I 

109TH CONGRESS 

1ST SESSION H. R. 1303

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

exploiting tax treaties to evade taxation of United States income and 

to prevent manipulation of transfer prices by deflection of income to 

tax havens. 

IN THE HOUSE OF REPRESENTATIVES 

MARCH 15, 2005

Mr. DOGGETT (for himself, Mr. LEVIN, Mr. NEAL of Massachusetts, Mr. 

LEWIS of Georgia, Mr. MCDERMOTT, Mr. MCNULTY, Mr. JEFFERSON, 

Mr. STARK, Mr. ABERCROMBIE, Mr. ACKERMAN, Mr. ANDREWS, Mr. 

BAIRD, Ms. BALDWIN, Ms. CORRINE BROWN of Florida, Mr. BROWN of 

Ohio, Mrs. CAPPS, Mr. CAPUANO, Ms. CARSON, Mr. CONYERS, Mr. 

CROWLEY, Mr. DAVIS of Illinois, Mr. DEFAZIO, Ms. DEGETTE, Mr. 

DELAHUNT, Ms. DELAURO, Mr. EDWARDS, Mr. EVANS, Mr. FARR, Mr. 

FATTAH, Mr. FILNER, Mr. GENE GREEN of Texas, Mr. GRIJALVA, Mr. 

HASTINGS of Florida, Mr. HINCHEY, Mr. HINOJOSA, Mr. HOLT, Ms. 

HOOLEY, Mr. JACKSON of Illinois, Ms. JACKSON-LEE of Texas, Ms. KAPTUR, Mr. KENNEDY of Rhode Island, Ms. KILPATRICK of Michigan, Mr. 

KIND, Mr. KUCINICH, Ms. LEE, Mr. MARKEY, Mr. MCGOVERN, Mr. 

MEEHAN, Mr. MEEK of Florida, Ms. MILLENDER-MCDONALD, Mr. 

GEORGE MILLER of California, Mr. NADLER, Mr. OLVER, Mr. OWENS, 

Mr. PALLONE, Mr. PASCRELL, Ms. ROYBAL-ALLARD, Mr. RUSH, Mr. 

RYAN of Ohio, Ms. LINDA T. SA ́NCHEZ of California, Ms. LORETTA

SANCHEZ of California, Mr. SANDERS, Ms. SCHAKOWSKY, Mr. SCHIFF, 

Mr. SHERMAN, Ms. SLAUGHTER, Ms. SOLIS, Mr. STRICKLAND, Mr. 

TIERNEY, Mrs. JONES of Ohio, Mr. UDALL of New Mexico, Ms. 

VELA ́ZQUEZ, Ms. WATERS, Ms. WATSON, and Mr. WAXMAN) introduced 

the following bill; which was referred to the Committee on Ways and 

Means 

A BILL

To amend the Internal Revenue Code of 1986 to prevent 
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corporations from exploiting tax treaties to evade taxation of United States income and to prevent manipulation of transfer prices by deflection of income to tax 

havens.

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

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Fairness and Account5 ability in International Taxation Act of 2005’’. 

6 SEC. 2. DENIAL OF TREATY BENEFITS FOR CERTAIN DE7 DUCTIBLE PAYMENTS. 

8 (a) IN GENERAL.—Section 894 of the Internal Rev9 enue Code of 1986 (relating to income affected by treaty) 

10 is amended by adding at the end the following new sub11 section: 

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

13 DEDUCTIBLE PAYMENTS.—

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

15 be entitled under any income tax treaty of the 

16 United States with a foreign country to any reduced 

17 rate of any withholding tax imposed by this title on 

18 any deductible foreign payment unless such entity is 

19 predominantly owned by individuals who are resi20 dents of such foreign country. 
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1 ‘‘(2) DEDUCTIBLE FOREIGN PAYMENT.—For 

2 purposes of paragraph (1), the term ‘deductible for3 eign payment’ means any payment—

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

5 directly or indirectly to a related person which 

6 is a foreign entity, and 

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

8 under this chapter. 

9 ‘‘(3) DOMESTIC AND FOREIGN ENTITIES; RE10 LATED PERSON.—For purposes of this subsection—

11 ‘‘(A) DOMESTIC ENTITY.—The term ‘do12 mestic entity’ means any domestic corporation 

13 or domestic partnership. 

14 ‘‘(B) FOREIGN ENTITY.—The term ‘for15 eign entity’ means any foreign corporation or 

16 foreign partnership. 

17 ‘‘(C) RELATED PERSON.—The term ‘re18 lated person’ has the meaning given such term 

19 by section 954(d)(3) (determined by sub20 stituting ‘domestic entity’ for ‘controlled foreign 

21 corporation’ each place it appears). 

22 ‘‘(4) PREDOMINANT OWNERSHIP.—For pur23 poses of this subsection—
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1 ‘‘(A) IN GENERAL.—An entity is predomi2 nantly owned by individuals who are residents 

3 of a foreign country if—

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

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

6 such corporation is owned (within the 

7 meaning of section 883(c)(4)) by individ8 uals who are residents of such foreign 

9 country, or 

10 ‘‘(ii) in the case of a partnership, 

11 more than 50 percent (by value) of the 

12 beneficial interests in such partnership are 

13 so owned. 

14 ‘‘(B) PUBLICLY TRADED CORPORATIONS.—

15 A foreign corporation also shall be treated as 

16 predominantly owned by individuals who are 

17 residents of a foreign country if—

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

19 primarily and regularly traded on an estab20 lished securities market in such foreign 

21 country, and 

22 ‘‘(II) such corporation has activities 

23 within such foreign country which are sub24 stantial in relation to the total activities of 
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1 such corporation and its related persons, 

2 or 

3 ‘‘(ii) such corporation is wholly owned 

4 (directly or indirectly) by another foreign 

5 corporation which is described in clause (i). 

6 ‘‘(C) SPECIAL RULE.—

7 ‘‘(i) IN GENERAL.—A foreign corpora8 tion shall be treated as meeting the re9 quirements of subparagraph (A) if—

10 ‘‘(I) such requirements would be 

11 met if ‘30 percent’ were substituted 

12 for ‘50 percent’ in subparagraph 

13 (A)(i), 

14 ‘‘(II) the treaty country is a 

15 member of a multinational economic 

16 association such as the European 

17 Union, and 

18 ‘‘(III) at least 50 percent of the 

19 value of the stock of the corporation is 

20 owned (within the meaning of section 

21 883(c)(4)) by individuals who are resi22 dents of the treaty country or other 

23 qualified foreign countries. 

24 ‘‘(ii) QUALIFIED FOREIGN COUN25 TRY.—For purposes of this subparagraph, 
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1 the term ‘qualified foreign country’ means 

2 any foreign country if—

3 ‘‘(I) such foreign country is a 

4 member of the multinational economic 

5 association of which the treaty coun6 try is a member, and 

7 ‘‘(II) such foreign country has a 

8 tax treaty with the United States pro9 viding a withholding tax rate reduc10 tion which is not less than the with11 holding tax rate reduction applicable 

12 (without regard to this subsection) to 

13 the payment received by such foreign 

14 corporation. 

15 ‘‘(5) EXCEPTION FOR CORPORATIONS WITH

16 SUBSTANTIAL BUSINESS ACTIVITIES IN TREATY

17 COUNTRY.—Paragraph (1) shall not apply to a pay18 ment received by a foreign corporation if such cor19 poration has substantial business activities in the 

20 treaty country and if such corporation establishes to 

21 the satisfaction of the Secretary that the payment is 

22 subject to an effective rate of income tax imposed by 

23 such country greater than 90 percent of the max24 imum rate of tax specified in section 11. 
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1 ‘‘(6) EXCEPTION FOR PAYMENTS RECEIVED BY

2 CONTROLLED FOREIGN CORPORATION.—Paragraph 

3 (1) shall not apply to any deductible foreign pay4 ment made by a corporation if the recipient of the 

5 payment is a controlled foreign corporation and the 

6 payor is a United States shareholder (as defined in 

7 section 951(b)) of such corporation. 

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

9 prescribed by the Secretary, paragraph (1) shall not 

10 apply to a payment received by a foreign entity re11 ferred to in paragraph (1) if—

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

13 entity receives such payment, such entity makes 

14 a comparable payment directly or indirectly to 

15 another related person, 

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

17 foreign country with which the United States 

18 has an income tax treaty, 

19 ‘‘(C) such related person is predominantly 

20 owned by individuals who are residents of such 

21 country, and 

22 ‘‘(D) the withholding tax rate applicable 

23 under such treaty is equal to or greater than 

24 the withholding tax rate applicable (without re-
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1 gard to this paragraph) to the payment received 

2 by such foreign entity. 

3 A similar rule shall apply where the payment is in4 cludible in the gross income of a related person by 

5 reason of a foreign law comparable to subpart F of 

6 part III of subchapter N.’’

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

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

9 of this Act. 

10 SEC. 3. TRANSFER PRICE REDUCED BY DEFLECTED TAX 

11 HAVEN INCOME. 

12 (a) IN GENERAL.—Section 482 of the Internal Rev13 enue Code of 1986 (relating to allocation of income and 

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

15 In General.—’’ before ‘‘In the case of two or more’’ and 

16 by adding at the end the following new subsection: 

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

18 AND OUTBOUND TRANSACTIONS.—

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

20 services to which this subsection applies, the transfer 

21 price under this section for such property or service 

22 shall be the transfer price determined without regard 

23 to this subsection—

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

25 transaction, reduced by the deflected tax haven 
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1 income with respect to such property or service, 

2 or 

3 ‘‘(B) in the case of a related-party out4 bound transaction, increased by the deflected 

5 tax haven income with respect to such property 

6 or service. 

7 ‘‘(2) PROPERTY OR SERVICES TO WHICH SUB8 SECTION APPLIES.—

9 ‘‘(A) IN GENERAL.—This subsection ap10 plies to any property or services if there is a re11 lated-party inbound or outbound transaction 

12 with respect to such property or services. 

13 ‘‘(B) RELATED-PARTY INBOUND TRANS14 ACTION.—A related-party inbound transaction 

15 is any transaction where—

16 ‘‘(i) property is acquired directly or 

17 indirectly by a foreign-controlled domestic 

18 corporation from a foreign related person, 

19 or 

20 ‘‘(ii) the services are performed di21 rectly or indirectly for a foreign-controlled 

22 domestic corporation by a foreign related 

23 person. 
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1 ‘‘(C) RELATED-PARTY OUTBOUND TRANS2 ACTION.—A related-party outbound transaction 

3 is any transaction where—

4 ‘‘(i) property is sold directly or indi5 rectly by a foreign-controlled domestic cor6 poration to a foreign related person, or 

7 ‘‘(ii) services are performed directly or 

8 indirectly by a foreign-controlled domestic 

9 corporation for a foreign related person. 

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

11 purposes of this subsection—

12 ‘‘(A) IN GENERAL.—The term ‘deflected 

13 tax haven income’ means income (whether in 

14 the form of profits, commissions, fees, or other15 wise) derived by a foreign related person in con16 nection with any transaction related to property 

17 or services to which this subsection applies if 

18 such income would be treated as foreign base 

19 company sales income (as defined in section 

20 954(d)) or foreign base company services in21 come (as defined in section 954(e)) were such 

22 foreign related person treated as a controlled 

23 foreign corporation. 

24 ‘‘(B) EXCEPTION FOR INCOME SUBJECT

25 TO FOREIGN TAXES.—
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1 ‘‘(i) HIGH TAXES.—Such term shall 

2 not include any item of income with re3 spect to which the requirements of section 

4 954(b)(4) are met. 

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

6 establishes to the satisfaction of the Sec7 retary that an item of income was subject 

8 to an income tax imposed by a foreign 

9 country and the effective rate of such tax 

10 (and such effective rate was not greater 

11 than 90 percent of the maximum rate of 

12 tax specified in section 11), the term ‘de13 flected tax haven income’ shall not include 

14 the same proportion of such income as 

15 such effective rate of tax bears to 90 per16 cent. 

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

18 this subsection—

19 ‘‘(A) FOREIGN RELATED PERSON.—The 

20 term ‘foreign related person’ means any foreign 

21 person who is related (within the meaning of 

22 subsection (a)) to the foreign-controlled domes23 tic corporation. 

24 ‘‘(B) FOREIGN-CONTROLLED DOMESTIC

25 CORPORATION.—The term ‘foreign-controlled 
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1 domestic corporation’ means any domestic cor2 poration which is 25-percent foreign-owned (as 

3 defined in section 6038A(c)).’’

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

5 this section shall apply to property acquired, and services 

6 performed, after the date of the enactment of this Act.

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