Title 26: Internal Revenue
PART 1—INCOME TAXES
foreign tax credit
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§ 1.901-3 Reduction in amount of foreign taxes on foreign mineral income allowed as a credit.
(a) Determination of amount of reduction—(1) In general. For purposes of determining the amount of taxes which are allowed as a credit under section 901(a) for taxable years beginning after December 31, 1969, the amount of any income, war profits, and excess profits taxes paid or accrued, or deemed to be paid under section 902, during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income (as defined in paragraph (b) of this section) from sources within such country or possession shall be reduced by the amount, if any, by which—
(i) The smaller of—
(a) The amount of such foreign income, war profits, and excess profits taxes, or
(b) The amount of the tax which would be computed under chapter 1 of the Code for such year with respect to such foreign mineral income if the deduction for depletion were determined under section 611 without regard to the deduction for percentage depletion under section 613, exceeds
(ii) The amount of the tax computed under chapter 1 of the Code for such year with respect to such foreign mineral income.
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).
(2) Determination of amount of tax on foreign mineral income—(i) Foreign tax. For purposes of subparagraph (1)(i)(a) of this paragraph, the amount of the income, war profits, and excess profits taxes paid or accrued during the taxable year to a foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession is an amount which is the greater of—
(a) The amount by which the total amount of the income, war profits, and excess profits taxes paid or accrued during the taxable year to such country or possession exceeds the amount of such taxes that would be paid or accrued for such year to such country or possesion without taking into account such foreign mineral income, or
(b) The amount of the income, war profits, and excess profits taxes that would be paid or accrued to such country or possession if such foreign mineral income were the taxpayer's only income for the taxable year, except that in no case shall the amount so determined exceed the total of all income, war profits, and excess profits taxes paid or accrued during the taxable year to such country or possession. For such purposes taxes which are paid or accrued also include taxes which are deemed paid under section 902. In the case of a dividend described in paragraph (b)(2)(i) (a) of this section which is from sources within a foreign country or possession of the United States and is attributable in whole or in part to foreign mineral income, the amount of the income, war profits, and excess profits taxes deemed paid under section 902 during the taxable year to such country or possession with respect to foreign mineral income from sources within such country or possession is an amount which bears the same ratio to the amount of the income, war profits, and excess profits taxes deemed paid under section 902 during such year to such country or possession with respect to such dividend as the portion of the dividend which is attributable to foreign mineral income bears to the total dividend. For purposes of (a) and (b) of this subdivision, foreign mineral income is to be reduced by any credits, expenses, losses, and other deductions which are properly allocable to such income under the law of the foreign country or possession of the United States from which such income is derived.
(ii) U.S. tax. For purposes of subparagraph (1)(ii) of this paragraph, the amount of the tax computed under chapter 1 of the Code for the taxable year with respect to foreign mineral income from sources within a foreign country or possession of the United States is the greater of—
(a) The amount by which the tax under chapter 1 of the Code on the taxpayer's taxable income for the taxable year exceeds a tax determined under such chapter on the taxable income for such year determined without regard to such foreign mineral income, or
(b) The amount of tax that would be determined under chapter 1 of the Code if such foreign mineral income were the taxpayer's only income for the taxable year.
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).
(iii) U.S. income tax computed without deduction allowed by section 613. For purposes of subparagraph (1)(i)(b) of this paragraph, the amount of the tax which would be computed under chapter 1 of the Code (without regard to section 613) for the taxable year with respect to foreign mineral income from sources within a foreign country or possession of the United States is the amount of the tax on such income that would be computed under such chapter by using as the allowance for depletion cost depletion computed upon the adjusted depletion basis of the property. 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 credit is not allowed under section 901(a). If the greater tax with respect to the foreign mineral income under subdivision (ii) of this subparagraph is the tax determined under (a) of such subdivision, the tax determined for purposes of subparagraph (1)(i)(b) of this paragraph is to be determined by applying the principles of (a) (rather than of (b)) of subdivision (ii) of this subparagraph. On the other hand, if the greater tax with respect to the foreign mineral income under subdivision (ii) of this subparagraph is the tax determined under (b) of such subdivision, the tax determined for purposes of subparagraph (1)(i)(b) of this paragraph is to be determined by applying the principles of (b) (rather than of (a)) of subdivision (ii) of this subparagraph.
(3) Special rules. (i) The reduction required by this paragraph in the amount of taxes paid, accrued, or deemed to be paid to a foreign country or possession of the United States applies only where the taxpayer is allowed a deduction for percentage depletion under section 613 with respect to any part of his foreign mineral income for the taxable year from sources within such country or possession, whether or not such deduction is allowed with respect to the entire foreign mineral income from sources within such country or possession for such year.
(ii) For purposes of this section, the term “foreign country” or “possession of the United States” includes the adjacent continental shelf areas to the extent, and in the manner, provided by section 638(2) and the regulations thereunder.
(iii) The provisions of this section are to be applied before making any reduction required by section 1503(b) in the amount of income, war profits, and excess profits taxes paid or accrued to foreign countries or possessions of the United States by a Western Hemisphere trade corporation.
(iv) If a taxpayer chooses with respect to any taxable year to claim a credit under section 901 and has any foreign mineral income from sources within a foreign country or possession of the United States with respect to which the deduction under section 613 is allowed, he must attach to his return a schedule showing the computations required by subdivisions (i), (ii), and (iii) of subparagraph (2) of this paragraph.
(v) A taxpayer who has elected to use the overall limitation under section 904(a)(2) on the amount of the foreign tax credit for any taxable year beginning before January 1, 1970, may, for his first taxable year beginning after December 31, 1969, revoke his election without first securing the consent of the Commissioner. See paragraph (d) of §1.904–1.
(b) Foreign mineral income defined—(1) In general. The term “foreign mineral income” means income (determined under chapter 1 of the Code) from sources within a foreign country or possession of the United States derived from—
(i) The extraction of minerals from mines, wells, or other natural deposits,
(ii) The processing of minerals into their primary products, or
(iii) The transportation, distribution, or sale of minerals or of the primary products derived from minerals.
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.
(2) Income included in foreign mineral income—(i) In general. Foreign mineral income from sources within a foreign country or possession of the United States includes, but is not limited to—
(a) Dividends from such sources, as determined under §1.902–1(h)(1), received from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902, to the extent such dividends are attributable to foreign mineral income described in subparagraph (1) of this paragraph. The portion of such a dividend which is attributable to such income is that amount which bears the same ratio to the total dividend received as the earnings and profits out of which such dividend is paid that are attributable to foreign mineral income bear to the total earnings and profits out of which such dividend is paid. For such purposes, the foreign mineral income of a foreign corporation is its foreign mineral income described in this paragraph (including any dividends described in this (a) which are received from another foreign corporation), whether or not such income is derived from sources within the foreign country or possession of the United States in which, or under the laws of which, the former corporation is created or organized. A foreign corporation is considered to have no foreign mineral income for any taxable year beginning before January 1, 1970.
(b) Any section 78 dividend to which a dividend described in (a) of this subdivision gives rise, but only to the extent such section 78 dividend is deemed paid under paragraph (a)(2)(i) of this section with respect to foreign mineral income from sources within such country or possession and to the extent it is treated under of §1.902–1(h)(1) as income from sources within such country or possession.
(c) Any amounts includible in income of the taxpayer under section 702(a) as his distributive share of the income of a partnership consisting of income described in subparagraph (1) of this paragraph.
(d) Any amounts includible in income of the taxpayer by virtue of section 652(a), 662(a), 671, 682(a), or 691(a), to the extent such amounts consist of income described in subparagraph (1) of this paragraph.
(ii) Illustration. The provisions of this subparagraph may be illustrated by the following example:
Example. (a) Throughout 1974, M, a domestic corporation, owns all the one class of stock of N, a foreign corporation which is not a less developed country corporation within the meaning of section 902(d). Both corporations use the calendar year as the taxable year. N is incorporated in foreign country Y. During 1974, N has income from sources within foreign country X, all of which is foreign mineral income. During 1974, N also has income from sources within country Y, none of which is foreign mineral income. N is taxed in each foreign country only on income derived from sources within that country. Neither country X nor country Y allows a credit against its tax for foreign income taxes. N pays a dividend of $40,000 to M for 1974. For purposes of section 902, the dividend is paid from earnings and profits for 1974.
(b) N's earnings and profits and taxes for 1974 are determined as follows:
Foreign mineral income from country X........................ $100,000Less: Intangible drilling and development costs........ $21,000 Cost depletion................................... 3,000 24,000 --------------------Taxable income from country X................................ 76,000Income tax rate of country X....................... x50% -----------Tax paid to country X.............................. 38,000 ===========Income from country Y.............................. 100,000Less deductions.................................... 25,000 -----------Taxable income from country Y...................... 75,000Income tax rate of country Y....................... x60% -----------Tax paid to country Y.............................. 45,000 ===========Total taxable income............................... 151,000Less total foreign income taxes.................... 83,000 -----------Total earnings and profits......................... 68,000 ===========Taxable income from foreign mineral income......... 76,000Less: Tax paid on foreign mineral income........... 38,000 -----------Earnings and profits from foreign mineral income... 38,000
| (c) For 1974, M has foreign mineral income from country Y of $49,636.68, determined in the following manner and by applying this section, §1.78–1, and §1.902–1(h)(1):
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Portion of dividend from country Y attributable to foreign $22,352.94 mineral income (subdivision (i)(a) of this subparagraph) ($40,000x$38,000/$68,000)..................................Foreign income tax deemed paid by M to country Y under 48,823.53 section 902(a)(1) ($83,000x$40,000/$68,000)................Foreign income tax deemed paid by M to country Y with 27,283.74 respect to foreign mineral income from country Y (paragraph (a)(2)(i) of this section) ($48,823.53x$22,352.94/$40,000). -----------Foreign mineral income from country Y: Dividend attributable to foreign mineral income from 22,352.94 country Y................................................ Sec. 78 dividend deemed paid with respect to foreign 27,283.74 mineral income (subdivision (i)(b) of this subparagraph). Total foreign mineral income.............................. 49,636.68 ===========
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(c) Limitations on foreign tax credit—(1) In general. The reduction under section 901(e) and paragraph (a)(1) of this section in the amount of foreign taxes allowed as a credit under section 901(a) is to be made whether the per-country limitation under section 904(a)(1) or the overall limitation under section 904(a)(2) is used for the taxable year, but the reduction in the amount of foreign taxes allowed as a credit under section 901(a) must be made on a country-by-country basis before applying the limitation under section 904(a) to the reduced amount of taxes. If for the taxable year the separate limitation under section 904(f) applies to any foreign mineral income, that limitation must also be applied after making the reduction under section 901(e) and paragraph (a)(1) of this section.
(2) Carrybacks and carryovers of excess tax paid—(i) In general. Any amount by which (a) any income, war profits, and excess profits taxes paid or accrued, or deemed to be paid under section 902, during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession exceed (b) the reduced amount of such taxes as determined under paragraph (a)(1) of this section may not be deemed paid or accrued under section 904(d) in any other taxable year. See §1.904–2(b)(2)(iii). However, to the extent such reduced amount of taxes exceeds the applicable limitation under section 904(a) for the taxable year it shall be deemed paid or accrued under section 904(d) in another taxable year as a carryback or carryover of an unused foreign tax. The amount so deemed paid or accrued in another taxable year is not, however, deemed paid or accrued with respect to foreign mineral income in such other taxable year. See §1.904–2(c)(3).
(ii) Carryovers to taxable years beginning after December 31, 1969. Where, under the provisions of section 904(d), taxes paid or accrued, or deemed to be paid under section 902, to any foreign country or possession of the United States in any taxable year beginning before January 1, 1970, are deemed paid or accrued in one or more taxable years beginning after December 31, 1969, the amount of such taxes so deemed paid or accrued shall not be deemed paid or accrued with respect to foreign mineral income and shall not be reduced under section 901(e) and paragraph (a)(1) of this section.
(iii) Carrybacks to taxable years beginning before January 1, 1970. Where income, war profits, and excess profits taxes are paid or accrued, or deemed to be paid under section 902, to any foreign country or possession of the United States in any taxable year beginning after December 31, 1969, with respect to foreign mineral income from sources within such country or possession, they must first be reduced under section 901(e) and paragraph (a)(1) of this section before they may be deemed paid or accrued under section 904(d) in one or more taxable years beginning before January 1, 1970.
(d) Illustrations. The application of this section may be illustrated by the following examples, in which the surtax exemption provided by section 11(d) and the tax surcharge provided by section 51(a) are disregarded for purposes of simplification:
Example 1. (a) M, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country W. For 1971, M's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country W and is subject to the allowance for depletion. During 1971, M incurs intangible drilling and development costs of $15,000, which are currently deductible for purposes of the tax of both countries. Cost depletion amounts to $2,000 for purposes of the tax of both countries, and only cost depletion is allowed as a deduction under the law of country W. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country W on such foreign mineral income is $41,500, and the U.S. tax on such income before allowance of the foreign tax credit is $30,240, determined as follows:
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------------------------------------------------------------------------ U.S. tax W tax------------------------------------------------------------------------Foreign mineral income............................ $100,000 $100,000Less: Intangible drilling and development costs....... 15,000 15,000 Cost depletion.................................. ......... 2,000 Percentage depletion (22% of $100,000, but not 22,000 ......... to exceed 50% of $85,000)......................Taxable income.................................... 63,000 83,000Income tax rate................................... 48% 50%Tax............................................... 30,240 41,500------------------------------------------------------------------------
| (b) Without taking this section into account, M would be allowed a foreign tax credit for 1971 of $30,240 ($30,240×$63,000/$63,000), and foreign income tax in the amount of $11,260 ($41,500 less $30,240) would first be carried back to 1969 under section 904(d).
(c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $31,900, determined as follows:
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Foreign income tax paid on foreign mineral income............. $41,500Less reduction under sec. 901(e): Smaller of $41,500 (tax paid to country W on 39,840 foreign mineral income) or $39,840 (U.S. tax on foreign mineral income of $83,000 ($83,000x48%), determined by deducting cost depletion of $2,000 in lieu of percentage depletion of $22,000)...... Less: U.S. tax on foreign mineral income (before $30,240 9,600 credit).......................................... -------------------Foreign income tax allowable as a credit...................... 31,900
| (d) After taking this section into account, M is allowed a foreign tax credit for 1971 of $30,240 ($30,240×$63,000/$63,000). The amount of foreign income tax which may be first carried back to 1969 under section 904(d) is reduced from $11,260 to $1,660 ($31,900 less $30,240).
Example 2. (a) M, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country X. For 1972, M has gross income under chapter 1 of the Code of $100,000, all of which is foreign mineral income from a property in country X and is subject to the allowance for depletion. During 1972, M incurs intangible drilling and development costs of $50,000 which are currently deductible for purposes of the U.S. tax but which must be amortized for purposes of the tax of country X. Percentage depletion of $22,000 is allowed as a deduction by both countries. For purposes of the U.S. tax, cost depletion for 1972 amounts to $15,000. It is assumed that no other deductions are allowable under the law of either country. Based upon these facts, the income tax paid to country X on such foreign mineral income is $27,200, and the U.S. tax on such income before allowance of the foreign tax credit is $13,440, determined as follows:
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------------------------------------------------------------------------ U.S. tax X tax------------------------------------------------------------------------Foreign mineral income............................ $100,000 $100,000Less: Intangible drilling and development costs....... 50,000 10,000 Percentage depletion............................ 22,000 22,000Taxable income.................................... 28,000 68,000Income tax rate................................... 48% 40%Tax............................................... 13,440 27,200------------------------------------------------------------------------
| (b) Without taking this section into account, M would be allowed a foreign tax credit for 1972 of $13,440 ($13,440×$28,000/$28,000), and foreign income tax in the amount of $13,760 ($27,200 less $13,440) would first be carried back to 1970 under section 904(d).
(c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $23,840, determined as follows:
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Foreign income tax paid on foreign mineral income............. $27,200Less reduction under sec. 901(e): Smaller of $27,200 (tax paid to country X on $16,800 foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000x48%), determined by deducting cost depletion of $15,000 in lieu of percentage depletion of $22,000)...... Less: U.S. tax on foreign mineral income (before 13,440 3,360 credit).......................................... -------------------Foreign income tax allowable as a credit...................... 23,840
| (d) After taking this section into account, M is allowed a foreign tax credit of $13,440 ($13,440×$28,000/$28,000). The amount of foreign income tax which may be first carried back to 1970 under section 904(d) is reduced from $13,760 to $10,400 ($23,840 less $13,440).
Example 3. (a) N, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country Y. For 1972, N's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country Y and is subject to the allowance for depletion. During 1972, N incurs intangible drilling and development costs of $15,000, which are currently deductible for purposes of the U.S. tax but are not deductible under the law of country Y. Depreciation of $40,000 is allowed as a deduction for purposes of the U.S. tax; and of $20,000, for purposes of the Y tax. Cost depletion amounts to $10,000 for purposes of the tax of both countries, and only cost depletion is allowed as a deduction under the law of country Y. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country Y on such foreign mineral income is $14,000, and the U.S. tax on such income before allowance of the foreign tax credit is $11,040, determined as follows:
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------------------------------------------------------------------------ U.S. tax Y tax------------------------------------------------------------------------Foreign mineral income............................ $100,000 $100,000Less: Intangible drilling and development costs....... 15,000 ......... Depreciation.................................... 40,000 20,000 Cost depletion.................................. ......... 10,000 Percentage depletion (22% of $100,000, but not 22,000 ......... to exceed 50% of $45,000)...................... Taxable income.................................. 23,000 70,000 Income tax rate................................. 48% 20% Tax............................................. 11,040 14,000------------------------------------------------------------------------
| (b) Without taking this section into account, N would be allowed a foreign tax credit for 1972 of $11,040 ($11,040×$23,000/$23,000), and foreign income tax in the amount of $2,960 ($14,000 less $11,040) would first be carried back to 1970 under section 904(d).
(c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $11,040, determined as follows:
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Foreign income tax paid on foreign mineral income............. $14,000Less reduction under sec. 901(e): Smaller of $14,000 (tax paid to country Y on $14,000 foreign mineral income) or $16,800 (U.S. tax on foreign mineral income of $35,000 ($35,000x48%), determined by deducting cost depletion of $10,000 in lieu of percentage depletion of $22,000)...... Less: U.S. tax on foreign mineral income (before 11,040 2,960 credit).......................................... -------------------Foreign income tax allowable as a credit...................... 11,040
| (d) After taking this section into account, N is allowed a foreign tax credit for 1972 of $11,040 ($11,040×$23,000/$23,000), but no foreign income tax is carried back to 1970 under section 904(d) since the allowable credit of $11,040 does not exceed the limitation of $11,040.
Example 4. (a) D, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in foreign country Z. For 1971, D's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country Z and is subject to the allowance for depletion. During 1971, D incurs intangible drilling and development costs of $85,000, which are currently deductible for purposes of the U.S. Tax but are not deductible under the law of country Z. Cost depletion in the amount of $10,000 is allowed as a deduction for purposes of both the U.S. tax and the tax of country Z. Percentage depletion is not allowed as a deduction under the law of country Z and is not taken as a deduction for purposes of the U.S. tax. It is assumed that no other deductions are allowable under the law of either country. Based upon the facts assumed, the income tax paid to country Z on such foreign mineral income is $27,000, and the U.S. tax on such income before allowance of the foreign tax credit is $2,400, determined as follows:
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------------------------------------------------------------------------ U.S. tax Z tax------------------------------------------------------------------------Foreign mineral income............................ $100,000 $100,000Less: Intangible drilling and development costs....... 85,000 ......... Cost depletion.................................. 10,000 10,000Taxable income.................................... 5,000 90,000Income tax rate................................... 48% 30%Tax............................................... 2,400 27,000------------------------------------------------------------------------
| (b) Section 901(e) and this section do not apply to reduce the amount of the foreign income tax paid to country Z with respect to the foreign mineral income since for 1971 D is not allowed the deduction for percentage depletion with respect to any foreign mineral income from sources within country Z. Accordingly, D is allowed a foreign tax credit of $2,400 ($2,400×$5,000/$5,000), and foreign income tax in the amount of $24,600 ($27,000 less $2,400) is first carried back to 1969 under section 904(d).
Example 5. (a) R, a domestic corporation using the calendar year as the taxable year, is an operator drilling for oil in the United States and in foreign country Z. For 1971, R's gross income under chapter 1 of the Code is $250,000, of which $100,000 is foreign mineral income from a property in foreign country Z and $150,000 is from a property in the United States, all being subject to the allowance for depletion. During 1971, R incurs intangible drilling and development costs of $125,000 in the United States and of $25,000 in country Z, all of which are currently deductible for purposes of the U.S. tax. Of these costs of $25,000 incurred in country Z, only $2,500 is currently deductible under the law of country Z. Cost depletion in the case of the U.S. property amounts to $60,000; and in the case of the property in country Z, to $5,000, which is allowed as a deduction under the laws of such country. Percentage depletion is not allowed as a deduction under the law of country Z. In computing the U.S. tax for 1971, R is required to use cost depletion with respect to the mineral income from the U.S. property and percentage depletion with respect to the foreign mineral income from the property in country Z. It is assumed that no other deductions are allowed under the law of either country. Based upon the facts assumed, the income tax paid to country Z on the foreign mineral income from sources therein is $37,000, and the U.S. tax on the entire mineral income before allowance of the foreign tax credit is $8,640, determined as follows:
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------------------------------------------------------------------------ U.S. tax Z tax------------------------------------------------------------------------Gross income (including foreign mineral income)... $250,000 $100,000Less: Intangible drilling and development costs....... 150,000 2,500 Cost depletion.................................. 60,000 5,000 Percentage depletion on foreign mineral income 22,000 ......... (22% of $100,000, but not to exceed 50% of [$100,000-$25,000])............................Taxable income.................................... 18,000 92,500Income tax rate................................... 48% 40%Tax............................................... 8,640 37,000------------------------------------------------------------------------
| (b) Without taking this section into account, R would be allowed a foreign tax credit for 1971 of $8,640 ($8,640×$18,000/$18,000), and foreign income tax in the amount of $28,360 ($37,000 less $8,640) would first be carried back to 1969 under section 904(d).
(c) Under paragraph (a)(2)(ii) of this section, the amount of the U.S. tax for 1971 with respect to foreign mineral income from country Z is $25,440, which is the greater of the amounts of tax determined under subparagraphs (1) and (2):
(1) U.S. tax on total taxable income in excess of U.S. tax on taxable income excluding foreign mineral income from country Z (determined under paragraph (a)(2)(ii)(a) of this section):
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U.S. tax on total taxable income.................. ......... $8,640Less 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
| (2) U.S. tax on foreign mineral income from country Z (determined under paragraph (a)(2)(ii) (b) of this section):
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Foreign mineral income....................................... $100,000Intangible drilling and development costs.................... 25,000Percentage depletion (22% of $100,000, but not to exceed 50% 22,000 of $75,000).................................................Taxable income............................................... 53,000Income tax rate.............................................. 48%U.S. tax..................................................... 25,440
| (d) Under paragraph (a)(2)(iii) of this section, the amount of the U.S. tax which would be computed for 1971 (without regard to section 613) with respect to foreign mineral income from sources within country Z is $33,600, computed by applying the principles of paragraph (a)(2)(ii)(b) of this section:
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Foreign mineral income....................................... $100,000Intangible drilling and development costs.................... 25,000Cost depletion............................................... 5,000Taxable income............................................... 70,000Income tax rate.............................................. 48%U.S. tax..................................................... 33,600
| (e) Pursuant to paragraph (a)(1) of this section, the foreign income tax allowable as a credit against the U.S. tax for 1971 is reduced to $28,840, determined as follows:
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Foreign income tax paid on foreign mineral income............. $37,000Less reduction under sec. 901(e): Smaller of $37,000 (tax paid to country Z on $33,600 foreign mineral income) or $33,600 (U.S. tax on foreign mineral income of $70,000, as determined under paragraph (d) of this example.............. Less: U.S. tax on foreign mineral income of 25,440 8,160 $53,000, as determined under paragraph (c) of this example..................................... -------------------Foreign income tax allowable as a credit...................... $28,840
| (f) After taking this section into account, R is allowed a foreign tax credit for 1971 of $8,640 ($8,640×$18,000/$18,000). The amount of foreign income tax which may be first carried back to 1969 under section 904(d) is reduced from $28,360 to $20,200 ($28,840 less $8,640).
Example 6. (a) B, a single individual using the calendar year as the taxable year, is an operator drilling for oil in foreign countries X and Y. For 1972, B's gross income under chapter 1 of the Code is $250,000, of which $150,000 is foreign mineral income from a property in country X and $100,000 is foreign mineral income from a property in country Y, all being subject to the allowance for depletion. The assumption is made that B's earned taxable income for 1972 is insufficient to cause section 1348 to apply. During 1972, B incurs intangible drilling and development costs of $16,000 in country X and of $9,000 in country Y, which are currently deductible for purposes of both the U.S. tax and the tax of countries X and Y, respectively. For purposes of both the U.S. tax and the tax of countries X and Y, respectively, cost depletion in the case of the X property amounts to $8,000, and in the case of Y property, to $7,000; and only cost depletion is allowed as a deduction under the law of countries X and Y. For 1972, B uses the overall limitation under section 904(a)(2) on the foreign tax credit. Percentage depletion is not allowed as a deduction under the law of countries X and Y. It is assumed that the only other allowable deductions amount to $2,250. None of these deductions is attributable to the income from the properties in countries X and Y, and none is deductible under the laws of country X or country Y. Based upon the facts assumed, the income tax paid to countries X and Y on the foreign mineral income from each such country is $71,820 and $25,200, respectively, and the U.S. tax on B's total taxable income before allowance of the foreign tax credit is $99,990, determined as follows:
|
------------------------------------------------------------------------ U.S. Tax X tax Y tax------------------------------------------------------------------------Total income (including foreign mineral $250,000 $150,000 $100,000 income from countries X and Y)........Intangible drilling and development 25,000 16,000 9,000 costs.................................Cost depletion......................... ......... 8,000 7,000Percentage depletion (22% of $150,000, 55,000 ......... ......... but not to exceed 50% of $134,000; plus 22% of $100,000, but not to exceed 50% of $91,000)................Adjusted gross income.................. 170,000 ......... .........Other deductions....................... 2,250 ......... .........Personal exemption..................... 750 ......... .........Taxable income......................... 167,000 126,000 84,000Income tax rate........................ ......... 57% 30%Foreign tax............................ ......... 71,820 25,200U.S. tax ($53,090 plus 70% of $67,000). 99,990 ......... .........------------------------------------------------------------------------
| (b) Without taking this section into account, B would be allowed a foreign tax credit for 1972 of $97,020 ($71,820+$25,200), but not to exceed the overall limitation under section 904(a)(2) of $99,990 ($99,990 ×$167,750/$167,750). There would be no foreign income tax carried back to 1970 under section 904(d) since the allowable credit of $97,020 does not exceed the limitation of $99,990.
(c) Under paragraph (a)(2)(ii) of this section, the amount of the U.S. tax for 1972 with respect to foreign mineral income from sources within country X is $69,760, which is the greater of the amounts of tax determined under subparagraphs (1) and (2):
(1) U.S. tax on total taxable income in excess of U.S. tax on taxable income excluding foreign mineral income from country X (determined under paragraph (a)(2)(ii)(a) of this section):
|
U.S. tax on total taxable income.................. ......... $99,990Less 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 22,000 to exceed 50% of $91,000)...................... Adjusted gross income........................... 69,000 Other deductions................................ 2,250 Personal exemption.............................. 750 Taxable income.................................. 66,000U.S. tax ($26,390 plus 64% of $6,000)............. ......... 30,230 ----------Excess tax........................................ ......... 69,760
| (2) U.S. tax on foreign mineral income from country X (determined under paragraph (a)(2)(ii)(b) of this section):
|
Foreign mineral income from country X...................... $150,000.00Intangible drilling and development costs.................. 16,000.00Percentage depletion (22% of $150,000, but not to exceed 33,000.00 50% of $134,000)..........................................Adjusted gross income...................................... 101,000.00Other deductions...........................................Taxable income............................................. 101,000.00U.S. tax ($53,090 plus 70% of excess over $100,000)........ 53,790.00
| (d) Under paragraph (a)(2)(iii) of this section, and by applying the principles of paragraph (a)(2)(ii)(a) of this section, the amount of the U.S. tax which would be computed for 1972 (without regard to section 613) with respect to foreign mineral income from sources within country X is $87,920, which is the excess of the U.S. tax ($127,990) determined under subparagraph (1) over the U.S. tax ($40,070) determined under subparagraph (2):
(1) U.S. tax on total taxable income determined without regard to section 613:
|
Total income................................................. $250,000Intangible drilling and development costs.................... 25,000Cost depletion............................................... 15,000Adjusted gross income........................................ 210,000Other deductions............................................. 2,250Personal exemption........................................... 750Taxable income............................................... 207,000U.S. tax ($53,090 plus 70% of $107,000)...................... 127,990
| (2) U.S. tax on total taxable income other than foreign mineral income from country X, determined without regard to section 613:
|
Foreign mineral income from country Y........................ $100,000Intangible drilling and development costs.................... 9,000Cost depletion............................................... 7,000Adjusted gross income........................................ 84,000Other deductions............................................. 2,250Personal exemption........................................... 750Taxable income............................................... 81,000U.S. tax ($39,390 plus 68% of $1,000)........................ 40,070
| (e) Under paragraph (a)(2)(i) of this section, the amount of income tax paid to country X for 1972 with respect to foreign mineral income from sources within such country is $71,820. This is the amount determined under both (a) and (b) of paragraph (a)(2)(i) of this section, since, in this case, there is no income from sources within country X other than foreign mineral income, and there are no deductions allowed under the law of country X which are not allocable to such foreign mineral income.
(f) Pursuant to paragraph (a)(1) of this section, the foreign income tax with respect to foreign mineral income from sources within country X which is allowable as a credit against the U.S. tax for 1972 is reduced to $69,760, determined as follows:
|
Foreign income tax paid to country X on foreign mineral income $71,820Less reduction under sec. 901(e): Smaller of $71,820 (tax paid to country X on $71,820 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).................................... Less: U.S. tax on foreign mineral income from 69,760 2,060 sources within country X, determined under paragraph (c) of this example.................... -------------------Foreign income tax of country X allowable as a ........ 69,760 credit.............................................
| (g) Under paragraph (a)(2)(ii) of this section, the amount of the U.S. tax for 1972 with respect to foreign mineral income from sources within country Y is $48,280, which is the greater of the amounts of tax determined under subparagraphs (1) and (2):
(1) U.S. tax on total taxable income in excess of U.S. tax on taxable income excluding foreign mineral income from country Y (determined under paragraph (a)(2)(ii)(a) of this section):
|
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 33,000 exceed 50% of $134,000)......................... 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
| (2) U.S. tax on foreign mineral income from country Y (determined under paragraph (a)(2)(ii)(b) of this section):
|
Foreign mineral income from country Y........................ $100,000Intangible drilling and development costs.................... 9,000Percentage depletion (22% of $100,000, but not to exceed 50% 22,000 of $91,000).................................................Adjusted gross income........................................ 69,000Other deductions............................................. .........Taxable income............................................... 69,000U.S. tax ($26,390 plus 64% of $9,000)........................ 32,150
| (h) Under paragraph (a)(2)(iii) of this section, and by applying the principles of paragraph (a)(2)(ii)(a) of this section, the amount of the U.S. tax which would be computed for 1972 (without regard to section 613) with respect to foreign mineral income from sources within country Y is $58,800, which is the excess of the U.S. tax ($127,990) determined under paragraph (d)(1) of this example over the U.S. tax ($69,190) on total taxable income other than foreign mineral income from country Y, determined without regard to section 613, as follows:
|
Foreign mineral income from country X........................ $150,000Intangible drilling and development costs.................... 16,000Cost depletion............................................... 8,000Adjusted gross income........................................ 126,000Other deductions............................................. 2,250Personal exemption........................................... 750Taxable income............................................... 123,000U.S. tax ($53,090 plus 70% of $23,000)....................... 69,190
| (i) Under paragraph (a)(2)(i) of this section, the amount of income tax paid to country Y for 1972 with respect to foreign mineral income from sources within such country is $25,200. This is the amount determined under both (a) and (b) of paragraph (a)(2)(i) of this section, since, in this case, there is no income from sources within country Y other than foreign mineral income, and there are no deductions allowed under the law of country Y which are not allocable to such foreign mineral income.
(j) Pursuant to paragraph (a)(1) of this section, the foreign income tax with respect to foreign mineral income from sources within country Y which is allowable as a credit against the U.S. tax for 1972 is not reduced from $25,200, as follows:
|
Foreign income tax paid to country Y on foreign ........ $25,200 mineral income.....................................Less reduction under sec. 901(e): Smaller of $25,200 (tax paid to country Y on $25,200 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).................................... Less: U.S. tax on foreign mineral income from 48,280 sources within country Y, as determined under paragraph (g) of this example.................... -------------------Foreign income tax of country Y allowable as a ........ 25,200 credit.............................................
| (k) After taking this section into account, B is allowed a foreign tax credit for 1972 of $94,960 ($69,760+$25,200), but not to exceed the overall limitation under section 904 (a)(2) of $99,990 ($99,990×$167,750/$167,750). There would be no foreign income tax carried back to 1970 under section 904(d) since the allowable credit of $94,960 does not exceed the limitation of $99,990.
Example 7. (a) P, a domestic corporation using the calendar year as the taxable year, is an operator mining for iron ore in foreign country X. For 1971, P's gross income under chapter 1 of the Code is $100,000, all of which is foreign mineral income from a property in country X and is subject to the allowance for depletion. For 1971, cost depletion amounts to $5,000 for purposes of the tax of both countries, and only cost depletion is allowed as a deduction under the law of country X. It is assumed that deductions (other than for depletion) attributable to the mineral property in country X amount to $8,000, and these deductions are allowable under the law of both countries. Based upon the facts assumed, the income tax paid to country X on such foreign mineral income is $39,150, and the U.S. tax on such income before allowance of the foreign tax credit is $37,440 determined as follows:
|
------------------------------------------------------------------------ U.S. tax X tax------------------------------------------------------------------------Foreign mineral income............................ $100,000 $100,000Less: Percentage depletion (14% of $100,000, but not 14,000 ......... to exceed 50% of $92,000)...................... Cost depletion.................................. ......... 5,000 Other deductions................................ 8,000 8,000Taxable income.................................... 78,000 87,000Income tax rate................................... 48% 45%Tax............................................... 37,440 39,150------------------------------------------------------------------------
| (b) Without taking this section into account, P would be allowed a foreign tax credit for 1971 of $37,440 ($37,440×$78,000/ $78,000), and foreign income tax in the amount of $1,710 ($39,150 less $37,440) would first be carried back to 1969 under section 904(d).
(c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced to $37,440, determined as follows:
|
Foreign income tax paid on foreign mineral income............. $39,150Less reduction under sec. 901(e): Smaller of $39,150 (tax paid to country X on $39,150 foreign mineral income) or $41,760 (U.S. tax on foreign mineral income of $87,000 ($87,000x48%), determined by deducting cost depletion of $5,000 in lieu of percentage depletion of $14,000)...... Less: U.S. tax on foreign mineral income (before 37,440 1,710 credit).......................................... -------------------Foreign income tax allowable as a credit...................... 37,440
| (d) After taking this section into account, P is allowed a foreign tax credit for 1971 of $37,440 ($37,440×$78,000/$78,000), but no foreign income tax is carried back to 1969 under section 904(d) since the allowable credit of $37,440 does not exceed the limitation of $37,440.
Example 8. (a) The facts are the same as in example 7, except that P is assumed to have received dividends for 1971 of $25,000 from R, a foreign corporation incorporated in country X which is not a less developed country corporation within the meaning of section 902(d). Income tax of $2,500 ($25,000×10%) on such dividends is withheld at the source in country X. It is assumed that P is deemed under section 902(a)(1) and §1.902–1(h) to have paid income tax of $22,500 to country X in respect of such dividends and that under paragraphs (a)(2)(i) and (b)(2)(i) of this section such dividends are deemed to be attributable to foreign mineral income from sources in country X and that such tax is deemed to be paid with respect to such foreign mineral income. Based upon the facts assumed, the U.S. tax on the foreign mineral income from sources in country X is $60,240 before allowance of the foreign tax credit, determined as follows:
|
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 $14,000 50% of $92,000)........................................... Other deductions................................ 8,000Taxable income.................................... 125,500Income tax rate................................... 48%U.S. tax.......................................... 60,240
| (b) Without taking this section into account, P would be allowed a foreign tax credit for 1971 of $60,240 ($60,240×$125,500/$125,500), and foreign income tax in the amount of $3,910 ([$39,150+$22,500+$2,500] less $60,240) would first be carried back to 1969 under section 904(d).
(c) Pursuant to paragraph (a)(1) of this section, however, the foreign income tax allowable as a credit against the U.S. tax is reduced from $64,150 to $60,240, determined as follows:
|
Foreign income tax paid, and deemed to be paid, to country X $64,150 on foreign mineral income ($39,150+$22,500+$2,500)..........Less reduction under sec. 901(e): Smaller of $64,150 (tax paid and deemed paid to $64,150 country X on foreign mineral income) or $64,560 (U.S. tax on foreign mineral income of $134,500 ($134,500x48%), determined by deducting cost depletion of $5,000 in lieu of percentage depletion of $14,000).......................... Less: U.S. tax on foreign mineral income (before $60,240 $3,910 credit)........................................ ---------------------Foreign income tax allowable as a credit..................... 60,240
| (d) After taking this section into account, P is allowed a foreign tax credit for 1971 of $60,240 ($60,240×$125,500/$125,500), but no foreign income tax is carried back to 1969 under section 904(d) since the allowable credit of $60,240 does not exceed the limitation of $60,240.
[T.D. 7294, 38 FR 33074, Nov. 30, 1973, as amended by T.D. 7481, 42 FR 20130, Apr. 18, 1977]
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