Dual-capacity taxpayer must use facts-and-circumstances or safe-harbor method.

• Author: Tapajna, Joseph J.
• Position: U.S.-Indonesia tax treaty

In Field Service Advice (FSA) 200032037, the IRS National Office concluded that a dual-capacity taxpayer must use the safe-harbor or facts-and-circumstances method in determining the amount of its creditable taxes, because the U.S.-Indonesia tax treaty does not specify that the Indonesian levy is an "income tax"

In FSA 200032037, a U.S. corporation conducted operations in Indonesia with a controlled entity of the Indonesian government. Under an agreement with that government, the corporation agreed to pay Indonesian taxes as indicated in the agreement, regardless of subsequent changes to Indonesian tax law or changes under the U.S.-Indonesian tax treaty. The corporation was treated as a dual-capacity taxpayer with regard to Indonesia, as defined in Regs. Sec. 1.901-2(a)(2)(ii).

Even though it was a dual-capacity taxpayer, the corporation argued that all of the taxes paid to Indonesia should be creditable for U.S. purposes. It based its argument on Regs. Sec. 1.901-2A(b) (2), which provides that, when a treaty with a foreign country treats a foreign levy as an income tax for foreign tax credit (FTC) purposes, all of the levy is treated as a creditable tax if the credit is...