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Respondent determined that petitioner is liable for
withholding taxes on all of the interest reported on its Forms
5472 filed with its 1994, 1995, and 1996 Forms 1120X because the
forms listed GXE, a Hong Kong corporation, as the interest
recipient. Petitioner argues that (1) the interest reported on
the Forms 5472 included interest paid to GITIC, a corporation
resident in China that was entitled to favorable tax treatment
under the China Agreement during the years in issue, and that (2)
interest paid to GXE should be treated as interest paid to GITIC.
Petitioner contends that the GXE loan was actually a loan from
GITIC and that GITIC chose to distribute the net loan proceeds
through GXE. Petitioner contends, therefore, that the loan
originated with the Guangdong government and should be exempt
under the China Agreement. Alternatively, petitioner argues that
GXE is GITIC’s agent and, as such, collected interest on the GXE
loan on GITIC’s behalf.
C. Interest Paid Directly to GITIC
Respondent concedes that any interest payments made directly
to GITIC with respect to a loan made by GITIC fall squarely
within the exemption from U.S. taxation provided in the China
Agreement. Respondent argues, however, that GXE and not GITIC
made the $2 million “GITIC” loan during the years in issue and
that the interest in question was paid to GXE on that loan.
Alternatively, respondent appears to argue that there are three
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