Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-21

1970-1 C.B. 158

Sec. 901

IRS Headnote

That portion of the Japanese Perfectural and Municipal Inhabitants Taxes imposed on corporations on the basis of a percentage of the national corporation tax paid is a creditable tax under section 901 of the Code; however, that portion imposed on a per capita basis does not qualify.

Full Text

Rev. Rul. 70-21

Advice has been requested whether the taxes imposed under Articles 24(1) and 294(1) of the Local Tax Law of Japan (Law No. 226 of July 31, 1950, as amended as of April 20, 1968) qualify as income taxes allowable as credits against United States income tax in accordance with the provisions of section 901 of the Internal Revenue Code of 1954.

Article 24(1) of the Japanese law imposes a Prefectural Inhabitants Tax on corporations having an office or place of business in the prefecture. That tax is a percentage of the Japanese national corporation tax paid by the corporation. Article 24(1) also imposes a Prefectural Inhabitants Tax on corporations on a per capita basis.

Article 294(1) of the Japanese law imposes a Municipal Inhabitants Tax on corporations having an office or place of business in the municipality on the basis of a percentage of the national corporation tax paid. It also imposes a Municipal Inhabitants Tax on corporations on a per capita basis.

In order for a tax paid to a foreign country to be allowable as a credit against United States income tax under section 901 of the Code, it must be a tax on income within the United States concept, or a tax paid in lieu of an income tax.

A tax imposed on the basis of a percentage of the amount of another tax that is an income tax is an income tax within the United States concept. A tax imposed on a per capita basis, however, is not an income tax within the United States concept.

Accordingly, that portion of the taxes imposed by articles 24(1) and 294(1) of the Local Tax Law of Japan (Law No. 226 of July 31, 1950, as amended as of April 20, 1968) that is a percentage of the Japanese national corporation tax paid is an income tax allowable as a credit against United States income tax in accordance with section 901 of the Internal Revenue Code of 1954. However, that portion of such taxes that is imposed on a per capita basis is not an income tax, or a tax in lieu of an income tax, and may not be allowed as a credit against United States income tax.