Income Tax Severed Letters - 2013-09-25

Principal Issues: 1) Is the Guatemalan tax on gross revenue an "income or profits tax"?
2) Would the earnings of an FA paying Guatemalan tax on gross revenues and that carries on its active business only in Guatemala be computed under subparagraph (a)(i) or (a)(iii) of the definition of "earnings" in subsection 5907(1) of the Regulations?
3) Would the tax that non-resident shareholders without a PE pay on Guatemalan source dividends after January 1, 2013, be considered an "income or profits tax"?

Position: 1) Yes.
2) Subparagraph (a)(iii).
3) Yes.

Reasons: 1) After a review of the applicable legislation, it was determined that the Guatemalan tax on gross revenue is part of a comprehensive income tax regime and is tightly linked and subordinate to what would otherwise be accepted as an income or profits tax. More specifically, the tax on gross revenue is levied under the same statute as an otherwise tax on net income which itself is not of such an unreasonably high rate as to remove the elective nature of a taxpayer's choice between the two options. Moreover, given that a taxpayer has an opportunity to elect annually to choose whether to be taxed on gross revenue or net income, the tax paid will generally be limited to a maximum amount computed by reference to net income.
2) There is no requirement to compute income or profit (i.e. net income) in a taxation year in which the taxpayer has elected to pay tax by reference to gross revenue.
3) Decree No. 10-2012 institutes a tax on non-resident shareholders receiving Guatemalan dividends in a manner similar to Part XIII withholding taxes on dividends.