Riggs National Corporation & Subsidiaries, f.k.a. Riggs National Bank and Subsidiaries - Page 16

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               issuing currency, acting as depositary of the official                 
               gold and foreign currency reserves, providing for the                  
               placement of domestic and foreign loans, furthering the                
               normal function of the exchange market, acting as a                    
               monetary policy instrument of the government and                       
               exercising control over credit in all its forms.                       
               (5) The financial transactions conducted by * * * [the                 
               Central Bank] are, in general, conducted on behalf of                  
               the Federal Union or in its interest.  In loan                         
               transactions, agreed upon with a net interest rate, the                
               financial burden of the tax is transferred to the                      
               borrower.  When the borrower assumes the tax burden,                   
               what actually happens is a gross-up of the income of                   
               the beneficiary lender.  For this reason and in order                  
               to calculate the gross income obtained, the law                        
               determines that the basis of calculation of the                        
               tax--the amount of interest--be grossed up.  In this                   
               way, the borrower pays the income tax to the Union on                  
               behalf of the lender, ensuring the net rate promised to                
               the lender by means of the payment of a greater amount.                
               (6) Following the same reasoning, * * * it is possible                 
               to deduct, as an expense of a legal entity, the amount                 
               of tax incident on income tax paid to third parties,                   
               when the legal entity contractually assumes the burden                 
               as it is a supplemental expense and not a withholding                  
               tax.                                                                   
               (7) Now, when * * * [the Central Bank] acts on behalf                  
               of the interest of the Federal Union, in cases of                      
               transactions agreed upon with net interest rates, it                   
               could claim a reimbursement for the amount paid in the                 
               form of income tax.  In reality, * * * [the Central                    
               Bank] would pay the tax to the Federal Union and the                   
               Federal Union could return it to * * * [the Central                    
               Bank].  Under this scenario, the payment of tax, as it                 
               would be a simple accounting transaction, could be                     
               waived.                                                                
               (8) It should be noted that, as regards the possibility                
               mentioned-- loans of funds which must be relent to                     
               borrowers in Brazil--said Bank must, in substitution of                
               the future not yet identified debtors of the tax, pay                  
               the income tax on the interest paid during the period                  
               in which the funds remained available for relending.                   
               The fact is that, since the loan benefits persons which                
               have not yet been identified from whom the payment of                  





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Last modified: May 25, 2011