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indicated on the Certificate of Registration for that loan and
verify that any required tax payments had been made. Upon
approval by the Central Bank, the exchange bank tendered the
foreign currency to the foreign lender and returned to the
Brazilian borrower the Certificate of Registration (stamped to
reflect the interest and tax payments), a stamped copy of the
DARF, and a copy of the exchange contract. Thus, the borrower
was required to pay the withholding tax before the interest owed
on a foreign debt could be paid.
At the time of payment of the withholding tax, the Brazilian
borrower automatically and immediately received a credit from the
tax collecting bank in the amount of the subsidy.
Mechanically, the tax-collecting bank credited the
account of the National Treasury for the entire tax due
and simultaneously debited (reduced) the account of the
National Treasury for the amount of the subsidy. The
effect of this accounting procedure was that the
National Treasury was credited only with the amount by
which the withholding tax exceeded the subsidy.
Nissho Iwai Am. Corp. v. Commissioner, supra at 770.
As explained by the U.S. Court of Appeals for the Eighth
Circuit in Norwest Corp. v. Commissioner, supra at 1409-1410:
The regulation reasonably views the payment of the
local tax and the receipt of the pecuniary benefit or
subsidy together in order to determine the amount of
foreign taxes creditable for purposes of 26 U.S.C. �
901. See Nissho, 89 T.C. at 777, (viewing payment of
tax and receipt of subsidy as “in lockstep”). This
interpretation is also consistent with the intent of
Congress to reduce international double taxation. * *
* [The taxpayer] can claim a foreign tax credit for the
amount of Brazilian taxes it paid, that is * * * the
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