H. Rept. 113-428 - 113th Congress (2013-2014)

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House Report 113-428 - PERMANENT CFC LOOK-THROUGH ACT OF 2014

[House Report 113-428]
[From the U.S. Government Publishing Office]


113th Congress  }                                           {    Report
                        HOUSE OF REPRESENTATIVES
 2d Session     }                                           {   113-428

======================================================================
 
                 PERMANENT CFC LOOK-THROUGH ACT OF 2014

                                _______
                                

  May 2, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Camp, from the Committee on Ways and Means, submitted the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 4464]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 4464) to amend the Internal Revenue Code of 1986 to 
make permanent the look-through treatment of payments between 
related controlled foreign corporations, having considered the 
same, report favorably thereon with an amendment and recommend 
that the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. SUMMARY AND BACKGROUND...........................................2
          A. Purpose and Summary.................................     2
          B. Background and Need for Legislation.................     2
          C. Legislative History.................................     2
 II. EXPLANATION OF THE BILL..........................................3
          A. Look-Through Treatment of Payments Between Related 
              Controlled Foreign Corporations Under Foreign 
              Personal Holding Company Rules (sec. 954(c)(6) of 
              the Code)..........................................     3
III. VOTES OF THE COMMITTEE...........................................5
 IV. BUDGET EFFECTS OF THE BILL.......................................6
          A. Committee Estimate of Budgetary Effects.............     6
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................     6
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................     6
          D. Macroeconomic Impact Analysis.......................     7
  V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......7
          A. Committee Oversight Findings and Recommendations....     7
          B. Statement of General Performance Goals and 
              Objectives.........................................     7
          C. Information Relating to Unfunded Mandates...........     8
          D. Applicability of House Rule XXI 5(b)................     8
          E. Tax Complexity Analysis.............................     8
          F. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................     8
          G. Duplication of Federal Programs.....................     8
          H. Disclosure of Directed Rule Makings.................     9
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............9
VII. DISSENTING VIEWS................................................11

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Permanent CFC Look-Through Act of 
2014''.

SEC. 2. LOOK-THROUGH TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED 
                    FOREIGN CORPORATIONS MADE PERMANENT.

  (a) In General.--Paragraph (6) of section 954(c) of the Internal 
Revenue Code of 1986 is amended by striking subparagraph (C).
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2013, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    Identical to a provision contained in the discussion draft 
of the ``Tax Reform Act of 2014'' released on February 26, 
2014, the bill, H.R. 4464, reported by the Committee on Ways 
and Means, provides permanent look-through treatment of 
payments between related controlled foreign corporations. Under 
current law, the temporary look-through treatment of payments 
between related controlled foreign corporations expired for 
taxable years beginning after December 31, 2013.

                 B. Background and Need for Legislation

    While the Committee continues actively to pursue 
comprehensive tax reform as a critical means of promoting 
economic growth and job creation, the Committee also believes 
that it is important to provide permanent, immediate tax relief 
to worldwide American companies to help encourage economic 
growth and job creation. By allowing worldwide American 
companies to deploy capital from one foreign subsidiary to 
another foreign subsidiary in a tax-efficient manner, H.R. 4464 
will enable American employers to be competitive against 
foreign multinational corporations that are not subject to an 
onerous worldwide tax system.

                         C. Legislative History


                               BACKGROUND

    H.R. 4464 was introduced on April 10, 2014, and was 
referred to the Committee on Ways and Means.

                            COMMITTEE ACTION

    The Committee on Ways and Means marked up H.R. 4464, the 
Permanent CFC Look-Through Act of 2014, on April 29, 2014, and 
ordered the bill, as amended, favorably reported (with a quorum 
being present).

                           COMMITTEE HEARINGS

    The need for permanent look-through treatment of payments 
between related controlled foreign corporations was discussed 
at no fewer than five hearings during the 112th and 113th 
Congresses:
            Full Committee hearing on Fundamental Tax 
        Reform (January 20, 2011);
            Full Committee hearing on The Need for 
        Comprehensive Tax Reform to Help American Companies 
        Compete in the Global Market and Create Jobs for 
        American Workers (May 12, 2011);
            Select Revenue Measures Subcommittee 
        hearing on Ways and Means International Tax Reform 
        Discussion Draft (November 17, 2011);
            Full Committee hearing on Tax Havens, Base 
        Erosion and Profit-Shifting (June 13, 2013); and
            Full Committee hearing on the Benefits of 
        Permanent Tax Policy for America's Job Creators (April 
        8, 2014).

                      II. EXPLANATION OF THE BILL


   A. Look-Through Treatment of Payments Between Related Controlled 
Foreign Corporations Under Foreign Personal Holding Company Rules (sec. 
                         954(c)(6) of the Code)


                              PRESENT LAW

In general

    The rules of subpart F\1\ require U.S. shareholders with a 
10-percent or greater interest in a controlled foreign 
corporation (``CFC'') to include certain income of the CFC 
(referred to as ``subpart F income'') on a current basis for 
U.S. tax purposes, regardless of whether the income is 
distributed to the shareholders.
---------------------------------------------------------------------------
    \1\Secs. 951-965.
---------------------------------------------------------------------------
    Subpart F income includes foreign base company income. One 
category of foreign base company income is foreign personal 
holding company income. For subpart F purposes, foreign 
personal holding company income generally includes dividends, 
interest, rents, and royalties, among other types of income. 
There are several exceptions to these rules. For example, 
foreign personal holding company income does not include 
dividends and interest received by a CFC from a related 
corporation organized and operating in the same foreign country 
in which the CFC is organized, or rents and royalties received 
by a CFC from a related corporation for the use of property 
within the country in which the CFC is organized. Interest, 
rent, and royalty payments do not qualify for this exclusion to 
the extent that such payments reduce the subpart F income of 
the payor. In addition, subpart F income of a CFC does not 
include any item of income from sources within the United 
States that is effectively connected with the conduct by such 
CFC of a trade or business within the United States (``ECI'') 
unless such item is exempt from taxation (or is subject to a 
reduced rate of tax) pursuant to a tax treaty.

The ``look-thru rule''

    Under the ``look-thru rule,''\2\ dividends, interest 
(including factoring income that is treated as equivalent to 
interest under section 954(c)(1)(E)), rents, and royalties 
received or accrued by one CFC from a related CFC are not 
treated as foreign personal holding company income to the 
extent attributable or properly allocable to income of the 
payor that is neither subpart F income nor treated as ECI. For 
this purpose, a related CFC is a CFC that controls or is 
controlled by the other CFC, or a CFC that is controlled by the 
same person or persons that control the other CFC. Ownership of 
more than 50 percent of the CFC's stock (by vote or value) 
constitutes control for these purposes.
---------------------------------------------------------------------------
    \2\Sec. 954(c)(6).
---------------------------------------------------------------------------
    The Secretary is authorized to prescribe regulations that 
are necessary or appropriate to carry out the look-thru rule, 
including such regulations as are necessary or appropriate to 
prevent the abuse of the purposes of such rule.
    The look-thru rule applies to taxable years of foreign 
corporations beginning after December 31, 2005 and before 
January 1, 2014, and to taxable years of U.S. shareholders with 
or within which such taxable years of foreign corporations end.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to make 
permanent the look-thru rule to provide certainty for 
businesses and to help U.S. companies with overseas operations 
compete more effectively with foreign firms.

                        EXPLANATION OF PROVISION

    The proposal makes the application of the look-thru rule 
permanent.

                             EFFECTIVE DATE

    The proposal is effective for taxable years of foreign 
corporations beginning after December 31, 2013, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 4464, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal budget receipts for fiscal years 2014-2024.

                                                  Fiscal Years
                                              [Billions of Dollars]
----------------------------------------------------------------------------------------------------------------
  2014     2015     2016     2017     2018     2019    2020    2021    2022    2023    2024    2014-19   2014-24
----------------------------------------------------------------------------------------------------------------
   -0.8     -1.3     -1.4     -1.5     -1.7     -1.8    -1.9    -2.1    -2.4    -2.6    -2.9      -8.4    -20.3
----------------------------------------------------------------------------------------------------------------
fNOTE: Details do not add to totals due to rounding.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue-reducing tax 
provisions involve increased tax expenditures. (See amounts in 
table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 1, 2014.
Hon. Dave Camp,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4464, the 
Permanent CFC Look-Through Act of 2014.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Logan 
Timmerhoff.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 4464--Permanent CFC Look-Through Act of 2014

    H.R. 4464 would amend the Internal Revenue Code to make 
permanent the ``look-through rule'' that applied to the taxable 
years of foreign corporations beginning after December 31, 2005 
and before January 1, 2014. This treatment would be permanently 
effective for taxable years beginning after December 31, 2013. 
The ``look-through rule'' determines the tax treatment of 
payments between related controlled foreign corporations (CFCs) 
under foreign personal holding company rules. Under this rule, 
dividends, interest, rents, and royalties received or accrued 
by one CFC from a related CFC are not treated as foreign 
personal holding company income for tax purposes if they meet 
certain characteristics.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 4464 would reduce revenues, thus 
increasing federal deficits, by about $20 billion over the 
2014-2024 period.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting 
direct spending and revenues. Enacting H.R. 4464 would result 
in revenue losses in each year beginning in 2014. The estimated 
increases in the deficit are shown in the following table.
    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Logan 
Timmerhoff. The estimate was approved by David Weiner, 
Assistant Director for Tax Analysis.

           CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4464, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON APRIL 29, 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              By fiscal year, in millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                             2014    2015    2016    2017    2018    2019    2020    2021    2022    2023    2024   2014-2019  2014-2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects...........     808   1,254   1,388   1,527   1,666   1,792   1,934   2,137   2,381   2,589   2,856     8,434    20,331
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not sum to totals because of rounding.

                    D. Macroeconomic Impact Analysis

    In compliance with clause 3(h)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made by the Joint Committee on Taxation with respect to the 
provisions of the bill amending the Internal Revenue Code of 
1986: the effects of the bill on economic activity are so small 
as to be incalculable within the context of a model of the 
aggregate economy.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was as a result of the 
Committee's review of the provisions of H.R. 4464 that the 
Committee concluded that it is appropriate to report the bill, 
as amended, favorably to the House of Representatives with the 
recommendation that the bill do pass.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                D. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``A bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase may not be considered as passed or agreed to 
unless so determined by a vote of not less than three-fifths of 
the Members voting, a quorum being present.'' The Committee has 
carefully reviewed the bill, and states that the bill does not 
involve any Federal income tax rate increases within the 
meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code and has widespread applicability to 
individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the IRS Reform Act because 
the bill contains no provisions that amend the Code and that 
have ``widespread applicability'' to individuals or small 
businesses, within the meaning of the rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill, and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   G. Duplication of Federal Programs

    In compliance with Sec. 3(j)(2) of H. Res. 5 (113th 
Congress), the Committee states that no provision of the bill 
establishes or reauthorizes: (1) a program of the Federal 
Government known to be duplicative of another Federal program, 
(2) a program included in any report from the Government 
Accountability Office to Congress pursuant to section 21 of 
Public Law 111-139, or (3) a program related to a program 
identified in the most recent Catalog of Federal Domestic 
Assistance, published pursuant to the Federal Program 
Information Act (Public Law 95-220, as amended by Public Law 
98-169).

                 H. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(k) of H. Res. 5 (113th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *



Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


 Subchapter N--Tax Based on Income From Sources Within or Without the 
United States

           *       *       *       *       *       *       *


PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *



Subpart F--Controlled Foreign Corporations

           *       *       *       *       *       *       *



SEC. 954. FOREIGN BASE COMPANY INCOME.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Foreign Personal Holding Company Income.--
          (1) * * *

           *       *       *       *       *       *       *

          (6) Look-thru rule for related controlled foreign 
        corporations.--
                  (A) * * *

           *       *       *       *       *       *       *

                  [(C) Application.--Subparagraph (A) shall 
                apply to taxable years of foreign corporations 
                beginning after December 31, 2005, and before 
                January 1, 2014, and to taxable years of United 
                States shareholders with or within which such 
                taxable years of foreign corporations end.]

           *       *       *       *       *       *       *


                         VII. DISSENTING VIEWS

    These bills would add a combined $310 billion to the 
deficit. Even though these bills were introduced individually 
with some bipartisan support, the opposition to these bills was 
based on the position that these tax provisions should not be 
made permanent by adding to the deficit without any revenue 
offset.
    To put the combined cost ($310 billion) into context, this 
total represents more than one-half of the entire federal 
deficit this year--the lowest it has been since President Obama 
took office. It represents nearly two-thirds of all non-defense 
domestic discretionary spending in 2014. It is more than three 
times what we spend annually on education, job training, and 
social services. It is five times more than we spend on 
veterans. And, it is five times more than we spend on medical 
research and public health.
    We also opposed the manner in which Republicans were 
proceeding--selecting six to make permanent without any offset 
from the approximately 60 tax provisions that expired last 
year. This approach was both fiscally irresponsible and 
fundamentally hypocritical.
    We found it hypocritical that, four months ago, Republicans 
let emergency unemployment insurance expire for more than 1.3 
million Americans by arguing that an adequate offset had yet to 
be proposed. In early April, the Senate came to a bipartisan 
agreement on an offset after months of painstaking 
negotiations. Yet House Republicans still refuse to act.
    Further, we found it also hypocritical that the Republicans 
were in favor of passing these six tax bills at a cost of $310 
billion without an offset at the same time that they were 
requiring an offset for a provision stripped from another bill 
under consideration at the markup that helped foster children 
at a cost of $12 million.
    The consideration of these six tax bills should have been 
part of the consideration of all the expired tax provisions 
commonly referred to as ``tax extenders.'' The Republicans did 
not take up other tax extenders that also are important to 
Democratic Committee Members. Left to an uncertain fate are 
provisions like the Work Opportunity Tax Credit, the New 
Markets Tax Credit, and the renewable energy tax credits, as 
well as the long-term status of the Earned Income Tax Credit, 
the Child Tax Credit, and the American Opportunity Tax Credit.
            Sincerely,
                                           Sander M. Levin,
                                                    Ranking Member.