Taiyo Hawaii Company, Ltd. - Page 15

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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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Last modified: May 25, 2011