Proposed revision of Revenue Procedure 65-17: adjustments required after a section 482 allocation.

On January 16, 1996, Tax Executives Institute submitted the following comments to the Internal Revenue Service, concerning the proposed revision Of Revenue Procedure 65-17, which addresses the collateral consequences of transfer pricing adjustments under section 482 of the Internal Revenue Code. The Institute's submission was prepared under the aegis of its International Tax Committee, whose chair is Philip J. Bergquist of Apple Computer, Inc. The following members joined Mr. Bergquist in materially contributing to TEI's comments: Robert D. Adams of Halliburton Company and Lisa Norton of Ingersoll-Rand Company.

Revenue Procedure 65-17(1) addresses the collateral consequences of U.S. transfer pricing adjustments. Specifically, the procedure permits a qualifying U.S. taxpayer, whose taxable income has been increased by reason of an allocation under section 482 of the Internal Revenue Code, to receive payment from the related entity from (or to) which the allocation of income (or deduction) was made, without having the receipt of such payment considered a taxable distribution for federal income tax purposes. It is our understanding that the Internal Revenue Service is revising Rev. Proc. 65-17 to reflect both the 1986 changes to section 482 and the final section 482 regulations, which were issued in 1994. Tax Executives Institute is pleased to offer the following comments on, and recommendations concerning, the procedure.

I. Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our more than 5,000 members represent approximately 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works - one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and. practical perspective to issues of tax policy and administration.

The past 30 years have seen a significant evolution in how foreign operations by U.S. multinational corporations are structured and in the technical rules for governing the U.S. tax consequences of international transactions. Foreign jurisdictions, too, have become increasingly active in the transfer pricing area, increasing the need for bilateral approaches to conflict resolution. In revising Rev. Proc. 65-17, the IRS has an opportunity to eliminate many ambiguities and bring a fuller measure of certainty to this area while advancing the goal of minimizing the potential for double taxation. We are pleased to have the opportunity to participate in this revision project and believe that it should be placed on the IRS and Treasury's 1996 business plan.

II. Introduction

A substantial number of TEI members work for multinational companies that engage in international trade. Such companies often face the difficult issue of determining arm's-length transfer prices for goods and services that move between U.S. operations and foreign entities. When such prices are subsequently adjusted, taxpayers must reconcile the adjusted prices with the existing cash and economic situation. For the last 30 years, Rev. Proc. 65-17 has provided guidance to taxpayers in properly aligning their offshore cash situations with pricing adjustments. Given the changes in the law and the expanding global market, we agree that more guidance is needed.

Rev. Proc. 65-17 essentially adopts the theory that section 482 adjustments will be treated as a loan from the entity to which the income properly belonged, to the entity that received the income.(2) This principle holds true whether the adjustment increases or decreases the taxpayer's reported U.S. taxable income.(3) Taxpayers may elect to establish "loan" accounts under prescribed IRS procedures. If such an election is not made, or if requests for relief are denied, then the taxpayer may face constructive dividend (or capital) treatment.

Rev. Proc. 65-17 provides the mechanism for U.S. parent companies to establish and receive payment of the "loan" from a foreign subsidiary. The procedure addresses the situation in which a U.S. parent company was subject to a section 482 adjustment that increased its taxable income from a foreign subsidiary. Relief was provided not only to mitigate double taxation, but also to encourage future settlements of section 482 issues.(4)

Rev. Proc. 65-17 provides the option of either offsetting dividends or repatriating cash to satisfy the receivable created by the section 482 adjustment.(5) In Rev. Rul. 82-80,(6) relief was extended to foreign-owned U.S. subsidiaries that are faced with a section 482 adjustment that increases their U.S. taxable income. The subsidiary may receive payment from its foreign parent of an amount not in excess of the increased taxable income. If Rev. Proc. 65-17 relief is granted, any original transaction that was adjusted is treated as if the correct amount had been paid. An example notes that where a U.S. subsidiary has paid more for services than an arm's-length amount, the foreign parent will not be considered to have received a dividend to the extent of the excess amount, and the withholding tax provisions of sections 881 and 1442 will not be applied. G.C.M. 38676 explains that any difference between the arm's-length charge and the amount actually transferred is to be established as an account receivable from the parent, pursuant to the general principles of Rev. Proc. 65-17.

The IRS has recently endeavored to integrate Rev. Proc. 65-17 relief with its competent authority procedures.(7) Thus, the IRS has provided that "if a taxpayer intends to request competent authority assistance ... to resolve a double taxation matter in a treaty case, the taxpayer should request relief under Rev. Proc. 65-17 in conjunction with its request for competent authority assistance under the provisions of [Rev. Proc. 96-131, sec. 4 and sec. 10." These procedures properly place Rev. Proc. 65-17 within the bilateral context.

TEI generally supports the relief provisions set forth in Rev. Proc. 65-17 and shares the IRS's goal of minimizing double taxation and bringing the reality of a taxpayer's economic situation in line with an agreed adjustment. The intent is to place the taxpayer in the same situation it would have been in, if the original transaction had been done in accord with section 482. Nevertheless, the need to revise Rev. Proc. 65-17 remains. These comments focus primarily on three areas: (i) the general principles of Rev. Proc. 65-17; (ii) the repatriation of cash to satisfy Rev. Proc. 65-17 accounts; and (iii) the offsetting of dividends to satisfy Rev. Proc. 65-17 accounts.

III. General Principles of Rev. Proc. 65-17

a. Non-tax Avoidance Purpose. Rev. Proc. 65-17 provides that a taxpayer is entitled to the procedure's benefits only if no "tax avoidance" purpose is present.(9) The IRS has historically been concerned that, without such a restriction, taxpayers would have little incentive to strive for an arm's-length price. The determination of whether such an improper motive exists is left to the District Director "based upon all the facts and circumstances of the case."

The law has changed considerably since Rev. Proc. 65-17 was issued. Section 6662(e) now embodies congressional intent concerning the penalty to be applied to section 482 adjustments. These penalties clearly hold taxpayers to a higher standard than prior law, and in our view there is no need for an additional penalty (such as the denial of relief under Rev. Proc. 65-17). We recommend that any adjustment that does not result in the imposition of a transfer pricing penalty should provide a safe harbor for eligibility for Rev. Proc. 65-17 relief; the requirement of a no-tax-avoidance purpose should be eliminated.(10)

b. Eligibility for Relief. Rev. Proc. 65-17 provides relief only for section 482 adjustments. Rev. Proc. 72-53(11) provides that such relief should be available "where adjustments have been made under section 61 of the Code provided that such adjustments could also have been made under section 482." Subsequent guidance suggests that relief may also be available for some adjustments made under sections 162 and 936(h).(12)

The revised procedure should explicitly provide that section 61, 162, or 936(h) adjustments cognizable under section 482 are eligible for Rev. Proc. 65-17 relief. This approach would be consistent with prior IRS guidance and would permit the broadest opportunity for relief from what could otherwise be a harsh result.

c. Ordering Rules. When a section 482 issue is resolved, the commensurate adjustment may extend over several years and result in the creation of multiple accounts receivable that must be "processed" under Rev. Proc. 65-17. The procedure does not address, however, the order in which these receivables should be settled.

TEI recommends that each year's receivable be treated separately and that payments (whether actual payments or recharacterized dividends) be applied on a first-in/first out (FIFO) basis against the receivable created, i.e., the oldest should be settled first. This approach provides a simple, easily administrable rule and mirrors what is already done in a majority of cases.

d. Interest Rate. In addressing the interest rate to be used to make adjustments, Rev. Proc. 65-17 refers to Treas. Reg. [sections] 1.482-2(a)(2), which provides for a safe-haven interest calculation based on the applicable federal rates (AFRS) specified in section 1274(d). The procedure provides no clear advice, however, on what specific rate should be used once the accounts receivable are established.

TEI believes that the interest rate for each allocation year should be calculated in the same manner using the AFR tables. The term for the receivable should be determined by measuring the period of time between the date on which the receivable is deemed created (i.e., the last day of the taxable year to which the section 482 adjustment relates, as provided in section 4.03 of Rev. Proc. 65-17) and the date when it is paid; this time period would thus determine whether the short-term, middle-term, or longterm AFR table should be used. Then, an arm's-length rate should be computed at 100 percent of the AFR rate. To determine the precise interest rate, TEI suggests semiannual compounding be used, consistent with section 7872(f)(2)(a)'s treatment of term loans.(13)

TEI also urges the IRS to empower the District Director, independently or in consultation with competent authority,(14) to waive any such interest when adjustments are between high-tax jurisdictions. It is our understanding that such waivers have been granted when resolving particular cases; formalizing this policy would further the goal of consistent treatment for taxpayers.

e. Accrual of Interest Income/ Expense. The accrual of interest is addressed in Rev. Proc. 72-48,(15) which provides that, when a taxpayer establishes an account receivable under Rev. Proc. 65-17, interest income resulting from such receivable should be included in income on an accrual basis, regardless of the method otherwise employed by the taxpayer.

This practical rule should be retained in any revised procedure. The rule should be expanded, however, to clarify that the entity recording the account payable may accrue any correlative interest expense.(16) Such an approach ensures the symmetry that was previously implicit in the procedure.

f. Recharacterizing Former PTI Dividends. Rev. Proc. 65-17 does not address the effect of the accrual of the interest expense on either the Subpart F income of the foreign (paying) entity or distributions characterized as previously taxed income (PTI). A foreign entity's Subpart F income, as well as the Subpart F income of its lower-tier subsidiaries, should be reduced by the adjustment. In addition, PTI dividends previously paid by that entity may be recharacterized as non-pti dividends. This recharacterization effectively creates "new" section 316 dividends. It is unclear whether these "new" dividends can be used to offset any Rev. Proc. 65-17 amounts because they were not reported on the taxpayer's original return as required under the procedure.

TEI believes that previously reported PTI distributions that are recharacterized as "new" section 316 dividends should offset any balances due the parent company under Rev. Proc. 65-17. No distinction should be made between such recharacterized dividends and section 316 dividends.

IV. The Repatriation of Cash

a. Withholding Taxes. Pursuant to section 4.02 of Rev. Proc. 65-17, a taxpayer is entitled to settle any receivable created with a cash payment, without any further tax consequences. Rev. Proc. 65-17 fails to address, however, the potential tax consequences of such payments in the foreign jurisdiction, which may view this "repayment" (both the principal and interest portions) as a dividend subject to local withholding taxes.

TEI submits that withholding taxes imposed upon cash used to satisfy Rev. Proc. 65-17 accounts receivable (including interest on that account) should be characterized as creditable taxes for foreign tax credit purposes.(18) The taxpayers should be permitted to claim a credit or deduction for these taxes, which should be placed into the appropriate foreign tax credit basket (or, if there is no associated income, in the overall limitation basket). Moreover, if the foreign jurisdiction treats the payment as a dividend, all such withholding taxes should be creditable as long as the rate used for withholding is consistent with the dividend characterization. No further action should be required under Rev. Rul. 76-508.(19) Finally, the credit should be permitted in the year, in which the dividend, payment, or interest accrual occurs.20

b. Time to Repay. Section 4.02 of Rev. Proc. 65-17 provides taxpayers with a 90-day window after the receivable is established in which to make the required section 482 payment. If payment is made after that date, the procedure implies that such payment will trigger tax consequenees.

TEI recommends that the District Director be permitted to extend the time in which such accounts must be settled. Providing the District Director with such discretion is consistent with the procedure's intended policy and flexibility.

V. Dividend Offset Option

a. Offset of Gross Amount. While section 4.01 of Rev. Proc. 65-17 permits an offset for certain dividends, it is unclear what the amount of that offset should be. Because withholding taxes may be imposed on dividends paid to U.S. taxpayers, only a net amount is ultimately received. An issue arises whether taxpayers should offset the gross or net amount of the dividend against the receivable created under the procedure.

TEI recommends that the gross amount of the dividend be offset against the receivable. Clearly providing for such an offset in the revised procedure ensures that the economics of the adjustment remain in balance. Using the gross amount will also further the goal of Rev. Proc. 65-17 by avoiding double taxation.(21)

b. Dividend from Second- or Lower-Tier Entities. Sec. 4.01 of the current procedure provides an offset only for section 316 dividends, thereby potentially limiting the use of the dividend offset option to dividends paid directly from a first-tier entity to the parent company. Section 951 dividends are not eligible for the offset. Such an approach fails to take into account the complex structures under which many multinational corporations operate.

In subsequent rulings, the IRS has recognized the need for a broader interpretation. In Rev. Proc. 70-23,(22) the IRS sanctioned an exclusion for dividends paid to a taxpayer other than the entity to which the section 482 adjustment had been made, where control existed between the two entities. Rev. Proc. 71-35(23) further clarified that the dividend exclusion was available even where the section 482 adjustment was between brother-sister entities. These clarifications should be incorporated into the new procedure.

Moreover, dividends received from second- or third-tier subsidiaries flowing through the chain of ownership - which would otherwise be treated as section 316 dividends if paid directly - should be permitted as an offset to any Rev. Proc. 65-17 adjustment as long as such dividends can be traced to the United States. Rev. Proc. 65-17 currently vitiates the ability of any taxpayer with a foreign holding company structure to receive a dividend offset for an adjustment because these holding companies rarely engage in the transactions to which section 482 allocations relate.

Multi-tier taxpayers should be encouraged to repatriate funds to the United States, a policy explicitly recognized in Rev. Proc. 65-17's list of factors to be considered in assessing "tax avoidance." Moreover, permitting distributions from a second- or third-tier subsidiary to offset section 482 adjustments would further the procedure's goal of avoiding double taxation.

With respect to whether such dividends can be traced through a taxpayer's chain of ownership, TEI urges the IRS to consider a two-prong approach. First, the IRS could adopt a simple "same-year" test under which taxpayers would be able to trace a dividend up from a lower tier to the parent - solely for purposes of Rev. Proc. 65-17 - if the cash flows up the entire chain in the same taxable year. Taxpayers could be required to have adequate documentation to support this cash movement.

Second, if this same-year test cannot be satisfied, a hierarchy should be created similar to the ordering rules of sections 956 and 959. Technically, once a dividend is paid from one tier to the next, it becomes Subpart F income for the receiving entity and is aggregated with all other Subpart F income of that receiving entity.(24) In order to account properly for the dividend from the lower-tier entity, the receiving entity's distribution to the parent would apply the following allocation ratio shown in Figure 1.

c. Offset of Section 316 Dividends in a Subsequent Year. Section 4.01(2) provides that only dividends within the meaning of section 316 "for the year for which the allocation is made' shall be allowed as an offset against any Rev. Proc. 65-17 amounts. Thus, only dividends actually paid in the year to which a section 482 adjustment relates can currently be used to offset any such adjustments. Any subsequent-year dividends, even if attributable to earnings and profits of the year to which the section 482 adjustment relates, cannot offset such adjustments.

TEI believes that both current and subsequent-year dividends should offset any Rev. Proc. 65-17 receivable amounts. The current limitation unfairly penalizes taxpayers that, for valid business reasons, do not repatriate funds from an entity on an annual basis. Removing this limitation would provide taxpayers with flexibility in their annual dividend planning, which is driven in large measure by the operating and financing needs of their companies. This recommendation is also consistent with the E&P pooling required for post-1986 tax years.

d. Withholding Taxes. If a dividend is recharacterized as a repayment of the section 482 amount, questions may arise about the treatment of any withholding taxes that have been imposed on the dividend. Section 4.01 of Rev. Proc. 65-17 provides that when a dividend is excluded from income under the procedure, such dividend shall cease to qualify as a dividend "for any Federal income tax purpose." This section continues that "no foreign tax shall be deemed to have been paid with respect thereto under section 902." Direct taxes incurred in conjunction with the original dividend are not addressed, leaving open the question of what actions the taxpayer must pursue, if any, to preserve the creditability (or deductibility) of such taxes.

Rev. Rul. 76-508 provides that a taxpayer may lose the foreign tax credit for such taxes unless the subsidiary from which the dividend has been paid "exhausts all effective and administrative remedies in seeking a refund of its foreign income tax liability and the domestic parent exhausts its rights under the competent authority procedure." Rev. Rul. 80-231(26) clarifies that "all effective and practical remedies would include requesting consideration of the matter by the United States competent authority." This compels taxpayers to pursue a costly and time-consuming procedure that may well be futile.(27)

TEI recommends that any dividend withholding taxes retain their characterization as foreign income taxes and be creditable or deductible in the year in which the dividend was originally paid; such treatment should be presumed in any competent authority proceeding. Taxpayers should be permitted to maintain the treatment originally claimed on their returns (i.e., a deduction or credit). If a credit were claimed, then taxpayers should be allowed to retain the same "basket" treatment as originally reported, subject to any audit adjustment that would have properly reclassified the original dividend itself (but for its "conversion").

VI. Other Issues

a. Reorganizations. Although Private Letter Ruling 9201034 (Oct. 9, 1991) permits Rev. Proc. 65-17 rights to carry over to a successor corporation in a "D" reorganization,(28) the treatment of potential Rev. Proc. 65-17 rights in such reorganizations has never been specifically addressed in any revenue procedure or ruling.

No policy reason exists for not allowing the successor corporation in any tax-free reorganization to succeed to the Rev. Proc. 65-17 rights of the predecessor corporation. The private ruling suggests that any such "rights" can be transferred to a successor entity in the event of a tax-free restructuring that causes the entity to which the section 482 adjustment relates to liquidate or otherwise dissolve. Any revision of Rev. Proc. 65-17 should specifically permit a carryover of the benefits of the procedure to successor entities in a reorganization.

TEI is concerned, however, that allowing for a carryforward of benefits could increase the complexity of the required calculations. For example, the successor corporation may well have Subpart F income from its own operations. Should that Subpart F income be offset by interest expense accrued on any Rev. Proc. 65-17 receivables? The recordkeeping required if taxpayers had to continually partition income earned from the reorganized assets vs. non-reorganized assets would be unwarranted. In the interest of simplicity, TEI recommends that the successor corporation be allowed to treat the Rev. Proc. 65-17 relief as if it had qualified for it directly, rather than on behalf of an entity whose assets it has inherited.

b. Rev. Proc. 65-17 Election/ Separate and Distinct. Rev. Proc. 65-17 should address how much flexibility a taxpayer has in determining which options to select, for which issues, in which amounts, and for which entities. Section 1, which defines the procedure's scope, suggests that such determinations can be made separately for each entity and for each section 482 adjustment. Section 4.03 suggests that the account receivable created "may not exceed" certain amounts. Rev. Proc. 65-31 clearly states that a "taxpayer may elect to establish an account receivable in an amount less than the maximum amount which could have been established as an account receivable."(29) Rev. Proc. 65-17 contains no such language.

The revised procedure should permit taxpayers to elect for what issues, entities, taxable years, and in what amounts, Rev. Proc. 65-17 relief is being sought. Thus, whether or not a consolidated return is filed should not have any effect on a taxpayer's ability to make a Rev. Proc. 65-17 election for a particular issue, year, or entity.

c. Subsequent Audit Adjustments. After a transfer pricing issue has been resolved, other issues may arise in a particular audit cycle that will have an effect on the calculations underlying the Rev. Proc. 65-17 adjustment. For example, the IRS may propose to increase the reported Subpart F income of a particular entity that would, if upheld, result in a greater offset of such Subpart F income against the interest expense generated by the Rev. Proc. 65-17 receivable. Such an adjustment could also reduce any deemed excess distribution amounts.

TEI recommends that these subsequent year audit adjustments and settlements be factored in to any previous Rev. Proc. 65-17 calculations. The calculations would not need to be redone, but rather the revised treatment for distributions should be recognized in any subsequent issue resolution and a correlative adjustment permitted accordingly.

d. Calculations. When relief is granted by the District Director, the calculations under Rev. Proc. 65-17 are generally made by an Appeals Officer. TEI suggests that it may be more efficient to have the initial calculations performed at the Examination level, subject to the normal Appeals and other review procedures.

VII. Conclusion

TEI believes that the IRS's effort to update Rev. Proc. 65-17 is appropriate and necessary, and we appreciate the opportunity to submit these comments. If you have any questions, please do not hesitate to contact Philip J. Bergquist, chair of TEI's International Tax Committee, at [phone] or Mary L. Fahey of the Institute's professional staff at [phone].

(1) 1965-1 C.B. 833, as amended by Rev. Proc. 65-17, Amendment 1, 1966-2 C.B. 1211, Rev. Proc. 65-17, Amendment 11, 1974-1 C.B. 411, and Rev. Proc. 96-14, 1996-3 I.R.B. 41 (Jan. 16, 1996), reprinted in 247 BNA Daily Tax Rptr. L-10 (Dec. 27, 1995) (hereinafter collectively referred to as "Rev. Proc. 65-17"). (2) See General Counsel Memorandum 38676 at 5 (Apr. 6, 1981). (3) G.C.M. 38676 at 12 ("although we recognize the differences between the overpayment and underpayment situations, we think they should be treated the same for purposes of section 482 and Rev. Proc. 65-17 because the arm's length goal of section 482 is the same in both cases."). Unfortunately, little guidance has been provided on how adjustments that decrease taxable income should be addressed. (4) G.C.M. 38676 at 6. (5) The only limitation on obtaining Rev. Proc. 65-17 relief is that a taxpayer has no tax-avoidance motive. (6) 1982-1 C.B. 89. See also G.C.M. 38676; Rev. Proc. 72-22, 1972-1 C.B. 747. (7) Rev. Proc. 96-13, 1996-3 I.R.B. 31 (JAN. 16, 1996), reprinted in 247 BNA Daily Tax Rprt.L-1 (Dec. 27, 1995). 1 Rev. Proc. 96-14, 1996-3 I.R.B. 41 (Jan. 16, 1996), reprinted in 247 BNA a Daily Taxr. L-10 (Dec. 27, 1995). (9) See Rev. Proc. 65-17, [sections] 3.02 (a U.S. taxpayer may qualify for relief only if "it is determined by the IRS that the arrangements or transactions, or the terms thereof, giving rise to the section 482 allocation did not have as one of their principal purposes the avoidance of Federal income tax"). (9) See also White Tool & Machine Co. v. Commissioner, T.C.M. 1980-443, affd, 677 F.2d 528 (6th Cir. , cert. denied, 459 U.S. 907 (1982), where the Tax Court refused to treat excessive rental payments between brother and sister corporations as a constructive dividend to the shareholders, noting that there was no direct benefit justifying such treatment. As White Tool evidences, taxpayers and the government may have legitimate disagreements concerning what constitutes "tax avoidance." (11) 1972-2 C.B. 833. (12) G.C.M. 38676 notes (at 12) that "to the extent possible all fact situations reasonably cognizable under section 482 (with the exception of the employee excess compensation cases ... ) should be brought under that section, with appropriate Rev. Proc. 65-17 relief available if warranted." (13) Under Treas. Reg. [sections] 1.482-2(a)(2)(iii), a 12-percent simple-interest calculation would be required for pre-May 9, 1986, loans. (14) Increased coordination is needed between these groups for adjustments involving entities in treaty countries. See Rev. Proc. 96-13, [sections] 10; Rev. Proc. 96-14, [sections] 3. (15) 1972-2 C.B. 829. (16) The effect of Subpart F income on the accrual of interest expense is discussed in Part III.f. (17) Rev. Proc. 65-17, [sections] 4.01. For pre-1986 tax years, some of the interest expenses will be allocated and apportioned against Subpart F income under the rules that existed at that time. For post-1986 years, a dollar-for-dollar setoff against Subpart F income should be permitted. See I.R.C. [sections] 954(b)(5). See Schering Corp. v. Commissioner, 69 T.C. 579 (1978), acq., 1981-1 C.B. 2 (result only) (Swiss withholding tax on dividend in the amount of section 482 allocation is creditable income tax). (19) 1976-2 C.B. 225 (requiring a taxpayer to reduce its foreign tax credit unless all administrative remedies are exhausted). (20) Alternatively, the credit could be allowed in the year in which the adjustment occurs; to the extent that such credit cannot be used in that year, it should be allowed in the year of the payment. (21) Use of the gross amount as the offset will also avoid the circular calculations that would be required to compute the net amount. (22) 1970-2 C.B. 505. (23) 1971-2 C.B. 573. (24) This assumes that an exception to Subpart F income inclusion does not apply. (25) If the receiving entity does not have any Subpart F income, this formula could also be used to calculate the amount of the E&P inclusion. (26) 1980-2 C.B. 219. (27) Because many current U.S. treaties provide that local law will determine what constitutes a dividend, a foreign competent authority may be less likely to waive withholding tax on the Rev. Proc. 65-17 amount. The ruling states: "In the future, if the income of Parent, or any corporation directly or indirectly owned by Parent, is increased by the Internal Revenue Service under section 482 of the Code because of an allocation of income from F-2 [the liquidated company], then for purposes of applying the provisions of Rev. Proc. 65-17,... F-1 [the surviving company] will be the successor in interest to F-2 with respect to any account receivable established in accordance with section 4.02 of Rev. Proc. 65-17." Rev. Proc. 65-31, [sections] 4.05, 1965-2 C.B. 1024, 1037.