I

104TH CONGRESS

1ST SESSION H. R. 1278

To amend the Internal Revenue Code of 1986 to reduce tax benefits for

foreign corporations, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 21, 1995

Mr. EVANS (for himself, Mr. RAHALL, Mr. BONIOR, Mr. DELLUMS, Mr.

HINCHEY, Mr. FATTAH, Mr. OWENS, Mr. WATT of North Carolina, Ms.

KAPTUR, Mr. GUTIERREZ, Mr. HOLDEN, and Mr. SANDERS) 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 reduce

tax benefits for foreign corporations, and for other purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Corporate Welfare

5 Reduction Act of 1995’’.

6 SEC. 2. FOREIGN OIL AND GAS INCOME.

7 (a) SPECIAL RULES FOR FOREIGN TAX CREDIT

8 WITH RESPECT TO FOREIGN OIL AND GAS INCOME.—

9 (1) CERTAIN TAXES NOT CREDITABLE.—
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1 (A) IN GENERAL.—Subsection (a) of sec2 tion 907 of the Internal Revenue Code of 1986

3 (relating to reduction in amount allowed as for4 eign tax under section 901) is amended to read

5 as follows:

6 ‘‘(a) CERTAIN TAXES NOT CREDITABLE.—

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 title, the term ‘income, war profits, and excess prof9 its taxes’ shall not include—

10 ‘‘(A) any taxes which are paid or accrued

11 to any foreign country with respect to foreign

12 oil and gas income and which are not imposed

13 under a generally applicable income tax law of

14 such country, and

15 ‘‘(B) any taxes (not described in subpara16 graph (A)) which are paid or accrued to any

17 foreign country with respect to foreign oil and

18 gas income to the extent that the foreign law

19 imposing such amount of tax is structured, or

20 in fact operates, so that the amount of tax im21 posed with respect to foreign oil and gas income

22 will generally be materially greater, over a rea23 sonable period of time, than the amount gen24 erally imposed on income that is not foreign oil

25 and gas income.
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1 In computing the amount not treated as tax under

2 subparagraph (B), such amount shall be treated as

3 a deduction under the foreign law.

4 ‘‘(2) FOREIGN OIL AND GAS INCOME.—For pur5 poses of this paragraph, the term ‘foreign oil and

6 gas income’ means the amount of foreign oil and gas

7 extraction income and foreign oil related income.

8 ‘‘(3) GENERALLY APPLICABLE INCOME TAX

9 LAW.—For purposes of this paragraph, the term

10 ‘generally applicable income tax law’ means any law

11 of a foreign country imposing an income tax if such

12 tax generally applies to all income from sources

13 within such foreign country—

14 ‘‘(A) without regard to the residence or na15 tionality of the person earning such income,

16 and

17 ‘‘(B) in the case of any income earned by

18 a corporation, partnership, or other entity,

19 without regard to—

20 ‘‘(i) where such corporation, partner21 ship, or other entity is organized, and

22 ‘‘(ii) the residence or nationality of

23 the persons owning interests in such cor24 poration, partnership, or entity.’’
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1 (B) CONFORMING AMENDMENT.—Section

2 907 of such Code is amended by striking sub3 sections (b), (c)(3), (c)(4), (c)(5), and (f).

4 (2) SEPARATE BASKETS FOR FOREIGN OIL AND

5 GAS EXTRACTION INCOME AND FOREIGN OIL RELAT6 ED INCOME.—

7 (A) IN GENERAL.—Paragraph (1) of sec8 tion 904(d) of such Code (relating to separate

9 application of section with respect to certain

10 categories of income) is amended by striking

11 ‘‘and’’ at the end of subparagraph (H), by re12 designating subparagraph (I) as subparagraph

13 (K) and by inserting after subparagraph (H)

14 the following new subparagraphs:

15 ‘‘(I) foreign oil and gas extraction income,

16 ‘‘(J) foreign oil related income, and’’.

17 (B) DEFINITIONS.—Paragraph (2) of sec18 tion 904(d) of such Code is amended by redes19 ignating subparagraphs (H) and (I) as subpara20 graphs (J) and (K), respectively, and by insert21 ing after subparagraph (G) the following new

22 subparagraphs:

23 ‘‘(H) FOREIGN OIL AND GAS EXTRACTION

24 INCOME.—The term ‘foreign oil and gas extrac25 tion income’ has the meaning given such term
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1 by section 907(c)(1). Such term shall not in2 clude any dividend from a noncontrolled section

3 902 corporation.

4 ‘‘(I) FOREIGN OIL RELATED INCOME.—

5 The term ‘foreign oil related income’ has the

6 meaning given such term by section 907(c)(2).

7 Such term shall not include any dividend from

8 a noncontrolled section 902 corporation and any

9 shipping income.’’

10 (C) CONFORMING AMENDMENT.—Clause

11 (i) of section 904(d)(3)(F) of such Code is

12 amended by striking ‘‘or (E)’’ and inserting

13 ‘‘(E), (I), or (J)’’.

14 (3) EFFECTIVE DATE.—

15 (A) IN GENERAL.—Except as otherwise

16 provided in this paragraph, the amendments

17 made by this subsection shall apply to taxable

18 years beginning after December 31, 1995.

19 (B) DISALLOWANCE RULE.—

20 (i) Section 907(a) of such Code (as

21 amended by paragraph (1)) shall apply to

22 taxes paid or accrued after December 31,

23 1995, in taxable years ending after such

24 date.
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1 (ii) In determining the amount of

2 taxes deemed to be paid in a taxable year

3 beginning after December 31, 1995, under

4 section 902 or 960 of such Code, section

5 907(a) of such Code (as amended by para6 graph (1)) shall apply to all taxes whether

7 paid or accrued before, on, or after Decem8 ber 31, 1995.

9 (C) LOSS RULE.—Notwithstanding the

10 amendments made by paragraph (1)(B), section

11 907(c)(4) of such Code shall continue to apply

12 with respect to foreign oil and gas extraction

13 losses for taxable years beginning before Janu14 ary 1, 1996.

15 (D) TRANSITIONAL RULES.—

16 (i) Any taxes paid or accrued in a tax17 able year beginning before January 1,

18 1996, with respect to income which was

19 described in subparagraph (I) of section

20 904(d)(1) of such Code (as in effect on the

21 day before the date of the enactment of

22 this Act) shall be treated as taxes paid or

23 accrued with respect to foreign oil and gas

24 extraction income or foreign oil related in25 come (as the case may be) to the extent
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1 such taxes were paid or accrued with re2 spect to such type of income.

3 (ii) Any unused oil and gas extraction

4 taxes which under section 907(f) of such

5 Code (as so in effect) would have been al6 lowed as a carryover to the taxpayer’s first

7 taxable year beginning after December 31,

8 1995 (determined without regard to the

9 limitation of paragraph (2) of such section

10 907(f) for such first taxable year), shall be

11 allowed as carryovers under section 904(c)

12 of such Code in the same manner as if

13 they were unused taxes under section

14 904(c) with respect to foreign oil and gas

15 extraction income.

16 (b) ELIMINATION OF DEFERRAL FOR FOREIGN OIL

17 AND GAS EXTRACTION INCOME.—

18 (1) GENERAL RULE.—Paragraph (1) of section

19 954(g) of the Internal Revenue Code of 1986 (defin20 ing foreign base company oil related income) is

21 amended to read as follows:

22 ‘‘(1) IN GENERAL.—Except as otherwise pro23 vided in this subsection, the term ‘foreign oil and

24 gas income’ means any income of a kind which
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1 would be taken into account in determining the

2 amount of—

3 ‘‘(A) foreign oil and gas extraction income

4 (as defined in section 907(c)(1)), or

5 ‘‘(B) foreign oil related income (as defined

6 in section 907(c)(2)).’’

7 (2) CONFORMING AMENDMENTS.—

8 (A) Subsections (a)(5), (b)(4), (b)(5), and

9 (b)(8) of section 954 of such Code are each

10 amended by striking ‘‘base company oil related

11 income’’ each place it appears (including in the

12 heading of subsection (b)(8)) and inserting ‘‘oil

13 and gas income’’.

14 (B) The subsection heading for subsection

15 (g) of section 954 of such Code is amended by

16 striking ‘‘FOREIGN BASE COMPANY OIL RE17 LATED INCOME’’ and inserting ‘‘FOREIGN OIL

18 AND GAS INCOME’’.

19 (C) Subparagraph (A) of section 954(g)(2)

20 of such Code is amended by striking ‘‘foreign

21 base company oil related income’’ and inserting

22 ‘‘foreign oil and gas income’’.

23 (3) EFFECTIVE DATE.—The amendments made

24 by this subsection shall apply to taxable years of for25 eign corporations beginning after December 31,
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1 1995, and to taxable years of United States share2 holders in which or with which such taxable years of

3 foreign corporations end.

4 SEC. 3. TRANSFER PRICING.

5 (a) AUTHORITY OF SECRETARY WHEN LEGAL LIM6 ITS ON TRANSFER BY TAXPAYER.—Section 482 of the In7 ternal Revenue Code of 1986 (relating to allocation of in8 come and deductions among taxpayers) is amended by

9 adding at the end the following: ‘‘The authority of the Sec10 retary under this section shall not be limited by any re11 striction (by any law or agreement) on the ability of such

12 interests, organizations, trades, or businesses to transfer

13 or receive money or other property.’’

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

15 this section shall apply to taxable years beginning after

16 December 31, 1995.

17 SEC. 4. ELIMINATION OF EXCLUSION FOR CITIZENS OR

18 RESIDENTS OF UNITED STATES LIVING

19 ABROAD.

20 Section 911 of the Internal Revenue Code of 1986

21 (relating to citizens or residents of the United States living

22 abroad) is amended by redesignating subsection (f) as sub23 section (g) and by inserting after subsection (e) the follow24 ing new subsection:
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1 ‘‘(f) TERMINATION.—This section shall not apply to

2 any taxable year beginning after December 31, 1995.’’

3 SEC. 5. DISPOSITION OF STOCK IN DOMESTIC CORPO4 RATIONS BY 10-PERCENT FOREIGN SHARE5 HOLDERS.

6 (a) GENERAL RULE.—Subpart D of part II of sub7 chapter N of chapter 1 of the Internal Revenue Code of

8 1986 (relating to miscellaneous provisions) is amended by

9 adding at the end thereof the following new section:

10 ‘‘SEC. 899. DISPOSITION OF STOCK IN DOMESTIC CORPO11 RATIONS BY 10-PERCENT FOREIGN SHARE12 HOLDERS.

13 ‘‘(a) GENERAL RULE.—

14 ‘‘(1) TREATMENT AS EFFECTIVELY CONNECTED

15 WITH UNITED STATES TRADE OR BUSINESS.—For

16 purposes of this title, if any nonresident alien indi17 vidual or foreign corporation is a 10-percent share18 holder in any domestic corporation, any gain or loss

19 of such individual or foreign corporation from the

20 disposition of any stock in such domestic corporation

21 shall be taken into account—

22 ‘‘(A) in the case of a nonresident alien in23 dividual, under section 871(b)(1), or

24 ‘‘(B) in the case of a foreign corporation,

25 under section 882(a)(1),
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1 as if the taxpayer were engaged during the taxable

2 year in a trade or business within the United States

3 through a permanent establishment in the United

4 States and as if such gain or loss were effectively

5 connected with such trade or business and attrib6 utable to such permanent establishment. Notwith7 standing section 865, any such gain or loss shall be

8 treated as from sources in the United States.

9 ‘‘(2) 26-PERCENT MINIMUM TAX ON NON10 RESIDENT ALIEN INDIVIDUALS.—

11 ‘‘(A) IN GENERAL.—In the case of any

12 nonresident alien individual, the amount deter13 mined under section 55(b)(1)(A) shall not be

14 less than 26 percent of the lesser of—

15 ‘‘(i) the individual’s alternative mini16 mum taxable income (as defined in section

17 55(b)(2)) for the taxable year, or

18 ‘‘(ii) the individual’s net taxable stock

19 gain for the taxable year.

20 ‘‘(B) NET TAXABLE STOCK GAIN.—For

21 purposes of subparagraph (A), the term ‘net

22 taxable stock gain’ means the excess of—

23 ‘‘(i) the aggregate gains for the tax24 able year from dispositions of stock in do25 mestic corporations with respect to which
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1 such individual is a 10-percent share2 holder, over

3 ‘‘(ii) the aggregate of the losses for

4 the taxable year from dispositions of such

5 stock.

6 ‘‘(C) COORDINATION WITH SECTION

7 897(a)(2).—Section 897(a)(2)(A) shall not apply

8 to any nonresident alien individual for any tax9 able year for which such individual has a net

10 taxable stock gain, but the amount of such net

11 taxable stock gain shall be increased by the

12 amount of such individual’s net United States

13 real property gain (as defined in section

14 897(a)(2)(B)) for such taxable year.

15 ‘‘(b) 10-PERCENT SHAREHOLDER.—

16 ‘‘(1) IN GENERAL.—For purposes of this sec17 tion, the term ‘10-percent shareholder’ means any

18 person who at any time during the shorter of—

19 ‘‘(A) the period beginning on January 1,

20 1995, and ending on the date of the disposition,

21 or

22 ‘‘(B) the 5-year period ending on the date

23 of the disposition,

24 owned 10 percent or more (by vote or value) of the

25 stock in the domestic corporation.
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1 ‘‘(2) CONSTRUCTIVE OWNERSHIP.—

2 ‘‘(A) IN GENERAL.—Section 318(a) (relat3 ing to constructive ownership of stock) shall

4 apply for purposes of paragraph (1).

5 ‘‘(B) MODIFICATIONS.—For purposes of

6 subparagraph (A)—

7 ‘‘(i) paragraph (2)(C) of section

8 318(a) shall be applied by substituting ‘10

9 percent’ for ‘50 percent’, and

10 ‘‘(ii) paragraph (3)(C) of section

11 318(a) shall be applied—

12 ‘‘(I) by substituting ‘10 percent’

13 for ‘50 percent’, and

14 ‘‘(II) in any case where such

15 paragraph would not apply but for

16 subclause (I), by considering a cor17 poration as owning the stock (other

18 than stock in such corporation) owned

19 by or for any shareholder of such cor20 poration in that proportion which the

21 value of the stock which such share22 holder owns in such corporation bears

23 to the value of all stock in such cor24 poration.
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1 ‘‘(3) TREATMENT OF STOCK HELD BY CERTAIN

2 PARTNERSHIPS.—

3 ‘‘(A) IN GENERAL.—For purposes of this

4 section, if—

5 ‘‘(i) a partnership is a 10-percent

6 shareholder in any domestic corporation,

7 and

8 ‘‘(ii) 10 percent or more of the capital

9 or profits interests in such partnership is

10 held (directly or indirectly) by nonresident

11 alien individuals or foreign corporations,

12 each partner in such partnership who is not

13 otherwise a 10-percent shareholder in such cor14 poration shall, with respect to the stock in such

15 corporation held by the partnership, be treated

16 as a 10-percent shareholder in such corpora17 tion.

18 ‘‘(B) EXCEPTION.—

19 ‘‘(i) IN GENERAL.—Subparagraph (A)

20 shall not apply with respect to stock in a

21 domestic corporation held by any partner22 ship if, at all times during the 5-year pe23 riod ending on the date of the disposition

24 involved—
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1 ‘‘(I) the aggregate bases of the

2 stock and securities in such domestic

3 corporation held by such partnership

4 were less than 25 percent of the part5 nership’s net adjusted asset cost, and

6 ‘‘(II) the partnership did not own

7 50 percent or more (by vote or value)

8 of the stock in such domestic corpora9 tion.

10 The Secretary may by regulations dis11 regard any failure to meet the require12 ments of subclause (I) where the partner13 ship normally met such requirements dur14 ing such 5-year period.

15 ‘‘(ii) NET ADJUSTED ASSET COST.—

16 For purposes of clause (i), the term ‘net

17 adjusted asset cost’ means—

18 ‘‘(I) the aggregate bases of all of

19 the assets of the partnership other

20 than cash and cash items, reduced by

21 ‘‘(II) the portion of the liabilities

22 of the partnership not allocable (on a

23 proportionate basis) to assets excluded

24 under subclause (I).
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1 ‘‘(C) EXCEPTION NOT TO APPLY TO 50-

2 PERCENT PARTNERS.—Subparagraph (B) shall

3 not apply in the case of any partner owning (di4 rectly or indirectly) more than 50 percent of the

5 capital or profits interests in the partnership at

6 any time during the 5-year period ending on the

7 date of the disposition.

8 ‘‘(D) SPECIAL RULES.—For purposes of

9 subparagraphs (B) and (C)—

10 ‘‘(i) TREATMENT OF PREDE11 CESSORS.—Any reference to a partnership

12 or corporation shall be treated as including

13 a reference to any predecessor thereof.

14 ‘‘(ii) PARTNERSHIP NOT IN EXIST15 ENCE.—If any partnership was not in ex16 istence throughout the entire 5-year period

17 ending on the date of the disposition, only

18 the portion of such period during which

19 the partnership (or any predecessor) was

20 in existence shall be taken into account.

21 ‘‘(E) OTHER PASS-THRU ENTITIES;

22 TIERED ENTITIES.—Rules similar to the rules

23 of the preceding provisions of this paragraph

24 shall also apply in the case of any pass-thru en-
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1 tity other than a partnership and in the case of

2 tiered partnerships and other entities.

3 ‘‘(c) COORDINATION WITH NONRECOGNITION PROVI4 SIONS; ETC.—

5 ‘‘(1) COORDINATION WITH NONRECOGNITION

6 PROVISIONS.—

7 ‘‘(A) IN GENERAL.—Except as provided in

8 subparagraph (B), any nonrecognition provision

9 shall apply for purposes of this section to a

10 transaction only in the case of—

11 ‘‘(i) an exchange of stock in a domes12 tic corporation for other property the sale

13 of which would be subject to taxation

14 under this chapter, or

15 ‘‘(ii) a distribution with respect to

16 which gain or loss would not be recognized

17 under section 336 if the sale of the distrib18 uted property by the distributee would be

19 subject to tax under this chapter.

20 ‘‘(B) REGULATIONS.—The Secretary shall

21 prescribe regulations (which are necessary or

22 appropriate to prevent the avoidance of Federal

23 income taxes) providing—
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1 ‘‘(i) the extent to which nonrecogni2 tion provisions shall, and shall not, apply

3 for purposes of this section, and

4 ‘‘(ii) the extent to which—

5 ‘‘(I) transfers of property in a re6 organization, and

7 ‘‘(II) changes in interests in, or

8 distributions from, a partnership,

9 trust, or estate,

10 shall be treated as sales of property at fair

11 market value.

12 ‘‘(C) NONRECOGNITION PROVISION.—For

13 purposes of this paragraph, the term ‘non14 recognition provision’ means any provision of

15 this title for not recognizing gain or loss.

16 ‘‘(2) CERTAIN OTHER RULES MADE APPLICA17 BLE.—For purposes of this section, rules similar to

18 the rules of subsections (g) and (j) of section 897

19 shall apply.

20 ‘‘(d) CERTAIN INTEREST TREATED AS STOCK.—For

21 purposes of this section—

22 ‘‘(1) any option or other right to acquire stock

23 in a domestic corporation,

24 ‘‘(2) the conversion feature of any debt instru25 ment issued by a domestic corporation, and
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1 ‘‘(3) to the extent provided in regulations, any

2 other interest in a domestic corporation other than

3 an interest solely as creditor,

4 shall be treated as stock in such corporation.

5 ‘‘(e) TREATMENT OF CERTAIN GAIN AS A DIVI6 DEND.—In the case of any gain which would be subject

7 to tax by reason of this section but for a treaty and which

8 results from any distribution in liquidation or redemption,

9 for purposes of this subtitle, such gain shall be treated

10 as a dividend to the extent of the earnings and profits

11 of the domestic corporation attributable to the stock.

12 Rules similar to the rules of section 1248(c) (determined

13 without regard to paragraph (2)(D) thereof) shall apply

14 for purposes of the preceding sentence.

15 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

16 such regulations as may be appropriate to carry out the

17 purposes of this section, including—

18 ‘‘(1) regulations coordinating the provisions of

19 this section with the provisions of section 897, and

20 ‘‘(2) regulations aggregating stock held by a

21 group of persons acting together.’’

22 (b) WITHHOLDING OF TAX.—Subchapter A of chap23 ter 3 of such Code is amended by adding at the end the

24 following new section:
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1 ‘‘SEC. 1447. WITHHOLDING OF TAX ON CERTAIN STOCK

2 DISPOSITIONS.

3 ‘‘(a) GENERAL RULE.—Except as otherwise provided

4 in this section, in the case of any disposition of stock in

5 a domestic corporation by a foreign person who is a 10-

6 percent shareholder in such corporation, the withholding

7 agent shall deduct and withhold a tax equal to 10 percent

8 of the amount realized on the disposition.

9 ‘‘(b) EXCEPTIONS.—

10 ‘‘(1) STOCK WHICH IS NOT REGULARLY TRAD11 ED.—In the case of a disposition of stock which is

12 not regularly traded, a withholding agent shall not

13 be required to deduct and withhold any amount

14 under subsection (a) if—

15 ‘‘(A) the transferor furnishes to such with16 holding agent an affidavit by such transferor

17 stating, under penalty of perjury, that section

18 899 does not apply to such disposition be19 cause—

20 ‘‘(i) the transferor is not a foreign

21 person, or

22 ‘‘(ii) the transferor is not a 10-percent

23 shareholder, and

24 ‘‘(B) such withholding agent does not

25 know (or have reason to know) that such affida26 vit is not correct.
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1 ‘‘(2) STOCK WHICH IS REGULARLY TRADED.—

2 ‘‘(A) IN GENERAL.—Except as provided in

3 subparagraph (B), a withholding agent shall

4 not be required to deduct and withhold any

5 amount under subsection (a) with respect to

6 any disposition of regularly traded stock if such

7 withholding agent does not know (or have rea8 son to know) that section 899 applies to such

9 disposition.

10 ‘‘(B) SPECIAL RULE WHERE SUBSTANTIAL

11 DISPOSITION.—If—

12 ‘‘(i) there is a disposition of regularly

13 traded stock in a corporation, and

14 ‘‘(ii) the amount of stock involved in

15 such disposition constitutes 1 percent or

16 more (by vote or value) of the stock in

17 such corporation,

18 subparagraph (A) shall not apply but para19 graph (1) shall apply as if the disposition in20 volved stock which was not regularly traded.

21 ‘‘(C) NOTIFICATION BY FOREIGN PER22 SON.—If section 899 applies to any disposition

23 by a foreign person of regularly traded stock,

24 such foreign person shall notify the withholding
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1 agent that section 899 applies to such disposi2 tion.

3 ‘‘(3) NONRECOGNITION TRANSACTIONS.—A

4 withholding agent shall not be required to deduct

5 and withhold any amount under subsection (a) in

6 any case where gain or loss is not recognized by rea7 son of section 899(c) (or the regulations prescribed

8 under such section).

9 ‘‘(c) SPECIAL RULE WHERE NO WITHHOLDING.—

10 If—

11 ‘‘(1) there is no amount deducted and withheld

12 under this section with respect to any disposition to

13 which section 899 applies, and

14 ‘‘(2) the foreign person does not pay the tax

15 imposed by this subtitle to the extent attributable to

16 such disposition on the date prescribed therefor,

17 for purposes of determining the amount of such tax, the

18 foreign person’s basis in the stock disposed of shall be

19 treated as zero or such other amount as the Secretary may

20 determine (and, for purposes of section 6501, the

21 underpayment of such tax shall be treated as due to a

22 willful attempt to evade such tax).

23 ‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur24 poses of this section—
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1 ‘‘(1) WITHHOLDING AGENT.—The term ‘with2 holding agent’ means—

3 ‘‘(A) the last United States person to have

4 the control, receipt, custody, disposal, or pay5 ment of the amount realized on the disposition,

6 or

7 ‘‘(B) if there is no such United States per8 son, the person prescribed in regulations.

9 ‘‘(2) FOREIGN PERSON.—The term ‘foreign per10 son’ means any person other than a United States

11 person.

12 ‘‘(3) REGULARLY TRADED STOCK.—The term

13 ‘regularly traded stock’ means any stock of a class

14 which is regularly traded on an established securities

15 market.

16 ‘‘(4) AUTHORITY TO PRESCRIBE REDUCED

17 AMOUNT.—At the request of the person making the

18 disposition or the withholding agent, the Secretary

19 may prescribe a reduced amount to be withheld

20 under this section if the Secretary determines that

21 to substitute such reduced amount will not jeopard22 ize the collection of the tax imposed by section

23 871(b)(1) or 882(a)(1).

24 ‘‘(5) OTHER TERMS.—Except as provided in

25 this section, terms used in this section shall have the
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1 same respective meanings as when used in section

2 899.

3 ‘‘(6) CERTAIN RULES MADE APPLICABLE.—

4 Rules similar to the rules of section 1445(e) shall

5 apply for purposes of this section.

6 ‘‘(e) REGULATIONS.—The Secretary shall prescribe

7 such regulations as may be appropriate to carry out the

8 purposes of this section, including regulations coordinat9 ing the provisions of this section with the provisions of

10 sections 1445 and 1446.’’

11 (c) EXCEPTION FROM BRANCH PROFITS TAX.—Sub12 paragraph (C) of section 884(d)(2) of such Code is amend13 ed to read as follows:

14 ‘‘(C) gain treated as effectively connected

15 with the conduct of a trade or business within

16 the United States under—

17 ‘‘(i) section 897 in the case of the

18 disposition of a United States real property

19 interest described in section

20 897(c)(1)(A)(ii), or

21 ‘‘(ii) section 899,’’.

22 (d) REPORTS WITH RESPECT TO CERTAIN DIS23 TRIBUTIONS.—Paragraph (2) of section 6038B(a) of such

24 Code (relating to notice of certain transfers to foreign per-
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1 son) is amended by striking ‘‘section 336’’ and inserting

2 ‘‘section 302, 331, or 336’’.

3 (e) CLERICAL AMENDMENTS.—

4 (1) The table of sections for subpart D of part

5 II of subchapter N of chapter 1 of such Code is

6 amended by adding at the end the following new

7 item:

‘‘Sec. 899. Dispositions of stock in domestic corporations by 10-

percent foreign shareholders.’’

8 (2) The table of sections for subchapter A of

9 chapter 3 of such Code is amended by adding at the

10 end the following new item:

‘‘Sec. 1447. Withholding of tax on certain stock dispositions.’’

11 (f) EFFECTIVE DATE.—

12 (1) IN GENERAL.—Except as otherwise pro13 vided in this subsection, the amendments made by

14 this section shall apply to dispositions after the date

15 of the enactment of this Act, except that section

16 1447 of such Code (as added by this section) shall

17 not apply to any disposition before the date 6

18 months after the date of the enactment of this Act.

19 (2) COORDINATION WITH TREATIES.—

20 (A) IN GENERAL.—Sections 899 (other

21 than subsection (e) thereof) and 1447 of such

22 Code (as added by this section) shall not apply

23 to any disposition if such disposition is by a
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1 qualified resident of a foreign country and the

2 application of such sections to such disposition

3 would be contrary to any treaty between the

4 United States and such foreign country which

5 is in effect on the date of the enactment of this

6 Act and at the time of such disposition.

7 (B) QUALIFIED RESIDENT.—For purposes

8 of subparagraph (A), the term ‘‘qualified resi9 dent’’ means any resident of the foreign country

10 entitled to the benefits of the treaty referred to

11 in subparagraph (A); except that such term

12 shall not include a corporation unless such cor13 poration is a qualified resident of such country

14 (as defined in section 884(e)(4) of such Code).

15 SEC. 6. PORTFOLIO DEBT.

16 (a) IN GENERAL.—Section 871(h)(3) of the Internal

17 Revenue Code of 1986 is amended to read as follows:

18 ‘‘(3) PORTFOLIO INTEREST TO INCLUDE ONLY

19 INTEREST ON GOVERNMENT OBLIGATIONS.—The

20 term ‘portfolio interest’ shall include only interest

21 paid on an obligation issued by a governmental en22 tity.’’

23 (b) CONFORMING AMENDMENTS.—

24 (1) Section 881(c)(3) of such Code is amend25 ed—
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1 (A) in subparagraph (A), by adding ‘‘or’’

2 at the end, and

3 (B) by striking subparagraph (B) and re4 designating subparagraph (C) as subparagraph

5 (B).

6 (2) Section 881(c)(4) of such Code is amend7 ed—

8 (A) by striking ‘‘section 871(h)(4)’’ and in9 serting ‘‘section 871(h)(3) or (4)’’, and

10 (B) in the heading, by inserting ‘‘INTER11 EST ON NON-GOVERNMENT OBLIGATIONS OR’’

12 after ‘‘INCLUDE’’.

13 (c) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to interest received after December

15 31, 1995, with respect to obligations issued after such

16 date.

17 SEC. 7. SOURCE OF INCOME FROM CERTAIN SALES OF IN18 VENTORY PROPERTY.

19 (a) GENERAL RULE.—Subsection (b) of section 865

20 of the Internal Revenue Code of 1986 (relating to excep21 tion for inventory property) is amended to read as follows:

22 ‘‘(b) INVENTORY PROPERTY.—

23 ‘‘(1) INCOME ATTRIBUTABLE TO PRODUCTION

24 ACTIVITY.—In the case of income from the sale of
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1 inventory property produced (in whole or in part) by

2 the taxpayer—

3 ‘‘(A) a portion (determined under regula4 tions) of such income shall be allocated to pro5 duction activity (and sourced in the United

6 States or outside the United States depending

7 on where such activity occurs), and

8 ‘‘(B) the remaining portion of such income

9 shall be sourced under the other provisions of

10 this section.

11 The regulations prescribed under subparagraph (A)

12 shall provide that at least 50 percent of such income

13 shall be allocated to production activities.

14 ‘‘(2) SALES INCOME.—

15 ‘‘(A) UNITED STATES RESIDENTS.—In16 come from the sale of inventory property by a

17 United States resident shall be sourced outside

18 the United States if—

19 ‘‘(i) the property is sold for use, con20 sumption, or disposition outside the United

21 States and an office or another fixed place

22 of business of the taxpayer outside the

23 United States participated materially in

24 the sale, and
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1 ‘‘(ii) such sale is not (directly or indi2 rectly) to an affiliate of the taxpayer.

3 ‘‘(B) NONRESIDENT.—Income from the

4 sale of inventory property by a nonresident

5 shall be sourced in the United States if—

6 ‘‘(i) the taxpayer has an office or

7 other fixed place of business in the United

8 States, and

9 ‘‘(ii) such sale is through such office

10 or other fixed place of business.

11 This subparagraph shall not apply if the require12 ments of clauses (i) and (ii) of subparagraph (A) are

13 met with respect to such sale.

14 ‘‘(3) COORDINATION WITH TREATIES.—For

15 purposes of paragraph (2)(A)(i), a United States

16 resident shall not be treated as having an office or

17 fixed place of business in a foreign country if a trea18 ty prevents such country from imposing an income

19 tax on the income.’’

20 (b) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to income from sales occurring

22 after December 31, 1995.
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1 SEC. 8. ENHANCEMENT OF BENEFITS FOR FOREIGN SALES

2 CORPORATIONS.

3 (a) IN GENERAL.—Subsection (a) of section 923 of

4 the Internal Revenue Code of 1986 is amended—

5 (1) in paragraph (2), by striking ‘‘32 percent’’

6 and inserting ‘‘34 percent’’, and

(2) in paragraph (3), by striking ‘‘16 7 ⁄23’’ and inserting ‘‘17 8 ⁄23’’.

9 (b) SPECIAL RULES RELATING TO CORPORATE

10 PREFERENCE ITEMS.—Paragraph (4) of section 291(a) of

11 such Code is amended—

12 (1) in subparagraph (A), by striking ‘‘ ‘30 per13 cent’ for ‘32 percent’ ’’ and inserting ‘‘ ‘32 percent’

14 for ‘34 percent’ ’’, and

(2) in subparagraph (B), by striking ‘‘ ‘15 15 ⁄23’ for

‘16⁄23’ ’’ and inserting ‘‘ ‘16⁄23’ for ‘17 16 ⁄23’ ’’.

17 (c) EFFECTIVE DATE.—The amendments made by

18 this section shall apply to taxable years beginning after

19 December 31, 1995.

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