In Year One, XYZ Manufacturing Corporation (XYZ), a U.S. corporation, receives $1,000,000 of interest income from a borrower who is resident in Country H, a foreign country. Country H has an income tax law that imposes a tax of 30% ($300,000) on the gross amount of such interest income and requires Country H debtors to collect the tax through withholding. However, a tax treaty between Country H and the United States provides that Country H may not tax interest received by a U.S. resident at a rate in excess of 5%. A U.S. resident may claim the benefit of the treaty only by applying for a refund of the excess withheld amount (25% of the gross amount of interest income) after the end of the tax year. XYZ does not file a timely claim for refund of the $250,000 excess withheld amount.

(a) To what extent is the Country H tax paid by XYZ creditable?

(b) How would the result in part (a) differ if it is not clear whether XYZ is eligible for the treaty reduction because under the loan agreement the amount of XYZs interest income is, in part, contingent on the Country H borrowers net profits for the year and the Country H treaty provision on interest income does not apply to certain types of contingent interest?