M to country Y under section 902(a)(1) ($83,000 * $40,000/$68,000) | 48,823.53 |
Foreign income tax deemed paid by M to country Y with respect to foreign mineral income from country Y (paragraph (a)(2)(i) of this section) ($48,823.53 * $22,352.94/$40,000) | 27,283.74 |
Foreign mineral income from country Y: | |
Dividend attributable to foreign mineral income from country Y | 22,352.94 |
Sec. 78 dividend deemed paid with respect to foreign mineral income (subdivision (i)(b) of this subparagraph) | 27,283.74 |
Total foreign mineral income | 49,636.68 |
U.S. tax | W tax | |
Foreign mineral income | $100,000 | $100,000 |
Less: | ||
Intangible drilling and development costs | 15,000 | 15,000 |
Cost depletion | 2,000 | |
Percentage depletion (22% of $100,000, but not to exceed 50% of $85,000) | 22,000 | |
Taxable income | 63,000 | 83,000 |
Income tax rate | 48% | 50% |
Tax | 30,240 | 41,500 |
Foreign income tax paid on foreign mineral income | $41,500 | |
Less reduction under sec. 901(e): | ||
Smaller of $41,500 (tax paid to country W on foreign mineral income) or $39,840 (U.S. tax on foreign mineral income of $83,000 ($83,000 * 48%), determined by deducting cost depletion of $2,000 in lieu of percentage depletion of $22,000) | 39,840 | |
Less: U.S. tax on foreign mineral income (before credit) | $30,240 | 9,600 |
Foreign income tax allowable as a credit | 31,900 |
U.S. tax | X tax | |
Foreign mineral income | $100,000 | $100,000 |
Less: | ||
Intangible drilling and development costs | 50,000 | 10,000 |
Percentage depletion | 22,000 | 22,000 |
Taxable income | 28,000 | 68,000 |
Income tax rate | 48% | 40% |
Tax | 13,440 | 27,200 |
Foreign income tax paid on foreign mineral income | $27,200 | |
Less reduction under sec. 901(e): | ||
Smaller of $27,200 (tax paid to country X on foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000 * 48%), determined by deducting cost depletion of $15,000 in lieu of percentage depletion of $22,000) | $16,800 | |
Less: U.S. tax on foreign mineral income (before credit) | 13,440 | 3,360 |
Foreign income tax allowable as a credit | 23,840 |
U.S. tax | Y tax | |
Foreign mineral income | $100,000 | $100,000 |
Less: | ||
Intangible drilling and development costs | 15,000 | |
Depreciation | 40,000 | 20,000 |
Cost depletion | 10,000 | |
Percentage depletion (22% of $100,000, but not to exceed 50% of $45,000) | 22,000 | |
Taxable income | 23,000 | 70,000 |
Income tax rate | 48% | 20% |
Tax | 11,040 | 14,000 |
Foreign income tax paid on foreign mineral income | $14,000 | |
Less reduction under sec. 901(e): | ||
Smaller of $14,000 (tax paid to country Y on foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000 * 48%), determined by deducting cost depletion of $10,000 in lieu of percentage depletion of $22,000) | $14,000 | |
Less: U.S. tax on foreign mineral income (before credit) | 11,040 | 2,960 |
Foreign income tax allowable as a credit | 11,040 |
U.S. tax | Z tax | |
Foreign mineral income | $100,000 | $100,000 |
Less: | ||
Intangible drilling and development costs | 85,000 | |
Cost depletion | 10,000 | 10,000 |
Taxable income | 5,000 | 90,000 |
Income tax rate | 48% | 30% |
Tax | 2,400 | 27,000 |
U.S. tax | Z tax | |
Gross income (including foreign mineral income) | $250,000 | $100,000 |
Less: | ||
Intangible drilling and development costs | 150,000 | 2,500 |
Cost depletion | 60,000 | 5,000 |
Percentage depletion on foreign mineral income (22% of $100,000, but not to exceed 50% of [$100,000-$25,000]) | 22,000 | |
Taxable income | 18,000 | 92,500 |
Income tax rate | 48% | 40% |
Tax | 8,640 | 37,000 |
U.S. tax on total taxable income | $8,640 | |
Less U.S. tax on taxable income other than foreign mineral income from country Z: | ||
Income from U.S. property | $150,000 | |
Intangible drilling and development costs | 125,000 | |
Cost depletion | 60,000 | |
Taxable income | 0 | |
Income tax rate | 48% | |
U.S. tax | 0 | 0 |
Excess tax | 8,640 |
Foreign mineral income | $100,000 |
Intangible drilling and development costs | 25,000 |
Percentage depletion (22% of $100,000, but not to exceed 50% of $75,000) | 22,000 |
Taxable income | 53,000 |
Income tax rate | 48% |
U.S. tax | 25,440 |
Foreign mineral income | $100,000 |
Intangible drilling and development costs | 25,000 |
Cost depletion | 5,000 |
Taxable income | 70,000 |
Income tax rate | 48% |
U.S. tax | 33,600 |
Foreign income tax paid on foreign mineral income | $37,000 | |
Less reduction under sec. 901(e): | ||
Smaller of $37,000 (tax paid to country Z on foreign mineral income) or $33,600 (U.S. tax on foreign mineral income of $70,000, as determined under paragraph (d) of this example | $33,600 | |
Less: U.S. tax on foreign mineral income of $53,000, as determined under paragraph (c) of this example | 25,440 | 8,160 |
Foreign income tax allowable as a credit | $28,840 |
U.S. Tax | X tax | Y tax | |
Total income (including foreign mineral income from countries X and Y) | $250,000 | $150,000 | $100,000 |
Intangible drilling and development costs | 25,000 | 16,000 | 9,000 |
Cost depletion | 8,000 | 7,000 | |
Percentage depletion (22% of $150,000, but not to exceed 50% of $134,000; plus 22% of $100,000, but not to exceed 50% of $91,000) | 55,000 | ||
Adjusted gross income | 170,000 | ||
Other deductions | 2,250 | ||
Personal exemption | 750 | ||
Taxable income | 167,000 | 126,000 | 84,000 |
Income tax rate | 57% | 30% | |
Foreign tax | 71,820 | 25,200 | |
U.S. tax ($53,090 plus 70% of $67,000) | 99,990 |
U.S. tax on total taxable income | $99,990 | |
Less U.S. tax on taxable income other than foreign mineral income from country X: | ||
Foreign mineral income from country Y | $100,000 | |
Intangible drilling and development costs | 9,000 | |
Percentage depletion (22% of $100,000, but not to exceed 50% of $91,000) | 22,000 | |
Adjusted gross income | 69,000 | |
Other deductions | 2,250 | |
Personal exemption | 750 | |
Taxable income | 66,000 | |
U.S. tax ($26,390 plus 64% of $6,000) | 30,230 | |
Excess tax | 69,760 |
Foreign mineral income from country X | $150,000.00 |
Intangible drilling and development costs | 16,000.00 |
Percentage depletion (22% of $150,000, but not to exceed 50% of $134,000) | 33,000.00 |
Adjusted gross income | 101,000.00 |
Other deductions | |
Taxable income | 101,000.00 |
U.S. tax ($53,090 plus 70% of excess over $100,000) | 53,790.00 |
Total income | $250,000 |
Intangible drilling and development costs | 25,000 |
Cost depletion | 15,000 |
Adjusted gross income | 210,000 |
Other deductions | 2,250 |
Personal exemption | 750 |
Taxable income | 207,000 |
U.S. tax ($53,090 plus 70% of $107,000) | 127,990 |
Foreign mineral income from country Y | $100,000 |
Intangible drilling and development costs | 9,000 |
Cost depletion | 7,000 |
Adjusted gross income | 84,000 |
Other deductions | 2,250 |
Personal exemption | 750 |
Taxable income | 81,000 |
U.S. tax ($39,390 plus 68% of $1,000) | 40,070 |
Foreign income tax paid to country X on foreign mineral income | $71,820 | |
Less reduction under sec. 901(e): | ||
Smaller of $71,820 (tax paid to country X on foreign mineral income) or $87,920 (U.S. tax on foreign mineral income from sources within country X, as determined under paragraph (d) of this example) | $71,820 | |
Less: U.S. tax on foreign mineral income from sources within country X, determined under paragraph (c) of this example | 69,760 | 2,060 |
Foreign income tax of country X allowable as a credit | 69,760 |
U.S. tax on total taxable income | $99,990 | |
Less U.S. tax on taxable income other than foreign mineral income from country Y: | ||
Foreign mineral income from country X | $150,000 | |
Intangible drilling and development costs | 16,000 | |
Percentage depletion (22% of $150,000, but not to exceed 50% of $134,000) | 33,000 | |
Adjusted gross income | 101,000 | |
Other deductions | 2,250 | |
Personal exemption | 750 | |
Taxable income | 98,000 | |
U.S. tax ($46,190 plus 69% of $8,000) | 51,710 | |
Excess tax | 48,280 |
Foreign mineral income from country Y | $100,000 |
Intangible drilling and development costs | 9,000 |
Percentage depletion (22% of $100,000, but not to exceed 50% of $91,000) | 22,000 |
Adjusted gross income | 69,000 |
Other deductions | |
Taxable income | 69,000 |
U.S. tax ($26,390 plus 64% of $9,000) | 32,150 |
Foreign mineral income from country X | $150,000 |
Intangible drilling and development costs | 16,000 |
Cost depletion | 8,000 |
Adjusted gross income | 126,000 |
Other deductions | 2,250 |
Personal exemption | 750 |
Taxable income | 123,000 |
U.S. tax ($53,090 plus 70% of $23,000) | 69,190 |
Foreign income tax paid to country Y on foreign mineral income | $25,200 | |
Less reduction under sec. 901(e): | ||
Smaller of $25,200 (tax paid to country Y on foreign mineral income) or $58,800 (U.S. tax on foreign mineral income from sources within country Y, as determined under paragraph (h) of this example) | $25,200 | |
Less: U.S. tax on foreign mineral income from sources within country Y, as determined under paragraph (g) of this example | 48,280 | |
Foreign income tax of country Y allowable as a credit | 25,200 |
U.S. tax | X tax | |
Foreign mineral income | $100,000 | $100,000 |
Less: | ||
Percentage depletion (14% of $100,000, but not to exceed 50% of $92,000) | 14,000 | |
Cost depletion | 5,000 | |
Other deductions | 8,000 | 8,000 |
Taxable income | 78,000 | 87,000 |
Income tax rate | 48% | 45% |
Tax | 37,440 | 39,150 |
Foreign income tax paid on foreign mineral income | $39,150 | |
Less reduction under sec. 901(e): | ||
Smaller of $39,150 (tax paid to country X on foreign mineral income) or $41,760 (U.S. tax on foreign mineral income of $87,000 ($87,000 * 48%), determined by deducting cost depletion of $5,000 in lieu of percentage depletion of $14,000) | $39,150 | |
Less: U.S. tax on foreign mineral income (before credit) | 37,440 | 1,710 |
Foreign income tax allowable as a credit | 37,440 |
Foreign mineral income from country X: | ||
Income from mining property | $100,000 | |
Dividends from R | 25,000 | |
Sec. 78 dividend | 22,500 | $147,500 |
Less: | ||
Percentage depletion (14% of $100,000, but not to exceed 50% of $92,000) | $14,000 | |
Other deductions | 8,000 | |
Taxable income | 125,500 | |
Income tax rate | 48% | |
U.S. tax | 60,240 |
Foreign income tax paid, and deemed to be paid, to country X on foreign mineral income ($39,150 + $22,500 + $2,500) | $64,150 | |
Less reduction under sec. 901(e): | ||
Smaller of $64,150 (tax paid and deemed paid to country X on foreign mineral income) or $64,560 (U.S. tax on foreign mineral income of $134,500 ($134,500 * 48%), determined by deducting cost depletion of $5,000 in lieu of percentage depletion of $14,000) | $64,150 | |
Less: U.S. tax on foreign mineral income (before credit) | $60,240 | $3,910 |
Foreign income tax allowable as a credit | 60,240 |
26 C.F.R. §1.901-3