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This question relates to paras. (a) and (c) of Art. 4.2.1, which defines “Covered Taxes”. The other paragraphs in Art. 4.2.1 are irrelevant, and the exclusions in Art. 4.2.2 do not apply.

Para. (a) can be immediately eliminated: even if the USD 50 million is a “tax” (see below), it is not “with respect to its income or profits …”.

Para. (c) applies to “Taxes imposed in lieu of a generally applicable corporate income tax”.

First issue: is the USD 50 million a “tax”?

Art. 10.1.1: “Tax means a compulsory unrequited payment to General Government.”

The confirmation of the concession contract in legislation enacted by jurisdiction A possibly causes the USD 50 million to be “compulsory”. The concession contract, without such legislation, might not satisfy the “compulsory” (cf. contractual) condition.

Assuming it is compulsory, is the payment “unrequited”? Para. 24 of Comm to Art. 4.2.1: “Taxes are unrequited in the sense that any benefits provided by government to the taxpayer are not in proportion to their payments. Thus, fees and payments for privileges, services, property, or other benefits provided by government do not qualify as Taxes.”

In return for the USD 50 million payment, ACo receives 2 benefits from the government: (1) the granting of the concession (i.e., to operate the port) for 50 years; and (2) a corporate income tax holiday for 5 years. The proportion of the payment which is allocable to (1) would not be “unrequited”. However, it is possible that the proportion of the payment which is allocable to (2) could be considered to be “unrequited” – on the basis that the term, “benefits”, in para. 24 should not cover reduced or zero corporate income tax payments, because otherwise the “in lieu of” limb in Art. 4.2.1(c) would have no operation.

Second issue: is the USD 50 million payment “in lieu of a generally applicable corporate income tax”?

The proportion of the payment which is allocable to (1) would not satisfy this second issue.

However, the proportion of the payment which is allocable to (2) would possibly do so. Para. 31 of Comm to Art. 4.2.1: “The ‘in lieu of’ test includes Taxes that are not described in the generally applicable income tax definition but which operate as substitutes for such taxes. … The ‘in lieu of’ concept also covers Taxes that are imposed on an alternative basis (i.e. other than net income) …”

The proportion of the payment allocable to (2) is, arguably, a substitute for the generally applicable corporate income tax, and it is imposed on an alternative basis.

Final answer: (assuming an independent valuation identifies the proportion of the payment which is allocable to each of (1) and (2)): the proportion allocable to (2) would possibly qualify under Art. 4.2.1(c) (but it is an aggressive argument), but the proportion allocable to (1) would not.

Do you agree?