- 32 -
The phase I DFA and the phase II DFA did not cover foreign
debt payments that were due after January 1, 1985. During the
phase III negotiations, Brazil and its foreign lenders agreed to
about six interim loan arrangements under which debt payments due
after January 1, 1985, being made by Brazilian borrowers would be
held by the Central Bank as "interim deposits". These interim
arrangements required the Central Bank to pay the foreign lenders
interest on such interim deposits, on a "net quoted" basis. The
interim arrangements themselves did not provide for any relending
period, as the Brazilians and the BAC envisioned that these interim
deposits would ultimately be rolled over into and covered under the
phase III DFA they anticipated would be concluded.
P. Various Foreign Lenders' Efforts During the Phase I and Phase
II Restructuring Negotiations To Have the Central Bank Issue Them
DARF's With Respect to Its Net Loan Interest Remittances
For certain U.S. and other foreign lenders who were in a
position to claim and utilize them, foreign tax credits potentially
represented a significant further source of tax benefits, with
respect to their Brazilian loans. Although, in the case of a net
loan, the U.S. lender would have to pay U.S. income tax with
respect to the additional interest income resulting from the gross-
up, a foreign tax credit equal in amount to the additional interest
income could be utilized to reduce the lender's U.S. income tax
liability on a dollar-for-dollar basis.11
11 See Nissho Iwai Am. Corp. v. Commissioner, 89 T.C. 765,
772-773 (1987).
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