(e) Other exclusions.-See section 861 and §1.861-2 for rules relating to income from bank deposits and income from bankers' acceptances. See section 892 and § 1.892-1 for rules relating to the income of foreign governments. PAR. 2. Paragraph (c)(1) of § 1.1441-3 is amended to read as follows: §1.1441-3 EXCEPTIONS AND RULES OF SPECIAL APPLICATION. (c) Interest.—(1) Government obligations.-Withholding is required under § 1.1441-1 in case of interest paid on obligations issued on or after March 1, 1941, by the United States or any agency or instrumentality thereof. See section 103 and the regulations thereunder, relating to the taxation of such interest, and § 1.1461-1, relating to ownership certificates. See also section 895 and the regulations thereunder, relating to the exemption from withholding on interest derived by a foreign central bank of issue from obligations of the United States held in custody by a withholding agent. (This Treasury Decision is issued under the authority contained in section 7805 of the Internal Revenue Code of 1954 (68A Stat. 917: 26 U.S.C. 7805).) Approved February 19, 1963. STANLEY S. SURREY, MORTIMER M. CAPLIN, Commissioner of Internal Revenue. Assistant Secretary of the Treasury. (Filed by the Division of the Federal Register on February 25, 1963, 8:49 a.m., and published in the issue of the Federal Register for February 26, 1963, 28 F.R. 1763) PART III-INCOME FROM SOURCES WITHOUT THE UNITED STATES Subpart A.-Foreign Tax Credit SECTION 901.-TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS OF UNITED STATES 26 CFR 1.901-1: Allowance of credit for taxes. Rev. Rul. 63-49 Optional investments in governmental securities made in lieu of payment of additional tax under article 12 of Colombian Decree No. 0285 of February 1955, are considered capital expenditures and are not allowable as a credit against United States income tax under section 901 of the Internal Revenue Code of 1954. I.T. 4023, C.B. 1950-2, 49, distinguished. Advice has been requested whether certain optional investments made in lieu of payment of the four-percent tax imposed under article 12 of Colombian Decree No. 0285 of February 1955, issued by the President of the Republic of Colombia, are allowable as a credit against United States income tax under section 901 of the Internal Revenue Code of 1954. The Republic of Colombia, by Colombian Law No. 85 of 1946, imposed as an additional obligation on income taxes a charge of five percent for the construction and improvement of low-cost housing. The additional obligation could be discharged, in part, by undertaking construction for a taxpayer's own account or by undertaking reconstruction or repairs for houses owned by his workers. If he chose, a taxpayer could discharge the entire obligation by the purchase of bonds issued by certain government corporations engaged in providing public housing. By law the bonds were negotiable, but they had only nominal market value. Under article 2 of Colombian Decree No. 4051 of 1949, the additional obligation was continued as a national tax at a five-percent rate and became directly payable with the income tax. By article 4 of that Decree, taxpayers were given the option to become exempt from payment of one-half the tax by investing in securities of a government corporation engaged in the development and encouragement of the iron and steel industry. The stock of the corporation was to be negotiable after the corporation began production, and the stock had only a nominal market value. Colombian Decree No. 270 of 1953 reduced the tax rate from five percent to two and one-half percent. By article 12 of Colombian Decree No. 0285 of February 1955, the tax rate was increased to four percent, but taxpayers were given the right to purchase stock in a government corporation in the amount of the tax, as specified in article 4 of Decree No. 4051, in lieu of paying the additional tax. M, a United States corporation doing business in the Republic of Colombia, was subject to the additional tax of four percent imposed by Colombian Decree No. 0285 of February 1955, but elected to purchase stock in the Colombian governmental corporation in lieu of paying the tax. In filing its Federal income tax returns, M corporation claimed a credit against United States tax pursuant to section 901 of the Code for the amount of its investment in the Colombian securities. The pertinent provisions of article 1 and article 2 of Colombian Decree No. 4051 of 1949 and of article 1 of Colombian Law 85 of 1946 are set out in I.T. 4023, C.B. 1950-2, 49. Article 4 of Colombian Decree No. 4051, allowing the above-described option, provides as follows: ART 4: Taxpayers presenting proof of having paid at the offices of the Empresa Siderurgica Nacional de Paz de Rio, or in a commercial bank to account and order of the said Company, an amount equal to that of this tax, for the purpose of purchasing for the taxpayer himself the number of shares of stock of the Empresa Siderurgica Nacional de Paz de Rio, equivalent to the said tax, calculated at their par value, shall be exempt from payment of the 22% enacted as tax for development and encouragement of the domestic iron and steel industry. To be entitled to the exemption stated in this Article, it is an indispensable condition that the taxpayer waive the right to negotiate the stock until the Siderurgica begins production, and this fact must be recorded in the certificate and in the Company's books. Taxpayers shall be entitled to subscribe the stock indicated in this Article, to avail themselves of the exemption granted, until the date when they pay the income and additional taxes. Taxpayers purchasing stock of the Empresa Siderurgica Nacional de Paz de Rio, S.A., in a greater amount than equivalent to the tax calculated for them in a given year, shall be entitled to have the excess computed for purposes of the respective exemption in subsequent fiscal years. Section 901 of the Code provides, in part, as follows: (a) Allowance of Credit.-If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under section 902. ** ** * (b) Amount Allowed.-Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a): (1) Citizens and Domestic Corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States * ** Section 903 of the Code provides that the term "income, war profits, and excess profits taxes" shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or any possession of the United States. I.T. 4023 provides that the five-percent tax imposed under article 2 of Decree No. 4051 of 1949, issued by the President of the Republic of Colombia, is an income tax which may be claimed as a credit against United States income tax under section 131 (a) of the Internal Revenue Code of 1939, which corresponds to section 901 of the 1954 Code, subject to the limitations contained in section 131(b) of the 1939 Code, which corresponds to section 904 of the 1954 Code. Although such fact was not brought out in I.T. 4023, the taxpayer corporation there involved had an option under article 4 to pay the additional tax imposed by article 1 or to purchase governmental securities. In that case the taxpayer elected to pay the Colombian tax rather than make the investment. M corporation elected to purchase securities in lieu of paying the additional tax imposed by Colombian Decree No. 0285 on its income. Although the optional investment was provided for under Colombian Decree No. 0285 of February 1955, as part of the income tax law, the purchase of securities under such option is, by United States concepts, in the nature of an investment to acquire a capital asset instead of the payment of a tax. The purchase of securities by M corporation under the option relieved M corporation of the liability for the additional tax but was not payment of a tax. In view of the foregoing, it is held that a taxpayer who has purchased securities pursuant to article 12 of Colombian Decree No. 0285 of February 1955, in lieu of paying the additional tax imposed under the article has made a capital expenditure. Therefore, credit for the tax in lieu of which it was made is not allowable against United States income tax under section 901 of the Code. I.T. 4023, C.B. 1950-2, 49, is hereby distinguished. Whether the Belgian taxe mobiliere or the contribution nationale de crise is allowable as a credit against United States income tax. See Rev. Rul. 63-51, page 407. SECTION 902.-CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION 26 CFR 1.902-1: Taxes of foreign corporation. Rev. Rul. 63-6 The criteria applied under United States income tax law in determining "earnings and profits" which are the source of dividends are applicable in the determination of "accumulated profits" for purposes of computing the foreign tax credit under section 902(a) of the Internal Revenue Code of 1954, prior to its amendment by section 9(a) of the Revenue Act of 1962. Advice has been requested as to the meaning of the term "accumulated profits" as used in section 902 of the Internal Revenue Code of 1954, prior to its amendment by section 9(a) of the Revenue Act of 1962. Section 902(a) of the Code prior to its amendment by section 9(a) of the Revenue Act of 1962 provides as follows: (a) TREATMENT OF TAXES PAID BY FOREIGN CORPORATION.-For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits. Section 902 (c) of the Code prior to its amendment by section 9 (a) of the Revenue Act of 1962 reads in part as follows: (1) The term "accumulated profits" when used in this section in reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income; ** It has been contended that profits for this purpose may be either (1) the profits as shown on the books of the foreign corporation, (2) the profits as shown on the foreign tax return of the foreign corporation, computed pursuant to the laws of the foreign country, or (3) the profits computed according to the United States income tax laws. In the application of United States income tax laws, the concepts established by that body of law are controlling, despite the fact that a particular transaction under consideration may have had its origin in a foreign country and, to that extent, may have been affected by a foreign income tax law. See Mary Duke Biddle v. Commissioner, 302 U.S. 573, Ct. D. 1303, C.B. 1938-1, 309; Edward D. Utermeyer v. Commissioner, 59 Fed. (2d) 1004, Ct. D. 644, C.B. XII-1, 157 (1933), affirming 24 B.T.A. 906 (1931), certiorari denied, 287 U.S. 647 (1932); Steel Improvement and Forge Co., v. Commissioner, 36 T.C. 265 (1961). The "accumulated profits" which enter into the determination of the foreign tax credit must, accordingly, be determined by reference to the concepts of United States law. This is the end result to be reached, regardless of whether, for convenience, the starting point in the computation may be the books of the foreign corporation or the profits as shown in a foreign tax return of such corporation. Illustrations of various items which might be relevant in the computation of a foreign tax but would be disregarded in the computation of "accumulated profits" may be found in I.T. 2676, C.B. XII-1, 48 (1933), at pages 50 and 51. The Code does not define the term "accumulated profits," except to the limited extent outlined in section 902 (c) (1). I.T. 2676 states that "accumulated profits" are "based as a fundamental principle upon all income of the foreign corporation available for distribution to its shareholders ***." Section 902(a) of the Code refers to "accumulated profits" as being the source from which the "dividends" received by the domestic corporation are paid. "Dividends" are elsewhere in the Code (section 316) defined as distributions of "earnings and profits," and the definition is stated to be "for purposes of this [the income tax] subtitle." Since both "accumulated profits" and "earnings and profits" denote the same source from which "dividends" are paid, the criteria applicable to the determination of "earnings and profits" are equally applicable to the determination of "accumulated profits." Accordingly, for the purpose of deriving the applicable fraction for determining the foreign tax credit under section 902(a) of the Code, prior to its amendment by section 9 (a) of the Revenue Act of 1962, the criteria applied under United States income tax law in determining "earnings and profits" which are the source of "dividends" are applicable in the determination of the "accumulated profits" mentioned in section 902(a), prior to its amendment by section 9(a) of the Revenue Act of 1962. 26 CFR 1.902-2: Special rules for payments from certain wholly-owned foreign corporations. Rules for determining the taxable year of a foreign corporation. See Rev. Proc. 63-7, page 485. Designation of certain foreign countries as economically less developed countries for purposes of the Revenue Act of 1962. E.O.11071, page 137. Subpart B.-Earned Income of Citizens of United States See SECTION 911.-EARNED INCOME FROM SOURCES 26 CFR 1.911-1: Earned income from sources without the United States. Income earned by citizens of United States on Canton Island. See Rev. Rul. 63-50, page 129. Definition of earned income for the purpose of section 37 (g) of the Internal Revenue Code of 1954. See Rev. Rul. 63-99, page 10. SECTION 912.-EXEMPTION FOR CERTAIN ALLOWANCES 26 CFR 1.912-1: Exclusion of certain cost-of-living allowances. Exclusion of certain allowances received by commissioned officers of Public Health Service. See Rev. Rul. 63-106, page 12. |