I

108TH CONGRESS

1ST SESSION H. R. 2184

To amend the Internal Revenue Code of 1986 to prevent corporations from

exploiting tax treaties to evade taxation of United States income and

to prevent manipulation of transfer prices by deflection of income to

tax havens.

IN THE HOUSE OF REPRESENTATIVES

MAY 21, 2003

Mr. DOGGETT (for himself, Ms. BALDWIN, Mr. CROWLEY, Mr. DEFAZIO, Mr.

DELAHUNT, Ms. DELAURO, Mr. FILNER, Mr. FROST, Mr. JEFFERSON,

Mrs. JONES of Ohio, Mr. KENNEDY of Rhode Island, Mr. KLECZKA, Mr.

KUCINICH, Ms. LEE, Mr. LEVIN, Mr. LEWIS of Georgia, Mr. MARKEY,

Mr. MATSUI, Mr. MCDERMOTT, Mr. MCGOVERN, Mr. MCNULTY, Mr.

GEORGE MILLER of California, Mr. NEAL of Massachusetts, Mr.

PALLONE, Ms. LORETTA SANCHEZ of California, Mr. SANDERS, Ms.

SOLIS, Ms. SLAUGHTER, Mr. STARK, Mr. TIERNEY, and Mr. WAXMAN)

introduced the following bill; which was referred to the Committee on

Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to prevent

corporations from exploiting tax treaties to evade taxation of United States income and to prevent manipulation of transfer prices by deflection of income to tax

havens.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. SHORT TITLE.

2 This Act may be cited as the ‘‘Fairness and Account3 ability in International Taxation Act of 2003’’.

4 SEC. 2. DENIAL OF TREATY BENEFITS FOR CERTAIN DE5 DUCTIBLE PAYMENTS.

6 (a) IN GENERAL.—Section 894 of the Internal Rev7 enue Code of 1986 (relating to income affected by treaty)

8 is amended by adding at the end the following new sub9 section:

10 ‘‘(d) DENIAL OF TREATY BENEFITS FOR CERTAIN

11 DEDUCTIBLE PAYMENTS.—

12 ‘‘(1) IN GENERAL.—A foreign entity shall not

13 be entitled under any income tax treaty of the

14 United States with a foreign country to any reduced

15 rate of any withholding tax imposed by this title on

16 any deductible foreign payment unless such entity is

17 predominantly owned by individuals who are resi18 dents of such foreign country.

19 ‘‘(2) DEDUCTIBLE FOREIGN PAYMENT.—For

20 purposes of paragraph (1), the term ‘deductible for21 eign payment’ means any payment—

22 ‘‘(A) which is made by a domestic entity

23 directly or indirectly to a related person which

24 is a foreign entity, and

25 ‘‘(B) which is allowable as a deduction

26 under this chapter.
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1 ‘‘(3) DOMESTIC AND FOREIGN ENTITIES; RE2 LATED PERSON.—For purposes of this subsection—

3 ‘‘(A) DOMESTIC ENTITY.—The term ‘do4 mestic entity’ means any domestic corporation

5 or domestic partnership.

6 ‘‘(B) FOREIGN ENTITY.—The term ‘for7 eign entity’ means any foreign corporation or

8 foreign partnership.

9 ‘‘(C) RELATED PERSON.—The term ‘re10 lated person’ has the meaning given such term

11 by section 954(d)(3) (determined by sub12 stituting ‘domestic entity’ for ‘controlled foreign

13 corporation’ each place it appears).

14 ‘‘(4) PREDOMINANT OWNERSHIP.—For pur15 poses of this subsection—

16 ‘‘(A) IN GENERAL.—An entity is predomi17 nantly owned by individuals who are residents

18 of a foreign country if—

19 ‘‘(i) in the case of a corporation, more

20 than 50 percent (by value) of the stock of

21 such corporation is owned (within the

22 meaning of section 883(c)(4)) by individ23 uals who are residents of such foreign

24 country, or
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1 ‘‘(ii) in the case of a partnership,

2 more than 50 percent (by value) of the

3 beneficial interests in such partnership are

4 so owned.

5 ‘‘(B) PUBLICLY TRADED CORPORATIONS.—

6 A foreign corporation also shall be treated as

7 predominantly owned by individuals who are

8 residents of a foreign country if—

9 ‘‘(i)(I) the stock of such corporation is

10 primarily and regularly traded on an estab11 lished securities market in such foreign

12 country, and

13 ‘‘(II) such corporation has activities

14 within such foreign country which are sub15 stantial in relation to the total activities of

16 such corporation and its related persons,

17 or

18 ‘‘(ii) such corporation is wholly owned

19 (directly or indirectly) by another foreign

20 corporation which is described in clause (i).

21 ‘‘(C) SPECIAL RULE.—

22 ‘‘(i) IN GENERAL.—A foreign corpora23 tion shall be treated as meeting the re24 quirements of subparagraph (A) if—
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1 ‘‘(I) such requirements would be

2 met if ‘30 percent’ were substituted

3 for ‘50 percent’ in subparagraph

4 (A)(i),

5 ‘‘(II) the treaty country is a

6 member of a multinational economic

7 association such as the European

8 Union, and

9 ‘‘(III) at least 50 percent of the

10 value of the stock of the corporation is

11 owned (within the meaning of section

12 883(c)(4)) by individuals who are resi13 dents of the treaty country or other

14 qualified foreign countries.

15 ‘‘(ii) QUALIFIED FOREIGN COUN16 TRY.—For purposes of this subparagraph,

17 the term ‘qualified foreign country’ means

18 any foreign country if—

19 ‘‘(I) such foreign country is a

20 member of the multinational economic

21 association of which the treaty coun22 try is a member, and

23 ‘‘(II) such foreign country has a

24 tax treaty with the United States pro25 viding a withholding tax rate reduc-
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1 tion which is not less than the with2 holding tax rate reduction applicable

3 (without regard to this subsection) to

4 the payment received by such foreign

5 corporation.

6 ‘‘(5) EXCEPTION FOR CORPORATIONS WITH

7 SUBSTANTIAL BUSINESS ACTIVITIES IN TREATY

8 COUNTRY.—Paragraph (1) shall not apply to a pay9 ment received by a foreign corporation if such cor10 poration has substantial business activities in the

11 treaty country and if such corporation establishes to

12 the satisfaction of the Secretary that the payment is

13 subject to an effective rate of income tax imposed by

14 such country greater than 90 percent of the max15 imum rate of tax specified in section 11.

16 ‘‘(6) EXCEPTION FOR PAYMENTS RECEIVED BY

17 CONTROLLED FOREIGN CORPORATION.—Paragraph

18 (1) shall not apply to any deductible foreign pay19 ment made by a corporation if the recipient of the

20 payment is a controlled foreign corporation and the

21 payor is a United States shareholder (as defined in

22 section 951(b)) of such corporation.

23 ‘‘(7) CONDUIT PAYMENTS.—Under regulations

24 prescribed by the Secretary, paragraph (1) shall not
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1 apply to a payment received by a foreign entity re2 ferred to in paragraph (1) if—

3 ‘‘(A) within a reasonable period after such

4 entity receives such payment, such entity makes

5 a comparable payment directly or indirectly to

6 another related person,

7 ‘‘(B) such related person is a resident of a

8 foreign country with which the United States

9 has an income tax treaty,

10 ‘‘(C) such related person is predominantly

11 owned by individuals who are residents of such

12 country, and

13 ‘‘(D) the withholding tax rate applicable

14 under such treaty is equal to or greater than

15 the withholding tax rate applicable (without re16 gard to this paragraph) to the payment received

17 by such foreign entity.

18 A similar rule shall apply where the payment is in19 cludible in the gross income of a related person by

20 reason of a foreign law comparable to subpart F of

21 part III of subchapter N.’’

22 (b) EFFECTIVE DATE.—The amendment made by

23 this section shall take effect on the date of the enactment

24 of this Act.
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1 SEC. 3. TRANSFER PRICE REDUCED BY DEFLECTED TAX

2 HAVEN INCOME.

3 (a) IN GENERAL.—Section 482 of the Internal Rev4 enue Code of 1986 (relating to allocation of income and

5 deductions among taxpayers) is amended by inserting ‘‘(a)

6 IN GENERAL.—’’ before ‘‘In the case of two or more’’ and

7 by adding at the end the following new subsection:

8 ‘‘(b) SPECIAL RULE FOR RELATED-PARTY INBOUND

9 AND OUTBOUND TRANSACTIONS.—

10 ‘‘(1) IN GENERAL.—In the case of property or

11 services to which this subsection applies, the transfer

12 price under this section for such property or service

13 shall be the transfer price determined without regard

14 to this subsection—

15 ‘‘(A) in the case of a related-party inbound

16 transaction, reduced by the deflected tax haven

17 income with respect to such property or service,

18 or

19 ‘‘(B) in the case of a related-party out20 bound transaction, increased by the deflected

21 tax haven income with respect to such property

22 or service.

23 ‘‘(2) PROPERTY OR SERVICES TO WHICH SUB24 SECTION APPLIES.—

25 ‘‘(A) IN GENERAL.—This subsection ap26 plies to any property or services if there is a re-
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1 lated-party inbound or outbound transaction

2 with respect to such property or services.

3 ‘‘(B) RELATED-PARTY INBOUND TRANS4 ACTION.—A related-party inbound transaction

5 is any transaction where—

6 ‘‘(i) property is acquired directly or

7 indirectly by a foreign-controlled domestic

8 corporation from a foreign related person,

9 or

10 ‘‘(ii) the services are performed di11 rectly or indirectly for a foreign-controlled

12 domestic corporation by a foreign related

13 person.

14 ‘‘(C) RELATED-PARTY OUTBOUND TRANS15 ACTION.—A related-party outbound transaction

16 is any transaction where—

17 ‘‘(i) property is sold directly or indi18 rectly by a foreign-controlled domestic cor19 poration to a foreign related person, or

20 ‘‘(ii) services are performed directly or

21 indirectly by a foreign-controlled domestic

22 corporation for a foreign related person.

23 ‘‘(3) DEFLECTED TAX HAVEN INCOME.—For

24 purposes of this subsection—
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1 ‘‘(A) IN GENERAL.—The term ‘deflected

2 tax haven income’ means income (whether in

3 the form of profits, commissions, fees, or other4 wise) derived by a foreign related person in con5 nection with any transaction related to property

6 or services to which this subsection applies if

7 such income would be treated as foreign base

8 company sales income (as defined in section

9 954(d)) or foreign base company services in10 come (as defined in section 954(e)) were such

11 foreign related person treated as a controlled

12 foreign corporation.

13 ‘‘(B) EXCEPTION FOR INCOME SUBJECT

14 TO FOREIGN TAXES.—

15 ‘‘(i) HIGH TAXES.—Such term shall

16 not include any item of income with re17 spect to which the requirements of section

18 954(b)(4) are met.

19 ‘‘(ii) OTHER TAXES.—If the taxpayer

20 establishes to the satisfaction of the Sec21 retary that an item of income was subject

22 to an income tax imposed by a foreign

23 country and the effective rate of such tax

24 (and such effective rate was not greater

25 than 90 percent of the maximum rate of
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1 tax specified in section 11), the term ‘de2 flected tax haven income’ shall not include

3 the same proportion of such income as

4 such effective rate of tax bears to 90 per5 cent.

6 ‘‘(4) OTHER DEFINITIONS.—For purposes of

7 this subsection—

8 ‘‘(A) FOREIGN RELATED PERSON.—The

9 term ‘foreign related person’ means any foreign

10 person who is related (within the meaning of

11 subsection (a)) to the foreign-controlled domes12 tic corporation.

13 ‘‘(B) FOREIGN-CONTROLLED DOMESTIC

14 CORPORATION.—The term ‘foreign-controlled

15 domestic corporation’ means any domestic cor16 poration which is 25-percent foreign-owned (as

17 defined in section 6038A(c)).’’

18 (b) EFFECTIVE DATE.—The amendment made by

19 this section shall apply to property acquired, and services

20 performed, after ll.

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