39-22-303(10) Foreign Source Income. Basis and Purpose. The bases for this rule are sections 39-21-112(1), 39-22-103(5.3),

39-22-103(11), 39-22-303, 39-22-303.6, 39-22-304, and 39-22-305, C.R.S. The purpose of this rule is to provide guidance regarding the definition of foreign source income in section 39-22-303(10), C.R.S., the calculation of the amount of foreign source income considered in the apportionment and allocation of a C corporation’s net income, and the requirement to report any changes to that amount. (1) General Rule. In apportioning and allocating income, a C corporation’s foreign source income shall be considered only to the extent provided in section 39-22- 303(10), C.R.S., and this rule. In the case of a combined return filed pursuant to section 39-22-303(11), C.R.S., a consolidated return filed pursuant to section 39- 22-305, C.R.S., or a combined-consolidated return filed pursuant to sections 39- 22-303(11) and -305, C.R.S., the foreign source income exclusion shall be calculated with respect to only the C corporations that are included in such combined, consolidated, or combined-consolidated return and based upon the foreign tax credit or deduction determined with respect to only the group of C corporations included in that combined, consolidated, or combined-consolidated Colorado return. In the case of a separate return filed by a single C corporation, the foreign source income exclusion shall be calculated with respect to only that C corporation and based upon the foreign tax credit or deduction determined with respect to only that C corporation. (2) Foreign Source Income. For the purpose of this rule, unless context otherwise requires, “foreign source income” means taxable income from sources without the United States, as used in section 862 of the Internal Revenue Code, and includes any taxable income from sources without the United States considered in the calculation of the limit on the federal foreign tax credit pursuant to section 904(a) of the Internal Revenue Code. In accordance with section 862(b) of the Internal Revenue Code, there shall be deducted from gross income from sources without the United States any expenses, losses, and other deductions properly apportioned or allocated thereto, including any deduction allowed pursuant to section 250 of the Internal Revenue Code, and a ratable part of any other expenses, losses, or deductions that cannot be allocated to some item or class of gross income. “Gross income from sources without the United States” includes, but is not limited to: (a) the types of income enumerated in section 862(a) of the Internal Revenue Code; (b) income allocated to sources without the United States pursuant to section 863 of the Internal Revenue Code; (c) amounts included in a C corporation’s federal taxable income pursuant to section 951 or 951A of the Internal Revenue Code; (d) the amount treated as a dividend received by the C corporation pursuant to section 78 of the Internal Revenue Code; and (e) any item of income treated as arising from sources outside of the United States under treaty obligation of the United States as described in section 245(a)(10), 904(d)(6), or 904(h)(10) of the Internal Revenue Code. (3) Federal Deduction for Foreign Tax. If, for federal income tax purposes, a C corporation has elected to claim foreign taxes paid or accrued as a deduction, the portion of the C corporation’s foreign source income to be subtracted in apportioning and allocating the C corporation’s income shall be determined pursuant to section 39-22-303(10), C.R.S., and this paragraph (3). The amount of the deduction allowed pursuant to section 164(a)(3) of the Internal Revenue Code for foreign income taxes paid or accrued shall be subtracted from: (a) the C corporation’s net income determined pursuant to section 39 22 304(1), C.R.S., to the extent that such foreign taxes: (i) were added to the C corporation’s federal taxable income pursuant to section 39-22-304(2)(a); and (ii) do not exceed the foreign source income otherwise included in the C corporation’s federal taxable income upon which such foreign taxes were paid or accrued; and (b) the total receipts of the C corporation in the calculation of the denominator described in section 39-22-303.6(4)(a), C.R.S., to the extent that such foreign taxes do not exceed the foreign source income, otherwise included in the denominator, upon which such foreign taxes were paid or accrued. (4) Federal Credit for Foreign Tax. (a) If, for federal income tax purposes, a C corporation has elected to claim foreign taxes as a credit, the portion of the C corporation’s foreign source income to be excluded in apportioning and allocating the C corporation’s income shall be determined pursuant to section 39-22-303(10), C.R.S., and this paragraph (4). (b) Separate Calculation of Exclusion with Respect to Certain Categories of Income. In accordance with section 39-22-103(11), C.R.S., the amount that shall be excluded pursuant to section 39-22-303(10)(b), C.R.S., and paragraph (4) of this rule shall be calculated separately with respect to each category of income for which separate calculation of the foreign tax credit is required pursuant to section 245(a)(10), 865(h), 901(j), 904(d), 904(d)(6), or 904(h)(10) of the Internal Revenue Code. The sum of such separately calculated amounts shall be excluded from federal taxable income and total receipts as prescribed by section 39-22-303(10), C.R.S., and this paragraph (4). (c) Coordination with Sections 39-22-303(8)(b) and 39-22-304(3)(q), C.R.S. (i) For the purpose of this paragraph (4)(c), a “section 303(8)(b) included entity” means a business entity that is included in a combined or combined-consolidated return pursuant to section 39- 22-303(8)(b), C.R.S. (ii) In the case of a combined or combined-consolidated return that includes a section 303(8)(b) included entity, the application of section 39-22-303(10), C.R.S., and this rule to that return shall be made as follows: (A) for the purpose of section 39-22-303(10)(b), C.R.S., and this paragraph (4), the federal taxable income of the section 303(8)(b) included entity shall be determined in accordance with sections 39-22-304(1)(b) and 39-22-303(10)(c), C.R.S.; (B) for the purpose of section 39-22-303(10)(b), C.R.S., and paragraph (4)(e)(i)(A) of this rule, the foreign taxes paid or accrued by the section 303(8)(b) included entity shall be determined under the applicable provision of the Internal Revenue Code as if that C corporation was a domestic corporation, as defined in section 7701(a)(3) and (4) of the Internal Revenue Code; (C) any amount that is subtracted from federal taxable income on the combined or combined-consolidated return pursuant to section 39-22-304(3)(q), C.R.S., shall be disregarded in the determination of both foreign source income, for the purpose of section 39-22-303(10), C.R.S, and paragraphs (2) and (4) of this rule, and federal taxable income, for the purpose of section 39-22-303(10)(b), C.R.S., and paragraph (4) of this rule; and (D) any foreign tax deemed paid pursuant to section 960 of the Internal Revenue Code by a U.S. shareholder of a section 303(8)(b) included entity, on any amount included in federal taxable income pursuant to section 951(a) or 951A(a) of the Internal Revenue Code and subtracted pursuant to 39-22- 304(3)(q), C.R.S., shall be disregarded for the purpose of section 39-22-303(10)(b), C.R.S., and paragraph (4)(e)(i)(B) of this rule. (d) The portion of the C corporation’s foreign source income, determined pursuant to this paragraph (4), shall be excluded, subject to the limit prescribed in paragraph (4)(g) of this rule, from: (i) the C corporation’s net income determined pursuant to section 39 22 304(1), C.R.S., to the extent such foreign source income is otherwise included in the C corporation’s net income; and (ii) the total receipts of the C corporation in the calculation of the denominator described in section 39 22 303.6(4)(a), C.R.S., to the extent such foreign source income is otherwise includible in total receipts. See section 39-22-303.6(4)(b), C.R.S., regarding the exclusion of foreign source income from the numerator described in section 39 22 303.6(4)(a), C.R.S. (e) The portion of a C corporation’s foreign source income that shall be excluded pursuant to paragraph (4)(d) of this rule shall be determined by first deducting from foreign source income any amount subtracted from federal taxable income pursuant to section 39-22-304(3)(j), C.R.S., and multiplying the remaining foreign source income by a fraction calculated pursuant to this paragraph (4)(e). (i) The numerator of the fraction shall be the total of any income taxes, subject to the limitation imposed by section 904(a) of the Internal Revenue Code and any other sections of the Internal Revenue Code imposing limitations on the amount of the federal foreign tax credit allowed, that are: (A) paid or accrued to foreign countries and United States possessions during the tax year by the C corporation pursuant to section 901 of the Internal Revenue Code; (B) deemed paid pursuant to section 960 of the Internal Revenue Code for the tax year; and (C) carried over or carried back to such tax year pursuant to section 904(c) of the Internal Revenue Code. (ii) The denominator of the fraction shall be determined by multiplying: (A) the C corporation’s effective federal corporate income tax rate, as computed pursuant to section 39-22-303(10)(b)(III), C.R.S., and paragraph (4)(f) of this rule, by: (B) the C corporation’s foreign source income without first deducting from such foreign source income any amount subtracted from federal taxable income pursuant to section 39-22-304(3)(j), C.R.S. (f) Effective Federal Corporate Income Tax Rate. For purposes of paragraph (4)(e)(ii)(A) of this rule, a C corporation’s effective federal corporate income tax rate is a fraction. (i) The numerator of the fraction is the C corporation’s federal corporate income tax calculated in accordance with section 11(a) and (b) of the Internal Revenue Code, without regard to any credits against tax allowed or claimed by the C corporation. (ii) The denominator of the fraction is the C corporation’s federal taxable income as determined pursuant to section 63 of the Internal Revenue Code. (g) The amount that shall be excluded from net income pursuant to paragraph (4)(d)(i) of this rule and from total receipts pursuant to paragraph (4)(d)(ii) of this rule shall be limited to the foreign source income otherwise included in net income or total receipts, respectively. (h) The amount excluded pursuant to section 39-22-303(10)(b)(III), C.R.S., and paragraph (4) of this rule is the sum of the exclusion amounts calculated separately for each income category described in paragraph (4)(b) of this rule. The calculation of the exclusion amount for each income category pursuant to section 39-22-303(10)(b)(III), C.R.S., and paragraphs (4)(e) and (4)(f) of this rule is represented by the formula in paragraph (4)(h)(i) of this rule with the terms therein defined in paragraph (4)(h)(ii): (i) Separate Income Category Exclusion = (FSI net § 78) X (FT / (Fed. Rate X FSI)) (ii) As used in the formula presented in paragraph (4)(h)(i): (A) “Separate Income Category Exclusion” means the amount of foreign source income in the separate income category to be excluded and determined pursuant to paragraph (4)(e) of this rule; (B) “FSI net § 78” means foreign source income, as defined in section 39-22-303(10), C.R.S., and paragraph (2) of this rule, in the separate income category, minus the amount treated as a dividend received by the C corporation with respect to such separate category income pursuant to section 78 of the Internal Revenue Code and subtracted from federal taxable income pursuant to section 39-22- 304(3)(j), C.R.S., as described in paragraph (4)(e) of this rule; (C) “FT” means the amount of foreign income taxes with respect to the separate income category determined pursuant to paragraph (4)(e)(i) of this rule and the applicable provisions of the Internal Revenue Code; (D) “Fed. Rate” means the effective federal corporate income tax rate determined pursuant to paragraphs (4)(e)(ii)(A) and (4)(f) of this rule; and (E) “FSI” means foreign source income in the separate income category, as defined in section 39-22-303(10), C.R.S., and paragraph (2) of this rule, as described in paragraph (4)(e)(ii)(B) of this rule. (i) In any case in which the amount of foreign source income excluded on the C corporation’s Colorado return was not properly calculated, as the result of an error in the original calculation, adjustments made in the accounting of the C corporation’s foreign source income, or for any other reason, the C corporation shall file an amended return reflecting the corrected calculation of the amount excluded. (j) Redetermination Under Section 905(c) of the Internal Revenue Code. (i) If a redetermination of federal tax is made or required pursuant to section 905(c) of the Internal Revenue Code for a C corporation that excluded any foreign source income pursuant to section 39-22- 303(10)(b), C.R.S., and paragraph (4) of this rule in the calculation of its Colorado income tax, that C corporation shall file an amended Colorado return to report any change to the amount of the foreign source income exclusion resulting from any adjustment to the amount of the federal foreign tax credit. (ii) Pursuant to section 39-21-107(2), C.R.S., and section 6501(c)(5) of the Internal Revenue Code, any additional Colorado income tax due as the direct result of a redetermination of federal tax pursuant to section 905(c) of the Internal Revenue Code and a corresponding adjustment to the C corporation’s foreign source income exclusion may be assessed and collected at any time, without regard to the provisions of section 6501(a) of the Internal Revenue Code (relating to limitations on assessment and collection). A C corporation may claim a credit or refund in the time provided by section 39-21-108(1), C.R.S., and section 6511(d)(3) of the Internal Revenue Code for any overpayment of Colorado income tax resulting directly from a redetermination of federal tax pursuant to section 905(c) of the Internal Revenue Code and a corresponding adjustment to the C corporation’s foreign source income exclusion. This paragraph (4)(j)(ii) shall not apply to any increase or decrease in Colorado income tax that does not result directly from a redetermination of federal tax pursuant to section 905(c) of the Internal Revenue Code and a corresponding adjustment to the C corporation’s foreign source income exclusion.