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calculation of profits, cannot be attributed to the hypothetical
independent enterprise without violating the very hypothesis
which * * * the treaty is designed to lay down as the basis of
taxability", i.e., the separate-entity principle). Respondent's
own witness, Dr. Newlon, an international economist with the
Treasury, admitted that the formula could be improved. We are
convinced that section 842(b) is contrary to and inconsistent
with Article VII, paragraph (2), which precludes the fictional
allocation of business profits to petitioner's permanent
establishment.
Imputing a level of assets and yields to petitioner's U.S.
branch, respondent contends, is not unreasonable because the
formula incorporates actual business data and petitioner operates
in the United States market and directly competes with domestic
life insurance companies. To conclude that section 842(b) is
reasonable in light of the fact that petitioner operates in the
United States would not resolve the dispute before us. It is not
enough for section 842(b) to be reasonable. To sustain the
application of section 842(b) based on the facts before us, we
must conclude that it comports with our Convention obligation.
See United States v. A.L. Burbank & Co., 525 F.2d at 15. As we
have stated above, we must conclude that the statute does not;
consequently, it cannot prevail in the presence of the
Convention.
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