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114th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 114-309
======================================================================
PERMANENT CFC LOOK-THROUGH ACT OF 2015
_______
October 23, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted
the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 1430]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 1430) 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 Income Rules (sec.
954(c)(6) of the Code)............................. 3
III. VOTES OF THE COMMITTEE...........................................4
IV. BUDGET EFFECTS OF THE BILL.......................................5
A. Committee Estimate of Budgetary Effects............. 5
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 7
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 7
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......8
A. Committee Oversight Findings and Recommendations.... 8
B. Statement of General Performance Goals and
Objectives......................................... 8
C. Information Relating to Unfunded Mandates........... 8
D. Applicability of House Rule XXI 5(b)................ 9
E. Tax Complexity Analysis............................. 9
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 9
G. Duplication of Federal Programs..................... 9
H. Disclosure of Directed Rule Makings................. 9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........10
A. Text of Existing Law Amended or Repealed by the
Bill, as Reported.................................. 10
B. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 24
VII. DISSENTING VIEWS................................................39
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
2015''.
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,
2014, 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
H.R. 1430, 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, 2014.
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. 1430
will enable American companies to be competitive against
foreign multinational corporations that are not subject to an
onerous worldwide tax system.
C. Legislative History
Background
H.R. 1430 was introduced on March 18, 2015, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 1430, the
``Permanent CFC Look-Through Act of 2015,'' on September 17,
2015, 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 six hearings during the 112th, 113th and 114th
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);
Full Committee hearing on the Benefits of
Permanent Tax Policy for America's Job Creators (April
8, 2014); and
Select Revenue Measures Subcommittee Hearing
on Repatriation of Foreign Earnings as a Source of
Funding for the Highway Trust Fund (June 24, 2015).
II. EXPLANATION OF THE BILL
A. Look-Through Treatment of Payments Between Related Controlled
Foreign Corporations Under Foreign Personal Holding Company Income
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. 951-964.
---------------------------------------------------------------------------
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-through rule''
Under the ``look-through 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-through
rule, including such regulations as are necessary or
appropriate to prevent the abuse of the purposes of such rule.
The look-through rule applies to taxable years of foreign
corporations beginning after December 31, 2005 and before
January 1, 2015, 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-through rule to provide certainty and to
facilitate business planning.
EXPLANATION OF PROVISION
The provision makes the application of the look-through
rule permanent.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2014, and for taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 1430, the ``Permanent CFC Look-Through
Act of 2015,'' on September 17, 2015.
The Chairman's amendment in the nature of a substitute was
adopted by a voice vote (with a quorum being present).
The bill H.R. 1430 was ordered favorably reported as
amended to the House of Representatives by a roll call vote of
22 yeas to 11 nays (with a quorum being present). The vote was
as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan....................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Brady...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Becerra...... ........ ........ .........
Mr. Boustany................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ ........ .........
Mr. Price...................... X ........ ......... Mr. Larson....... ........ ........ .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Marchant................... ........ ........ ......... Mr. Davis........ ........ X .........
Ms. Black...................... X ........ ......... Ms. Sanchez...... ........ ........ .........
Mr. Reed....................... X ........ .........
Mr. Young...................... X ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... ........ ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Dold....................... X ........ .........
----------------------------------------------------------------------------------------------------------------
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. 1430, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2016-2025:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal years, in millions of dollars--
---------------------------------------------------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-20 2016-25
--------------------------------------------------------------------------------------------------------------------------------------------------------
-2,296 -1,527 -1,666 -1,792 -1,934 -2,217 -2,238 -2,489 -2,693 -2,935 -9,214 -21,785
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Details do not add to totals due to rounding.
Pursuant to clause 8 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 gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
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, September 22, 2015.
Hon. Paul Ryan,
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. 1430, the
Permanent CFC Look-Through Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Peter
Huether.
Sincerely,
Keith Hall.
Enclosure.
H.R. 1430--Permanent CFC Look-Through Act of 2015
H.R. 1430 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, 2015. This treatment would be permanently
effective for taxable years beginning after December 31, 2014.
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. 1430 would reduce revenues, thus
increasing federal deficits, by about $21.8 billion over the
2016-2025 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. 1430 would result
in revenue losses in each year beginning in 2016. 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 Peter Huether.
The estimate was approved by David Weiner, Assistant Director
for Tax Analysis.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 1430, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 17, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars
-----------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-2020 2016-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects................... 2,296 1,527 1,666 1,792 1,934 2,217 2,238 2,489 2,693 2,935 9,214 21,785
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components do not sum to totals because of rounding.
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. 1430 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 (``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 Internal Revenue
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(g)(2) of H. Res. 5 (114th
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(i) of H. Res. 5 (114th 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
A. Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
SECTION 954 OF THE INTERNAL REVENUE CODE OF 1986
SEC. 954. FOREIGN BASE COMPANY INCOME.
(a) Foreign Base Company Income.--For purposes of section
952(a)(2), the term ``foreign base company income'' means for
any taxable year the sum of--
(1) the foreign personal holding company income for
the taxable year (determined under subsection (c) and
reduced as provided in subsection (b)(5)),
(2) the foreign base company sales income for the
taxable year (determined under subsection (d) and
reduced as provided in subsection (b)(5)),
(3) the foreign base company services income for the
taxable year (determined under subsection (e) and
reduced as provided in subsection (b)(5)),
(5) the foreign base company oil related income for
the taxable year (determined under subsection (g) and
reduced as provided in subsection (b)(5)).
(b) Exclusion and Special Rules.--
(3) De minimis, etc., rules.--For purposes of
subsection (a) and section 953--
(A) De minimis rule.--If the sum of foreign
base company income (determined without regard
to paragraph (5)) and the gross insurance
income for the taxable year is less than the
lesser of--
(i) 5 percent of gross income, or
(ii) $1,000,000, no part of the gross
income for the taxable year shall be
treated as foreign base company income
or insurance income.
(B) Foreign base company income and insurance
income in excess of 70 percent of gross
income.--If the sum of the foreign base company
income (determined without regard to paragraph
(5)) and the gross insurance income for the
taxable year exceeds 70 percent of gross
income, the entire gross income for the taxable
year shall, subject to the provisions of
paragraphs (4) and (5), be treated as foreign
base company income or insurance income
(whichever is appropriate).
(C) Gross insurance income.--For purposes of
subparagraphs (A) and (B), the term ``gross
insurance income'' means any item of gross
income taken into account in determining
insurance income under section 953.
(4) Exception for certain income subject to high
foreign taxes.--For purposes of subsection (a) and
section 953, foreign base company income and insurance
income shall not include any item of income received by
a controlled foreign corporation if the taxpayer
establishes to the satisfaction of the Secretary that
such income was subject to an effective rate of income
tax imposed by a foreign country greater than 90
percent of the maximum rate of tax specified in section
11. The preceding sentence shall not apply to foreign
base company oil-related income described in subsection
(a)(5).
(5) Deductions to be taken into account.--For
purposes of subsection (a), the foreign personal
holding company income, the foreign base company sales
income, the foreign base company services income,, and
the foreign base company oil related income shall be
reduced, under regulations prescribed by the Secretary
so as to take into account deductions (including taxes)
properly allocable to such income. Except to the extent
provided in regulations prescribed by the Secretary,
any interest which is paid or accrued by the controlled
foreign corporation to any United States shareholder in
such corporation (or any controlled foreign corporation
related to such a shareholder) shall be allocated first
to foreign personal holding company income which is
passive income (within the meaning of section
904(d)(2)) of such corporation to the extent thereof.
The Secretary may, by regulations, provide that the
preceding sentence shall apply also to interest paid or
accrued to other persons.
(6) Foreign base company oil related income not
treated as another kind of base company income.--Income
of a corporation which is foreign base company oil
related income shall not be considered foreign base
company income of such corporation under paragraph (2),
or (3) of subsection (a).
(c) Foreign Personal Holding Company Income.--
(1) In general.--For purposes of subsection (a)(1),
the term ``foreign personal holding company income''
means the portion of the gross income which consists
of:
(A) Dividends, etc..--Dividends, interest,
royalties, rents, and annuities.
(B) Certain property transactions.--The
excess of gains over losses from the sale or
exchange of property--
(i) which gives rise to income
described in subparagraph (A) (after
application of paragraph (2)(A)) other
than property which gives rise to
income not treated as foreign personal
holding company income by reason of
subsection (h) or (i) for the taxable
year,
(ii) which is an interest in a trust,
partnership, or REMIC, or
(iii) which does not give rise to any
income.
Gains and losses from the sale or exchange of
any property which, in the hands of the
controlled foreign corporation, is property
described in section 1221(a)(1) shall not be
taken into account under this subparagraph.
(C) Commodities transactions.--The excess of
gains over losses from transactions (including
futures, forward, and similar transactions) in
any commodities. This subparagraph shall not
apply to gains or losses which--
(i) arise out of commodity hedging
transactions (as defined in paragraph
(5)(A)),
(ii) are active business gains or
losses from the sale of commodities,
but only if substantially all of the
controlled foreign corporation's
commodities are property described in
paragraph (1), (2), or (8) of section
1221(a), or
(iii) are foreign currency gains or
losses (as defined in section 988(b))
attributable to any section 988
transactions.
(D) Foreign currency gains.--The excess of
foreign currency gains over foreign currency
losses (as defined in section 988(b))
attributable to any section 988 transactions.
This subparagraph shall not apply in the case
of any transaction directly related to the
business needs of the controlled foreign
corporation.
(E) Income equivalent to interest.--Any
income equivalent to interest, including income
from commitment fees (or similar amounts) for
loans actually made.
(F) Income from notional principal
contracts.--
(i) In general.--Net income from
notional principal contracts.
(ii) Coordination with other
categories of foreign personal holding
company income.--Any item of income,
gain, deduction, or loss from a
notional principal contract entered
into for purposes of hedging any item
described in any preceding subparagraph
shall not be taken into account for
purposes of this subparagraph but shall
be taken into account under such other
subparagraph.
(G) Payments in lieu of dividends.--Payments
in lieu of dividends which are made pursuant to
an agreement to which section 1058 applies.
(H) Personal service contracts.--
(i) Amounts received under a contract
under which the corporation is to
furnish personal services if--
(I) some person other than
the corporation has the right
to designate (by name or by
description) the individual who
is to perform the services, or
(II) the individual who is to
perform the services is
designated (by name or by
description) in the contract,
and
(ii) amounts received from the sale
or other disposition of such a
contract.
This subparagraph shall apply with respect to
amounts received for services under a
particular contract only if at some time during
the taxable year 25 percent or more in value of
the outstanding stock of the corporation is
owned, directly or indirectly, by or for the
individual who has performed, is to perform, or
may be designated (by name or by description)
as the one to perform, such services.
(2) Exception for certain amounts.--
(A) Rents and royalties derived in active
business.--Foreign personal holding company
income shall not include rents and royalties
which are derived in the active conduct of a
trade or business and which are received from a
person other than a related person (within the
meaning of subsection (d)(3)). For purposes of
the preceding sentence, rents derived from
leasing an aircraft or vessel in foreign
commerce shall not fail to be treated as
derived in the active conduct of a trade or
business if, as determined under regulations
prescribed by the Secretary, the active leasing
expenses are not less than 10 percent of the
profit on the lease.
(B) Certain export financing.--Foreign
personal holding company income shall not
include any interest which is derived in the
conduct of a banking business and which is
export financing interest (as defined in
section 904(d)(2)(G)).
(C) Exception for dealers.--Except as
provided by regulations, in the case of a
regular dealer in property which is property
described in paragraph (1)(B), forward
contracts, option contracts, or similar
financial instruments (including notional
principal contracts and all instruments
referenced to commodities), there shall not be
taken into account in computing foreign
personal holding company income--
(i) any item of income, gain,
deduction, or loss (other than any item
described in subparagraph (A), (E), or
(G) of paragraph (1)) from any
transaction (including hedging
transactions and transactions involving
physical settlement) entered into in
the ordinary course of such dealer's
trade or business as such a dealer, and
(ii) if such dealer is a dealer in
securities (within the meaning of
section 475), any interest or dividend
or equivalent amount described in
subparagraph (E) or (G) of paragraph
(1) from any transaction (including any
hedging transaction or transaction
described in section 956(c)(2)(I))
entered into in the ordinary course of
such dealer's trade or business as such
a dealer in securities, but only if the
income from the transaction is
attributable to activities of the
dealer in the country under the laws of
which the dealer is created or
organized (or in the case of a
qualified business unit described in
section 989(a), is attributable to
activities of the unit in the country
in which the unit both maintains its
principal office and conducts
substantial business activity).
(3) Certain income received from related persons.--
(A) In general.--Except as provided in
subparagraph (B), the term ``foreign personal
holding company income'' does not include--
(i) dividends and interest received
from a related person which (I) is a
corporation created or organized under
the laws of the same foreign country
under the laws of which the controlled
foreign corporation is created or
organized, and (II) has a substantial
part of its assets used in its trade or
business located in such same foreign
country, and
(ii) rents and royalties received
from a corporation which is a related
person for the use of, or the privilege
of using, property within the country
under the laws of which the controlled
foreign corporation is created or
organized.
To the extent provided in regulations, payments
made by a partnership with 1 or more corporate
partners shall be treated as made by such
corporate partners in proportion to their
respective interests in the partnership.
(B) Exception not to apply to items which
reduce subpart F income.-- Subparagraph (A)
shall not apply in the case of any interest,
rent, or royalty to the extent such interest,
rent, or royalty reduces the payor's subpart F
income or creates (or increases) a deficit
which under section 952(c) may reduce the
subpart F income of the payor or another
controlled foreign corporation.
(C) Exception for certain dividends.--
Subparagraph (A)(i) shall not apply to any
dividend with respect to any stock which is
attributable to earnings and profits of the
distributing corporation accumulated during any
period during which the person receiving such
dividend did not hold such stock either
directly, or indirectly through a chain of one
or more subsidiaries each of which meets the
requirements of subparagraph (A)(i).
(4) Look-thru rule for certain partnership sales.--
(A) In general.--In the case of any sale by a
controlled foreign corporation of an interest
in a partnership with respect to which such
corporation is a 25-percent owner, such
corporation shall be treated for purposes of
this subsection as selling the proportionate
share of the assets of the partnership
attributable to such interest. The Secretary
shall prescribe such regulations as may be
appropriate to prevent abuse of the purposes of
this paragraph, including regulations providing
for coordination of this paragraph with the
provisions of subchapter K.
(B) 25-percent owner.--For purposes of this
paragraph, the term ``25-percent owner'' means
a controlled foreign corporation which owns
directly 25 percent or more of the capital or
profits interest in a partnership. For purposes
of the preceding sentence, if a controlled
foreign corporation is a shareholder or partner
of a corporation or partnership, the controlled
foreign corporation shall be treated as owning
directly its proportionate share of any such
capital or profits interest held directly or
indirectly by such corporation or partnership.
If a controlled foreign corporation is treated
as owning a capital or profits interest in a
partnership under constructive ownership rules
similar to the rules of section 958(b), the
controlled foreign corporation shall be treated
as owning such interest directly for purposes
of this subparagraph.
(5) Definition and special rules relating to
commodity transactions.--
(A) Commodity hedging transactions.--For
purposes of paragraph (1)(C)(i), the term
``commodity hedging transaction'' means any
transaction with respect to a commodity if such
transaction--
(i) is a hedging transaction as
defined in section 1221(b)(2),
determined--
(I) without regard to
subparagraph (A)(ii) thereof,
(II) by applying subparagraph
(A)(i) thereof by substituting
``ordinary property or property
described in section 1231(b)''
for ``ordinary property'', and
(III) by substituting
``controlled foreign
corporation'' for ``taxpayer''
each place it appears, and
(ii) is clearly identified as such in
accordance with section 1221(a)(7).
(B) Treatment of dealer activities under
paragraph (1)(C).--Commodities with respect to
which gains and losses are not taken into
account under paragraph (2)(C) in computing a
controlled foreign corporation's foreign
personal holding company income shall not be
taken into account in applying the
substantially all test under paragraph
(1)(C)(ii) to such corporation.
(C) Regulations.--The Secretary shall
prescribe such regulations as are appropriate
to carry out the purposes of paragraph (1)(C)
in the case of transactions involving related
parties.
(6) Look-thru rule for related controlled foreign
corporations.--
(A) In general.--For purposes of this
subsection, dividends, interest, rents, and
royalties received or accrued from a controlled
foreign corporation which is a related person
shall not be treated as foreign personal
holding company income to the extent
attributable or properly allocable (determined
under rules similar to the rules of
subparagraphs (C) and (D) of section 904(d)(3))
to income of the related person which is
neither subpart F income nor income treated as
effectively connected with the conduct of a
trade or business in the United States. For
purposes of this subparagraph, interest shall
include factoring income which is treated as
income equivalent to interest for purposes of
paragraph (1)(E). The Secretary shall prescribe
such regulations as may be necessary or
appropriate to carry out this paragraph,
including such regulations as may be necessary
or appropriate to prevent the abuse of the
purposes of this paragraph.
(B) Exception.--Subparagraph (A) shall not
apply in the case of any interest, rent, or
royalty to the extent such interest, rent, or
royalty creates (or increases) a deficit which
under section 952(c) may reduce the subpart F
income of the payor or another controlled
foreign corporation.
(C) Application.--Subparagraph (A) shall
apply to taxable years of foreign corporations
beginning after December 31, 2005, and before
January 1, 2015, and to taxable years of United
States shareholders with or within which such
taxable years of foreign corporations end.
(d) Foreign Base Company Sales Income.--
(1) In general.--For purposes of subsection (a)(2),
the term ``foreign base company sales income'' means
income (whether in the form of profits, commissions,
fees, or otherwise) derived in connection with the
purchase of personal property from a related person and
its sale to any person, the sale of personal property
to any person on behalf of a related person, the
purchase of personal property from any person and its
sale to a related person, or the purchase of personal
property from any person on behalf of a related person
where--
(A) the property which is purchased (or in
the case of property sold on behalf of a
related person, the property which is sold) is
manufactured, produced, grown, or extracted
outside the country under the laws of which the
controlled foreign corporation is created or
organized, and
(B) the property is sold for use,
consumption, or disposition outside such
foreign country, or, in the case of property
purchased on behalf of a related person, is
purchased for use, consumption, or disposition
outside such foreign country.
For purposes of this subsection, personal property does
not include agricultural commodities which are not
grown in the United States in commercially marketable
quantities.
(2) Certain branch income.--For purposes of
determining foreign base company sales income in
situations in which the carrying on of activities by a
controlled foreign corporation through a branch or
similar establishment outside the country of
incorporation of the controlled foreign corporation has
substantially the same effect as if such branch or
similar establishment were a wholly owned subsidiary
corporation deriving such income, under regulations
prescribed by the Secretary the income attributable to
the carrying on of such activities of such branch or
similar establishment shall be treated as income
derived by a wholly owned subsidiary of the controlled
foreign corporation and shall constitute foreign base
company sales income of the controlled foreign
corporation.
(3) Related person defined.--For purposes of this
section, a person is a related person with respect to a
controlled foreign corporation, if--
(A) such person is an individual,
corporation, partnership, trust, or estate
which controls, or is controlled by, the
controlled foreign corporation, or
(B) such person is a corporation,
partnership, trust, or estate which is
controlled by the same person or persons which
control the controlled foreign corporation.
For purposes of the preceding sentence, control means,
with respect to a corporation, the ownership, directly
or indirectly, of stock possessing more than 50 percent
of the total voting power of all classes of stock
entitled to vote or of the total value of stock of such
corporation. In the case of a partnership, trust, or
estate, control means the ownership, directly or
indirectly, of more than 50 percent (by value) of the
beneficial interests in such partnership, trust, or
estate. For purposes of this paragraph, rules similar
to the rules of section 958 shall apply.
(4) Special rule for certain timber products.--For
purposes of subsection (a)(2), the term ``foreign base
company sales income'' includes any income (whether in
the form of profits, commissions, fees, or otherwise)
derived in connection with--
(A) the sale of any unprocessed timber
referred to in section 865(b), or
(B) the milling of any such timber outside
the United States.
Subpart G shall not apply to any amount treated as
subpart F income by reason of this paragraph.
(e) Foreign Base Company Services Income.--
(1) In general.--For purposes of subsection (a)(3),
the term ``foreign base company services income'' means
income (whether in the form of compensation,
commissions, fees, or otherwise) derived in connection
with the performance of technical, managerial,
engineering, architectural, scientific, skilled,
industrial, commercial, or like services which--
(A) are performed for or on behalf of any
related person (within the meaning of
subsection (d)(3)), and
(B) are performed outside the country under
the laws of which the controlled foreign
corporation is created or organized.
(2) Exception.--Paragraph (1) shall not apply to
income derived in connection with the performance of
services which are directly related to--
(A) the sale or exchange by the controlled
foreign corporation of property manufactured,
produced, grown, or extracted by it and which
are performed before the time of the sale or
exchange, or
(B) an offer or effort to sell or exchange
such property.
Paragraph (1) shall also not apply to income which is
exempt insurance income (as defined in section 953(e))
or which is not treated as foreign personal holding
income by reason of subsection (c)(2)(C)(ii), (h), or
(i).
(g) Foreign Base Company Oil Related Income.--For purposes of
this section--
(1) In general.--Except as otherwise provided in this
subsection, the term ``foreign base company oil related
income'' means foreign oil related income (within the
meaning of paragraphs (2) and (3) of section 907(c))
other than income derived from a source within a
foreign country in connection with--
(A) oil or gas which was extracted from an
oil or gas well located in such foreign
country, or
(B) oil, gas, or a primary product of oil or
gas which is sold by the foreign corporation or
a related person for use or consumption within
such country or is loaded in such country on a
vessel or aircraft as fuel for such vessel or
aircraft.
Such term shall not include any foreign personal
holding company income (as defined in subsection (c)).
(2) Paragraph (1) applies only where corporation has
produced 1,000 barrels per day or more.--
(A) In general.--The term ``foreign base
company oil related income'' shall not include
any income of a foreign corporation if such
corporation is not a large oil producer for the
taxable year.
(B) Large oil producer.--For purposes of
subparagraph (A), the term ``large oil
producer'' means any corporation if, for the
taxable year or for the preceding taxable year,
the average daily production of foreign crude
oil and natural gas of the related group which
includes such corporation equaled or exceeded
1,000 barrels.
(C) Related group.--The term ``related
group'' means a group consisting of the foreign
corporation and any other person who is a
related person with respect to such
corporation.
(D) Average daily production of foreign crude
oil and natural gas.--For purposes of this
paragraph, the average daily production of
foreign crude oil or natural gas of any related
group for any taxable year (and the conversion
of cubic feet of natural gas into barrels)
shall be determined under rules similar to the
rules of section 613A except that only crude
oil or natural gas from a well located outside
the United States shall be taken into account.
(h) Special Rule for Income Derived in the Active Conduct of
Banking, Financing, or Similar Businesses.--
(1) In general.--For purposes of subsection (c)(1),
foreign personal holding company income shall not
include qualified banking or financing income of an
eligible controlled foreign corporation.
(2) Eligible controlled foreign corporation.--For
purposes of this subsection--
(A) In general.--The term ``eligible
controlled foreign corporation'' means a
controlled foreign corporation which--
(i) is predominantly engaged in the
active conduct of a banking, financing,
or similar business, and
(ii) conducts substantial activity
with respect to such business.
(B) Predominantly engaged.--A controlled
foreign corporation shall be treated as
predominantly engaged in the active conduct of
a banking, financing, or similar business if--
(i) more than 70 percent of the gross
income of the controlled foreign
corporation is derived directly from
the active and regular conduct of a
lending or finance business from
transactions with customers which are
not related persons,
(ii) it is engaged in the active
conduct of a banking business and is an
institution licensed to do business as
a bank in the United States (or is any
other corporation not so licensed which
is specified by the Secretary in
regulations), or
(iii) it is engaged in the active
conduct of a securities business and is
registered as a securities broker or
dealer under section 15(a) of the
Securities Exchange Act of 1934 or is
registered as a Government securities
broker or dealer under section 15C(a)
of such Act (or is any other
corporation not so registered which is
specified by the Secretary in
regulations).
(3) Qualified banking or financing income.--For
purposes of this subsection--
(A) In general.--The term ``qualified banking
or financing income'' means income of an
eligible controlled foreign corporation which--
(i) is derived in the active conduct
of a banking, financing, or similar
business by--
(I) such eligible controlled
foreign corporation, or
(II) a qualified business
unit of such eligible
controlled foreign corporation,
(ii) is derived from one or more
transactions--
(I) with customers located in
a country other than the United
States, and
(II) substantially all of the
activities in connection with
which are conducted directly by
the corporation or unit in its
home country, and
(iii) is treated as earned by such
corporation or unit in its home country
for purposes of such country's tax
laws.
(B) Limitation on nonbanking and
nonsecurities businesses.--No income of an
eligible controlled foreign corporation not
described in clause (ii) or (iii) of paragraph
(2)(B) (or of a qualified business unit of such
corporation) shall be treated as qualified
banking or financing income unless more than 30
percent of such corporation's or unit's gross
income is derived directly from the active and
regular conduct of a lending or finance
business from transactions with customers which
are not related persons and which are located
within such corporation's or unit's home
country.
(C) Substantial activity requirement for
cross border income.--The term ``qualified
banking or financing income'' shall not include
income derived from 1 or more transactions with
customers located in a country other than the
home country of the eligible controlled foreign
corporation or a qualified business unit of
such corporation unless such corporation or
unit conducts substantial activity with respect
to a banking, financing, or similar business in
its home country.
(D) Determinations made separately.--For
purposes of this paragraph, the qualified
banking or financing income of an eligible
controlled foreign corporation and each
qualified business unit of such corporation
shall be determined separately for such
corporation and each such unit by taking into
account--
(i) in the case of the eligible
controlled foreign corporation, only
items of income, deduction, gain, or
loss and activities of such corporation
not properly allocable or attributable
to any qualified business unit of such
corporation, and
(ii) in the case of a qualified
business unit, only items of income,
deduction, gain, or loss and activities
properly allocable or attributable to
such unit.
(E) Direct conduct of activities.--For
purposes of subparagraph (A)(ii)(II), an
activity shall be treated as conducted directly
by an eligible controlled foreign corporation
or qualified business unit in its home country
if the activity is performed by employees of a
related person and--
(i) the related person is an eligible
controlled foreign corporation the home
country of which is the same as the
home country of the corporation or unit
to which subparagraph (A)(ii)(II) is
being applied,
(ii) the activity is performed in the
home country of the related person, and
(iii) the related person is
compensated on an arm's- length basis
for the performance of the activity by
its employees and such compensation is
treated as earned by such person in its
home country for purposes of the home
country's tax laws.
(4) Lending or finance business.--For purposes of
this subsection, the term ``lending or finance
business'' means the business of--
(A) making loans,
(B) purchasing or discounting accounts
receivable, notes, or installment obligations,
(C) engaging in leasing (including entering
into leases and purchasing, servicing, and
disposing of leases and leased assets),
(D) issuing letters of credit or providing
guarantees,
(E) providing charge and credit card
services, or
(F) rendering services or making facilities
available in connection with activities
described in subparagraphs (A) through (E)
carried on by--
(i) the corporation (or qualified
business unit) rendering services or
making facilities available, or
(ii) another corporation (or
qualified business unit of a
corporation) which is a member of the
same affiliated group (as defined in
section 1504, but determined without
regard to section 1504(b)(3)).
(5) Other definitions.--For purposes of this
subsection--
(A) Customer.--The term ``customer'' means,
with respect to any controlled foreign
corporation or qualified business unit, any
person which has a customer relationship with
such corporation or unit and which is acting in
its capacity as such.
(B) Home country.--Except as provided in
regulations--
(i) Controlled foreign corporation.--
The term ``home country'' means, with
respect to any controlled foreign
corporation, the country under the laws
of which the corporation was created or
organized.
(ii) Qualified business unit.--The
term ``home country'' means, with
respect to any qualified business unit,
the country in which such unit
maintains its principal office.
(C) Located.--The determination of where a
customer is located shall be made under rules
prescribed by the Secretary.
(D) Qualified business unit.--The term
``qualified business unit'' has the meaning
given such term by section 989(a).
(E) Related person.--The term ``related
person'' has the meaning given such term by
subsection (d)(3).
(6) Coordination with exception for dealers.--
Paragraph (1) shall not apply to income described in
subsection (c)(2)(C)(ii) of a dealer in securities
(within the meaning of section 475) which is an
eligible controlled foreign corporation described in
paragraph (2)(B)(iii).
(7) Anti-abuse rules.--For purposes of applying this
subsection and subsection (c)(2)(C)(ii)--
(A) there shall be disregarded any item of
income, gain, loss, or deduction with respect
to any transaction or series of transactions
one of the principal purposes of which is
qualifying income or gain for the exclusion
under this section, including any transaction
or series of transactions a principal purpose
of which is the acceleration or deferral of any
item in order to claim the benefits of such
exclusion through the application of this
subsection,
(B) there shall be disregarded any item of
income, gain, loss, or deduction of an entity
which is not engaged in regular and continuous
transactions with customers which are not
related persons,
(C) there shall be disregarded any item of
income, gain, loss, or deduction with respect
to any transaction or series of transactions
utilizing, or doing business with--
(i) one or more entities in order to
satisfy any home country requirement
under this subsection, or
(ii) a special purpose entity or
arrangement, including a
securitization, financing, or similar
entity or arrangement,
if one of the principal purposes of such
transaction or series of transactions is
qualifying income or gain for the exclusion
under this subsection, and
(D) a related person, an officer, a director,
or an employee with respect to any controlled
foreign corporation (or qualified business
unit) which would otherwise be treated as a
customer of such corporation or unit with
respect to any transaction shall not be so
treated if a principal purpose of such
transaction is to satisfy any requirement of
this subsection.
(8) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection, subsection
(c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last
sentence of subsection (e)(2).
(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection
(e)(2) shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2015, and to taxable years of United
States shareholders with or within which any such
taxable year of such foreign corporation ends.
(i) Special Rule for Income Derived in the Active Conduct of
Insurance Business.--
(1) In general.--For purposes of subsection (c)(1),
foreign personal holding company income shall not
include qualified insurance income of a qualifying
insurance company.
(2) Qualified insurance income.--The term ``qualified
insurance income'' means income of a qualifying
insurance company which is--
(A) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from the
investments made by a qualifying insurance
company or a qualifying insurance company
branch of its reserves allocable to exempt
contracts or of 80 percent of its unearned
premiums from exempt contracts (as both are
determined in the manner prescribed under
paragraph (4)), or
(B) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from investments
made by a qualifying insurance company or a
qualifying insurance company branch of an
amount of its assets allocable to exempt
contracts equal to--
(i) in the case of property,
casualty, or health insurance
contracts, one-third of its premiums
earned on such insurance contracts
during the taxable year (as defined in
section 832(b)(4)), and
(ii) in the case of life insurance or
annuity contracts, 10 percent of the
reserves described in subparagraph (A)
for such contracts.
(3) Principles for determining insurance income.--
Except as provided by the Secretary, for purposes of
subparagraphs (A) and (B) of paragraph (2)--
(A) in the case of any contract which is a
separate account-type contract (including any
variable contract not meeting the requirements
of section 817), income credited under such
contract shall be allocable only to such
contract, and
(B) income not allocable under subparagraph
(A) shall be allocated ratably among contracts
not described in subparagraph (A).
(4) Methods for determining unearned premiums and
reserves.--For purposes of paragraph (2)(A)--
(A) Property and casualty contracts.--The
unearned premiums and reserves of a qualifying
insurance company or a qualifying insurance
company branch with respect to property,
casualty, or health insurance contracts shall
be determined using the same methods and
interest rates which would be used if such
company or branch were subject to tax under
subchapter L, except that--
(i) the interest rate determined for
the functional currency of the company
or branch, and which, except as
provided by the Secretary, is
calculated in the same manner as the
Federal mid-term rate under section
1274(d), shall be substituted for the
applicable Federal interest rate, and
(ii) such company or branch shall use
the appropriate foreign loss payment
pattern.
(B) Life insurance and annuity contracts.--
(i) In general.--Except as provided
in clause (ii), the amount of the
reserve of a qualifying insurance
company or qualifying insurance company
branch for any life insurance or
annuity contract shall be equal to the
greater of--
(I) the net surrender value
of such contract (as defined in
section 807(e)(1)(A)), or
(II) the reserve determined
under paragraph (5).
(ii) Ruling request, etc.--The amount
of the reserve under clause (i) shall
be the foreign statement reserve for
the contract (less any catastrophe,
deficiency, equalization, or similar
reserves), if, pursuant to a ruling
request submitted by the taxpayer or as
provided in published guidance, the
Secretary determines that the factors
taken into account in determining the
foreign statement reserve provide an
appropriate means of measuring income.
(C) Limitation on reserves.--In no event
shall the reserve determined under this
paragraph for any contract as of any time
exceed the amount which would be taken into
account with respect to such contract as of
such time in determining foreign statement
reserves (less any catastrophe, deficiency,
equalization, or similar reserves).
(5) Amount of reserve.--The amount of the reserve
determined under this paragraph with respect to any
contract shall be determined in the same manner as it
would be determined if the qualifying insurance company
or qualifying insurance company branch were subject to
tax under subchapter L, except that in applying such
subchapter--
(A) the interest rate determined for the
functional currency of the company or branch,
and which, except as provided by the Secretary,
is calculated in the same manner as the Federal
mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest
rate,
(B) the highest assumed interest rate
permitted to be used in determining foreign
statement reserves shall be substituted for the
prevailing State assumed interest rate, and
(C) tables for mortality and morbidity which
reasonably reflect the current mortality and
morbidity risks in the company's or branch's
home country shall be substituted for the
mortality and morbidity tables otherwise used
for such subchapter.
The Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying
insurance company may be used for 1 or more of its
qualifying insurance company branches when appropriate.
(6) Definitions.--For purposes of this subsection,
any term used in this subsection which is also used in
section 953(e) shall have the meaning given such term
by section 953.
B. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed 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 italics, existing law in
which no change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets and existing law in which no change is proposed is
shown in roman):
SECTION 954 OF THE INTERNAL REVENUE CODE OF 1986
SEC. 954. FOREIGN BASE COMPANY INCOME.
(a) Foreign Base Company Income.--For purposes of section
952(a)(2), the term ``foreign base company income'' means for
any taxable year the sum of--
(1) the foreign personal holding company income for
the taxable year (determined under subsection (c) and
reduced as provided in subsection (b)(5)),
(2) the foreign base company sales income for the
taxable year (determined under subsection (d) and
reduced as provided in subsection (b)(5)),
(3) the foreign base company services income for the
taxable year (determined under subsection (e) and
reduced as provided in subsection (b)(5)),
(5) the foreign base company oil related income for
the taxable year (determined under subsection (g) and
reduced as provided in subsection (b)(5)).
(b) Exclusion and Special Rules.--
(3) De minimis, etc., rules.--For purposes of
subsection (a) and section 953--
(A) De minimis rule.--If the sum of foreign
base company income (determined without regard
to paragraph (5)) and the gross insurance
income for the taxable year is less than the
lesser of--
(i) 5 percent of gross income, or
(ii) $1,000,000, no part of the gross
income for the taxable year shall be
treated as foreign base company income
or insurance income.
(B) Foreign base company income and insurance
income in excess of 70 percent of gross
income.--If the sum of the foreign base company
income (determined without regard to paragraph
(5)) and the gross insurance income for the
taxable year exceeds 70 percent of gross
income, the entire gross income for the taxable
year shall, subject to the provisions of
paragraphs (4) and (5), be treated as foreign
base company income or insurance income
(whichever is appropriate).
(C) Gross insurance income.--For purposes of
subparagraphs (A) and (B), the term ``gross
insurance income'' means any item of gross
income taken into account in determining
insurance income under section 953.
(4) Exception for certain income subject to high
foreign taxes.--For purposes of subsection (a) and
section 953, foreign base company income and insurance
income shall not include any item of income received by
a controlled foreign corporation if the taxpayer
establishes to the satisfaction of the Secretary that
such income was subject to an effective rate of income
tax imposed by a foreign country greater than 90
percent of the maximum rate of tax specified in section
11. The preceding sentence shall not apply to foreign
base company oil-related income described in subsection
(a)(5).
(5) Deductions to be taken into account.--For
purposes of subsection (a), the foreign personal
holding company income, the foreign base company sales
income, the foreign base company services income,, and
the foreign base company oil related income shall be
reduced, under regulations prescribed by the Secretary
so as to take into account deductions (including taxes)
properly allocable to such income. Except to the extent
provided in regulations prescribed by the Secretary,
any interest which is paid or accrued by the controlled
foreign corporation to any United States shareholder in
such corporation (or any controlled foreign corporation
related to such a shareholder) shall be allocated first
to foreign personal holding company income which is
passive income (within the meaning of section
904(d)(2)) of such corporation to the extent thereof.
The Secretary may, by regulations, provide that the
preceding sentence shall apply also to interest paid or
accrued to other persons.
(6) Foreign base company oil related income not
treated as another kind of base company income.--Income
of a corporation which is foreign base company oil
related income shall not be considered foreign base
company income of such corporation under paragraph (2),
or (3) of subsection (a).
(c) Foreign Personal Holding Company Income.--
(1) In general.--For purposes of subsection (a)(1),
the term ``foreign personal holding company income''
means the portion of the gross income which consists
of:
(A) Dividends, etc..--Dividends, interest,
royalties, rents, and annuities.
(B) Certain property transactions.--The
excess of gains over losses from the sale or
exchange of property--
(i) which gives rise to income
described in subparagraph (A) (after
application of paragraph (2)(A)) other
than property which gives rise to
income not treated as foreign personal
holding company income by reason of
subsection (h) or (i) for the taxable
year,
(ii) which is an interest in a trust,
partnership, or REMIC, or
(iii) which does not give rise to any
income.
Gains and losses from the sale or exchange of
any property which, in the hands of the
controlled foreign corporation, is property
described in section 1221(a)(1) shall not be
taken into account under this subparagraph.
(C) Commodities transactions.--The excess of
gains over losses from transactions (including
futures, forward, and similar transactions) in
any commodities. This subparagraph shall not
apply to gains or losses which--
(i) arise out of commodity hedging
transactions (as defined in paragraph
(5)(A)),
(ii) are active business gains or
losses from the sale of commodities,
but only if substantially all of the
controlled foreign corporation's
commodities are property described in
paragraph (1), (2), or (8) of section
1221(a), or
(iii) are foreign currency gains or
losses (as defined in section 988(b))
attributable to any section 988
transactions.
(D) Foreign currency gains.--The excess of
foreign currency gains over foreign currency
losses (as defined in section 988(b))
attributable to any section 988 transactions.
This subparagraph shall not apply in the case
of any transaction directly related to the
business needs of the controlled foreign
corporation.
(E) Income equivalent to interest.--Any
income equivalent to interest, including income
from commitment fees (or similar amounts) for
loans actually made.
(F) Income from notional principal
contracts.--
(i) In general.--Net income from
notional principal contracts.
(ii) Coordination with other
categories of foreign personal holding
company income.--Any item of income,
gain, deduction, or loss from a
notional principal contract entered
into for purposes of hedging any item
described in any preceding subparagraph
shall not be taken into account for
purposes of this subparagraph but shall
be taken into account under such other
subparagraph.
(G) Payments in lieu of dividends.--Payments
in lieu of dividends which are made pursuant to
an agreement to which section 1058 applies.
(H) Personal service contracts.--
(i) Amounts received under a contract
under which the corporation is to
furnish personal services if--
(I) some person other than
the corporation has the right
to designate (by name or by
description) the individual who
is to perform the services, or
(II) the individual who is to
perform the services is
designated (by name or by
description) in the contract,
and
(ii) amounts received from the sale
or other disposition of such a
contract.
This subparagraph shall apply with respect to
amounts received for services under a
particular contract only if at some time during
the taxable year 25 percent or more in value of
the outstanding stock of the corporation is
owned, directly or indirectly, by or for the
individual who has performed, is to perform, or
may be designated (by name or by description)
as the one to perform, such services.
(2) Exception for certain amounts.--
(A) Rents and royalties derived in active
business.--Foreign personal holding company
income shall not include rents and royalties
which are derived in the active conduct of a
trade or business and which are received from a
person other than a related person (within the
meaning of subsection (d)(3)). For purposes of
the preceding sentence, rents derived from
leasing an aircraft or vessel in foreign
commerce shall not fail to be treated as
derived in the active conduct of a trade or
business if, as determined under regulations
prescribed by the Secretary, the active leasing
expenses are not less than 10 percent of the
profit on the lease.
(B) Certain export financing.--Foreign
personal holding company income shall not
include any interest which is derived in the
conduct of a banking business and which is
export financing interest (as defined in
section 904(d)(2)(G)).
(C) Exception for dealers.--Except as
provided by regulations, in the case of a
regular dealer in property which is property
described in paragraph (1)(B), forward
contracts, option contracts, or similar
financial instruments (including notional
principal contracts and all instruments
referenced to commodities), there shall not be
taken into account in computing foreign
personal holding company income--
(i) any item of income, gain,
deduction, or loss (other than any item
described in subparagraph (A), (E), or
(G) of paragraph (1)) from any
transaction (including hedging
transactions and transactions involving
physical settlement) entered into in
the ordinary course of such dealer's
trade or business as such a dealer, and
(ii) if such dealer is a dealer in
securities (within the meaning of
section 475), any interest or dividend
or equivalent amount described in
subparagraph (E) or (G) of paragraph
(1) from any transaction (including any
hedging transaction or transaction
described in section 956(c)(2)(I))
entered into in the ordinary course of
such dealer's trade or business as such
a dealer in securities, but only if the
income from the transaction is
attributable to activities of the
dealer in the country under the laws of
which the dealer is created or
organized (or in the case of a
qualified business unit described in
section 989(a), is attributable to
activities of the unit in the country
in which the unit both maintains its
principal office and conducts
substantial business activity).
(3) Certain income received from related persons.--
(A) In general.--Except as provided in
subparagraph (B), the term ``foreign personal
holding company income'' does not include--
(i) dividends and interest received
from a related person which (I) is a
corporation created or organized under
the laws of the same foreign country
under the laws of which the controlled
foreign corporation is created or
organized, and (II) has a substantial
part of its assets used in its trade or
business located in such same foreign
country, and
(ii) rents and royalties received
from a corporation which is a related
person for the use of, or the privilege
of using, property within the country
under the laws of which the controlled
foreign corporation is created or
organized.
To the extent provided in regulations, payments
made by a partnership with 1 or more corporate
partners shall be treated as made by such
corporate partners in proportion to their
respective interests in the partnership.
(B) Exception not to apply to items which
reduce subpart F income.--Subparagraph (A)
shall not apply in the case of any interest,
rent, or royalty to the extent such interest,
rent, or royalty reduces the payor's subpart F
income or creates (or increases) a deficit
which under section 952(c) may reduce the
subpart F income of the payor or another
controlled foreign corporation.
(C) Exception for certain dividends.--
Subparagraph (A)(i) shall not apply to any
dividend with respect to any stock which is
attributable to earnings and profits of the
distributing corporation accumulated during any
period during which the person receiving such
dividend did not hold such stock either
directly, or indirectly through a chain of one
or more subsidiaries each of which meets the
requirements of subparagraph (A)(i).
(4) Look-thru rule for certain partnership sales.--
(A) In general.--In the case of any sale by a
controlled foreign corporation of an interest
in a partnership with respect to which such
corporation is a 25-percent owner, such
corporation shall be treated for purposes of
this subsection as selling the proportionate
share of the assets of the partnership
attributable to such interest. The Secretary
shall prescribe such regulations as may be
appropriate to prevent abuse of the purposes of
this paragraph, including regulations providing
for coordination of this paragraph with the
provisions of subchapter K.
(B) 25-percent owner.--For purposes of this
paragraph, the term ``25-percent owner'' means
a controlled foreign corporation which owns
directly 25 percent or more of the capital or
profits interest in a partnership. For purposes
of the preceding sentence, if a controlled
foreign corporation is a shareholder or partner
of a corporation or partnership, the controlled
foreign corporation shall be treated as owning
directly its proportionate share of any such
capital or profits interest held directly or
indirectly by such corporation or partnership.
If a controlled foreign corporation is treated
as owning a capital or profits interest in a
partnership under constructive ownership rules
similar to the rules of section 958(b), the
controlled foreign corporation shall be treated
as owning such interest directly for purposes
of this subparagraph.
(5) Definition and special rules relating to
commodity transactions.--
(A) Commodity hedging transactions.--For
purposes of paragraph (1)(C)(i), the term
``commodity hedging transaction'' means any
transaction with respect to a commodity if such
transaction--
(i) is a hedging transaction as
defined in section 1221(b)(2),
determined--
(I) without regard to
subparagraph (A)(ii) thereof,
(II) by applying subparagraph
(A)(i) thereof by substituting
``ordinary property or property
described in section 1231(b)''
for ``ordinary property'', and
(III) by substituting
``controlled foreign
corporation'' for ``taxpayer''
each place it appears, and
(ii) is clearly identified as such in
accordance with section 1221(a)(7).
(B) Treatment of dealer activities under
paragraph (1)(C).--Commodities with respect to
which gains and losses are not taken into
account under paragraph (2)(C) in computing a
controlled foreign corporation's foreign
personal holding company income shall not be
taken into account in applying the
substantially all test under paragraph
(1)(C)(ii) to such corporation.
(C) Regulations.--The Secretary shall
prescribe such regulations as are appropriate
to carry out the purposes of paragraph (1)(C)
in the case of transactions involving related
parties.
(6) Look-thru rule for related controlled foreign
corporations.--
(A) In general.--For purposes of this
subsection, dividends, interest, rents, and
royalties received or accrued from a controlled
foreign corporation which is a related person
shall not be treated as foreign personal
holding company income to the extent
attributable or properly allocable (determined
under rules similar to the rules of
subparagraphs (C) and (D) of section 904(d)(3))
to income of the related person which is
neither subpart F income nor income treated as
effectively connected with the conduct of a
trade or business in the United States. For
purposes of this subparagraph, interest shall
include factoring income which is treated as
income equivalent to interest for purposes of
paragraph (1)(E). The Secretary shall prescribe
such regulations as may be necessary or
appropriate to carry out this paragraph,
including such regulations as may be necessary
or appropriate to prevent the abuse of the
purposes of this paragraph.
(B) Exception.--Subparagraph (A) shall not
apply in the case of any interest, rent, or
royalty to the extent such interest, rent, or
royalty creates (or increases) a deficit which
under section 952(c) may reduce the subpart F
income of the payor or another controlled
foreign corporation.
[(C) Application.--Subparagraph (A) shall
apply to taxable years of foreign corporations
beginning after December 31, 2005, and before
January 1, 2015, and to taxable years of United
States shareholders with or within which such
taxable years of foreign corporations end.]
(d) Foreign Base Company Sales Income.--
(1) In general.--For purposes of subsection (a)(2),
the term ``foreign base company sales income'' means
income (whether in the form of profits, commissions,
fees, or otherwise) derived in connection with the
purchase of personal property from a related person and
its sale to any person, the sale of personal property
to any person on behalf of a related person, the
purchase of personal property from any person and its
sale to a related person, or the purchase of personal
property from any person on behalf of a related person
where--
(A) the property which is purchased (or in
the case of property sold on behalf of a
related person, the property which is sold) is
manufactured, produced, grown, or extracted
outside the country under the laws of which the
controlled foreign corporation is created or
organized, and
(B) the property is sold for use,
consumption, or disposition outside such
foreign country, or, in the case of property
purchased on behalf of a related person, is
purchased for use, consumption, or disposition
outside such foreign country.
For purposes of this subsection, personal property does
not include agricultural commodities which are not
grown in the United States in commercially marketable
quantities.
(2) Certain branch income.--For purposes of
determining foreign base company sales income in
situations in which the carrying on of activities by a
controlled foreign corporation through a branch or
similar establishment outside the country of
incorporation of the controlled foreign corporation has
substantially the same effect as if such branch or
similar establishment were a wholly owned subsidiary
corporation deriving such income, under regulations
prescribed by the Secretary the income attributable to
the carrying on of such activities of such branch or
similar establishment shall be treated as income
derived by a wholly owned subsidiary of the controlled
foreign corporation and shall constitute foreign base
company sales income of the controlled foreign
corporation.
(3) Related person defined.--For purposes of this
section, a person is a related person with respect to a
controlled foreign corporation, if--
(A) such person is an individual,
corporation, partnership, trust, or estate
which controls, or is controlled by, the
controlled foreign corporation, or
(B) such person is a corporation,
partnership, trust, or estate which is
controlled by the same person or persons which
control the controlled foreign corporation.
For purposes of the preceding sentence, control means,
with respect to a corporation, the ownership, directly
or indirectly, of stock possessing more than 50 percent
of the total voting power of all classes of stock
entitled to vote or of the total value of stock of such
corporation. In the case of a partnership, trust, or
estate, control means the ownership, directly or
indirectly, of more than 50 percent (by value) of the
beneficial interests in such partnership, trust, or
estate. For purposes of this paragraph, rules similar
to the rules of section 958 shall apply.
(4) Special rule for certain timber products.--For
purposes of subsection (a)(2), the term ``foreign base
company sales income'' includes any income (whether in
the form of profits, commissions, fees, or otherwise)
derived in connection with--
(A) the sale of any unprocessed timber
referred to in section 865(b), or
(B) the milling of any such timber outside
the United States.
Subpart G shall not apply to any amount treated as
subpart F income by reason of this paragraph.
(e) Foreign Base Company Services Income.--
(1) In general.--For purposes of subsection (a)(3),
the term ``foreign base company services income'' means
income (whether in the form of compensation,
commissions, fees, or otherwise) derived in connection
with the performance of technical, managerial,
engineering, architectural, scientific, skilled,
industrial, commercial, or like services which--
(A) are performed for or on behalf of any
related person (within the meaning of
subsection (d)(3)), and
(B) are performed outside the country under
the laws of which the controlled foreign
corporation is created or organized.
(2) Exception.--Paragraph (1) shall not apply to
income derived in connection with the performance of
services which are directly related to--
(A) the sale or exchange by the controlled
foreign corporation of property manufactured,
produced, grown, or extracted by it and which
are performed before the time of the sale or
exchange, or
(B) an offer or effort to sell or exchange
such property.
Paragraph (1) shall also not apply to income which is
exempt insurance income (as defined in section 953(e))
or which is not treated as foreign personal holding
income by reason of subsection (c)(2)(C)(ii), (h), or
(i).
(g) Foreign Base Company Oil Related Income.--For purposes of
this section--
(1) In general.--Except as otherwise provided in this
subsection, the term ``foreign base company oil related
income'' means foreign oil related income (within the
meaning of paragraphs (2) and (3) of section 907(c))
other than income derived from a source within a
foreign country in connection with--
(A) oil or gas which was extracted from an
oil or gas well located in such foreign
country, or
(B) oil, gas, or a primary product of oil or
gas which is sold by the foreign corporation or
a related person for use or consumption within
such country or is loaded in such country on a
vessel or aircraft as fuel for such vessel or
aircraft.
Such term shall not include any foreign personal
holding company income (as defined in subsection (c)).
(2) Paragraph (1) applies only where corporation has
produced 1,000 barrels per day or more.--
(A) In general.--The term ``foreign base
company oil related income'' shall not include
any income of a foreign corporation if such
corporation is not a large oil producer for the
taxable year.
(B) Large oil producer.--For purposes of
subparagraph (A), the term ``large oil
producer'' means any corporation if, for the
taxable year or for the preceding taxable year,
the average daily production of foreign crude
oil and natural gas of the related group which
includes such corporation equaled or exceeded
1,000 barrels.
(C) Related group.--The term ``related
group'' means a group consisting of the foreign
corporation and any other person who is a
related person with respect to such
corporation.
(D) Average daily production of foreign crude
oil and natural gas.--For purposes of this
paragraph, the average daily production of
foreign crude oil or natural gas of any related
group for any taxable year (and the conversion
of cubic feet of natural gas into barrels)
shall be determined under rules similar to the
rules of section 613A except that only crude
oil or natural gas from a well located outside
the United States shall be taken into account.
(h) Special Rule for Income Derived in the Active Conduct of
Banking, Financing, or Similar Businesses.--
(1) In general.--For purposes of subsection (c)(1),
foreign personal holding company income shall not
include qualified banking or financing income of an
eligible controlled foreign corporation.
(2) Eligible controlled foreign corporation.--For
purposes of this subsection--
(A) In general.--The term ``eligible
controlled foreign corporation'' means a
controlled foreign corporation which--
(i) is predominantly engaged in the
active conduct of a banking, financing,
or similar business, and
(ii) conducts substantial activity
with respect to such business.
(B) Predominantly engaged.--A controlled
foreign corporation shall be treated as
predominantly engaged in the active conduct of
a banking, financing, or similar business if--
(i) more than 70 percent of the gross
income of the controlled foreign
corporation is derived directly from
the active and regular conduct of a
lending or finance business from
transactions with customers which are
not related persons,
(ii) it is engaged in the active
conduct of a banking business and is an
institution licensed to do business as
a bank in the United States (or is any
other corporation not so licensed which
is specified by the Secretary in
regulations), or
(iii) it is engaged in the active
conduct of a securities business and is
registered as a securities broker or
dealer under section 15(a) of the
Securities Exchange Act of 1934 or is
registered as a Government securities
broker or dealer under section 15C(a)
of such Act (or is any other
corporation not so registered which is
specified by the Secretary in
regulations).
(3) Qualified banking or financing income.--For
purposes of this subsection--
(A) In general.--The term ``qualified banking
or financing income'' means income of an
eligible controlled foreign corporation which--
(i) is derived in the active conduct
of a banking, financing, or similar
business by--
(I) such eligible controlled
foreign corporation, or
(II) a qualified business
unit of such eligible
controlled foreign corporation,
(ii) is derived from one or more
transactions--
(I) with customers located in
a country other than the United
States, and
(II) substantially all of the
activities in connection with
which are conducted directly by
the corporation or unit in its
home country, and
(iii) is treated as earned by such
corporation or unit in its home country
for purposes of such country's tax
laws.
(B) Limitation on nonbanking and
nonsecurities businesses.--No income of an
eligible controlled foreign corporation not
described in clause (ii) or (iii) of paragraph
(2)(B) (or of a qualified business unit of such
corporation) shall be treated as qualified
banking or financing income unless more than 30
percent of such corporation's or unit's gross
income is derived directly from the active and
regular conduct of a lending or finance
business from transactions with customers which
are not related persons and which are located
within such corporation's or unit's home
country.
(C) Substantial activity requirement for
cross border income.--The term ``qualified
banking or financing income'' shall not include
income derived from 1 or more transactions with
customers located in a country other than the
home country of the eligible controlled foreign
corporation or a qualified business unit of
such corporation unless such corporation or
unit conducts substantial activity with respect
to a banking, financing, or similar business in
its home country.
(D) Determinations made separately.--For
purposes of this paragraph, the qualified
banking or financing income of an eligible
controlled foreign corporation and each
qualified business unit of such corporation
shall be determined separately for such
corporation and each such unit by taking into
account--
(i) in the case of the eligible
controlled foreign corporation, only
items of income, deduction, gain, or
loss and activities of such corporation
not properly allocable or attributable
to any qualified business unit of such
corporation, and
(ii) in the case of a qualified
business unit, only items of income,
deduction, gain, or loss and activities
properly allocable or attributable to
such unit.
(E) Direct conduct of activities.--For
purposes of subparagraph (A)(ii)(II), an
activity shall be treated as conducted directly
by an eligible controlled foreign corporation
or qualified business unit in its home country
if the activity is performed by employees of a
related person and--
(i) the related person is an eligible
controlled foreign corporation the home
country of which is the same as the
home country of the corporation or unit
to which subparagraph (A)(ii)(II) is
being applied,
(ii) the activity is performed in the
home country of the related person, and
(iii) the related person is
compensated on an arm's- length basis
for the performance of the activity by
its employees and such compensation is
treated as earned by such person in its
home country for purposes of the home
country's tax laws.
(4) Lending or finance business.--For purposes of
this subsection, the term ``lending or finance
business'' means the business of--
(A) making loans,
(B) purchasing or discounting accounts
receivable, notes, or installment obligations,
(C) engaging in leasing (including entering
into leases and purchasing, servicing, and
disposing of leases and leased assets),
(D) issuing letters of credit or providing
guarantees,
(E) providing charge and credit card
services, or
(F) rendering services or making facilities
available in connection with activities
described in subparagraphs (A) through (E)
carried on by--
(i) the corporation (or qualified
business unit) rendering services or
making facilities available, or
(ii) another corporation (or
qualified business unit of a
corporation) which is a member of the
same affiliated group (as defined in
section 1504, but determined without
regard to section 1504(b)(3)).
(5) Other definitions.--For purposes of this
subsection--
(A) Customer.--The term ``customer'' means,
with respect to any controlled foreign
corporation or qualified business unit, any
person which has a customer relationship with
such corporation or unit and which is acting in
its capacity as such.
(B) Home country.--Except as provided in
regulations--
(i) Controlled foreign corporation.--
The term ``home country'' means, with
respect to any controlled foreign
corporation, the country under the laws
of which the corporation was created or
organized.
(ii) Qualified business unit.--The
term ``home country'' means, with
respect to any qualified business unit,
the country in which such unit
maintains its principal office.
(C) Located.--The determination of where a
customer is located shall be made under rules
prescribed by the Secretary.
(D) Qualified business unit.--The term
``qualified business unit'' has the meaning
given such term by section 989(a).
(E) Related person.--The term ``related
person'' has the meaning given such term by
subsection (d)(3).
(6) Coordination with exception for dealers.--
Paragraph (1) shall not apply to income described in
subsection (c)(2)(C)(ii) of a dealer in securities
(within the meaning of section 475) which is an
eligible controlled foreign corporation described in
paragraph (2)(B)(iii).
(7) Anti-abuse rules.--For purposes of applying this
subsection and subsection (c)(2)(C)(ii)--
(A) there shall be disregarded any item of
income, gain, loss, or deduction with respect
to any transaction or series of transactions
one of the principal purposes of which is
qualifying income or gain for the exclusion
under this section, including any transaction
or series of transactions a principal purpose
of which is the acceleration or deferral of any
item in order to claim the benefits of such
exclusion through the application of this
subsection,
(B) there shall be disregarded any item of
income, gain, loss, or deduction of an entity
which is not engaged in regular and continuous
transactions with customers which are not
related persons,
(C) there shall be disregarded any item of
income, gain, loss, or deduction with respect
to any transaction or series of transactions
utilizing, or doing business with--
(i) one or more entities in order to
satisfy any home country requirement
under this subsection, or
(ii) a special purpose entity or
arrangement, including a
securitization, financing, or similar
entity or arrangement,
if one of the principal purposes of such
transaction or series of transactions is
qualifying income or gain for the exclusion
under this subsection, and
(D) a related person, an officer, a director,
or an employee with respect to any controlled
foreign corporation (or qualified business
unit) which would otherwise be treated as a
customer of such corporation or unit with
respect to any transaction shall not be so
treated if a principal purpose of such
transaction is to satisfy any requirement of
this subsection.
(8) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection, subsection
(c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last
sentence of subsection (e)(2).
(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection
(e)(2) shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2015, and to taxable years of United
States shareholders with or within which any such
taxable year of such foreign corporation ends.
(i) Special Rule for Income Derived in the Active Conduct of
Insurance Business.--
(1) In general.--For purposes of subsection (c)(1),
foreign personal holding company income shall not
include qualified insurance income of a qualifying
insurance company.
(2) Qualified insurance income.--The term ``qualified
insurance income'' means income of a qualifying
insurance company which is--
(A) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from the
investments made by a qualifying insurance
company or a qualifying insurance company
branch of its reserves allocable to exempt
contracts or of 80 percent of its unearned
premiums from exempt contracts (as both are
determined in the manner prescribed under
paragraph (4)), or
(B) received from a person other than a
related person (within the meaning of
subsection (d)(3)) and derived from investments
made by a qualifying insurance company or a
qualifying insurance company branch of an
amount of its assets allocable to exempt
contracts equal to--
(i) in the case of property,
casualty, or health insurance
contracts, one-third of its premiums
earned on such insurance contracts
during the taxable year (as defined in
section 832(b)(4)), and
(ii) in the case of life insurance or
annuity contracts, 10 percent of the
reserves described in subparagraph (A)
for such contracts.
(3) Principles for determining insurance income.--
Except as provided by the Secretary, for purposes of
subparagraphs (A) and (B) of paragraph (2)--
(A) in the case of any contract which is a
separate account-type contract (including any
variable contract not meeting the requirements
of section 817), income credited under such
contract shall be allocable only to such
contract, and
(B) income not allocable under subparagraph
(A) shall be allocated ratably among contracts
not described in subparagraph (A).
(4) Methods for determining unearned premiums and
reserves.--For purposes of paragraph (2)(A)--
(A) Property and casualty contracts.--The
unearned premiums and reserves of a qualifying
insurance company or a qualifying insurance
company branch with respect to property,
casualty, or health insurance contracts shall
be determined using the same methods and
interest rates which would be used if such
company or branch were subject to tax under
subchapter L, except that--
(i) the interest rate determined for
the functional currency of the company
or branch, and which, except as
provided by the Secretary, is
calculated in the same manner as the
Federal mid-term rate under section
1274(d), shall be substituted for the
applicable Federal interest rate, and
(ii) such company or branch shall use
the appropriate foreign loss payment
pattern.
(B) Life insurance and annuity contracts.--
(i) In general.--Except as provided
in clause (ii), the amount of the
reserve of a qualifying insurance
company or qualifying insurance company
branch for any life insurance or
annuity contract shall be equal to the
greater of--
(I) the net surrender value
of such contract (as defined in
section 807(e)(1)(A)), or
(II) the reserve determined
under paragraph (5).
(ii) Ruling request, etc.--The amount
of the reserve under clause (i) shall
be the foreign statement reserve for
the contract (less any catastrophe,
deficiency, equalization, or similar
reserves), if, pursuant to a ruling
request submitted by the taxpayer or as
provided in published guidance, the
Secretary determines that the factors
taken into account in determining the
foreign statement reserve provide an
appropriate means of measuring income.
(C) Limitation on reserves.--In no event
shall the reserve determined under this
paragraph for any contract as of any time
exceed the amount which would be taken into
account with respect to such contract as of
such time in determining foreign statement
reserves (less any catastrophe, deficiency,
equalization, or similar reserves).
(5) Amount of reserve.--The amount of the reserve
determined under this paragraph with respect to any
contract shall be determined in the same manner as it
would be determined if the qualifying insurance company
or qualifying insurance company branch were subject to
tax under subchapter L, except that in applying such
subchapter--
(A) the interest rate determined for the
functional currency of the company or branch,
and which, except as provided by the Secretary,
is calculated in the same manner as the Federal
mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest
rate,
(B) the highest assumed interest rate
permitted to be used in determining foreign
statement reserves shall be substituted for the
prevailing State assumed interest rate, and
(C) tables for mortality and morbidity which
reasonably reflect the current mortality and
morbidity risks in the company's or branch's
home country shall be substituted for the
mortality and morbidity tables otherwise used
for such subchapter.
The Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying
insurance company may be used for 1 or more of its
qualifying insurance company branches when appropriate.
(6) Definitions.--For purposes of this subsection,
any term used in this subsection which is also used in
section 953(e) shall have the meaning given such term
by section 953.
VII. DISSENTING VIEWS
The five permanent, unpaid-for tax extender bills approved
by the Republicans at the markup would add more than $411
billion to the deficit. Combined with the eleven tax bills that
were approved by the Republicans in previous markups this
Congress, these sixteen tax bills would add more than $1
trillion to the deficit. In the 113th Congress, Ways and Means
Committee Republicans selectively approved fourteen of the more
than fifty expired tax provisions, totaling more than $825
billion worth of deficit-financed, permanent tax cuts. This
selective approach failed last Congress, with none of these
permanent provisions being enacted into law or even considered
by the Senate. The permanent, unpaid-for bills marked up by the
Committee set us down a partisan path, when we should be
working in a responsible, bipartisan manner on tax reform.
Even though a number of these bills were introduced
individually with some bipartisan support, our opposition to
these bills is based on the position that these tax provisions
should not be made permanent without any revenue offset. The
fiscally irresponsible approach that the Committee Republicans
are taking with respect to this and other legislation
undermines the bipartisan support that some of the provisions
enjoy. The cost of making this provision permanent should be
offset, and Republicans should stop playing games by passing
these provisions outside of comprehensive tax reform. The
American people expect a tax code that maintains and supports
our shared priorities, and each time the Committee considers
these bills in a piecemeal approach, it is taking a step in the
wrong direction and away from comprehensive tax reform.
Expired provisions must be dealt with in a comprehensive
manner. 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.
