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on the last day of the foreign corporation's taxable year and
subject to tax under section 881(a) (the excess interest tax).
The controversy here concerns the excess interest provisions.
The excess interest tax ties in with the withholding
provisions of section 884(f)(1)(A). The withholding on interest
paid to foreign persons or entities is a means of collecting tax
on the interest recipient, whereas the excess interest tax of
section 884(f)(1)(B) is imposed on the foreign branch payor. The
interest deduction allocable to the branch is determined by a
formula provided in section 1.882-5, Income Tax Regs., and is an
apportionable amount of ECI, which is used as the base. The
amount of interest deductible for purposes of the branch tax law
is therefore derived in a theoretical fashion7 to complete the
statutory configuration designed to achieve parity between a
foreign branch and a domestic subsidiary of a foreign parent.
Here, petitioner, a Japanese corporation wholly owned by
another Japanese corporation, obtained funding from unrelated
banks and also from related corporations (its parent and another
related corporation). Petitioner paid interest on the loans from
unrelated banks. Also, petitioner accrued interest without
making any payments on the funds obtained from the affiliated
7 The amount derived is not necessarily equivalent to the
amount of interest actually paid or accrued. Instead, the
deductible amount of interest pursuant to sec. 1.882-5, Income
Tax Regs., is an amount prescribed to achieve parity.
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