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treaties and concluded that section 842(b) was consistent with
existing treaties, including the Canadian Treaty.
The conference report on section 842(b) states:
In particular, the Treasury Department believes that
the provision does not violate treaty requirements that
foreign corporations be taxed only on profits derived
from the assets or activities of a corporation's U.S.
permanent establishment, that permanent establishments
of foreign corporations be taxed only on profits the
permanent establishments might be expected to make were
they separate enterprises dealing independently with
the foreign corporations of which they are a part, or
that permanent establishments of foreign corporations
be taxed in a manner no more burdensome than the manner
in which domestic corporations in the same
circumstances are taxed. The conferees similarly
believe that this provision does not violate any treaty
now in effect.
Several factors are cited by the Treasury
Department in support of this view. First, the
provision applies to life insurance companies and
property and casualty insurance companies in a manner
substantially similar to present-law rules covering
only life insurance companies. The Treasury Department
does not consider those present-law rules to violate
U.S. treaties.
Second, the provision attributes to a foreign
insurance company an amount of assets determined by
reference to the assets of comparable domestic
insurance companies, thus reasonably measuring the
amount of assets that the U.S. trade or business of a
foreign insurance company would be expected to have
were it a separate company dealing independently with
non-U.S. offices of the foreign insurance company. In
addition, a foreign insurance company can elect to
determine its investment income based on the company's
worldwide investment yield, or utilize the statutory
formula based on domestic industry averages. It is
well established that use of a formula as an element in
determining taxable income does not necessarily violate
"separate entity" accounting. The Internal Revenue
Code contains a number of provisions that apply
fungibility principles to financial assets; use of
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