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taxpayer is a subsidy, and that the U.S. taxpayer is not entitled
to a foreign tax credit for the amount of the subsidy.17 Section
901(i), as well as the regulations thereunder, are applicable
only to foreign taxes paid or accrued in taxable years beginning
after December 31, 1986. Tax Reform Act of 1986, Pub. L. 99-514,
sec. 1204(a), 100 Stat. 2085, 2532; sec. 1.901-2(e)(3)(v), Income
Tax Regs. (1991). We need not decide whether petitioner would be
entitled to foreign tax credit for foreign taxes paid or accrued
after December 31, 1986. See T.D. 8372, 1991-2 C.B. at 340. We
note, however, that the focus of the background material seems to
confirm concern on respondent's part that prior law did not
17 Sec. 1.901-2(e)(3)(iv) Example (4), Income Tax Regs. (1991),
provides:
Example 4. (i) B, a U.S. corporation, is engaged
in the production of oil and gas in Country X pursuant
to a production sharing agreement between B, Country X,
and the state petroleum authority of Country X. The
agreement is approved and enacted into law by the
Legislature of Country X. Both B and the petroleum
authority are subject to the Country X income tax.
Each entity files an annual income tax return and pays,
to the tax authority of Country X, the amount of income
tax due on its annual income. B is a dual capacity
taxpayer as defined in � 1.901-2(a)(2)(ii)(A). Country
X has agreed to return to the petroleum authority one-
half of the income taxes paid by B by allowing it a
credit in calculating its own tax liability to Country
X.
(ii) The petroleum authority is a party to a
transaction with B and the amount returned by Country X
to the petroleum authority is determined by reference
to the amount of the tax imposed on B. Therefore, the
amount returned is a subsidy as described in this
paragraph (e)(3) and one-half the tax imposed on B is
not an amount of income tax paid or accrued.
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