Rev. Rul. 83-9

Rev. Rul. 83-9 [FN1]

                       Internal Revenue Service
                                 Revenue Ruling

                              INCOME SOURCE;  GUAM

                          Published: January 10, 1983

SECTION 861. - -INCOME FROM SOURCES WITHIN THE UNITED STATES, 26 CFR 4a.861-1: Special rules for determining source of interest and dividends

  Income source;  Guam.  Interest received by a Guam corporation from a U.S. corporation on which no U.S. tax was withheld and then paid to a corporation foreign to the U.S. and Guam is subject to withholding tax under section 1442(a) of the Guam Code.

ISSUE

  Whether interest paid by a Guam corporation to a foreign corporation is exempt from Guam tax collected by withholding under the circumstances described below.

FACTS

  FP, a foreign corporation other than a Guam corporation, organizes FX as a wholly owned subsidiary under the laws of Guam.  FX in turn acquires all of the stock of Y, a United States corporation.  Y is engaged in a manufacturing business in the United States and derives all of its income from sources within the United States.  FX is not engaged in a U.S. trade or business.  FP is not engaged in trade or business in Guam. Y pays interest on indebtedness to FX. FX's income for the taxable year consists solely of payments of interest from Y. FX pays interest on indebtedness to FP.

LAW AND ANALYSIS

  Section 881(a)(1) of the Internal Revenue Code imposes a tax of 30 percent of the amount received as interest from sources within the United States by a foreign corporation to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

  Section 1442(a) of the Internal Revenue Code provides that in the case of a foreign corporation subject to tax under subtitle A of the Code there shall be deducted and withheld at the source a tax on certain types of income, including interest.  The tax is imposed at a rate of 30 percent.

  Sections 881(b) and 1442(c) of the Internal Revenue Code each provide that, for purposes of such section, the term "foreign corporation" does not include a corporation organized under the laws of Guam.  Accordingly, interest paid by Y to FX is not subject to the U.S. tax imposed by section 881(a) and no tax should be withheld under section 1442(a).

  Section 31 of the Organic Act of Guam, as amended, 48 U.S.C. 1421(i), creates a separate income tax system in Guam.  The Internal Revenue Code is generally applied as the Guam territorial income tax law (Guam Code) by substituting "Guam" for "United States" where appropriate in order to give the law proper effect in Guam.  The Internal Revenue Code and the Guam Code were enacted by Congress as an integrated scheme of income taxation.  The Guam Code shall not be interpreted to controvert this statutory scheme and allow income from sources within either taxing jurisdiction to escape taxation by both jurisdictions.  See Rev. Rul. 82-179, 1982-43 I.R.B. 6.

  Sections 881(a) and 1442(a) of the Guam Code provide for the imposition and withholding, respectively, of a Guam tax of 30 percent on the amount of interest received by a foreign corporation from sources within Guam.

  Section 861(a)(1)(B) of the Internal Revenue Code and sections 1.861-2(b)(2) and 1.861-2(c)(2) of the Income Tax Regulations, as mirrored for purposes of the Guam Code, treat as foreign source income interest received from a Guam corporation where it is shown that less than 20 percent of the gross income from all sources of such corporation has been derived from sources within Guam for the 3 year period ending with the close of the taxable year preceding the payment of such interest (or for such part of such period as may be applicable), or, if the Guam corporation has no gross income for such period, for the taxable year in which the interest is paid.

  Section 4a.861-1(a) of the Temporary Income Tax Regulations provides, in part, that for purposes of sections 1.861-2(b)(2) and 1.861-2(c)(2) of the regulations, income of a U.S. corporation derived from sources within Guam that is not subject to income tax to the recipient by Guam shall be considered income from sources within the United States.  When mirrored as the Guam Code, section 4a.861-1(a) of the temporary regulations provides, in part, that interest income of a Guam corporation derived from sources within the United States that is not subject to U.S. income tax to the recipient shall be considered income from sources within Guam for purposes of Guam Code section 861(a)(1)(B) and sections 1.861-2(b)(2) and 1.861-2(c)(2) of the Income Tax Regulations. Since interest received by FX from Y is not subject to U.S. income tax, it will be treated as income from sources within Guam for purposes of applying Guam Code section 861(a)(1)(B).

HOLDING

  Interest paid by FX to FP is Guam source income and is subject to the 30 percent tax imposed by section 881(a) of the Guam Code.  Such tax must be withheld by FX pursuant to section 1442(a) of the Guam Code.

FN1. Also released as News Release IR-82-158, dated December 29, 1982.

Rev. Rul. 83-9, 1983-1 C.B. 126.