Rev. Rul. 74-58

Advice has been requested whether the tax imposed on legal entities by Article 248 of the Brazilian Income Tax Law, as amended, (hereinafter referred to as "the Law") is an income tax within the United States concept of that term and, therefore, is creditable under section 901 of the Internal Revenue Code of 1954. Advice has also been requested whether amounts deducted from the Brazilian income tax and paid to the MOBRAL Foundation of Brazil are creditable under section 901.

Article 15 of the Law states, in substance, that all legal entities organized, incorporated or registered, in Brazil and doing business therein or all legal entities organized or incorporated abroad and doing business in Brazil either directly or through a qualified agent, qualify as income taxpayers, whatever their purposes or nationality. (Decree Law No. 5,844, Article 27.) Legal entities include but are not limited to individual firms and persons, who, in their individual name, habitually and professionally engage in any economic activity of a commercial or service nature for profit by means of selling goods or services to third parties. (Decree Law No. 4,506, Article 29, 1 and Decree Law No. 56,720, Article 1.)

Article 153 of the Law states that the operational profit constitutes the actual profit (operational profit ascertained) of the legal entities, increased or decreased by the net results of eventual transactions. (Law No. 4,506, Article 37, ss. 2.) Article 156 of the Law states that the "operational profit ascertained" is the gross operational receipts less costs, operating expenses, charges, provisions and losses authorized by these Regulations. (Law No. 4,506, Article 43.) Article 157 of the Law provides that the gross operational receipts are composed of (a) the proceeds of the sale of goods and services in transactions or operations on its own behalf, (b) results obtained in operations on behalf of others, (c) recoveries or reversions of costs, deductions or provisions, and (d) current subsidies for costs or operations received from legal entities, whether public or private, or from individuals. (Law No. 4,506, Article 44.) Articles 161 through 189 of the Law details the costs, operational expenses, charges, etc., referred to in Article 156 of the Law.

Article 248 of the Law, as amended by Decree Law No. 62 of November 21, 1966 provides that legal entities (as described in Article 15 of the Law), whether organized for commercial or civil purposes shall pay income tax on the profits ascertained in conformity with these Regulations. (Law No. 4,506, Art. 37 and Law No. 4,863, Article 28.)

Section 901 of the Code allows a credit against the United States tax of certain persons for foreign income, war profits, and excess profits taxes paid or accrued, or deemed to have been paid or accrued within the taxable year. In order for a tax paid to a foreign country to qualify as an income tax, however, it must be shown that the tax imposed by the foreign country is a tax on income within the U. S. concept thereof. Biddle v. Commissioner, 302 U.S. 573 (1938), 1938-1 C.B. 309.

An analysis of the tax imposed on legal entities by Article 248 of the Brazilian Income Tax Law, as amended, shows it is an income tax within the United States concept of that term.

Accordingly, it is held that the tax under Article 248 is creditable under section 901 of the Code subject to the applicable limitations of section 904.

Article 1 of Decree Law No. 1,124 of September 8, 1970, provides that for taxable years from 1971 to 1973, inclusive, juridical presons may deduct from income tax owed the Brazilian Government amounts destined for application in the alphabetization programs approved by the MOBRAL Foundation. MOBRAL is the organization set up by the Government of Brazil under Public Law 5,379 as the executive agency providing for functional literacy training and continued education of adolescents and adults. MOBRAL is a corporation wholly-owned by the government of Brazil and is a public benefit corporation.

Article 2 of Decree Law No. 1,124 provides that the deduction from income tax owed may be taken without prejudicing the fiscal incentives through the following methods:

I. Deduction of the amounts which were donated to the MOBRAL Foundation during the tax year, in the minimum value of 1 percent and maximum of 2 percent of the income tax paid during the tax year;

II. Indication on the return of the amounts that will be paid to the MOBRAL Foundation for application in the specific alphabetization projects, up to 1 percent of the income tax owed.

Article 3 of Decree Law No. 1,124 provides that amounts deducted under Article 2(II) must be paid when the return is filed, or during the period for paying installments on the income tax. Overdue payments of such amounts are subject to the same penalties and monetary corrections which would be due on the income tax owed in an identical situation.

Amounts of taxes paid directly to a public benefit corporation rather than to a government's general revenue fund constitute "taxes" if the corporation has been created for a public purpose and is regarded as performing a governmental function for which public money may be appropriated. See Rev. Rul. 71-49, 1971-1 C.B. 103, which holds that tax equivalency payments made to the New York City Educational Construction Fund by a cooperative housing corporation are real estate taxes deductible by each tenant-shareholder under section 216 of the Code in an amount representing his proportionate share.

Accordingly, it is further held that payments to the MOBRAL Foundation to the extent that they are deductible from the Brazilian income tax pursuant to Decree Law No. 1,124, are creditable under section 901 of the code subject to the applicable limitations of section 904.