Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-69

1973-1 C.B. 340

Sec. 883

IRS Headnote

For taxable years beginning after 1970 shipping corporations organized and domiciled in the Republic of China are entitled to income tax exemption on earnings from cargos and passengers taken on or discharged in U.S. ports.

Full Text

Rev. Rul. 73-69

Advice has been requested whether the National Government of the Republic of China grants to United States corporations an exemption from income taxation equivalent to the exemption granted by section 883(a)(1) of the Internal Revenue Code of 1954 and section 1.883-1(a)(1) of the Income Tax Regulations to foreign corporations with respect to their United States source earnings derived from the operation of a ship or ships.

The taxpayer is a foreign corporation organized under the laws of the Republic of China and has its principal office there. The taxpayer is engaged in the operation of ships, documented under the laws of the Republic, that regularly touch at United States ports to discharge and take on cargo and passengers. The taxpayer does not have a place of business in the United States or carry on any other trade or business in the United States.

Article 1 of the Income Tax Law of the Republic of China, as amended and promulgated on January 29, 1963, classifies income tax into (1) consolidated income tax imposed only on individuals and (2) profit-seeking enterprise income tax.

Article 3 of the Income Tax Law of the Republic of China provides (1) for the levy of profit-seeking enterprise income tax on any profit-seeking enterprise operating within the Republic, (2) that in the case of a profit-seeking enterprise having its head office without the Republic but having all or part of its branch or sub-branch offices or business agents within the Republic such tax is levied on that portion of its profit-seeking enterprise income derived within the Republic; and (3) that in the case of a profit-seeking enterprise having neither fixed place of business nor business agent within the Republic but having income derived from sources in the Republic, the income tax payable thereby shall be withheld and paid at the respective sources.

Article 11 of the Income Tax Law of the Republic of China defines "profit-seeking enterprise" as industrial, commercial, agricultural, forestry, fishing, animal husbandry, mining, or metallurgical enterprises operated by public, private, or joint public and private interests and having a business name or place and organized in the form of sole proprietorship, partnership, company, or in any other form of organization.

Article 24 of the Income Tax Law of the Republic of China defines the amount of income of a profit-seeking enterprise as the net income, i.e., the gross yearly income after deduction of all costs, expenses, losses, and other taxes. Various enterprises, including transportation, that meet the Republic's "encouragement standards," are permitted by Article 31 of the Income Tax Law of the Republic of China to set up a special reserve of up to 7 percent for foreign currency debt exchange loss which is deductible for income tax purposes.

Article 25 of the Income Tax Law of the Republic of China provides that:

(1) in the case of an international transport enterprise with head office outside the territory of the Republic but with branch office inside the Republic, computation of income of the branch inside the Republic shall be based on the total income according to the proportion of the yearly business revenue of such branch to the total business revenue;

(2) in the case of an international transport enterprise without branch office but with business agent inside the Republic, the income within the Republic may be computed either in accordance with the preceding paragraph or at 10 percent of business revenue as is obtained each time within the Republic; and

(3) in the case of an international transport enterprise with neither branch office nor business agent inside the Republic, the income within the Republic shall be 10 percent of the amount of business revenue as is obtained within the Republic.

Income within the Republic as provided in the two preceding paragraphs, in the case of a sea transport enterprise, refers to transportation charges for outbound passengers and cargo accepted for carriage inside the Republic or to transportation charges for inbound passengers and cargo accepted for carriage pursuant to transport contracts executed inside the Republic and in the case of an air transport enterprise, refers to ticket fares or freight charges from the stations of embarkation inside the Republic to first-leg stations outside the Republic.

Article 69 of the Income Tax Law of the Republic of China makes estimated tax payment requirements at current rates inapplicable to nonresident individuals and profit-seeking enterprises without fixed places of business but with business agents in the Republic or having elected to pay tax through withholding by business agents each time a business transaction occurs.

Article 73 of the Income Tax Law of the Republic of China makes filing of annual income tax return requirements similarly inapplicable.

Article 88(6) of the Income Tax Law of the Republic of China provides for withholding with respect to income derived by any nonresident individual or profit-seeking enterprise without fixed place of business in the Republic of 15 percent on profit-seeking enterprise income derived in the Republic by an international transport enterprise without a branch office but with a business agent in the Republic having elected to pay income tax through withholding on each business transaction, or by one with neither a branch office nor a business agent inside the Republic.

An income tax agreement was entered into between the Republic of China and the United States for relief from double taxation of earnings derived from the operation of ships and aircraft. The agreement was effected by an exchange of notes signed at Taipei on February 8 and 26, 1972, and entered into force on February 26, 1972. The official text of the agreement is contained in the pamphlet of the Treaties and Other International Act Series (TIAS) designated TIAS 7282. The text of the agreement is published in 1972-1 C.B., page 437. This agreement was made in accordance with sections 872(b) and 883(a) of the Code. The agreement is applicable to taxable years beginning on or after January 1, 1971.

Section 883(a)(1) of the Code provides for an exemption from the gross income of a foreign corporation of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States.

Section 1.883-1(a)(1) of the regulations provides, in pertinent part, for the exclusion from gross income of so much of the income from sources within the United States of a foreign corporation as consists of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States nonresident in the foreign country and to corporations organized in the United States. Section 1.883-1(a)(2)(i) of the regulations states that a foreign country which either imposes no income tax, or, in imposing that tax exempts from taxation so much of the income of a citizen of the United States nonresident in that foreign country and of a corporation organized in the United States as consists of earnings derived from the operation of a ship or ships documented under the laws of the United States is considered as granting an equivalent exemption for purposes of the exclusion from gross income of the earnings of a foreign ship or ships.

An income tax is a direct tax on income. Income, within the meaning of the Internal Revenue Code, is based on gain or profit and not on gross income or gross receipts. See Allstate Insurance Company v. United States, 190 Ct. Cls. 19, 419 F.2d 409 (1969), and the cases cited therein.

The tax levied on profit-seeking enterprises, including transportation enterprises, by Article 3 of the Income Tax Law of the Republic of China is based on net profit so that it is clearly an income tax rather than an excise tax under United States concepts. The fact that Article 25 of the Income Tax Law of the Republic of China requires that the taxable income of an international transport enterprise without a head office in the Republic which is derived from within the Republic be computed in a different manner from that used for profit-seeking enterprises generally does not change the nature of the tax imposed thereon from an income tax to a tax in lieu of an income tax. Compare Revenue Ruling 67-329, 1967-2 C.B. 257. See also Bank of America National Trust and Savings Association of Santa Ana v. United States, 459 F. 2d 513 (1972), certiorari denied, 409 U.S. 949 (October 24, 1972). Thus, the tax on income as determined by the formulas described in Article 25 of the Income Tax Law of the Republic of China is an income tax under United States concepts.

Accordingly, for the taxable years prior to January 1, 1971, the taxpayer's earnings from shipping from sources within the United States are not exempt from Federal income tax under the provisions of section 883 of the Code since the income tax laws of the Republic of China did not grant an equivalent exemption to corporations organized in the United States. However, for taxable years beginning on or after January 1, 1971, as a result of the income tax agreement entered into by the United States and the Republic of China on February 26, 1972 (TIAS 7282) the taxpayer is entitled to the exemption provided by section 883 of the Code.