I

104TH CONGRESS

1ST SESSION H. R. 1690

To amend the Internal Revenue Code of 1986 to simplify certain rules

relating to the taxation of United States business operating abroad,

and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MAY 24, 1995

Mr. LEVIN (for himself and Mr. HOUGHTON) 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 simplify

certain rules relating to the taxation of United States

business operating abroad, 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; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘International Tax Simplification and Reform Act of

6 1995’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 SEC. 2. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR

5 CERTAIN LOWER TIER COMPANIES.

6 (a) SECTION 902 CREDIT.—

7 (1) IN GENERAL.—Subsection (b) of section

8 902 (relating to deemed taxes increased in case of

9 certain 2nd and 3rd tier foreign corporations) is

10 amended to read as follows:

11 ‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER12 TAIN LOWER TIER CORPORATIONS.—

13 ‘‘(1) IN GENERAL.—If—

14 ‘‘(A) any foreign corporation is a member

15 of a qualified group, and

16 ‘‘(B) such foreign corporation owns 10 per17 cent or more of the voting stock of another

18 member of such group from which it receives

19 dividends in any taxable year,

20 such foreign corporation shall be deemed to have

21 paid the same proportion of such other member’s

22 post-1986 foreign income taxes as would be deter23 mined under subsection (a) if such foreign corpora24 tion were a domestic corporation.
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1 ‘‘(2) QUALIFIED GROUP.—For purposes of

2 paragraph (1), the term ‘qualified group’ means—

3 ‘‘(A) the foreign corporation described in

4 subsection (a), and

5 ‘‘(B) any other foreign corporation if—

6 ‘‘(i) the domestic corporation owns at

7 least 5 percent of the voting stock of such

8 other foreign corporation indirectly

9 through a chain of foreign corporations

10 connected through stock ownership of at

11 least 10 percent of their voting stock,

12 ‘‘(ii) the foreign corporation described

13 in subsection (a) is the first tier corpora14 tion in such chain, and

15 ‘‘(iii) such other corporation is not

16 below the sixth tier in such chain.

17 The term ‘qualified group’ shall not include any for18 eign corporation below the third tier in the chain re19 ferred to in clause (i) unless such foreign corpora20 tion is a controlled foreign corporation (as defined in

21 section 957) and the domestic corporation is a Unit22 ed States shareholder (as defined in section 951(b))

23 in such foreign corporation. Paragraph (1) shall

24 apply to those taxes paid by a member of the quali25 fied group below the third tier only with respect to
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1 periods during which it was a controlled foreign cor2 poration.’’

3 (2) CONFORMING AMENDMENTS.—

4 (A) Subparagraph (B) of section 902(c)(3)

5 is amended by adding ‘‘or’’ at the end of clause

6 (i) and by striking clauses (ii) and (iii) and in7 serting the following new clause:

8 ‘‘(ii) the requirements of subsection

9 (b)(2) are met with respect to such foreign

10 corporation.’’

11 (B) Subparagraph (B) of section 902(c)(4)

12 is amended by striking ‘‘3rd foreign corpora13 tion’’ and inserting ‘‘sixth tier foreign corpora14 tion’’.

15 (C) The heading for paragraph (3) of sec16 tion 902(c) is amended by striking ‘‘WHERE DO17 MESTIC CORPORATION ACQUIRES 10 PERCENT

18 OF FOREIGN CORPORATION’’ and inserting

19 ‘‘WHERE FOREIGN CORPORATION FIRST QUALI20 FIES’’.

21 (D) Paragraph (3) of section 902(c) is

22 amended by striking ‘‘ownership’’ each place it

23 appears.
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1 (b) SECTION 960 CREDIT.—Paragraph (1) of section

2 960(a) (relating to special rules for foreign tax credits)

3 is amended to read as follows:

4 ‘‘(1) DEEMED PAID CREDIT.—For purposes of

5 subpart A of this part, if there is included under

6 section 951(a) in the gross income of a domestic cor7 poration any amount attributable to earnings and

8 profits of a foreign corporation which is a member

9 of a qualified group (as defined in section 902(b))

10 with respect to the domestic corporation, then, ex11 cept to the extent provided in regulations, section

12 902 shall be applied as if the amount so included

13 were a dividend paid by such foreign corporation

14 (determined by applying section 902(c) in accord15 ance with section 904(d)(3)(B)).’’

16 (c) EFFECTIVE DATE.—

17 (1) IN GENERAL.—The amendments made by

18 this section shall apply to taxes of foreign corpora19 tions for taxable years of such corporations begin20 ning after the date of enactment of this Act.

21 (2) SPECIAL RULE.—In the case of any chain

22 of foreign corporations described in clauses (i) and

23 (ii) of section 902(b)(2)(B) of the Internal Revenue

24 Code of 1986 (as amended by this section), no liq25 uidation, reorganization, or similar transaction in a
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1 taxable year beginning after the date of the enact2 ment of this Act shall have the effect of permitting

3 taxes to be taken into account under section 902 of

4 the Internal Revenue Code of 1986 which could not

5 have been taken into account under such section but

6 for such transaction.

7 SEC. 3. EXCHANGE RATE USED IN TRANSLATING FOREIGN

8 TAXES.

9 (a) ACCRUED TAXES TRANSLATED BY USING AVER10 AGE RATE FOR YEAR TO WHICH TAXES RELATE.—

11 (1) IN GENERAL.—Subsection (a) of section

12 986 (relating to translation of foreign taxes) is

13 amended to read as follows:

14 ‘‘(a) FOREIGN INCOME TAXES.—

15 ‘‘(1) TRANSLATION OF ACCRUED TAXES.—

16 ‘‘(A) IN GENERAL.—For purposes of deter17 mining the amount of the foreign tax credit, in

18 the case of a taxpayer who takes foreign income

19 taxes into account when accrued, the amount of

20 any foreign income taxes (and any adjustment

21 thereto) shall be translated into dollars by using

22 the average exchange rate for the taxable year

23 to which such taxes relate.

24 ‘‘(B) EXCEPTION FOR TAXES NOT PAID

25 WITHIN FOLLOWING 2 YEARS.—
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1 ‘‘(i) Subparagraph (A) shall not apply

2 to any foreign income taxes paid after the

3 date 2 years after the close of the taxable

4 year to which such taxes relate.

5 ‘‘(ii) Subparagraph (A) shall not

6 apply to taxes paid before the beginning of

7 the taxable year to which such taxes relate.

8 ‘‘(C) EXCEPTION FOR INFLATIONARY CUR9 RENCIES.—To the extent provided in regula10 tions, subparagraph (A) shall not apply to any

11 foreign income taxes the liability for which is

12 denominated in any currency determined to be

13 an inflationary currency under such regulations.

14 ‘‘(D) CROSS REFERENCE.—

‘‘For adjustments where tax is not paid within 2

years, see section 905(c).

15 ‘‘(2) TRANSLATION OF TAXES TO WHICH PARA16 GRAPH (1) DOES NOT APPLY.—For purposes of de17 termining the amount of the foreign tax credit, in

18 the case of any foreign income taxes to which sub19 paragraph (A) of paragraph (1) does not apply—

20 ‘‘(A) such taxes shall be translated into

21 dollars using the exchange rates as of the time

22 such taxes were paid to the foreign country or

23 possession of the United States, and
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1 ‘‘(B) any adjustment to the amount of

2 such taxes shall be translated into dollars

3 using—

4 ‘‘(i) except as provided in clause (ii),

5 the exchange rate as of the time when such

6 adjustment is paid to the foreign country

7 or possession, or

8 ‘‘(ii) in the case of any refund or cred9 it of foreign income taxes, using the ex10 change rate as of the time of the original

11 payment of such foreign income taxes.

12 ‘‘(3) FOREIGN INCOME TAXES.—For purposes

13 of this subsection, the term ‘foreign income taxes’

14 means any income, war profits, or excess profits

15 taxes paid or accrued to any foreign country or to

16 any possession of the United States.’’

17 (2) ADJUSTMENT WHEN NOT PAID WITHIN 2

18 YEARS AFTER YEAR TO WHICH TAXES RELATE.—

19 Subsection (c) of section 905 is amended to read as

20 follows:

21 ‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—

22 ‘‘(1) IN GENERAL.—If—

23 ‘‘(A) accrued taxes when paid differ from

24 the amounts claimed as credits by the taxpayer,
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1 ‘‘(B) accrued taxes are not paid before the

2 date 2 years after the close of the taxable year

3 to which such taxes relate, or

4 ‘‘(C) any tax paid is refunded in whole or

5 in part,

6 the taxpayer shall notify the Secretary, who shall re7 determine the amount of the tax for the year or

8 years affected.

9 ‘‘(2) SPECIAL RULE FOR TAXES NOT PAID

10 WITHIN 2 YEARS.—In making the redetermination

11 under paragraph (1), no credit shall be allowed for

12 accrued taxes not paid before the date referred to in

13 subparagraph (B) of paragraph (1). Any such taxes

14 if subsequently paid shall be taken into account for

15 the taxable year in which paid and no redetermina16 tion under this section shall be made on account of

17 such payment.

18 ‘‘(3) ADJUSTMENTS.—The amount of tax due

19 on any redetermination under paragraph (1) (if any)

20 shall be paid by the taxpayer on notice and demand

21 by the Secretary, and the amount of tax overpaid (if

22 any) shall be credited or refunded to the taxpayer in

23 accordance with subchapter B of chapter 66 (section

24 6511 et seq.).
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1 ‘‘(4) BOND REQUIREMENTS.—In the case of

2 any tax accrued but not paid, the Secretary, as a

3 condition precedent to the allowance of the credit

4 provided in this subpart, may require the taxpayer

5 to give a bond, with sureties satisfactory to and ap6 proved by the Secretary, in such sum as the Sec7 retary may require, conditioned on the payment by

8 the taxpayer of any amount of tax found due on any

9 such redetermination. Any such bond shall contain

10 such further conditions as the Secretary may re11 quire.

12 ‘‘(5) OTHER SPECIAL RULES.—In any redeter13 mination under paragraph (1) by the Secretary of

14 the amount of tax due from the taxpayer for the

15 year or years affected by a refund, the amount of

16 the taxes refunded for which credit has been allowed

17 under this section shall be reduced by the amount of

18 any tax described in section 901 imposed by the for19 eign country or possession of the United States with

20 respect to such refund; but no credit under this sub21 part, or deduction under section 164, shall be al22 lowed for any taxable year with respect to any such

23 tax imposed on the refund. No interest shall be as24 sessed or collected on any amount of tax due on any

25 redetermination by the Secretary, resulting from a
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1 refund to the taxpayer, for any period before the re2 ceipt of such refund, except to the extent interest

3 was paid by the foreign country or possession of the

4 United States on such refund for such period.’’

5 (b) AUTHORITY TO USE AVERAGE RATES.—

6 (1) IN GENERAL.—Subsection (a) of section

7 986 (as amended by subsection (a)) is amended by

8 redesignating paragraph (3) as paragraph (4) and

9 inserting after paragraph (2) the following new

10 paragraph:

11 ‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE

12 RATES.—To the extent prescribed in regulations, the

13 average exchange rate for the period (specified in

14 such regulations) during which the taxes or adjust15 ment is paid may be used instead of the exchange

16 rate as of the time of such payment.’’

17 (2) DETERMINATION OF AVERAGE RATES.—

18 Subsection (c) of section 989 is amended by striking

19 ‘‘and’’ at the end of paragraph (4), by striking the

20 period at the end of paragraph (5) and inserting ‘‘,

21 and’’, and by adding at the end thereof the following

22 new paragraph:

23 ‘‘(6) setting forth procedures for determining

24 the average exchange rate for any period.’’
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1 (3) CONFORMING AMENDMENTS.—Subsection

2 (b) of section 989 is amended by striking ‘‘weight3 ed’’ each place it appears.

4 (c) EFFECTIVE DATES.—

5 (1) IN GENERAL.—The amendments made by

6 subsections (a)(1) and (b) shall apply to taxes paid

7 or accrued in taxable years beginning after Decem8 ber 31, 1995.

9 (2) SUBSECTION (a)(2).—The amendment made

10 by subsection (a)(2) shall apply to taxes which relate

11 to taxable years beginning after December 31, 1995.

12 SEC. 4. LIMITED APPLICATION OF UNIFORM CAPITALIZA13 TION RULES TO FOREIGN PERSONS.

14 (a) IN GENERAL.—Section 263A(c) (relating to ex15 ceptions) is amended by adding at the end thereof the fol16 lowing new paragraph:

17 ‘‘(7) FOREIGN PERSONS.—This section shall

18 apply to any taxpayer who is not a United States

19 person only for purposes of applying sections

20 871(b)(1) and 882(a)(1) and subpart F of part III

21 of subchapter N.’’

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

23 subsection (a) shall apply to taxable years beginning after

24 December 31, 1995.
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1 SEC. 5. EXEMPTION FOR ACTIVE FINANCING INCOME.

2 (a) EXEMPTION FROM FOREIGN PERSONAL HOLD3 ING COMPANY INCOME.—Subsection (c) of section 954 is

4 amended by adding at the end the following new para5 graph:

6 ‘‘(4) CERTAIN INCOME DERIVED IN ACTIVE

7 CONDUCT OF TRADE OR BUSINESS.—For purposes

8 of paragraph (1), foreign personal holding company

9 income does not include income which is derived

10 from sources within the country under the laws of

11 which the controlled foreign corporation is created or

12 organized and which is—

13 ‘‘(A) income derived in the active conduct

14 of a banking, financing or similar business, but

15 only if such corporation is predominantly en16 gaged in such active conduct;

17 ‘‘(B) dividends, interest, and gains from

18 the sale or exchange of stock or securities de19 rived from the investments made by a qualify20 ing insurance company of its unearned pre21 miums or reserves ordinary and necessary for

22 the proper conduct of its insurance business,

23 and which are received from a person other

24 than a related person (within the meaning of

25 subsection (d)(3)); or
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1 ‘‘(C) dividends, interest, and gains from

2 the sale or exchange of stock or securities re3 ceived from a person other than a related per4 son (within the meaning of subsection (d)(3))

5 derived from investments made by a qualifying

6 insurance company of an amount of its assets

equal to 1 7 ⁄3 of its premiums earned on insur8 ance contracts during the taxable year (as de9 fined in section 832(b)(4)) which are not di10 rectly or indirectly attributable to the insurance

11 or reinsurance of risks of persons who are relat12 ed persons (within the meaning of subsection

13 (d)(3)).

14 Dividends, interest, income equivalent to interest,

15 rent, and royalties received or accrued from a relat16 ed person (within the meaning of subsection (d)(3)),

17 shall be subject to look-thru treatment for purposes

18 of subparagraph (A) under regulations prescribed by

19 the Secretary which are consistent with the prin20 ciples of section 904(d)(2). The Secretary shall pre21 scribe regulations which interpret subparagraph (A)

22 in accordance with the applicable principles of sec23 tion 904(d)(2)(C). For purposes of subparagraph

24 (C), the term ‘qualifying insurance company’ means

25 an insurance company which is subject to regulation
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1 as an insurance company under the laws of its coun2 try of incorporation and which realizes at least 50

3 percent of its gross income (other than gross income

4 derived from investments) from premiums written on

5 risks situated within its country of incorporation.’’

6 (b) EXEMPTION FROM FOREIGN BASE COMPANY

7 SERVICES INCOME.—Paragraph (2) of section 954(e) is

8 amended by striking ‘‘or’’ at the end of subparagraph (A),

9 by striking the period at the end of subparagraph (B) and

10 inserting ‘‘, or’’, and by adding at the end the following:

11 ‘‘(C) the active conduct of a banking, fi12 nancing or similar business, but only if—

13 ‘‘(i) the controlled foreign corporation

14 is predominantly engaged in such active

15 conduct, and

16 ‘‘(ii) the income so derived is from

17 sources within the country under the laws

18 of which the controlled foreign corporation

19 is created or organized.

20 The Secretary shall prescribe regulations which

21 interpret subparagraph (C) in accordance with

22 the applicable principles of section

23 904(d)(2)(C).’’

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

25 this section shall apply to taxable years of foreign corpora-
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1 tions beginning after December 31, 1995, and to taxable

2 years of United States shareholders in which or with which

3 such taxable years of foreign corporations end.

4 SEC. 6. EXTENSION OF PERIOD TO WHICH EXCESS FOR5 EIGN TAXES MAY BE CARRIED.

6 (a) GENERAL RULE.—Subsection (c) of section 904

7 (relating to carryback and carryover of excess tax paid)

8 is amended—

9 (1) by inserting ‘‘in the third preceding taxable

10 year,’’ before ‘‘in the second preceding taxable

11 year’’, and

12 (2) by striking ‘‘in the first, second, third,

13 fourth, or fifth’’ and inserting ‘‘in any of the first

14 15’’.

15 (b) EXCESS EXTRACTION TAXES.—Paragraph (1) of

16 section 907(f) is amended—

17 (1) by inserting ‘‘in the third preceding taxable

18 year,’’ before ‘‘in the second preceding taxable

19 year’’, and

20 (2) by striking ‘‘in the first, second, third,

21 fourth, or fifth’’ and inserting ‘‘in any of the first

22 15’’.

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

24 this section shall apply to excess foreign taxes for taxable

25 years beginning after December 31, 1995.
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1 SEC. 7. APPLICATION OF SEPARATE FOREIGN TAX CREDIT

2 LIMITATION FOR NONCONTROLLED SECTION

3 902 CORPORATIONS.

4 (a) LOOK-THRU IN CASE OF NONCONTROLLED SEC5 TION 902 CORPORATIONS IF INFORMATION AVAILABLE.—

6 Section 904(d) (relating to separate application of section

7 with respect to certain categories of income) is amended

8 by redesignating paragraphs (4) and (5) as paragraphs

9 (5) and (6), respectively, and by inserting after paragraph

10 (3) the following new paragraph:

11 ‘‘(4) LOOK-THRU IN THE CASE OF CERTAIN

12 NONCONTROLLED SECTION 902 CORPORATIONS.—

13 ‘‘(A) IN GENERAL.—Dividends received or

14 accrued by a corporation from a noncontrolled

15 section 902 corporation shall be treated as not

16 described in paragraph (1)(E) if information

17 necessary to make the determinations under

18 subparagraph (B) is readily available to the

19 taxpayer.

20 ‘‘(B) ALLOCATION OF DIVIDENDS AMONG

21 CATEGORIES.—Dividends treated as provided in

22 subparagraph (A) which are paid out of the

23 earnings or profits of such corporation shall be

24 treated as income in a separate category in pro25 portion to the ratio of—
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1 ‘‘(i) the portion of the earnings and

2 profits attributable to income in such sepa3 rate category, to

4 ‘‘(ii) the total amount of earnings and

5 profits.

6 ‘‘(C) COORDINATION WITH OTHER PROVI7 SIONS.—Dividends treated as provided in sub8 paragraph (A) shall not be treated as dividends

9 from a noncontrolled section 902 corporation

10 for purposes of subparagraphs (C)(iii) and (D)

11 of paragraph (2).’’

12 (b) DIVIDENDS FROM OTHER NONCONTROLLED

13 SECTION 902 CORPORATIONS ALL IN SAME SEPARATE

14 BASKET.—Subparagraph (E) of section 904(d)(1) is

15 amended to read as follows:

16 ‘‘(E) in the case of a corporation, except as

17 provided in paragraph (4), dividends from all

18 noncontrolled section 902 corporations,’’.

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

20 this section shall apply to taxable years of foreign corpora21 tions beginning after December 31, 1995, and to taxable

22 years of United States shareholders in which or with which

23 such taxable years of foreign corporations end.
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1 SEC. 8. COUNTRIES IN EUROPEAN UNION TREATED A SIN2 GLE COUNTRY UNDER SAME COUNTRY EX3 CEPTIONS.

4 (a) IN GENERAL.—Subsection (d) of section 954 is

5 amended by adding at the end the following new para6 graph:

7 ‘‘(5) COUNTRIES IN EUROPEAN UNION TREAT8 ED AS 1 COUNTRY.—For purposes of this subsection

9 and subsection (e), in the case of a controlled for10 eign corporation which is created or organized under

11 the laws of a country included in the European

12 Union, the geographic extent of such country shall

13 be treated as including the countries in such

14 Union.’’

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

16 this section shall apply to taxable years of foreign corpora17 tions beginning after December 31, 1995, and to taxable

18 years of United States shareholders in which or with which

19 such taxable years of foreign corporations end.

20 SEC. 9. CONTROLLED FOREIGN CORPORATIONS PASSIVE

21 FOREIGN INVESTMENT COMPANY.

22 (a) IN GENERAL.—Subsection (b) of section 1297 is

23 amended by adding at the end thereof the following new

24 paragraph:

25 ‘‘(10) EXCEPTION WHERE SECTION 951 APPLIES

26 WITHOUT REGARD TO THIS SECTION.—This part
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1 shall not apply to a taxpayer with respect to a cor2 poration if, without regard to this section—

3 ‘‘(A) such corporation is a controlled for4 eign corporation (as defined in section 957),

5 and

6 ‘‘(B) the taxpayer is a United States

7 shareholder (as defined in section 951(b)) with

8 respect to such corporation.’’

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

10 subsection (a) shall apply to taxable years of foreign cor11 porations beginning after December 31, 1995, and to tax12 able years of United States shareholders in which or with

13 which such taxable years of foreign corporations end.

14 SEC. 10. EARNINGS AND PROFITS DEPRECIATION USED IN

15 ASSET BASIS IN ALLOCATING EXPENSES.

16 (a) IN GENERAL.—Subsection (e)(2) of section 864

17 is amended by inserting at the end thereof the following

18 new sentence: ‘‘Except as otherwise provided in this sub19 section, for purposes of allocating and apportioning any

20 deductible expense on the basis of assets, the taxpayer

21 shall be permitted to base such allocations and apportion22 ments on the adjusted bases of assets as determined by

23 applying the rules and principles of subsections (k) and

24 (n) of section 312.’’
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1 (b) EFFECTIVE DATE.—The amendment made by

2 subsection (a) shall apply to taxable years beginning after

3 December 31, 1995.

4 SEC. 11. RECHARACTERIZATION OF OVERALL DOMESTIC

5 LOSS.

6 (a) GENERAL RULE.—Section 904 is amended by re7 designating subsections (g), (h), (i), and (j) as subsections

8 (h), (i), (j), and (k), respectively, and by inserting after

9 subsection (f) the following new subsection:

10 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

11 LOSS.—

12 ‘‘(1) GENERAL RULE.—For purposes of this

13 subpart, in the case of any taxpayer who sustains an

14 overall domestic loss for any taxable year beginning

15 after December 31, 1995, that portion of the tax16 payer’s taxable income from sources within the Unit17 ed States for each succeeding taxable year which is

18 equal to the lesser of—

19 ‘‘(A) the amount of such loss (to the extent

20 not used under this paragraph in prior taxable

21 years), or

22 ‘‘(B) 50 percent of the taxpayer’s taxable

23 income from sources within the United States

24 for such succeeding taxable year,
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1 shall be treated as income from sources without the

2 United States (and not as income from sources with3 in the United States).

4 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For

5 purposes of this subsection—

6 ‘‘(A) IN GENERAL.—The term ‘overall do7 mestic loss’ means any domestic loss to the ex8 tent such loss offsets taxable income from

9 sources without the United States for the tax10 able year or for any preceding taxable year by

11 reason of a carryback. For purposes of the pre12 ceding sentence, the term ‘domestic loss’ means

13 the amount by which the gross income for the

14 taxable year from sources within the United

15 States is exceeded by the sum of the deductions

16 properly apportioned or allocated thereto (deter17 mined without regard to any carryback from a

18 subsequent taxable year).

19 ‘‘(B) TAXPAYER MUST HAVE ELECTED

20 FOREIGN TAX CREDIT FOR YEAR OF LOSS.—

21 The term ‘overall domestic loss’ shall not in22 clude any loss for any taxable year unless the

23 taxpayer chose the benefits of this subpart for

24 such taxable year.
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1 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN2 COME.—

3 ‘‘(A) IN GENERAL.—Any income from

4 sources within the United States that is treated

5 as income from sources without the United

6 States under paragraph (1) shall be allocated

7 among and increase the income categories in

8 proportion to the loss from sources within the

9 United States previously allocated to those in10 come categories.

11 ‘‘(B) INCOME CATEGORY.—For purposes of

12 this paragraph, the term ‘income category’ has

13 the meaning given to such term by subsection

14 (f)(5)(E)(i).

15 ‘‘(4) COORDINATION WITH SUBSECTION (f).—

16 The Secretary shall prescribe such regulations as

17 may be necessary to coordinate the provisions of this

18 subsection with the provisions of subsection (f).’’

19 (b) CONFORMING AMENDMENT.—Subparagraph (A)

20 of section 936(a)(2) is amended by striking ‘‘section

21 904(f)’’ and inserting ‘‘subsections (f) and (g) of section

22 904’’.

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

24 this section shall apply to losses for taxable years begin25 ning after December 31, 1995.
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1 SEC. 12. EXPANSION OF DE MINIMIS RULE UNDER SUB2 PART F.

3 (a) IN GENERAL.—Subparagraph (A) of section

4 954(b)(3) (relating to de minimis, etc., rules) is amended

5 to read as follows:

6 ‘‘(A) DE MINIMIS RULE.—If the sum of

7 foreign base company income (determined with8 out regard to paragraph (5)) and the gross in9 surance income for the taxable year is less than

10 10 percent of gross income, no part of the gross

11 income for the taxable year shall be treated as

12 foreign base company income or insurance in13 come.’’

14 (b) TECHNICAL AMENDMENTS.—

15 (1) Clause (ii) of section 864(d)(5)(A) is

16 amended by striking ‘‘5 percent or $1,000,000’’ and

17 inserting ‘‘10 percent’’.

18 (2) Clause (i) of section 881(c)(5)(A) is amend19 ed by striking ‘‘5 percent or $1,000,000’’ and insert20 ing ‘‘10 percent’’.

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

22 this section shall apply to taxable years beginning after

23 December 31, 1995.
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1 SEC. 13. ALLOCATION OF RESEARCH AND EXPERIMENTAL

2 EXPENDITURES.

3 (a) GENERAL RULE.—Subparagraph (B) of section

4 864(f)(1) (relating to allocation of research and experi5 mental expenditures) is amended by striking ‘‘50 percent’’

6 each place it appears and inserting ‘‘64 percent’’.

7 (b) ALLOCATION RULE MADE PERMANENT.—Sub8 section (f) of section 864 is amended by striking para9 graph (6).

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

11 this section shall apply to taxable years beginning after

12 the last taxable year to which section 864(f) of the Inter13 nal Revenue Code of 1986 would have applied but for this

14 section.

15 SEC. 14. INCREASE IN FILING THRESHOLDS FOR RETURNS

16 AS TO ORGANIZATION OF FOREIGN COR17 PORATIONS AND ACQUISITIONS OF STOCK IN

18 SUCH CORPORATIONS.

19 (a) IN GENERAL.—Subsection (a) of section 6046

20 (relating to returns as to organization or reorganization

21 of foreign corporations and as to acquisitions of their

22 stock) is amended to read as follows:

23 ‘‘(a) REQUIREMENT OF RETURN.—A return comply24 ing with the requirements of subsection (b) shall be made

25 by—
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1 ‘‘(1) each United States citizen or resident who

2 becomes an officer or director of a foreign corpora3 tion, 10 percent or more in value of the stock of

4 which is owned by a United States person (as de5 fined in section 7701(a)(30)),

6 ‘‘(2) each United States person—

7 ‘‘(A) who acquires stock which, when

8 added to any stock owned on the date of such

9 acquisition, has a value equal to 10 percent or

10 more of the value of the stock of a foreign cor11 poration, or

12 ‘‘(B) who acquires an additional 10 per13 cent or more in value of the stock of a foreign

14 corporation,

15 ‘‘(3) each person (not described in paragraph

16 (2)) who is treated as a United States shareholder

17 under section 953(c) with respect to a foreign cor18 poration, and

19 ‘‘(4) each person who becomes a United States

20 person while owning 10 percent or more in value of

21 the stock of a foreign corporation.

22 In the case of a foreign corporation with respect to which

23 any person is treated as a United States shareholder

24 under section 953(c), paragraph (1) shall be treated as
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1 including a reference to each United States person who

2 is an officer or director of such corporation.’’

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

4 this section shall take effect on January 1, 1996.

5 SEC. 15. SUBPART F EARNINGS AND PROFITS DETERMINED

6 UNDER GENERALLY ACCEPTED ACCOUNTING

7 PRINCIPLES.

8 (a) IN GENERAL.—Subsection (a) of section 964 (re9 lating to miscellaneous provisions) is amended by striking

10 ‘‘rules substantially similar to those applicable to domestic

11 corporations, under regulations prescribed by the Sec12 retary’’ and inserting ‘‘generally accepted accounting prin13 ciples in the United States’’.

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

15 subsection (a) shall apply to distributions during, and the

16 determination of the inclusion under section 951 of the

17 Internal Revenue Code of 1986 with respect to, taxable

18 years of foreign corporations beginning after December

19 31, 1995.

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