Internal Revenue Service
Revenue Ruling
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smRev. Rul. 56-51
1956-1 C.B. 320
Sec. 901
IRS Headnote
The tax imposed by article 15, chapter IV of Cuban Law No. 7, approved April 5, 1943, as amended by article 25, chapter IV of Cuban Law No. 2, approved May 22, 1951, constitutes an excess profits tax and is, accordingly, allowable as a credit under section 901 of the Internal Revenue Code of 1954.
Rev. Rul. 31, C.B. 1953-1, 225, modified.
Full Text
Rev. Rul. 56-51
The Internal Revenue Service has been requested to reconsider its position, as set forth in Revenue Ruling 31, C.B. 1953-1, 225, in regard to the allowance, as a credit against Federal income tax, of foreign taxes paid pursuant to article 15, chapter IV of Cuban Law No. 7, approved April 5, 1943, as amended by article 25, chapter IV of Cuban Law No. 2, approved May 22, 1951.
The pertinent provisions of chapter IV of Cuban Law No. 7, as amended, read as follows:
ARTICLE 14. A tax of four pesos * * * is hereby levied on each one thousand pesos or fraction thereof, on the capital, estimated at its real worth, with which every partnership or company of any sort or description, whether civil or mercantile, national or foreign, may be operating in Cuba.
ARTICLE 15. Without prejudice to the tax on profits, referred to in the Law of January 29, 1931, and its modifications, which will continue to be paid as heretofore, a tax is established of fifteen per centum (15%) additional on any profits in excess of ten per centum of the capital taxed in the manner specified in the preceding Article.
In Revenue Ruling 31, Supra , it was held that neither of these taxes constituted an income tax or tax in lieu of an income tax for which a credit could be allowed under section 131 of the Internal Revenue Code of 1939 (section 901 of the Internal Revenue Code of 1954). This conclusion was based on the premise that the levies imposed by articles 14 and 15 were interrelated and interdependent.
Upon reconsideration, it appears that the tax imposed by article 14 of Cuban Law No. 7 of 1943, as amended, is levied against capital valuation and is due whether or not the taxpayer has net income for the period. The tax imposed by article 15 of the Cuban Law, on the other hand, is imposed as an additional tax on the profits subject to taxation and is due only if there is income in the form of profits. Although reference must be made to the valuation of capital declared under article 14, as a basis for computing the excess profits subject to taxation under article 15, this correlation of the two taxes does not cause them to be so integrated that they must be treated as a single tax for the purpose of determining whether credit is allowable for such taxes under section 901 of the Internal Revenue Code of 1954.
It is not intended by any statement made herein to suggest that when a single tax is imposed on items which, by United States standards, are both income and nonincome items, credit is allowable for the portion of the tax imposed on income items but denied for the portion of the tax allocable to nonincome items. When such a unified tax is imposed by a foreign country, its predominant character will determine whether the tax is an income tax and credit will be denied for the entire amount of the tax or allowed for the entire tax subject to the limitations of section 904 of the Code. I.T. 4074, C.B. 1952-1, 87.
Accordingly, it is held that the two taxes imposed by article 14 and article 15, chapter IV of Cuban Law No. 7 of 1943, as amended, are legally separate and distinct and that the tax imposed by article 15 constitutes a tax on excess profits for which credit is allowed under section 901 of the Code.
Revenue Ruling 31, supra , is accordingly modified to the extent that it applies to the tax imposed by article 15, chapter IV of Cuban Law No. 7, approved April 5, 1943, as amended.