- 25 -
(iii) Example. The provisions of this paragraph
(e)(3) may be illustrated by the following example:
Example. Country X imposes a 30-percent tax on
interest received by non-resident lenders from
borrowers who are residents of country X, and it is
established that this tax is a tax in lieu of an income
tax within the meaning of � 1.903-1(a). Country X
remits to resident borrowers an incentive payment for
engaging in foreign loans, which payment is an amount
equal to 20 percent of the interest paid to non-
resident lenders. Because the incentive payment is
based on such interest, it is determined by reference
to the base used to compute the tax in lieu of an
income tax that is imposed on the nonresident lender.
Under paragraph (e)(3)(ii)(B) of this section, the
incentive payment is considered a subsidy provided
indirectly to the nonresident lender since it is
provided to a person (the borrower) that engaged in a
business transaction with the lender and is based on
the amount of tax in lieu of an income tax that is
imposed on the lender with respect to the transaction.
Therefore, two-thirds (20 percent/30 percent) of the
amount withheld by a resident borrower from interest
payments to a non-resident lender is not tax in lieu of
an income tax that is paid by the lender under
paragraph (e)(3)(i) of this section and � 1.903-1(a).
The regulation deems the taxpayer to have been subsidized if
the country provides a subsidy to a person with whom the taxpayer
engages in a business transaction, provided the subsidy is
determined directly or indirectly by reference to the amount of
income tax, or to the base used to compute the income tax,
imposed by the country on the taxpayer with respect to the
transaction. The existence of an indirect subsidy does not
depend upon a finding that the U.S. taxpayer derived an actual
economic benefit; it is sufficient that another person who
engages in a transaction with the U.S. taxpayer has received a
Page: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 NextLast modified: May 25, 2011