Deloitte Proposes Approach to Adjust Partnership's Withholding Obligations

[1] We are writing on behalf of our client, P.M.I. Norteamérica S.A. de C.V. ("Norteamérica"), a Mexican corporation which is ultimately owned by Petróleos Mexicanos (Mexico's state oil and gas company a.k.a. "PEMEX")) to request permission to testify at the December 4, 2003 hearing on the proposed section 1446 regulations (REG-108524-00). In response to Treasury and the IRS's request for comments regarding alternative approaches for adjusting the withholding tax obligation under section 1446 ("1446 tax") to more closely approximate a foreign partner's actual tax liability, we will propose an approach that achieves this objective in cases where a foreign partner has an NOL carryover that will reduce or eliminate its U.S. tax liability with respect to its distributive share of effectively connected income of the partnership.

[2] Below is a summary of the approach we will propose. We intend to provide a more detailed description of our proposal in a separate submission.

[4] On the other hand, it is apparent that Congress was not concerned with foreign investors in U.S. partnerships, such as our client, Norteamérica. Norteamérica has substantial and continuous investments in fixed U.S. business assets, both in partnership form and otherwise, and has a history of meeting its U.S. tax obligations. Specifically, Norteamérica, is a 50-percent limited partner in the Deer Park Refining Limited Partnership, a Delaware limited partnership ("the Partnership"). Shell Oil Company is the 50-percent general partner. The Partnership was organized for the purpose of operating the fuels refinery portion of a 1,600 acre, fully-integrated refinery and petrochemical facility located in Deer Park, Texas. The Partnership has more than $1 billion in assets located in the United States, and employs approximately 1000 people. Norteamérica has treated its distributive share of the income (loss) generated by the partnership as attributable to a U.S. permanent establishment and has filed a Form 1120F properly reflecting that income.

[5] In addition to its investment in the Partnership, Norteamérica directly conducts substantial activities in the United States. These activities consist of supplying feedstocks for the refinery and the sale of the refined products within the U.S. and exports to Mexico and through which Norteamérica employs more than 10 people. Norteamérica has treated the income (loss) generated from these activities as also attributable to a U.S. permanent establishment and has reflected that income (loss) on its Form 1120F.

[6] Norteamérica's interest in the Partnership, as well as the U.S. activities it conducts directly, clearly represent a substantial and continuing investment in the United States, and present no question that Norteamérica will be present to meet its tax obligations as they come due. In recent years, however, the Partnership has paid a 1446 tax on effectively connected income generated by the Partnership, even though Norteamérica has had an NOL carryover that far exceeds of its distributive share of that income. Upon the filing of its Form 1120F, Norteamérica obtained a refund of substantially all the 1446 tax paid.

[7] Norteamérica believes that the congressional intent underlying section 1446 may still be effected by permitting, in certain circumstances, a partnership to take into account the NOL carryover of a foreign partner in computing the partner's distributive share of effectively connected income. These circumstances would be based on the following five requirements: