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901 and 903 is the person on whom foreign law imposes
legal liability for such tax, even if another person
(e.g., a withholding agent) remits such tax. * * *
(2) Party undertaking tax obligation as part of
transaction--(i) In general. Tax is considered paid
by the taxpayer even if another party to a direct or
indirect transaction with the taxpayer agrees, as a
part of the transaction, to assume the taxpayer's
foreign tax liability. The rules of the foregoing
sentence apply notwithstanding anything to the contrary
in paragraph (e)(3) of this section. See � 1.901-2A
for additional rules regarding dual capacity taxpayers.
(ii) Examples. The provisions of paragraphs
(f)(1) and (f)(2)(i) of this section may be illustrated
by the following examples:
* * * * * * *
Example (3). Country X imposes a tax called the
"country X income tax." A, a United States person
engaged in construction activities in country X, is
subject to that tax. Country X has contracted with A
for A to construct a naval base. A is a dual capacity
taxpayer (as defined in paragraph (a)(2)(ii)(A) of this
section) and, in accordance with paragraphs (a)(1) and
(c)(1) of � 1.901-2A, A has established that the
country X income tax as applied to dual capacity
persons and the country X income tax as applied to
persons other than dual capacity persons together
constitute a single levy. A has also established that
that levy is an income tax within the meaning of
paragraph (a)(1) of this section. Pursuant to the
terms of the contract, country X has agreed to assume
any country X tax liability that A may incur with
respect to A's income from the contract. For federal
income tax purposes, A's income from the contract
includes the amount of tax liability that is imposed by
country X on A with respect to its income from the
contract and that is assumed by country X; and for
purposes of section 901 the amount of such tax
liability assumed by country X is considered to be paid
by A. By reason of paragraph (f)(2)(i) of this
section, country X is not considered to provide a
subsidy, within the meaning of paragraph (e)(3) of this
section, to A.
Section 1.901-2(g)(2), Income Tax Regs., provides:
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