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predominant character, the base of the tax is computed by
reducing gross receipts to permit --
(1) recovery of significant costs and expenses attributable
to gross receipts, sec. 1.901-2(b)(4)(i)(A), Income Tax Regs.; or
(2) recovery of significant costs and expenses computed
under a method that is likely to produce an amount that
approximates, or is greater than, recovery of such significant
costs and expenses, sec. 1.901-2(b)(4)(i)(B), Income Tax Regs.
A foreign tax also meets the net income requirement of
section 1.901-2(b)(4), Income Tax Regs., if it provides
allowances that "effectively compensate" for nonrecovery of
4(...continued)
(4) Net income -- (i) In general. A foreign tax
satisfies the net income requirement if, judged on the
basis of its predominant character, the base of the tax
is computed by reducing gross receipts (including gross
receipts as computed under paragraph (b)(3)(i)(B) of
this section) to permit--
(A) Recovery of the significant costs and
expenses (including significant capital expenditures)
attributable, under reasonable principles, to such
gross receipts; or
(B) Recovery of such significant costs and
expenses computed under a method that is likely to
produce an amount that approximates, or is greater
than, recovery of such significant costs and expenses.
A foreign tax law that does not permit recovery of one
or more significant costs or expenses, but that
provides allowances that effectively compensate for
nonrecovery of such significant costs or expenses, is
considered to permit recovery of such costs or
expenses. * * *
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