I

103D CONGRESS

1ST SESSION H. R. 1409

To amend the Internal Revenue Code of 1986 to reduce compliance costs

and administrative burdens in connection with foreign taxes, and for

other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 18, 1993

Mr. THOMAS of California 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

compliance costs and administrative burdens in connection with foreign taxes, 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 TAX CODE.

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

5 ‘‘Foreign Tax Simplification Act of 1993’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
2

•HR 1409 IH

1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. LIMITED APPLICATION OF UNIFORM CAPITALIZA4 TION RULES TO FOREIGN PERSONS.

5 (A) IN GENERAL.—Section 263A(c) (relating to ex6 ceptions) is amended by adding at the end thereof the fol7 lowing new paragraph:

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

9 not apply to any foreign person except to the extent

10 necessary for the computation of taxable income

11 under sections 871(b)(2) and 882(a)(2) for purposes

12 of the taxes imposed by sections 871(b)(1) and

13 882(a)(1).’’

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

15 this section shall apply to costs incurred after December

16 31, 1993, in taxable years ending after such date.

17 SEC. 3. DEFINITION OF PASSIVE FOREIGN INVESTMENT

18 COMPANY.

19 (a) EXCLUSION OF CONTROLLED FOREIGN COR20 PORATIONS.—Section 1296 (defining passive foreign in21 vestment company) is amended by adding at the end

22 thereof the following new subsection:

23 ‘‘(e) SECTION 957 CORPORATIONS.—For purposes of

24 this part, a foreign corporation shall not be considered a

25 passive foreign investment company for any day on which
3

•HR 1409 IH

1 such corporation was a controlled foreign corporation to

2 which section 957(a) applied.’’

3 (b) EFFECTIVE DATE.—

4 (1) IN GENERAL.—The amendment made by

5 this section shall apply to taxable years of foreign

6 corporations ending after December 31, 1992.

7 (2) TRANSITION RULE.—If, for the 1st taxable

8 year to which the amendment made by this section

9 applies, a foreign corporation which was a passive

10 foreign investment corporation for any preceding

11 taxable year is not such a corporation for such 1st

12 taxable year by reason of such amendment, section

13 1297(b)(1) of the Internal Revenue Code of 1986

14 shall not apply to such 1st taxable year and subse15 quent taxable years solely by reason of such corpora16 tion being a passive foreign investment corporation

17 before such 1st taxable year.

18 SEC. 4. APPLICATION OF SEPARATE FOREIGN TAX CREDIT

19 LIMITATION FOR NONCONTROLLED SECTION

20 902 CORPORATIONS.

21 (a) IN GENERAL.—Subparagraph (E) of section

22 904(d)(1) (relating to separate application of section with

23 respect to certain categories of income) is amended to read

24 as follows:
4

•HR 1409 IH

1 ‘‘(E) in the case of a corporation, divi2 dends from all noncontrolled section 902 cor3 porations,’’.

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

5 this section shall apply to taxable years beginning after

6 December 31, 1992.

7 SEC. 5. 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.—
5

•HR 1409 IH

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
6

•HR 1409 IH

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,
7

•HR 1409 IH

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.).
8

•HR 1409 IH

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

11 require.

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
9

•HR 1409 IH

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 (relating to foreign taxes) is amended by adding

8 at the end thereof the following new paragraph:

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

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

11 average exchange rate for the period (specified in

12 such regulations) during which the taxes or adjust13 ment is paid may be used instead of the exchange

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

15 (2) DETERMINATION OF AVERAGE RATES.—

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

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

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

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

20 new paragraph:

21 ‘‘(6) setting forth procedures for determining

22 the average exchange rate for any period.’’

23 (3) CONFORMING AMENDMENTS.—Subsection

24 (b) of section 989 is amended by striking ‘‘weight25 ed’’ each place it appears.
10

•HR 1409 IH

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

2 this section shall apply to taxes paid or accrued in taxable

3 years beginning after December 31, 1992.

4 SEC. 6. LOOK-THRU RULES FOR CONTROLLED FOREIGN

5 CORPORATIONS NOT TO APPLY TO SEPARATE

6 CATEGORIES WITH DE MINIMIS AMOUNTS.

7 (a) IN GENERAL.—Section 904(d)(3)(E) (relating to

8 look-thru applies only where subpart F applies) is

9 amended to read as follows:

10 ‘‘(E) LOOK-THROUGH APPLIES ONLY WHERE

11 SEPARATE CATEGORY INCOME NOT DE MINIMIS.—

12 ‘‘(i) IN GENERAL.—If the aggregate gross

13 income in all separate categories of a foreign

14 corporation for the taxable year is less than the

15 lesser of—

16 ‘‘(I) 5 percent of gross income, or

17 ‘‘(II) $1,000,000,

18 no part of its gross income for such taxable

19 year shall be treated as income in a separate

20 category, except that this sentence shall not

21 apply to any income which (without regard to

22 this sentence) would be treated as financial

23 services income.

24 ‘‘(ii) PASSIVE INCOME.—Solely for pur25 poses of applying subparagraph (D), passive in-
11

•HR 1409 IH

1 come of a foreign corporation shall not be treat2 ed as income in a separate category if the re3 quirements of section 954(b)(4) are met with

4 respect to such income.’’

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

6 this section shall apply to taxable years beginning after

7 December 31, 1992.

Æ