Foreign Tax Compliance Act of 1994

Summary: Foreign Tax Compliance Act of 1994 - Amends the Internal Revenue Code to include in the taxation of controlled foreign corporations income attributable to imported property. 
Requires the separate application of limitations on the foreign tax credit for imported property income. 
Expresses the sense of the Congress that deficit reduction should be achieved in part by eliminating enforcement breakdowns that enable foreign-controlled corporations operating in the United States, and foreign persons investing in the United States, to pay no taxes.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Foreign Tax Compliance Act of 
1994''.

SEC. 2. TAXATION OF INCOME OF CONTROLLED FOREIGN CORPORATIONS 
              ATTRIBUTABLE TO IMPORTED PROPERTY.

    (a) General Rule.--Subsection (a) of section 954 of the Internal 
Revenue Code of 1986 (defining foreign base company income) is amended 
by striking ``and'' at the end of paragraph (4), by striking the period 
at the end of paragraph (5) and inserting ``, and'', and by adding at 
the end the following new paragraph:
            ``(6) imported property income for the taxable year 
        (determined under subsection (h) and reduced as provided in 
        subsection (b)(5)).''
    (b) Definition of Imported Property Income.--Section 954 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new subsection:
    ``(h) Imported Property Income.--
            ``(1) In general.--For purposes of subsection (a)(6), the 
        term `imported property income' means income (whether in the 
        form of profits, commissions, fees, or otherwise) derived in 
        connection with--
                    ``(A) manufacturing, producing, growing, or 
                extracting imported property,
                    ``(B) the sale, exchange, or other disposition of 
                imported property, or
                    ``(C) the lease, rental, or licensing of imported 
                property.
        Such term shall not include any foreign oil and gas extraction 
        income (within the meaning of section 907(c)) or any foreign 
        oil related income (within the meaning of section 907(c)).
            ``(2) Imported property.--For purposes of this subsection--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the term `imported property' means 
                property which is imported into the United States by 
                the controlled foreign corporation or a related person.
                    ``(B) Imported property includes certain property 
                imported by unrelated persons.--The term `imported 
                property' includes any property imported into the 
                United States by an unrelated person if, when such 
                property was sold to the unrelated person by the 
                controlled foreign corporation (or a related person), 
                it was reasonable to expect that--
                            ``(i) such property would be imported into 
                        the United States, or
                            ``(ii) such property would be used as a 
                        component in other property which would be 
                        imported into the United States.
                    ``(C) Exception for property subsequently 
                exported.--The term `imported property' does not 
                include any property which is imported into the United 
                States and which--
                            ``(i) before substantial use in the United 
                        States, is sold, leased, or rented by the 
                        controlled foreign corporation or a related 
                        person for direct use, consumption, or 
                        disposition outside the United States, or
                            ``(ii) is used by the controlled foreign 
                        corporation or a related person as a component 
                        in other property which is so sold, leased, or 
                        rented.
            ``(3) Definitions and special rules.--
                    ``(A) Import.--For purposes of this subsection, the 
                term `import' means entering, or withdrawal from 
                warehouse, for consumption or use. Such term includes 
                any grant of the right to use an intangible (as defined 
                in section 936(b)(3)(B)) in the United States.
                    ``(B) Unrelated person.--For purposes of this 
                subsection, the term `unrelated person' means any 
                person who is not a related person with respect to the 
                controlled foreign corporation.
                    ``(C) Coordination with foreign base company sales 
                income.--For purposes of this section, the term 
                `foreign base company sales income' shall not include 
                any imported property income.''
    (c) Separate Application of Limitations on Foreign Tax Credit for 
Imported Property Income.--
            (1) In general.--Paragraph (1) of section 904(d) of the 
        Internal Revenue Code of 1986 (relating to separate application 
        of section with respect to certain categories of income) is 
        amended by striking ``and'' at the end of subparagraph (H), by 
        redesignating subparagraph (I) as subparagraph (J), and by 
        inserting after subparagraph (H) the following new 
        subparagraph:
                    ``(I) imported property income, and''.
            (2) Imported property income defined.--Paragraph (2) of 
        section 904(d) of such Code is amended by redesignating 
        subparagraphs (H) and (I) as subparagraphs (I) and (J), 
        respectively, and by inserting after subparagraph (G) the 
        following new subparagraph:
                    ``(H) Imported property income.--The term `imported 
                property income' means any income received or accrued 
                by any person which is of a kind which would be 
                imported property income (as defined in section 
                954(h)).''
            (3) Look-thru rules to apply.--Clause (i) of section 
        904(d)(3)(F) of such Code is amended by striking ``or (E)'' and 
        inserting ``(E), or (H)''.
    (d) Technical Amendments.--
            (1) Clause (iii) of section 952(c)(1)(B) of the Internal 
        Revenue Code of 1986 (relating to certain prior year deficits 
        may be taken into account) is amended by inserting the 
        following subclause after subclause (II) (and by redesignating 
        the following subclauses accordingly):
                            ``(III) imported property income,''.
            (2) Paragraph (5) of section 954(b) of such Code (relating 
        to deductions to be taken into account) is amended by striking 
        ``and the foreign base company oil related income'' and 
        inserting ``the foreign base company oil related income, and 
        the imported property income''.
    (e) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years of 
        foreign corporations beginning after December 31, 1994, and to 
        taxable years of United States shareholders within which or 
        with which such taxable years of such foreign corporations end.
            (2) Subsection (c).--The amendments made by subsection (c) 
        shall apply to taxable years beginning after December 31, 1994.

SEC. 3. IMPROVEMENTS IN THE COLLECTION OF UNITED STATES TAXES OWED BY 
              FOREIGN PERSONS.

    (a) Findings.--The Congress finds that--
            (1) foreign-controlled corporations doing business in the 
        United States do not pay their fair share of taxes;
            (2) up to 72 percent of foreign-controlled corporations 
        doing business in the United States pay no Federal income tax;
            (3) the Internal Revenue Service has limited its own 
        ability to enforce Federal tax laws against foreign-controlled 
        corporations, to the detriment of domestic taxpayers;
            (4) the Internal Revenue Service has been using antiquated 
        accounting concepts to deal with sophisticated multinational 
        corporations;
            (5) billions of dollars of Federal revenues are lost 
        annually due to the inability of the Internal Revenue Service 
        to enforce the ``arm's length'' transaction rule--not even 
        counting the costs of bureaucracy and litigation;
            (6) current procedures of the Internal Revenue Service are 
        insufficient for ensuring that a foreigner who is not a 
        resident of a foreign country does not take advantage of the 
        treaty benefits of that country; and
            (7) current regulations and other positions adopted by the 
        Internal Revenue Service may permit foreign persons to avoid 
        United States taxes by utilizing derivative financial products 
        which replicate the economic features of United States taxable 
        investments.
    (b) Sense of the Congress.--It is the sense of the Congress that 
deficit reduction should be achieved, in part, by eliminating 
enforcement breakdowns that now enable foreign-controlled corporations 
operating in the United States, and foreign persons investing in the 
United States, to pay no taxes, including--
            (1) a more streamlined and efficient method of enforcing 
        Federal tax laws involving multinational corporations, 
        especially those based abroad; in particular, the use of a 
        formula approach by the Treasury Department where the ``arm's 
        length'' transaction rule does not work; and
            (2) the Secretary of the Treasury or the Secretary's 
        delegate shall, no later than December 31, 1994, prescribe 
        regulations which--
                    (A) establish certification, refund, or other 
                procedures which ensure that any treaty benefit 
                relating to withholding of tax under sections 1441 and 
                1442 of the Internal Revenue Code of 1986 is available 
                only to persons entitled to the benefit, and
                    (B) prevent the avoidance of withholding of tax 
                under such sections by use of derivative financial 
                instruments, including regulations providing for the 
                sourcing of income of foreign residents from notional 
                principal contracts as income from sources within the 
                United States in appropriate cases.