REVENUE RULE 91-45

1991-2 C.B. 336, 1991-33 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

FOREIGN TAXES; MEXICAN TWO-PERCENT ASSETS TAX

Published: August 19, 1991

Section 901 Taxes of Foreign Countries and of Possessions of United States, 26 CFR 1.901-2: Income, war profits, or excess profits tax paid or accrued.

(See Also Section 903: 1.903-1.)

FOREIGN TAXES; MEXICAN TWO-PERCENT ASSETS TAX. The interaction of the Mexican assets tax and the Mexican income tax will not effect the credibility of the Mexican income tax under section 901 of the Code.

ISSUE

Whether the interaction of the Mexican income tax and the Mexican assets tax reduces the amount of Mexican income tax paid or accrued for purposes of section 901 of the Internal Revenue Code.

FACTS

In December 1988, the Government of Mexico enacted the Business Assets Tax Law, effective January 1, 1989, which imposed a new tax based upon the average yearly value of assets of certain persons. That law was amended in December 1989, effective January 1, 1990, at which time its name was changed to the Assets Tax Law (ATL). The ATL was further amended in December 1990, effective January 1, 1991. Assets Tax Regulations were issued in March 1989. Those regulations were revised in June 1989, and May 1990.

The new Mexican assets tax is imposed at the rate of 2 percent on the average yearly value of assets of Mexican legal entities and of business assets of individuals resident in Mexico. The location of the assets is irrelevant for purposes of the preceding sentence. Residents of foreign countries, who have permanent establishments in Mexico, are also obligated to pay the assets tax on the assets attributable to the permanent establishment. (Articles 1 and 2 of the ATL).

Taxpayers, generally, are required to make monthly provisional or estimated assets tax and income tax payments. (Article 7 of the ATL).

Pursuant to Article 9 of the ATL, taxpayers may credit toward their assets tax liability for the fiscal year an amount equivalent to the income tax paid in the same fiscal year. Any assets tax amount that exceeds the amount of income tax paid for that year shall be the tax payable pursuant to the ATL. When it is determined in a fiscal year that the income tax to be credited exceeds the initial assets tax liability calculated for that year, taxpayers may, to that extent, request a refund of the amounts they have paid as assets tax (adjusted for inflation) during any of the five immediately preceding fiscal years, on the condition that said amounts have not been refunded before.

An example of the interaction of the income tax and the assets tax is as follows:

Refund: 1) The 200 excess of the 1990 estimated payment of income tax over the 1990 income tax liability (1400-1200) is refundable under the income tax law and reduces the amount of income tax paid.

Refund: 2) The 200 excess of the 1990 income tax liability over the 1990 initial assets tax liability (1200-1000) can be carried back to reduce the taxpayer's assets tax liability of 400 that was paid in 1989, resulting in a refund of 200 of assets tax.

The above facts are based upon a translation of the ATL, and the regulations thereunder, provided to the Internal Revenue Service by the Mexican Government. Neither the facts, nor the analysis, reflect any administrative practice in interpreting or enforcing the statute or regulations, as is required by section 1.901-2 of the Income Tax Regulations.

LAW AND ANALYSIS

Section 901 of the Code allows a credit against United States income tax for the amount of any income, war profits, and excess profits taxes paid or accrued to any foreign country. Section 1.901-2(a)(1) of the regulations provides that a foreign levy is an income tax if and only if it is a tax; and the predominant character of that tax is that of an income tax in the United States sense. Section 1.901-2(a)(3)(i) of the regulations provides that a foreign levy satisfies the predominant character test only if the foreign levy is likely to reach net gain in the normal circumstances in which it applies. Section 1.901- 2(b)(1) provides that a foreign levy is likely to reach net gain in the normal circumstances in which it applies if, judged on the basis of its predominant character, it satisfies the realization, gross receipts, and net income requirements.

The Mexican assets tax is imposed on the average yearly value of certain assets, rather than on an "income" base. Therefore, it does not satisfy the realization, gross receipts, or net income requirement under the regulations, and is not an income tax for purposes of section 901.

Section 903 of the Code extends the credit available under section 901 to taxes paid in lieu of income taxes. Section 1.903-1(a)(1) of the regulations provides that a foreign levy is a tax in lieu of an income tax if and only if it is a tax, and it meets the "substitution requirement" of section 1.903-1(b). Pursuant to section 1.903-1(b)(1), a foreign levy satisfies the substitution requirement only if it operates in substitution for, not in addition to, an income tax. Taxpayers are subject to both the assets tax and an income tax. Therefore, the assets tax is imposed in addition to the income tax and cannot qualify as an in lieu of tax for purposes of section 903.

Because the amount of income tax paid by a taxpayer for a taxable year can be offset against the taxpayer's assets tax liability for the same taxable year, the "multiple levies" rule of section 1.901-2(e)(4) of the regulations must be considered. Section 1.901-2(e)(4)(i) provides that if, under foreign law, a taxpayer's tentative liability for one levy (the "first levy") is or can be reduced by the amount of the taxpayer's liability for a different levy (the "second levy"), then the amount considered paid pursuant to the second levy is an amount equal to its entire liability for that levy, and the remainder of the amount paid is considered paid pursuant to the first levy.

According to Article 9 of the ATL, a taxpayer can credit against its assets tax liability for the taxable year the amount of its income tax liability paid for that period. Applying the multiple levies rule to the ATL for a single taxable year, the assets tax would be the first levy because liability for that levy is tentative and can be reduced by the amount of the Mexican income tax paid, which is the second levy. Therefore, the total amount of the income tax liability is considered paid and the excess of the assets tax liability over the amount of the income tax is considered assets tax paid.

The above analysis does not end the inquiry about the application of the multiple levies rule because, in cases where a taxpayer's income tax liability exceeds its assets tax liability for a taxable year, Mexico allows the taxpayer to carry back to the five immediately preceding tax years the excess amount of income tax paid over assets tax liability for the taxable year and to claim a refund for up to the amount of assets tax paid. Thus, in order for that refund provision to operate, a taxpayer's assets tax liability would have to exceed its income tax liability for at least one of the five immediately preceding tax years. According to the ATL, the amount of assets tax liability paid for any of the five immediately preceding tax years is tentative until it is known in the fifth year whether the amount of income tax liability will exceed the amount of assets tax liability for that year. It is only at that time that it can be determined whether the taxpayer is entitled to any refund. Therefore, the total amount of income tax liability deemed to be paid before the operation of the carryback and refund provisions is not reduced by the amount of the refund of assets tax previously paid.

HOLDING

Assuming that the Mexican income tax is otherwise creditable under section 901 or section 903 of the Code, the amount of the income tax paid or accrued will not be reduced under section 1.901-2(e)(4) of the regulations by any amount of Mexican assets tax liability for that taxable year. Further, any Mexican assets tax that is refunded for a taxable year under Article 9 of the ATL because the taxpayer's income tax liability exceeds its assets tax liability in a subsequent taxable year will not reduce the amount of Mexican income tax paid in that subsequent year.

DRAFTING INFORMATION

The principal author of this revenue ruling is Phyllis Elayne Marcus of the Office of Associate Chief Counsel (International), Internal Revenue Service. For further information regarding this revenue ruling contact Ms. Marcus on (202) 566-6645 (not a toll-free call).

Rev. Rul. 91-45, 1991-2 C.B. 336, 1991-33 I.R.B. 5.