Principal Issues: Where, as a result of a corresponding adjustment under foreign tax law pursuant to a mutual agreement procedure and a bilateral advance pricing arrangement, the taxable income and income taxes payable of a foreign affiliate have been reassessed by a foreign tax authority, would there be i) a re-computation of earnings and net earnings of the foreign affiliate for the relevant taxation years under subsection 5907(1) of the Regulations and ii) an addition to the earnings of the foreign affiliate under paragraph 5907(2)(f) of the Regulations for the relevant taxation years of the amount of the money retained but not included in computing the earnings of the foreign affiliate as a result of the corresponding adjustment?
Position: In the factual circumstances provided, i) yes and ii) yes.
Reasons: i) The corresponding adjustment and the resulting reassessment by the foreign tax authority changes the income or profit from active business of the foreign affiliate computed in accordance with the foreign tax law and the income taxes paid by the foreign affiliate in respect of that income or profit. ii) The money realized and retained by the foreign affiliate, but excluded from its income for foreign income tax purposes as a result of the corresponding adjustment by the foreign tax authority, would be "revenue, income, or profit" derived by the foreign affiliate for purposes of paragraph 5907(2)(f) of the Regulations.
