COMPARISON OF CERTAIN PROVISIONS OF H.R. 4520 AS PASSED BY THE

HOUSE OF REPRESENTATIVES AND AS AMENDED BY THE SENATE:

PROVISIONS RELATING TO INTERNATIONAL TAX REFORM AND SIMPLIFICATION

FOR UNITED STATES BUSINESSES

Prepared by the Staff of the

JOINT COMMITTEE ON TAXATION

September 29, 2004

JCX-63-04
ii

Contents

Page

INTRODUCTION ...................................................................................................................................................................................... 1

1. Interest expense allocation rules (sec. 301 of the House bill and sec. 205 of the Senate amendment) ...................................... 3

2. Recharacterize overall domestic loss (sec. 302 of the House bill and sec. 204 of the Senate amendment) ............................... 4

3. Foreign tax credit baskets and base differences (sec. 303 of the House bill and sec. 225 of the Senate amendment)............... 5

4. Apply look-through rules for dividends from noncontrolled section 902 corporations (sec. 304 of the House bill and

sec. 202 of the Senate amendment) ............................................................................................................................................ 7

5. Attribution of stock ownership through partnerships in determining section 902 and 960 credits (sec. 305 of the House

bill and sec. 213 of the Senate amendment)............................................................................................................................... 8

6. Foreign tax credit treatment of deemed payments under section 367(d) (sec. 306 of the House bill and sec. 229 of the

Senate amendment) .................................................................................................................................................................... 9

7. United States property not to include certain assets of controlled foreign corporations (sec. 307 of the House bill and

sec. 227 of the Senate amendment) .......................................................................................................................................... 10

8. Election not to use average exchange rate for foreign tax paid other than in functional currency (sec. 308 of the House

bill and sec. 224 of the Senate amendment)............................................................................................................................. 11

9. Eliminate secondary withholding tax with respect to dividends paid by certain foreign corporations (sec. 309 of the

House bill and sec. 215 of the Senate amendment).................................................................................................................. 11

10. Provide equal treatment for interest paid by foreign partnerships and foreign corporations (sec. 310 of the House bill

 and sec. 228 of the Senate amendment) .................................................................................................................................. 12

11. Look-through treatment of payments between related CFCs (sec. 311 of the House bill and sec. 222 of the Senate

 amendment) ............................................................................................................................................................................. 13

12. Look-through treatment under subpart F for sales of partnership interests (sec. 312 of the House bill and sec. 223

 of the Senate amendment) ....................................................................................................................................................... 15

13. Repeal of foreign personal holding company rules and foreign investment company rules (sec. 313 of the House bill

 and sec. 211 of the Senate amendment) .................................................................................................................................. 16

14. Determination of foreign personal holding company income with respect to transactions in commodities (sec. 314

 of the House bill and sec. 206 of the Senate amendment)....................................................................................................... 17

15. Active leasing income from aircraft and vessels (sec. 315 of the House bill and sec. 221 of the Senate amendment) ......... 18

16. Modification of subpart F exemption for active financing (sec. 316 of the House bill and sec. 226 of the Senate 

 amendment) ............................................................................................................................................................................. 20
Page

iii

17. 20-year foreign tax credit carryover; one-year foreign tax credit carryback (sec. 201 of the Senate amendment)................ 22

18. Expand the subpart F de minimis rule to the lesser of five percent of gross income or $5 million (sec. 212 of the Senate

 amendment) ............................................................................................................................................................................. 23

19. Limit application of uniform capitalization rules in the case of foreign persons (sec. 214 of the Senate amendment) ......... 24

20. Eliminate 30-percent tax on certain U.S.-source capital gains of nonresident individuals (sec. 216 of the Senate

 amendment) ............................................................................................................................................................................. 25

21. Modification of the treatment of certain REIT distributions attributable to gain from sales or exchanges of U.S. real 

 property interests (sec. 230 of the Senate amendment).......................................................................................................... 25

22. Exclusion of certain horse-racing and dog-racing gambling winnings from the income of nonresident alien individuals

 (sec. 232 of the Senate amendment)........................................................................................................................................ 26

23. Limitation of withholding on U.S.-source dividends paid to Puerto Rico corporations (sec. 233 of the Senate

 amendment) ............................................................................................................................................................................. 27

24. Report on WTO dispute settlement panels and the appellate body (sec. 234 of the Senate amendment) .............................. 28

25. Study of impact of international tax laws on taxpayers other than large corporations (sec. 235 of the Senate

 amendment) ............................................................................................................................................................................. 29

26. Delay in effective date of final regulations governing exclusion of income from international operation of ships and

 aircraft (sec. 236 of the Senate amendment) ........................................................................................................................... 30

27. Interest payments deductible where taxpayer could have borrowed without a guarantee (sec. 237 of the Senate

 amendment) ............................................................................................................................................................................. 31
1

INTRODUCTION

On June 17, 2004, the House of Representatives passed H.R. 4520, the “American Jobs Creations Act of 2004.” On July 15, 

2004, the Senate amended H.R. 4520 by substituting the text and title of S. 1637, the “Jumpstart Our Business Strength (JOBS) Act,”1

and an additional non-tax amendment.

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide 

provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make 

numerous other changes to the Internal Revenue Code. This document, 2 prepared by the staff of the Joint Committee on Taxation, 

compares certain provisions relating to international tax reform and simplification for United States businesses. 

In this publication set,3 (JCX-61-04 to JCX-66-04), the staff of the Joint Committee on Taxation compares provisions of H.R. 

4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income 

 

1

 The Senate originally passed S. 1637 on May 11, 2004.

2

 This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Provisions Relating to International Tax Reform and 

Simplification for United States Businesses (JCX-63-04), September 29, 2004. 

3

 Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives 

and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production, 

and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-61-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004; Joint Committee on 

Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: 

Provisions Relating to International Tax Reform and Simplification for United States Businesses (JCX-63-04), September 29, 2004; 

Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as 

Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain 

Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud 

Provisions (JCX-65-04), September 29, 2004; and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as 

Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-66-04), September 29, 2004.
2

exclusions, domestic production, corporate income tax rates applicable to small corporations, tax incentives for manufacturers, small 

businesses and farming, international tax reform and simplification for United States businesses, alcohol fuels and fuel fraud, expiring 

provisions, and certain revenue raising provisions.
3

Provision Present Law House Bill Senate Amendment

1. Interest expense allocation 

rules (sec. 301 of the House bill 

and sec. 205 of the Senate 

amendment)

In order to compute the foreign tax 

credit limitation, a taxpayer must 

determine the amount of its taxable 

income from foreign sources. In so 

doing, the taxpayer must allocate 

and apportion deductions between 

U.S.-source gross income and 

foreign-source gross income.

In the case of interest expense, the 

rules generally are based on the 

approach that money is fungible 

and that interest expense is 

properly attributable to all assets of 

a taxpayer, regardless of any 

specific purpose for incurring the 

underlying obligation.

This fungibility principle is applied 

on a “water’s edge” basis, under 

which the U.S. interest expense of 

a multinational group is effectively 

deemed to support both U.S. and 

foreign assets of the group, but the 

interest expense of foreign group 

members is disregarded for this 

purpose. As a result, some of the 

group’s U.S. interest expense will 

reduce foreign-source income, 

even in cases in which foreign 

group members borrow locally at 

levels appropriate to support their 

assets.

Provides a one-time election under 

which the taxable income of the 

domestic members of an affiliated 

group from sources outside the 

United States generally is 

determined by allocating and 

apportioning interest expense of 

the domestic members of a 

worldwide affiliated group on a 

worldwide-group basis (a 

“worldwide fungibility” approach).

If a group makes this election, the 

third-party interest expense of 

domestic group members is 

allocated and apportioned to 

foreign-source income in an 

amount equal to the excess (if any) 

of: (1) the group’s worldwide thirdparty interest expense multiplied 

by the ratio which the foreign 

assets of the worldwide affiliated 

group bears to the total assets of 

the worldwide affiliated group; 

over (2) the third-party interest 

expense incurred by foreign group 

members to the extent such interest 

would be allocated to foreign 

sources if the provision’s principles 

were applied separately to the 

foreign members of the group.

Same as the House bill.
4

Provision Present Law House Bill Senate Amendment

A “financial corporation” is not 

treated as a member of the regular 

affiliated group for purposes of 

applying the allocation and 

apportionment rules to nonfinancial members of that group. 

Instead, all financial corporations 

that would be so affiliated are 

treated as a separate single 

corporation for these purposes.

The bill also allows taxpayers to 

apply the present-law financial 

group rules to exclude certain 

financial institutions from the 

affiliated group for interest 

allocation purposes. In addition, 

the bill provides a one-time 

“financial institution group” 

election that expands the presentlaw bank group.

Effective date.–Taxable years 

beginning after December 31, 

2008.

2. Recharacterize overall 

domestic loss (sec. 302 of the 

House bill and sec. 204 of the 

Senate amendment)

If a taxpayer’s losses from foreign 

sources exceed its foreign-source 

income, the excess (“overall 

foreign loss,” or “OFL”) may 

offset U.S.-source income. Such 

an offset reduces the effective rate 

of U.S. tax on U.S.-source income. 

Under present law, a portion of 

foreign-source taxable income 

earned after an OFL year is 

recharacterized as U.S.-source 

taxable income for foreign tax 

credit purposes. The effect of this 

recapture is to reduce the foreign 

tax credit limitation in one or more 

years following an OFL year and, 

therefore, the amount of U.S. tax 

The House bill applies a resourcing rule to U.S.-source 

income in cases in which a 

taxpayer’s foreign tax credit 

limitation has been reduced as a 

result of an overall domestic loss. 

Under the provision, a portion of 

the taxpayer's U.S.-source income 

for each succeeding taxable year is 

recharacterized as foreign-source 

income in an amount equal to the 

lesser of: (1) the amount of the 

unrecharacterized overall domestic 

losses for years prior to such 

succeeding taxable year, and (2) 50 

percent of the taxpayer's U.S.-

source income for such succeeding 

taxable year.

Same as the House bill.
5

Provision Present Law House Bill Senate Amendment

that can be offset by foreign tax 

credits in the later year or years.

A U.S.-source loss reduces precredit U.S. tax on worldwide 

income to an amount less than the 

hypothetical tax that would apply 

to the taxpayer's foreign-source 

income viewed in isolation, thus 

reducing the foreign tax credit 

limitation. The existence of 

foreign-source taxable income in 

the year of the U.S.-source loss 

also reduces or eliminates any net 

operating loss carryover that the 

U.S.-source loss would otherwise 

have generated.

There is currently no mechanism 

for recharacterizing subsequent 

U.S.-source income as foreignsource income, to correspond with 

the treatment of OFLs.

Any U.S.-source income 

recharacterized under the provision 

is allocated among and increases 

the various foreign tax credit 

separate limitation categories in the 

same proportion that those 

categories were reduced by the 

prior overall domestic losses, in a 

manner similar to the 

recharacterization rules for separate 

limitation losses.

Effective date.–Losses incurred in 

taxable years beginning after 

December 31, 2006.

3. Foreign tax credit baskets and 

base differences (sec. 303 of the 

House bill and sec. 225 of the 

Senate amendment)

Number of foreign tax credit 

baskets.–The foreign tax credit 

limitation is applied separately to 

the following categories of income: 

(1) passive income; (2) high 

withholding tax interest; (3) 

financial services income; (4) 

shipping income; (5) certain 

dividends received from 

Number of foreign tax credit 

baskets.–The House bill generally 

reduces the number of foreign tax 

credit limitation categories to two: 

passive category income and 

general category income. Other 

income is included in one of the 

two categories, as appropriate. For 

example, shipping income 

Number of foreign tax credit 

baskets.–No provision.
6

Provision Present Law House Bill Senate Amendment

noncontrolled section 902 foreign 

corporations (“10/50 companies”); 

(6) certain dividends from a 

domestic international sales 

corporation or former domestic 

international sales corporation; (7) 

taxable income attributable to 

certain foreign trade income; (8) 

certain distributions from a foreign 

sales corporation or former foreign 

sales corporation; and (9) any other 

income not described in items (1) 

through (8) (so-called “general 

basket” income).

Base differences.–Under Treasury 

regulations, foreign taxes are 

allocated and apportioned to the 

same limitation categories as the 

income to which they relate. In 

cases in which foreign law imposes 

tax on an item of income that does 

generally falls into the general 

limitation category, whereas high 

withholding tax interest generally 

could fall into the passive income 

or the general limitation category, 

depending on the circumstances. 

Dividends from a domestic 

international sales corporation or 

former domestic international sales 

corporation, income attributable to 

certain foreign trade income, and 

certain distributions from a foreign 

sales corporation or former foreign 

sales corporation all are assigned to 

the passive income limitation 

category.

In the case of a member of a 

financial services group or any 

other person predominantly 

engaged in the active conduct of a 

banking, insurance, financing or 

similar business, the bill treats 

income meeting the definition of 

financial services income as 

general category income.

Base differences.–Creditable 

foreign taxes that are imposed on 

amounts that do not constitute 

income under U.S. tax principles 

are treated as imposed on general 

limitation income.

Base differences.–The Senate 

amendment provides that creditable 

foreign taxes imposed on amounts 

that do not constitute income under 

U.S. tax principles are treated as 

imposed on general limitation 

income or on financial services 
7

Provision Present Law House Bill Senate Amendment

not constitute income under U.S. 

tax principles (a “base difference” 

item), the tax is treated as imposed 

on income in the general limitation 

category.

Effective date.–Taxable years 

beginning after December 31, 

2006.

income, at the taxpayer’s election. 

Once made, this election also 

applies for all subsequent taxable 

years unless revoked with the 

consent of the Treasury Secretary.

Effective date.–Taxable years 

ending after date of enactment.

4. Apply look-through rules for 

dividends from noncontrolled 

section 902 corporations (sec. 304 

of the House bill and sec. 202 of 

the Senate amendment)

Special foreign tax credit 

limitations apply in the case of 

dividends received from a foreign 

corporation in which the taxpayer 

owns at least 10 percent of the 

stock by vote and which is not a 

controlled foreign corporation (a 

so-called “10/50 company”). 

Dividends paid by a 10/50 

company that is not a passive 

foreign investment company out of 

earnings and profits accumulated in 

taxable years beginning before 

January 1, 2003, are subject to a 

single foreign tax credit limitation 

for all 10/50 companies (other than 

passive foreign investment 

companies).

Dividends paid by a 10/50 

company that is a passive foreign 

investment company out of 

earnings and profits accumulated in 

Generally applies the look-through 

approach to dividends paid by a 

10/50 company regardless of the 

year in which the earnings and 

profits out of which the dividend is 

paid were accumulated.

Effective date.–Taxable years 

beginning after December 31, 

2002.

Same as the House bill.
8

Provision Present Law House Bill Senate Amendment

taxable years beginning before 

January 1, 2003, continue to be 

subject to a separate foreign tax 

credit limitation for each such 

10/50 company. Dividends paid by 

a 10/50 company out of earnings 

and profits accumulated in taxable 

years after December 31, 2002 are 

treated as income in a foreign tax 

credit limitation category in 

proportion to the ratio of the 10/50 

company’s earnings and profits 

attributable to income in such 

foreign tax credit limitation 

category to its total earnings and 

profits (a “look-through” 

approach).

5. Attribution of stock ownership 

through partnerships in 

determining section 902 and 960 

credits (sec. 305 of the House bill 

and sec. 213 of the Senate 

amendment)

Under section 902, a domestic 

corporation that receives a 

dividend from a foreign 

corporation in which it owns ten 

percent or more of the voting stock 

is deemed to have paid a portion of 

the foreign taxes paid by such 

foreign corporation. Thus, such a 

domestic corporation is eligible to 

claim a foreign tax credit with 

respect to such deemed-paid taxes. 

The domestic corporation that 

receives a dividend is deemed to 

have paid a portion of the foreign 

corporation’s post-1986 foreign 

Clarifies that a domestic 

corporation is entitled to claim 

deemed-paid foreign tax credits 

with respect to a foreign 

corporation that is held indirectly 

through a foreign or domestic 

partnership, provided that the 

domestic corporation owns 

(indirectly through the partnership) 

ten percent or more of the foreign 

corporation’s voting stock. The 

proposal also clarifies that both 

individual and corporate partners 

(or estate or trust beneficiaries) 

may claim direct foreign tax credits 

Same as the House bill.
9

Provision Present Law House Bill Senate Amendment

income taxes based on the ratio of 

the amount of the dividend to the 

foreign corporation’s post-1986 

undistributed earnings and profits.

The Code does not specifically 

address whether a domestic 

corporation owning ten percent or 

more of the voting stock of a 

foreign corporation through a 

partnership is entitled to a deemedpaid foreign tax credit.

with respect to their proportionate 

shares of taxes paid or accrued by a 

partnership (or estate or trust).

Effective date.–Taxes of foreign 

corporations for taxable years of 

such corporations beginning after 

the date of enactment. 

6. Foreign tax credit treatment of 

deemed payments under section 

367(d) (sec. 306 of the House bill 

and sec. 229 of the Senate 

amendment)

Under section 367(d) of the Code, 

the outbound transfer of intangible 

property by means of contribution 

and certain other nonrecognition 

transactions is treated as a sale of 

the intangible for a stream of 

contingent payments. The amounts 

of these deemed payments must be 

commensurate with the income 

attributable to the intangible. The 

amounts are sourced like royalties, 

but the Code does not clearly 

address how to characterize the 

amounts for purposes of applying 

the separate limitation categories of 

the foreign tax credit.

Specifies that deemed payments 

under section 367(d) are treated as 

royalties for purposes of applying 

the separate limitation categories of 

the foreign tax credit.

Effective date.–Amounts treated as 

received on or after August 5, 

1997.

Same as the House bill.
10

Provision Present Law House Bill Senate Amendment

7. United States property not to 

include certain assets of 

controlled foreign corporations 

(sec. 307 of the House bill and 

sec. 227 of the Senate 

amendment)

U.S. 10-percent shareholders of a 

CFC generally are subject to U.S. 

tax currently on their pro rata 

shares of the controlled foreign 

corporations (“CFC’s”) earnings 

that have not previously been taxed 

in the United States, to the extent 

such earnings are invested by the 

CFC in certain U.S. property, 

including tangible property located 

in the United States, stock of a U.S. 

corporation, an obligation of a U.S. 

person, and certain intangible 

assets (e.g., patents or copyrights, 

inventions, models or designs, 

secret formulae or processes or 

similar property rights acquired or 

developed by the CFC for use in 

the United States).

Specified exceptions from the 

definition of U.S. property are 

provided for, including: (1) stock 

or debt of certain unrelated U.S. 

corporations; and (2) certain 

deposits or receipts of collateral or 

margin by a securities or 

commodities dealer.

Adds two new exceptions from the 

definition of U.S. property for 

determining current income 

inclusion by a U.S. 10-percent 

shareholder with respect to an 

investment in U.S. property by a 

controlled foreign corporation.

The first exception generally 

applies to securities acquired and 

held by a controlled foreign 

corporation in the ordinary course 

of its trade or business as a dealer 

in securities.

The second exception generally 

applies to the acquisition by a 

controlled foreign corporation of 

obligations issued by an unrelated 

U.S. person that is not a domestic 

corporation.

Effective date.–Taxable years of 

foreign corporations beginning 

after December 31, 2004, and 

taxable years of U.S. shareholders 

with or within which such taxable 

years of foreign corporations end.

Same as the House bill.
11

Provision Present Law House Bill Senate Amendment

8. Election not to use average 

exchange rate for foreign tax 

paid other than in functional 

currency (sec. 308 of the House 

bill and sec. 224 of the Senate 

amendment)

For taxpayers that take foreign 

income taxes into account when 

accrued, the amount of the foreign 

tax credit generally is determined 

by translating the amount of 

foreign taxes paid in foreign 

currencies into a U.S. dollar 

amount at the average exchange 

rate for the taxable year to which 

such taxes relate.

Foreign taxes that are not eligible 

for translation at the average 

exchange rate generally are 

translated into U.S. dollar amounts 

using the exchange rates as of the 

time such taxes are paid. However, 

the Secretary is authorized to issue 

regulations that would allow 

foreign tax payments to be 

translated into U.S. dollar amounts 

using an average exchange rate for 

a specified period.

For taxpayers that are required 

under present law to translate 

foreign income tax payments at the 

average exchange rate, provides an 

election to translate such taxes into 

U.S. dollar amounts using the 

exchange rates as of the time such 

taxes are paid, provided the foreign 

income taxes are denominated in a 

currency other than the taxpayer’s 

functional currency. Any such 

election applies to the taxable year 

for which the election is made and 

to all subsequent taxable years 

unless revoked with the consent of 

the Secretary.

Effective date.–Taxable years 

beginning after December 31, 

2004.

Same as the House bill.

9. Eliminate secondary 

withholding tax with respect to 

dividends paid by certain foreign 

corporations (sec. 309 of the 

House bill and sec. 215 of the 

Senate amendment)

Foreign persons are subject to a 30-

percent gross basis tax, collected 

by withholding, on certain U.S.-

source passive income (e.g., 

dividends) that is not effectively 

connected with a U.S. trade or 

business. This withholding tax 

Repeals the secondary withholding 

tax.

Effective date.–Payments made 

after December 31, 2004.

Same as the House bill.
12

Provision Present Law House Bill Senate Amendment

may be reduced or eliminated by 

treaty.

In general, dividends paid by a 

domestic corporation are treated as 

U.S.-source, and dividends paid by 

a foreign corporation are treated as 

foreign-source. However, if a 

foreign corporation derives 25 

percent or more of its gross income 

as income effectively connected 

with a U.S. trade or business for 

the three-year period ending with 

the close of the taxable year 

preceding the declaration of a 

dividend, then a portion of any 

dividend paid by the foreign 

corporation to its shareholders will 

be treated as U.S.-source and, in 

the case of dividends paid to 

foreign shareholders, will be 

subject to withholding tax. This 

rule is sometimes referred to as the 

“secondary withholding tax.”

10. Provide equal treatment for 

interest paid by foreign 

partnerships and foreign 

corporations (sec. 310 of the 

House bill and sec. 228 of the 

Senate amendment)

Interest income from obligations of 

noncorporate U.S. residents or 

domestic corporations generally is 

treated as U.S.-source income. 

Other interest (e.g., interest on 

obligations of foreign corporations 

and foreign partnerships) generally 

is treated as foreign-source income. 

Treats interest paid by foreign 

partnerships in a manner similar to 

the treatment of interest paid by 

foreign corporations. Thus, 

interest paid by a foreign 

partnership is treated as U.S.-

source income only if the interest is 

paid by a U.S. trade or business 

Same as the House bill.
13

Provision Present Law House Bill Senate Amendment

However, Treasury regulations 

provide that a foreign partnership is 

a U.S. resident for purposes of this 

rule if at any time during its taxable 

year it is engaged in a trade or 

business in the United States. 

Therefore, any interest received 

from such a foreign partnership is 

U.S.-source income.

Notwithstanding the general rule 

described above, in the case of a 

foreign corporation engaged in a 

U.S. trade or business (or having 

gross income that is treated as 

effectively connected with the 

conduct of a U.S. trade or 

business), interest paid by such 

U.S. trade or business is treated as 

if it were paid by a domestic 

corporation (i.e., such interest is 

treated as U.S.-source income).

conducted by the partnership or is 

allocable to income that is treated 

as effectively connected with the 

conduct of a U.S. trade or business. 

Applies only to foreign 

partnerships that are predominantly 

engaged in the active conduct of a 

trade or business outside the United 

States.

Effective date.–Taxable years 

beginning after December 31, 

2003.

11. Look-through treatment of 

payments between related CFCs 

(sec. 311 of the House bill and 

sec. 222 of the Senate 

amendment)

In general, the rules of subpart F 

require U.S. shareholders with a 

10-percent or greater interest in a 

controlled foreign corporation 

(“CFC”) to include certain income 

of the controlled foreign 

corporation (referred to as “subpart 

F income”) on a current basis for 

U.S. tax purposes, regardless of 

Dividends, interest, rents, and 

royalties received by one 

controlled foreign corporation from 

a related controlled foreign 

corporation are not treated as 

foreign personal holding company 

income to the extent attributable to 

non-subpart-F earnings of the 

payor. 

Same as the House bill.
14

Provision Present Law House Bill Senate Amendment

whether the income is distributed 

to the shareholders.

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. However, foreign 

personal holding company income 

does not include dividends and 

interest received by a controlled 

foreign corporation from a related 

corporation organized and 

operating in the same foreign 

country in which the controlled 

foreign corporation is organized, or 

rents and royalties received by a 

controlled foreign corporation from 

a related corporation for the use of 

property within the country in 

which the controlled foreign 

corporation 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.

For these purposes, a related 

controlled foreign corporation is a 

controlled foreign corporation that 

controls or is controlled by the 

other controlled foreign 

corporation, or a controlled foreign 

corporation that is controlled by the 

same person or persons that control 

the other controlled foreign 

corporation. Ownership of more 

than 50 percent of the controlled 

foreign corporation's stock (by vote 

or value) constitutes control for 

these purposes.

Effective date.–Taxable years of 

foreign corporations beginning 

after December 31, 2004, and 

taxable years of U.S. shareholders 

with or within which such taxable 

years of such foreign corporations 

end.
15

Provision Present Law House Bill Senate Amendment

12. Look-through treatment 

under subpart F for sales of 

partnership interests (sec. 312 of 

the House bill and sec. 223 of the 

Senate amendment)

If a controlled foreign corporation 

sells a partnership interest at a gain, 

the gain generally constitutes 

foreign personal holding company 

income and is included in the 

income of 10-percent U.S. 

shareholders of the controlled 

foreign corporation as subpart F 

income.

Treats the sale by a controlled 

foreign corporation of a partnership 

interest as a sale of the 

proportionate share of partnership

assets attributable to such interest 

for purposes of determining 

subpart F foreign personal holding 

company income. This rule applies 

only to partners owning directly, 

indirectly, or constructively at least 

25 percent of a capital or profits 

interest in the partnership. Thus, 

the sale of a partnership interest by 

a controlled foreign corporation 

that meets this ownership threshold 

constitutes subpart F income under 

the proposal only to the extent that 

a proportionate sale of the 

underlying partnership assets 

attributable to the partnership 

interest would constitute subpart F 

income.

Effective date.–Taxable years of 

foreign corporations beginning 

after December 31, 2004, and 

taxable years of U.S. shareholders 

with or within which such taxable 

years of such foreign corporations 

end.

Same as the House bill.
16

Provision Present Law House Bill Senate Amendment

13. Repeal of foreign personal 

holding company rules and 

foreign investment company 

rules (sec. 313 of the House bill 

and sec. 211 of the Senate 

amendment)

Income earned by a foreign 

corporation from its foreign 

operations generally is subject to 

U.S. tax only when such income is 

distributed to a U.S. person that 

holds stock in such corporation. 

The Code sets forth the following 

anti-deferral rules which impose 

current U.S. tax or interest charges 

on certain income earned by a U.S. 

person through a foreign 

corporation: 

• the controlled foreign 

corporation rules of subpart F 

(secs. 951-964); 

• the passive foreign investment 

company rules (secs. 1291-

1298);

• the foreign personal holding 

company rules (secs. 551-558); 

• the personal holding company 

rules (secs. 541-547);

• the accumulated earnings tax 

rules (secs. 531-537); and 

• the foreign investment 

company rules (secs. 1246-

1247). 

The provision reduces the 

complexity that results from 

overlap among the various antideferral regimes by: 

(1) eliminating the rules applicable 

to foreign personal holding 

companies and foreign investment 

companies;

(2) excluding foreign corporations 

from the application of the personal 

holding company rules; and

(3) including as subpart F foreign 

personal holding company income 

personal services contract income 

that is subject to the present-law 

foreign personal holding company 

rules.

Effective date.–The provision is 

effective for taxable years 

beginning after December 31, 

2004, and taxable years of U.S. 

shareholders with or within such 

taxable years of such foreign 

corporations end.

Same as the House bill.
17

Provision Present Law House Bill Senate Amendment

14. Determination of foreign 

personal holding company 

income with respect to 

transactions in commodities (sec. 

314 of the House bill and sec. 206 

of the Senate amendment)

Under the subpart F rules, U.S. 

shareholders with a 10-percent or 

greater interest in a controlled 

foreign corporation (“U.S. 10-

percent shareholders”) are subject 

to U.S. tax currently on certain 

income earned by the controlled 

foreign corporation, whether or not 

such income is distributed to the 

shareholders. The income subject 

to current inclusion under the 

subpart F rules includes, among 

other things, “foreign personal 

holding company income.”

With respect to transactions in 

commodities, foreign personal 

holding company income does not 

consist of gains or losses which 

arise out of bona fide hedging 

transactions that are reasonably 

necessary to the conduct of any 

business by a producer, processor, 

merchant, or handler of a 

commodity in the manner in which 

such business is customarily and 

usually conducted by others. In 

addition, foreign personal holding 

company income does not consist 

of gains or losses which are 

comprised of active business gains 

or losses from the sale of 

commodities, but only if 

Modifies the requirements that 

must be satisfied for gains or losses 

from a commodities hedging 

transaction to qualify for exclusion 

from the definition of subpart F 

foreign personal holding company 

income. Under the provision, gains 

or losses from a transaction with 

respect to a commodity are not 

treated as foreign personal holding

company income if the transaction 

satisfies the general definition of a 

hedging transaction under the 

Code, as modified for this purpose.

Also changes the requirements that 

must be satisfied for active 

business gains or losses from the 

sale of commodities to qualify for 

exclusion from the definition of 

foreign personal holding company 

income. Under the provision, such 

gains or losses are not treated as 

foreign personal holding company 

income if substantially all of the 

controlled foreign corporation’s 

commodities are comprised of: (1) 

stock in trade, inventory, or 

property held primarily for sale to 

customers in the ordinary course of 

trade or business; (2) depreciable 

trade or business property; or (3) 

supplies.

Same as the House bill.
18

Provision Present Law House Bill Senate Amendment

substantially all of the controlled 

foreign corporation’s business is as 

an active producer, processor, 

merchant, or handler of 

commodities.

Also provides that, for purposes of 

applying the requirements for 

active business gains or losses from 

commodities sales to qualify for 

exclusion from the definition of 

foreign personal holding company 

income, commodities with respect 

to which gains or losses are not 

taken into account as foreign 

personal holding company income 

by a regular dealer in commodities 

(or financial instruments referenced 

to commodities) are not taken into 

account in determining whether 

substantially all of the dealer’s 

commodities are comprised of the 

property described above.

Effective date.–Transactions 

entered into after December 31, 

2004.

15. Active leasing income from 

aircraft and vessels (sec. 315 of 

the House bill and sec. 221 of the 

Senate amendment)

In general, the subpart F rules 

require U.S. shareholders with a 

10-percent or greater interest in a 

controlled foreign corporation 

(“CFC”) to include currently in 

income for U.S. tax purposes 

certain income of the CFC 

(referred to as "subpart F income"), 

without regard to whether the 

income is distributed to the 

Repeals the subpart F rules relating 

to foreign base company shipping 

income. Also amends the 

exception from foreign personal 

holding company income 

applicable to rents or royalties 

derived from unrelated persons in 

the active conduct of a trade or 

business, by providing a safe 

harbor for rents derived from 

Provides that “qualified leasing 

income” derived from or in 

connection with the leasing or 

rental of any aircraft or vessel is 

not treated as foreign personal 

holding company income or 

foreign base company shipping 

income. Also, defines “qualified 

leasing income” as rents or gains 

derived in the active conduct of a 
19

Provision Present Law House Bill Senate Amendment

shareholders. Subpart F income 

includes foreign base company 

shipping income and foreign 

personal holding company income. 

Foreign base company shipping 

income generally includes income 

derived from the use of an aircraft 

or vessel in foreign commerce, the 

performance of services directly 

related to the use of any such 

aircraft or vessel, the sale or other 

disposition of any such aircraft or 

vessel, and certain space or ocean 

activities. Foreign commerce 

generally involves the 

transportation of property or 

passengers between a port (or 

airport) in the U.S. and a port (or 

airport) in a foreign country, two 

ports (or airports) within the same 

foreign country, or two ports (or 

airports) in different foreign 

countries. 

Foreign personal holding company 

income generally includes rents 

and royalties, except rents and 

royalties received by a CFC in the 

active conduct of a trade or 

business from unrelated persons as 

determined under a facts and 

circumstances test. Treasury 

regulations provide that rents are 

leasing an aircraft or vessel in 

foreign commerce. Such rents are 

excluded from foreign personal 

holding company income if the 

active leasing expenses comprise at 

least 10 percent of the profit on the 

lease. 

The safe harbor will not prevent a 

lessor from otherwise showing it 

actively carries on a trade or 

business. Such a showing can be 

made if a lessor regularly and 

directly performs active and 

substantial marketing, remarketing, 

management and operational 

functions with respect to the 

leasing of an aircraft or vessel (or 

component engines). 

An aircraft or vessel is considered 

to be leased in foreign commerce if 

it is used for the transportation of 

property or passengers between a 

port or airport in the United States 

and one in a foreign country or 

between foreign ports or airports, 

provided the aircraft or vessel is 

used predominantly outside the 

United States. An aircraft or vessel 

will be considered used 

predominately outside the United 

States if more than 50 percent of its 

miles traveled during the taxable 

leasing trade or business with 

respect to which the CFC conducts 

substantial activity, provided that 

the leased property is used by the 

lessee or other end-user in foreign 

commerce and predominantly 

outside the United States, and such 

lessee or other end-user is not 

related to the CFC.

The determination of whether an 

aircraft or vessel is leased in 

foreign commerce is the same as 

under the House bill, except the 

United States includes U.S. 

possessions for this purpose. The 

determination of whether an 

aircraft or vessel is used 

predominantly outside the United 

States is the same as under the 

House bill, except 70 percent is 

substituted for 50 percent. 
20

Provision Present Law House Bill Senate Amendment

treated as derived in the active 

conduct of a trade or business if 

they are derived from property that 

is leased as a result of the 

performance of marketing 

functions by the lessor if the lessor 

(through its own officers or 

employees located in a foreign 

country) maintains and operates an 

organization in such country that 

regularly engages in the business of 

marketing, or marketing and 

servicing, the leased property and 

that is substantial in relation to the 

amount of rents derived from the 

leasing of such property. An 

organization in a foreign country is 

substantial in relation to rents if the 

active leasing expenses equal at 

least 25 percent of the adjusted 

leasing profit.

year are traveled outside the United 

States or the aircraft or vessel is 

located outside the United States 

more than 50 percent of the time 

during the taxable year.

Effective date.–Effective for 

taxable years of foreign 

corporations beginning after 

December 31, 2004, and taxable 

years of U.S. shareholders with or 

within which such taxable years of 

foreign corporations end. 

Effective date.–Effective for 

taxable years of foreign 

corporations beginning after 

December 31, 2005, and taxable 

years of U.S. shareholders with or 

within which such taxable years of 

such foreign corporations end.

16. Modification of subpart F 

exemption for active financing 

(sec. 316 of the House bill and 

sec. 226 of the Senate 

amendment)

Under the subpart F rules, U.S. 

shareholders with a 10-percent or 

greater interest in a controlled 

foreign corporation (“CFC”) are 

subject to U.S. tax currently on 

certain income earned by the CFC, 

whether or not such income is 

distributed to the shareholders. The 

income subject to current inclusion 

under the subpart F rules includes, 

among other things, foreign base 

Modifies the temporary exceptions 

from subpart F foreign personal 

holding company income and 

foreign base company services 

income for income derived in the 

active conduct of a banking, 

financing, or similar business. For 

purposes of determining whether a 

CFC or QBU has conducted 

directly in its home country 

substantially all of the activities in 

Same as the House bill.
21

Provision Present Law House Bill Senate Amendment

company service income, foreign 

personal holding company income, 

and insurance income.

Temporary exceptions from foreign 

personal holding company income, 

foreign base company services 

income, and insurance income 

apply for subpart F purposes for 

certain income that is derived in 

the active conduct of a banking, 

financing, or similar business, or in 

the conduct of an insurance 

business (“active financing 

income”).

With respect to income derived in 

the active conduct of a banking, 

financing, or similar business, a 

CFC is required to be 

predominantly engaged in such 

business and to conduct substantial 

activity with respect to such 

business in order to qualify for the 

exceptions. In addition, income 

derived by a CFC or a qualified

business unit (“QBU”) of a CFC 

from transactions with customers is 

eligible for the exceptions if, 

among other things, substantially 

all of the activities in connection 

with such transactions are 

conducted directly by the CFC or 

QBU in its home country.

connection with transactions with 

customers, provides that an activity 

is treated as conducted directly by 

the CFC or QBU in its home 

country if the activity is performed 

by employees of a related person 

and: (1) the related person is itself 

an eligible CFC the home country 

of which is the same as that of the 

CFC or QBU; (2) the activity is 

performed in the home country of 

the related person; and (3) 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 tax laws of such country. For 

purposes of determining whether a 

CFC or QBU is eligible to earn 

active financing income, such 

activity may not be taken into 

account by any CFC or QBU 

(including the employer of the 

employees performing the activity) 

other than the CFC or QBU for 

which the activities are performed.

Effective date

.–Taxable years of 

foreign corporations beginning 

after December 31, 2004, and 

taxable years of U.S. shareholders 
22

Provision Present Law House Bill Senate Amendment

with or within which such taxable 

years of foreign corporations end.

17. 20-year foreign tax credit 

carryover; one-year foreign tax 

credit carryback (sec. 201 of the 

Senate amendment)

The amount of creditable taxes 

paid or accrued (or deemed paid) in 

any taxable year which exceeds the 

foreign tax credit limitation is 

permitted to be carried back to the 

two immediately preceding taxable 

years (to the earliest year first) and 

carried forward five taxable years 

(in chronological order) and 

credited to the extent that the 

taxpayer otherwise has excess 

foreign tax credit limitation for 

those years. 

Excess credits are carried forward 

or carried back on a separate 

limitation basis. Thus, if a 

taxpayer has excess foreign tax 

credits in one separate limitation 

category for a taxable year, those 

excess credits may be carried back 

and forward only as taxes allocable 

to that category, notwithstanding 

the fact that the taxpayer may have 

excess foreign tax credit limitation 

in another category for that year. If 

credits cannot be so utilized, they 

are permanently disallowed.

No provision. The Senate amendment extends the 

excess foreign tax credit 

carryforward period to twenty 

years and limits the carryback 

period to one year.

Effective date.–The extension of 

the carryforward period is effective 

for excess foreign tax credits that 

may be carried to any taxable years 

ending after the date of enactment 

of the provision; the limited 

carryback period is effective for 

excess foreign tax credits arising in 

taxable years beginning after the 

date of enactment of the provision.
23

Provision Present Law House Bill Senate Amendment

18. Expand the subpart F de 

minimis rule to the lesser of five 

percent of gross income or $5 

million (sec. 212 of the Senate 

amendment)

Under the rules of subpart F, U.S. 

10-percent shareholders of a 

controlled foreign corporation are 

required to include in income 

currently for U.S. tax purposes 

certain types of income of the 

controlled foreign corporation, 

whether or not such income is 

actually distributed currently to the 

shareholders (referred to as 

“subpart F income”). 

Subpart F income includes foreign 

base company income and certain 

insurance income. Foreign base 

company income includes five 

categories of income: foreign 

personal holding company income, 

foreign base company sales 

income, foreign base company 

services income, foreign base 

company shipping income, and 

foreign base company oil-related 

income. 

Under a de minimis rule, if the 

gross amount of a controlled 

foreign corporation’s foreign base 

company income and insurance 

income for a taxable year is less 

than the lesser of five percent of 

the controlled foreign corporation's 

gross income or $1 million, then no 

No provision. The Senate amendment expands 

the subpart F de minimis rule to 

provide that, if the gross amount of 

a controlled foreign corporation’s 

foreign base company income and 

insurance income for a taxable year 

is less than the lesser of five 

percent of the controlled foreign 

corporation's gross income or $5 

million, then no part of the 

controlled foreign corporation's 

gross income is treated as foreign 

base company income or insurance 

income.

Effective date.–Taxable years of 

foreign corporations beginning 

after December 31, 2004, and 

taxable years of U.S. shareholders 

with or within which such taxable 

years of such foreign corporations 

end.
24

Provision Present Law House Bill Senate Amendment

part of the controlled foreign 

corporation's gross income is 

treated as foreign base company 

income or insurance income.

19. Limit application of uniform 

capitalization rules in the case of 

foreign persons (sec. 214 of the 

Senate amendment)

Taxpayers generally may not 

currently deduct the costs incurred 

in producing property or acquiring 

property for resale. In general, the 

uniform capitalization rules require 

that a portion of the direct and 

indirect costs of producing 

property or acquiring property for 

resale be capitalized or included in 

the cost of inventory. 

The uniform capitalization rules 

apply to foreign corporations, 

whether or not engaged in business 

in the United States. In the case of 

a foreign corporation not engaged 

in a trade or business in the United 

States, the corporation’s taxable 

income and earnings and profits 

may nonetheless be relevant under 

the Code. For example, the subpart 

F income of a controlled foreign 

corporation may be currently 

includible on the return of a U.S. 

shareholder of the controlled 

foreign corporation.

No provision. The Senate amendment provides 

that, in lieu of the uniform 

capitalization rules, costs incurred 

in producing property or acquiring 

property for resale are capitalized 

using U.S. generally accepted 

accounting principles (i.e., the 

method used to ascertain income, 

profit, or loss for purposes of 

reports or statements to 

shareholders, partners, other 

proprietors, or beneficiaries, or for 

credit purposes) for purposes of 

determining a U.S.-owned foreign 

corporation’s earnings and profits 

and subpart F income. The 

uniform capitalization rules 

continue to apply to foreign 

corporations for purposes of 

determining income effectively 

connected with a U.S. trade or 

business and the related earnings 

and profits therefrom.

Effective date.–Taxable years 

beginning after December 31, 

2004.
25

Provision Present Law House Bill Senate Amendment

20. Eliminate 30-percent tax on 

certain U.S.-source capital gains 

of nonresident individuals (sec. 

216 of the Senate amendment)

Under the special capital gains tax 

of section 871(a)(2), a nonresident 

individual who is physically 

present in the United States for 183 

days or more during a taxable year 

is subject to a 30-percent tax on the 

excess of U.S.-source capital gains 

over U.S.-source capital losses. 

No provision. The provision repeals the special 

tax on certain capital gains of 

nonresident aliens under section 

871(a)(2).

Effective date.–Taxable years 

beginning after December 31, 

2003.

21. Modification of the treatment 

of certain REIT distributions 

attributable to gain from sales or 

exchanges of U.S. real property 

interests (sec. 230 of the Senate 

amendment)

The Foreign Investors in Real

Property Tax Act (“FIRPTA”) 

requires foreign investors to treat 

certain otherwise nontaxable 

capital gain from the sale of U.S. 

real property as though such gain 

were effectively connected with a 

U.S. trade or business. The receipt 

of a distribution from a real estate 

investment trust (“REIT”) is so 

treated to the extent attributable to 

the disposition of a U.S. real 

property interest by the REIT. Such 

distributions are generally subject 

to a withholding tax at a rate of 35 

percent (or lower treaty rate). The 

recipients of such distributions are 

required to file a U.S. tax return. A 

foreign recipient that is a 

corporation may also be subject to 

a branch profits tax at a 30 percent 

or lower treaty rate. 

No provision. A REIT distribution to a foreign 

investor of the REIT capital gain 

from dispositions of U.S. real 

property interests is no longer 

treated as though such gain were 

effectively connected with a U.S. 

trade or business, provided that 1) 

the distribution is received with 

respect to a class of stock that is 

regularly traded on an established 

securities market located in the 

U.S. and 2) the foreign investor 

does not own more than 5 percent 

of the class of stock at any time 

during the taxable year. 

The foreign investor is not required 

to file a U.S. Federal income tax 

return by reason of receiving such 

a distribution; and the distribution 

is treated as a dividend to that 

investor. The branch profits tax
26

Provision Present Law House Bill Senate Amendment

also no longer applies to such a 

distribution.

Effective date.–Taxable years 

beginning after the date of 

enactment.

22. Exclusion of certain horseracing and dog-racing gambling 

winnings from the income of 

nonresident alien individuals 

(sec. 232 of the Senate 

amendment)

Certain items of gross income 

received by a nonresident alien 

from sources within the United 

States are subject to a flat 30-

percent withholding tax. Gambling 

winnings received by a nonresident 

alien from wagers placed in the 

United States are U.S.-source and 

thus generally are subject to this 

withholding tax, unless specifically 

exempted by statute or treaty.

With respect to gambling winnings 

of a nonresident alien resulting 

from a wager initiated outside the 

United States on a pari-mutuel 

event taking place within the 

United States, the source of the 

winnings, and thus the applicability 

of the 30-percent U.S. withholding 

tax, depends on the type of 

wagering pool from which the 

winnings are paid. 

If the payout is made from a 

separate foreign pool, maintained 

No provision. The Senate amendment provides an 

exclusion from gross income for 

winnings paid to a nonresident 

alien resulting from a legal wager 

initiated outside the United States 

in a pari-mutuel pool on a live 

horse or dog race in the United 

States, regardless of whether the 

pool is a separate foreign pool or a 

merged U.S.-foreign pool.

Effective date.–Wagers made after 

date of enactment.
27

Provision Present Law House Bill Senate Amendment

completely in a foreign jurisdiction 

(e.g., a pool maintained by a 

racetrack or off-track betting parlor 

that is showing in a foreign country 

a simulcast of a horse race taking 

place in the United States), then the 

winnings paid to a nonresident 

alien generally would not be 

subject to withholding tax, because 

the amounts received generally 

would not be from sources within 

the United States. However, if the 

payout is made from a “merged” or 

“commingled” pool, in which 

betting pools in the United States 

and the foreign country are 

combined for a particular event, 

then the portion of the payout 

attributable to wagers placed in the 

United States could be subject to 

withholding tax.

23. Limitation of withholding on 

U.S.-source dividends paid to 

Puerto Rico corporations

(sec. 233 of the Senate 

amendment)

In general, dividends paid by 

corporations organized in the 

United States (which does not 

include possessions) to 

corporations organized outside of 

the United States and its 

possessions, or to Puerto Rico 

corporations, are subject to U.S. 

income tax withholding at the flat 

rate of 30 percent. Corporations 

organized in the U.S. possessions 

No provision. Lowers the withholding income tax 

rate on U.S. source dividends paid 

to a corporation created or 

organized in Puerto Rico from 30 

percent to 10 percent, to create 

parity with the 10 percent 

withholding tax imposed by Puerto 

Rico on dividends paid to nonPuerto Rico corporations. The 

lower rate applies only if the same 

local ownership and activity 
28

Provision Present Law House Bill Senate Amendment

of the Virgin Islands, Guam, 

American Samoa or the Northern 

Mariana Islands are not subject to 

withholding tax on dividends from 

corporations organized in the 

United States, provided that certain 

local ownership and activity 

requirements are met. Under the 

tax laws of Puerto Rico, a 10-

percent withholding tax is imposed 

on dividends paid by Puerto Rico 

corporations to non-Puerto Rico 

corporations. 

requirements are met that are 

applicable to corporations 

organized in other possessions 

receiving dividends from 

corporations organized in the 

United States. 

Effective date.–Dividends paid 

after date of enactment.

24. Report on WTO dispute 

settlement panels and the 

appellate body (sec. 234 of the 

Senate amendment)

The World Trade Organization 

(“WTO”) is the only global 

international organization dealing 

with the rules of trade between 

nations, as agreed to by the 

member countries in trade 

agreements. The WTO is not only 

involved in the forming of such 

rules but it is also involved in the 

settlement of trade disputes that 

arise between member nations. 

No provision. Requires that by no later than 

March 31, 2004, the Secretary of 

Commerce, in consultation with the 

United States Trade 

Representative, shall transmit a 

report to the Senate Committee on 

Finance and the House of 

Representatives Committee on 

Ways and Means regarding 

whether dispute settlement panels 

or the Appellate Body of the World 

Trade Organization have:

(1) added to or diminished the 

rights of the United States by 

imposing obligations and 

restrictions on the use of 

antidumping, countervailing, or 

safeguard measures not agreed to 
29

Provision Present Law House Bill Senate Amendment

under the World Trade 

Organization Antidumping 

Agreement, the Agreement on 

Subsidies and Countervailing 

Measures, or the Agreement on 

Safeguards; 

(2) appropriately applied the 

standard of review contained in 

Article 17.6 of the Antidumping 

Agreement; or 

(3) exceeded its authority or terms 

of reference.

Effective date.–The provision is 

effective on the date of enactment.

25. Study of impact of 

international tax laws on 

taxpayers other than large 

corporations (sec. 235 of the 

Senate amendment)

The United States employs a 

“worldwide” tax system, under 

which U.S. persons (including 

domestic corporations) generally 

are taxed on all income, whether 

derived in the United States or 

abroad. In contrast, foreign 

persons (including foreign 

corporations) are subject to U.S. 

tax only on U.S.-source income 

and income that has a sufficient 

nexus to the United States. The 

United States generally provides a 

credit to U.S. persons for foreign 

income taxes paid or accrued. The 

No provision. The provision requires the 

Secretary of the Treasury or a 

delegate to conduct a study of the 

impact of Federal international tax 

rules on taxpayers other than large 

corporations, including the burdens 

placed on such taxpayers in 

complying with such rules. No 

later than 180 days after the date of 

the enactment of this provision, the 

Secretary shall report to the 

Committee on Finance of the 

Senate and the Committee on Ways 

and Means of the House of 

Representatives the results of the 
30

Provision Present Law House Bill Senate Amendment

foreign tax credit generally is 

limited to the U.S. tax liability on a 

taxpayer’s foreign-source income. 

study conducted as a result of this 

provision.

Effective date.–The provision is 

effective on the date of enactment.

26. Delay in effective date of final 

regulations governing exclusion 

of income from international 

operation of ships and aircraft 

(sec. 236 of the Senate 

amendment)

Section 883 generally provides an 

exemption from gross income for 

earnings of a foreign corporation 

derived from the international 

operation of ships and aircraft if an 

equivalent exemption from tax is 

granted by the applicable foreign 

country to corporations organized 

in the United States. 

Treasury has issued regulations 

implementing the rules of section 

883 that are effective for taxable 

years beginning 30 days or more 

after August 26, 2003. The 

regulations provide, in general, that 

a foreign corporation organized in 

a qualified foreign country and 

engaged in the international 

operation of ships or aircraft shall 

exclude qualified income from 

gross income for purposes of 

United States Federal income 

taxation, provided that the 

corporation can satisfy certain 

ownership and related 

documentation requirements. The 

No provision. Delays the effective date for the 

Treasury regulations so that they 

apply to taxable years of foreign 

corporations seeking qualified 

foreign corporation status 

beginning after December 31, 

2004. 

Effective date.–The provision is 

effective after date of enactment.
31

Provision Present Law House Bill Senate Amendment

proposed rules explain when a 

foreign country is a qualified 

foreign country and what income is 

considered to be qualified income.

27. Interest payments deductible 

where taxpayer could have 

borrowed without a guarantee 

(sec. 237 of the Senate 

amendment)

Present law provides rules to limit 

the ability of U.S. corporations to 

reduce the U.S. tax on their U.S.-

source income through earnings 

stripping transactions. These rules 

limit the deductibility of interest 

paid to certain related parties 

(“disqualified interest”), if the 

payor’s debt-equity ratio exceeds 

1.5 to 1 and the payor’s net interest 

expense exceeds 50 percent of its 

“adjusted taxable income” 

(generally taxable income 

computed without regard to 

deductions for net interest expense, 

net operating losses, and 

depreciation, amortization, and 

depletion). 

Disqualified interest for these 

purposes also may include interest 

paid to unrelated parties in certain 

cases in which a related party 

guarantees the debt. 

No provision. A foreign related-party guarantee 

does not trigger the earnings 

stripping rules to the extent of the 

amount of debt that the taxpayer 

establishes (to the satisfaction of 

the Treasury Secretary) that it 

could have borrowed without the 

guarantee.

Effective date.–Guarantees issued 

on or after date of enactment.