PCO, a Pennsylvania company, borrows money from First National Bank, a local bank, but a condition for the loan is that FCO, a foreign company affiliated with PCO, guarantees PCO's loan from First National Bank. PCO pays FCO a $50,000 guarantee fee. In the absence of any tax treaty, the U.S. income tax consequence with respect to PCO's guarantee fee paid to FCO will be as follows:

Group of answer choices

It will be taxed at net rates as effectively connected income.

 

It will be exempt as a fee for services rendered outside of the United States.

 

It will be exempt under the portfolio interest exemption.

 

It will be taxed at a flat 30% rate.

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