Nissho Iwai American Corp.. v. Comm'r of Internal Revenue, Docket No. 4598-85
| Decision Date | 08 October 1987 |
| Docket Number | Docket No. 4598-85 |
| Citation | 89 T.C. No. 53,89 T.C. 765 |
| Parties | NISSHO IWAI AMERICAN CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, an American subsidiary of a Japanese corporation, make s loans in the United States and in foreign countries as part of its business operations. On February 17, 1978, P lent $20 million to N, a Brazilian corporation. The loan between P and N was a net loan in which N agreed to make interest payments to P free and clear of the withholding tax which Brazil imposed on payments of interest made by Brazilian borrowers to foreign lenders. During the years in issue, N received a government subsidy based upon the amount of withholding tax imposed on P. HELD: (1) For purposes of section 901, I.R.C. 1954, P is legally liable under Brazilian law for the Brazilian withholding tax and, (2) the amount of such Brazilian withholding tax allowable as a foreign tax credit is the amount of the withholding tax less the subsidy to N; however due to the grandfather clause s et forth in Rev. Rul. 78-258, 1978-1 C.B. 239, P is entitled to credit for the full amount of the withholding tax paid on interest accrued or received prior to January 1, 1980 without reduction for the subsidy paid to N.
Pursuant to Brazilian Resolution No. 432, Brazilian borrowers were permitted to deposit funds with the Central Ban k of Brazil up to the principal amount of their outstanding obligations to foreign lenders. The purpose of this procedure was to enable borrowers to eliminate potentially fluctuating exchange rates. The Central Bank paid interest on funds deposited at a rate equal to that to be paid by the Brazilian borrower to the foreign lender. The Central Bank assumed payment of the withholding tax on the interest paid. During one of the years at issue, N deposited funds with the Central Bank, and P received interest with respect to its loan from N, pursuant to this procedure. P claims entitlement to a foreign tax credit with respect to withholding taxes on interest income received with respect to funds deposited by N with the Central Bank. The record in this case does not indicate whether any tax was withheld by the Central Bank on behalf of P with respect to funds so deposited. HELD: Because P failed to carry its burden of proof with respect to this matter, P is not entitled to a foreign tax credit with respect to any tax on the interest earned on funds deposited by N with the Central Bank pursuant to Brazilian Resolution No. 432. Steven Kamerman and Jerome Kamerman, for the petitioner. 1
Anne Hintermeister, for the respondent.
Respondent determined the following deficiencies in petitioner's Federal income taxes:
+--------------------------------------+
¦FYE Mar. 31---¦Amount of Deficiency2 ¦
+--------------+-----------------------¦
¦1980 ¦$183,457 ¦
+--------------+-----------------------¦
¦1981 ¦439,808 ¦
+--------------------------------------+
Respondent twice increased the deficiency amount in two amended answers to the petition filed herein. The total deficiency now claimed is $438,180 for the fiscal year ended March 31, 1980 and $466,531 for the fiscal year ended March 31, 1981.
Petitioner filed an amendment to its petition, claiming an overpayment of $1,850,956 for the fiscal year ended March 31, 1980.
This case concerns the amount of foreign tax credit, if any, which may be claimed with respect to Brazilian taxes withheld on interest income received by petitioner as a result of a loan to a Brazilian borrower. The borrower was contractually obligated to absorb all Brazilian taxes required to be paid with respect to the interest income (i.e., petitioner was to receive the interest free of all Brazilian taxes). During the years involved, the borrower received a subsidy from the Brazilian government equal to a percentage of the taxes withheld.
The issues to be resolved are: (1) whether petitioner is legally liable for Brazilian withholding taxes paid by the Brazilian borrower; and if so, then (2) whether such subsidy reduces the amount of the foreign tax credit allowable to petitioner pursuant to section 901; 3 and (3) whether petitioner is entitled to a foreign tax credit with respect to withholding taxes, if any, on interest received on funds deposited by the Brazilian borrower with the Banco Central do Brasil pursuant to Brazilian Resolution No. 432.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Nissho Iwai American Corporation (hereinafter referred to as petitioner or NIAC) is a corporation organized and existing under the laws of the State of New York. Its principal place of business at the time of the filing of the petition herein was in New York City.
Petitioner is a wholly-owned subsidiary of Nissho Iwai Corporation (hereinafter referred to as NIC), a Japanese corporation. NIC is a large trading company, having numerous subsidiaries and branches.
During the years in issue, petitioner was engaged in the business of importing and exporting a wide variety of products, including metals and metal products, machinery, textiles, lumber, chemicals, foodstuffs, fuels, and general merchandise. It also engaged in making loans in the United States and abroad.
On January 27, 1978, petitioner entered into a loan agreement with Companhia Nipo-Brasileira de Pelotizacao-Nibrasco (hereinafter referred to as Nibrasco), a corporation organized and existing under the laws of the Federal Republic of Brazil. 4 The loan agreement provided that NIAC would lend Nibrasco twenty million dollars U.S. (the loan) on or before February 17, 1978 (the remittance date). Nibrasco agreed to repay the principal of the loan in six semi-annual installments, the first of which was due 30 months from the remittance date and the last of which was due 60 months from the remittance date. The amount of the first installment was $3.5 million and the amount of each of the remaining five installments was $3.3 million.
The loan agreement provided that Nibrasco would pay interest sem-annually; the first interest payment was due six months after the remittance date. The rate of interest fluctuated; it was based on the rate quoted to The Industrial Bank of Japan, Limited, London Branch for the offering of dollars by prime banks in the London interbank eurodollar market for deposit for the applicable six-month period.
All payments of principal and interest were to be made by means of telegraphic transfer to NIAC's bank account in New York, in United States dollars. All payments of principal and interest were to be free and clear of, and without deduction for, any taxes imposed by Brazil.
The loan was subject to the approval of the Brazilian government and the obtaining of a certificate of registration by The Banco Central do Brasil (hereinafter referred to as the Central Bank). 5 Nibrasco also agreed to pay NIAC an administration fee of $200,000 within ten days after the issuance of the certificate of registration. On February 17, 1978, NIAC caused $20 million to be transferred to Nibrasco's Brazilian bank. The U.S. dollars were subsequently converted into Brazilian currency.
The Central Bank issued a registration certificate with respect to the loan on March 31, 1978. Nibrasco timely paid the administration fee, as well as all required installments of principal and interest.
Brazil imposes a 25 percent withholding tax on interest paid by Brazilian borrowers on loans to foreign entities. Foreign loans to Brazilian borrowers fall into two categories — gross loans and net loans. The difference between a gross loan and a net loan is that in the former the quoted interest rate is a gross rate which does not guarantee the lender a fixed rate of return after deduction of the withholding tax, whereas in the latter the interest quoted is net of the withholding tax. Because of this difference, most of the foreign loans made to Brazilian borrowers during the years in issue were net loans, as was the NIAC-Nibrasco loan.
Evidence of payment of the withholding tax is a pre-condition for the payment of interest to a foreign lender. 6 Under Brazilian law, payment of the tax is made by submitting a Documento de Arrecadacao de Receitas Federais (hereinafter referred to as a DARF) and the amount of tax to a Brazilian bank.
Nibrasco maintained a bank account at Banco America de Sul, S.A. (hereinafter referred to as the Bank). For each interest payment made to NIAC during the years in issue, Nibrasco prepared a DARF indicating the amount of the interest payment and the 25 percent withholding tax due thereon and submitted it to the Bank. Thereafter, the Bank debited Nibrasco's account for the amount of tax due.
On July 31, 1975, Brazilian Decree-Law No. 1411 was issued which inter alia granted the National Monetary Council 7 authority to reduce the income tax on interest paid to non-Brazilian persons or to grant a monetary benefit (i.e., a subsidy) to the Brazilian borrower. The subsidy is payable only when payment of income tax on the interest is ‘actually made, and never in an amount higher than the collected tax.‘ Pursuant to Decree-Law No. 1411, on August 5, 1975, a subsidy was granted to certain borrowers (including Nibrasco) equal to 85 percent of the income tax withheld. 8 The amount of the subsidy was reduced from 85 percent to 50 percent, effective July 27, 1979, and remained at 50 percent until December 9, 1979. From December 10, 1979 to May 12, 1980, the amount of the subsidy was 95 percent. From May 13, 1980 to June 30, 1985, the amount of the subsidy was 40 percent until its elimination on July 1, 1985.
The Brazilian borrower (here, Nibrasco) automatically receives a credit from his bank (i.e., the tax collecting bank) in the amount of the subsidy at the time of payment of the withholding tax; however,...
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