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apply. See sec. 1.901-2(a)(3)(i), Income Tax Regs. More
specifically, the regulations provide that foreign taxes will be
treated as income taxes if and only if the taxes, judged on the
basis of their predominant character, satisfy each of the
realization, gross receipts, and net income requirements of
section 1.901-2(b), Income Tax Regs.
Generally, under section 1.901-2(b)(4)(i), Income Tax Regs.,
foreign taxes will be regarded as satisfying the net income
requirement if, measured by their predominant character, they
permit recovery of the significant costs and expenses relating to
the income or if they provide other allowances that effectively
compensate for nonrecovery of such costs and expenses.7
7 Pertinent language of sec. 1.901-2(b)(4)(i), Income Tax
Regs., is as follows:
(4) Net Income–(i) In general. A foreign tax
satisfies the net income requirement if, judged on the
basis of its predominant character, the base of the tax
is computed by reducing gross receipts * * * to
permit–-
(A) Recovery of the significant costs and
expenses (including significant capital expenditures)
attributable, under reasonable principles, to such
gross receipts; or
(B) Recovery of such significant costs and
expenses computed under a method that is likely to
produce an amount that approximates, or is greater
than, recovery of such significant costs and expenses.
* * *
A foreign tax law that does not permit recovery of one
or more significant costs or expenses, but that
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