Principal Issues: For the purposes of determining "exempt earnings", how should the earnings from an active business of a branch of a foreign affiliate be computed for a taxation year for purposes of subsection 5907(1) of the Regulations in circumstances where the income tax law of the country in which the foreign affiliate is resident does not require that income or profit to be computed until such time as the income or profit are remitted to the foreign affiliate’s country of residence.
Position: The methodology to compute "earnings" will depend on the facts. However, the “net earnings” derived by a foreign affiliate for the year from the “earnings” from its active business carried on through a branch in a country that is not a "designated treaty country" will not be included in its “exempt earnings” for the taxation year.
Reasons: To the extent that the country of residence of a foreign affiliate does not require the income or profit from the active business of a branch of that foreign affiliate carried on in another country for a taxation year to be computed in accordance with its income tax law, the earnings from the active business of the branch of the foreign affiliate for that taxation year are to be computed under either subparagraph (a)(ii) or (iii) of the definition of earnings in the Regulations, as the case may be. Moreover, in order for the “net earnings” derived by a foreign affiliate from the “earnings” from its active business carried on through a branch to be included in its “exempt earnings” for the taxation year, the foreign affiliate must be resident in a “designated treaty country” and the active business must be carried on by it in a “designated treaty country" as outlined in subparagraph (d)(i) of the definition of "exempt earnings" in subsection 5907(1).