EXAMPLE:
Corporation B is engaged in foreign country Y in the business of extracting petroleum. B pays to Y a foreign tax based upon a tax base comprised of two elements:
PART ONE: | A-X(B-C)=D |
PART TWO: | A-X[B-(C+D)]+E=F |
The components of the safe harbor method formula are defined asfollows:
A =The aggregate amount of NONPPD payments plus amounts of liability actually paid during the income year for taxes which are not dual capacity taxes and which are not separately deductible under subsection (b), excluding any withholding tax.
B = The amount of total gross receipts which relate to all activity taxed in the foreign country as determined under subsection (c)(5)(C).
C = The amount of cost of goods sold and operating expenses incurred in the income year to which the election pertains that related to the gross receipts included in component B, above, as determined under subsection (c)(5)(C), excluding NONPPD payments, but including PPD payments, if any.
D = The result of the PART ONE computation, but not less than zero.
E = PPD payments, if any.
F = The safe harbor deduction.
X = Fifty-five percent (.55) for all income years ended on or before December 31, 1986. Fifty two percent (.52) for all income years beginning on or after January 1, 1987.
In no case shall the deductible amount exceed the actual payment amount; and the deductible amount is zero if the safe harbor method formula yields a deductible amount less than zero. In no case shall the deductible amount be less than the PPD payments. In no case shall more than a single deduction be allowed for any payment of a foreign tax.
EXAMPLE 1:
The Petroleum Profits Tax Law (PPTL) of foreign country A provides, in part, that all underground oil and gas in that country is the property of the government of country A and that no person shall mine or produce petroleum unless authorized by a concession agreement issued under that law. The PPTL imposes a tax on the profits of all companies engaged in "petroleum operations" which are defined as activities involved in and incidental to obtaining petroleum and natural gas. The General Income Tax Law (GITL) of country A subjects all income generated in that country to taxation. However, income from petroleum operations is exempted by the GITL. The tax imposed under the PPTL is based on net income and the amount of the tax is set at a flat rate of 70 percent, a rate higher than the GITL tax rate which is set at a flat 55 percent. For purposes of calculating net income under the PPTL, profits are calculated based on the posted price of crude oil, which is higher in amount than the actual market price. In 1985 S is a concession holder whose income generated within country A is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California taxpayer.
The PPTL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PPTL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C)), S had 165 in grossreceipts, 45 in cost of goods sold and operating expenses, and a net income of 120 (165 less 45). A tax liability of 84 (120 net income multiplied by the 70 percent tax rate) is imposed on and paid by S under the PPTL.
For purposes of the safe harbor method formula, of the 84 imposed and paid under the PPTL, 10 is determined to be a PPD payment within the meaning of component E because that is the amount by which the actual tax paid under the PPTL exceeded the tax that would have been payable had profits been calculated based on the market price of crude oil. Component A, the NONPPD payment, is 74 (84 less 10). S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 50 in cost of goods sold and operating expenses (including the PPD payment of 10) within the meaning of component C and the methods of accounting attendant thereto. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed by the safe harbor method formula is determined as follows: A=74, B=150, C=50, E=10 and X=.55.
PART ONE: A-X(B-C)=D
74-.55(150-50)=D
74-.55(100)=D
74-55 =D
D=19
PART TWO: A-X[B-(C+D)]+E=F
74-.55[150-(50+19)]+10=F
74-.55[150-69]+10=F
74-.55[81]+10=F
74-44.55 +10=F
F=39.45
Thus, of the 84 imposed on and paid by S to country A, 39.45 is deductible. The remaining 44.55 is not deductible.
EXAMPLE 2:
The Petroleum Tax Law (PTL) of foreign country B provides, in part, that all underground oil and gas in that country is the property of the government of country B and that no person shall mine or produce petroleum unless authorized by a concession agreement issued under that law. Furthermore, the PTL specifies that an oil company or other concession holder under the PTL shall pay such income tax and other taxes as are payable under the laws of country B. The PTL requires that if the total annual amount of income tax and other direct taxes falls short of 70 percent of a concession holder's profits from all its country B concessions, such concession holder must pay such sum by way of a "surtax" as will make the total of its payments equal 70 percent of its profits. Credit is allowed for the payment of income tax and other direct taxes of country B against the PTL liability.
Under the PTL, "profits" are defined as the income resulting from the operations of the concession holder after deducting certain expenses. No deduction is allowed for income taxes and other direct taxes paid to country B. For purposes of calculating "income resulting from the operations of the concession holder," profits are calculated based on the posted price of crude oil, which is higher in amount than the actual market price. In 1985 S is a concession holder whose income generated within country B is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California taxpayer.
All companies engaged in business activities in country B must pay an income tax imposed under the Corporation Income Tax Law (CITL). The CITL is the general income tax law of country B and is imposed at a flat rate of 55 percent.
The PTL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PTL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the CITL), S had 165 in gross receipts, 45 in cost of goods sold and operating expenses and a net income of 120 (165 less 45). A tax liability of 84 (120 net income multiplied by the 70 percent tax rate) is imposed on S under the PTL.
The CITL tax is determined not to be deductible under subsection (b). Pursuant to procedures of computing tax liability and the methods of accounting set forth in the CITL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the PTL), S had 150 in gross receipts, 50 in cost of goods sold and operating expenses and a net income of 100 (150 less 50). A tax liability of 55 (100 net income multiplied by the 55 percent tax rate) is imposed on and paid by S under that law. However, S is allowed a credit of the amount paid under the CITL against its PTL tax liability. Therefore, the net amount of tax S actually pays under the PTL is 29 (84 less 55).
For purposes of the safe harbor method formula, of the 29 paid under the PTL, 10 is determined to be a PPD payment within the meaning of component E because that is the amount by which the actual tax paid under the PTL exceeded the tax that would have been payable had profits been calculated based on the market price of crude oil. No portion of the CITL is a PPD payment. Component A, the NONPPD payment, is 19 (29 less 10) plus 55 paid under the CITL which was credited against S's liability under the PTL, for a total value of 74. S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 50 in cost of goods sold and operating expenses (including the PPD payment of 10) within the meaning of component C and the methods of accounting attendant thereto. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed under the safe harbor method formula is determined as follows:
A=74, B=150, C=50, E=10 and X=.55.
PART ONE: A-X(B-C)=D
74-.55(150-50)=D
74-.55(100)=D
74-55 =D
D=19
PART TW O: A-X[B-(C+D)]+E=F
74-.55[150-(50+19)]+10=F
74-.55[150-69]+10=F
74-.55[81]+10=F
74-44.55 +10=F
F=39.45
Thus, of the 84 imposed on and paid by S to country B, 39.45 is deductible. The remaining 44.55 is not deductible.
EXAMPLE 3:
The Petroleum Revenue Law (PRL) of foreign country C provides, in part, that all underground oil and gas in country C, its territorial waters and its continental shelf is the property of country C and that no person shall extract such oil and gas except under license from the government of country C. Securing such a license to extract oil and gas in country C subjects a taxpayer to the tax imposed under the PRL. The PRL imposes a tax on all profits from oil extraction at a flat rate of 60 percent. Gross receipts for purposes of the PRL are calculated based on the current market value of oil and gas. The PRL tax is generally based on net income and is imposed in addition to the tax imposed by the Corporation Income Tax Law (CITL), the general income tax law of country C. The tax liability paid under the PRL is allowed as a deduction in computing a taxpayer's liability under the CITL. In 1985 S is a license holder under the PRL whose income generated within country C is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California tax payer.
The CITL imposes a tax on the aggregate of net income of a corporation and its rate is set at a flat 50 percent.
The PRL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PRL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the CITL), S had 150 in gross receipts, 40 in cost of goods sold and operating expenses and a net income of 110 (150 less 40). A tax liability of 66 (110 net income multiplied by the 60 percent tax rate) is imposed on and paid by S under the PRL. The CITL tax is determined to not be deductible under subsection (b). Pursuant to the procedures of computing tax liability and the methods of accounting set forth in the CITL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the PRL), S had 150 in gross receipts, 52 in cost of goods sold and operating expenses, a deduction for the payment of its PRL liability of 66, and a net income of 32 (150 less 52 and 66). A tax liability of 16 (32 net income multiplied by the 50 percent tax rate) is imposed on and paid by S under the CITL.
For purposes of the safe harbor method formula, the value of component A is 82 (66 paid under the PRL plus 16 paid under the CITL). S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 40 in cost of goods sold and operating expenses within the meaning of component C and the methods of accounting attendant thereto. The value of component E is zero because there were no PPD payments. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed under the safe harbor method formula is determined as follows: A=82, B=150, C=40, E=O and X=.55.
PART ONE: A-X(B-C)=D
82-.55(150-40)=D
82-.55(110)=D
82-60.5
D=21.5
PART TWO:
82-.55[150-(40+21.5)]+0=F
82-.55[150-61.5]+0=F
82-.55[88.5]+0=F
82-48.675 +0=F
F=33.325
Thus of the 82 imposed on and paid by S to country C, 33.325 is deductible. The remaining 48.675 is not deductible.
Cal. Code Regs. Tit. 18, §§ 24345-7
Note: Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.