In Year One, XYZ Manufacturing Corporation (“XYZ”), a U.S. corporation, receives

Question

In Year One, XYZ Manufacturing Corporation (“XYZ”), a U.S. corporation, receives $1,000,000 of interest income from a borrower who is resident in Country H, a foreign country. Country H has an income tax law that imposes a tax of 30% ($300,000) on the gross amount of such interest income and requires Country H debtors to collect the tax through withholding. However, a tax treaty between Country H and the United States provides that Country H may not tax interest received by a U.S. resident at a rate in excess of 5%. A U.S. resident may claim the benefit of the treaty only by applying for a refund of the excess withheld amount (25% of the gross amount of interest income) after the end of the tax year. XYZ does not file a timely claim for refund of the $250,000 excess withheld amount.

(a) To what extent is the Country H tax paid by XYZ creditable?

(b) How would the result in part (a) differ if it is not clear whether XYZ is eligible for the treaty reduction because under the loan agreement the amount of XYZ’s interest income is, in part, contingent on the Country H borrower’s net profits for the year and the Country H treaty provision on interest income does not apply to certain types of contingent interest?

Explanation / Answer

Amount of $700,000 is creditable in country H as borrower of country H has paid interest after deducting 30% tax as per law of country H. Now xyz company has to claim a refund as per treaty regulations.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.