I

104TH CONGRESS

1ST SESSION H. R. 389

To discourage domestic corporations from establishing foreign manufacturing

subsidiaries in order to avoid Federal taxes by including in gross income

of United States shareholders in foreign corporations the retained earnings of any such subsidiary which are attributable to manufacturing

operations in runaway plants or tax havens.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. TRAFICANT introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To discourage domestic corporations from establishing foreign manufacturing subsidiaries in order to avoid Federal

taxes by including in gross income of United States

shareholders in foreign corporations the retained earnings of any such subsidiary which are attributable to

manufacturing operations in runaway plants or 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 ‘‘Foreign Subsidiary

5 Tax Equity Act’’.
2

•HR 389 IH

1 SEC. 2. INCOME FROM RUNAWAY PLANTS OR FROM MANU2 FACTURING OPERATIONS LOCATED IN A

3 COUNTRY WHICH PROVIDES A TAX HOLIDAY

4 INCLUDED IN SUBPART F INCOME.

5 (a) FOREIGN BASE COMPANY MANUFACTURING RE6 LATED INCOME ADDED TO CURRENTLY TAXED

7 AMOUNTS.—Subsection (a) of section 954 of the Internal

8 Revenue Code of 1986 (defining foreign base company in9 come) is amended by striking ‘‘and’’ at the end of para10 graph (4), by striking the period at the end of paragraph

11 (5) and inserting ‘‘, and’’, and by adding at the end there12 of the following new paragraph:

13 ‘‘(6) the foreign base company manufacturing

14 related income for the taxable year (determined

15 under subsection (h) and reduced as provided in

16 subsection (b)(5)).’’

17 (b) DEFINITION OF FOREIGN BASE COMPANY MANU18 FACTURING RELATED INCOME.—Section 954 of such

19 Code is amended by adding at the end thereof the follow20 ing new subsection:

21 ‘‘(h) FOREIGN BASE COMPANY MANUFACTURING

22 RELATED INCOME.—

23 ‘‘(1) IN GENERAL.—For purposes of this sec24 tion, the term ‘foreign base company manufacturing

25 related income’ means income (whether in the form

26 of profits, commissions, fees, or otherwise) derived in
3

•HR 389 IH

1 connection with the manufacture for or sale to any

2 person of personal property by the controlled foreign

3 corporation where the property sold was manufac4 tured by the controlled foreign corporation in any

5 country other than the United States if such prop6 erty or any component of such property was manu7 factured—

8 ‘‘(A) in a tax holiday plant, or

9 ‘‘(B) in a runaway plant.

10 ‘‘(2) OTHER DEFINITIONS; SPECIAL RULES.—

11 For purposes of this subsection—

12 ‘‘(A) TAX HOLIDAY PLANT DEFINED.—The

13 term ‘tax holiday plant’ means any facility—

14 ‘‘(i) operated by the controlled foreign

15 corporation in connection with the manu16 facture of personal property, and

17 ‘‘(ii) with respect to which any eco18 nomic benefit under any tax law of the

19 country in which such facility is located ac20 crued—

21 ‘‘(I) to such corporation,

22 ‘‘(II) for the purpose of providing

23 an incentive to such corporation to es24 tablish, maintain, or expand such fa25 cility, and
4

•HR 389 IH

1 ‘‘(III) for the taxable year of

2 such corporation during which the

3 personal property referred to in para4 graph (1) was manufactured.

5 ‘‘(B) RUNAWAY PLANT DEFINED.—The

6 term ‘runaway plant’ means any facility—

7 ‘‘(i) for the manufacture of personal

8 property of which not less than 10 percent

9 is used, consumed, or otherwise disposed of

10 in the United States, and

11 ‘‘(ii) which is established or main12 tained by the controlled foreign corporation

13 in a country in which the effective tax rate

14 imposed by such country on the corpora15 tion is less than 90 percent of the effective

16 tax rate which would be imposed on such

17 corporation under this title.

18 ‘‘(C) ECONOMIC BENEFIT UNDER ANY TAX

19 LAW DEFINED.—The term ‘economic benefit

20 under any tax law’ includes—

21 ‘‘(i) any exclusion or deduction of any

22 amount from gross income derived in con23 nection with—

24 ‘‘(I) the operation of any manu25 facturing facility, or
5

•HR 389 IH

1 ‘‘(II) the manufacture or sale of

2 any personal property,

3 which would otherwise be subject to tax

4 under the law of such country;

5 ‘‘(ii) any reduction in the rate of any

6 tax which would otherwise be imposed

7 under the laws of such country with re8 spect to any facility or property referred to

9 in clause (i) (including any ad valorem tax

10 or excise tax with respect to such prop11 erty);

12 ‘‘(iii) any credit against any tax which

13 would otherwise be assessed against any

14 such facility or property or any income de15 rived in connection with the operation of

16 any such facility or the manufacture or

17 sale of any such property; and

18 ‘‘(iv) any abatement of any amount of

19 tax otherwise due and any other reduction

20 in the actual amount of tax paid to such

21 country.

22 ‘‘(D) MANUFACTURE DEFINED.—The term

23 ‘manufacture’ or ‘manufacturing’ includes any

24 production, processing, assembling, or finishing

25 of any personal property or any component of
6

•HR 389 IH

1 property not yet assembled and any packaging,

2 handling, or other activity incidental to the

3 shipment or delivery of such property to any

4 buyer.

5 ‘‘(E) CORPORATION INCLUDES ANY RELAT6 ED PERSON.—The term ‘controlled foreign cor7 poration’ includes any related person with re8 spect to such corporation.

9 ‘‘(F) SPECIAL RULE FOR DETERMINING

10 WHICH TAXABLE YEAR AN ECONOMIC BENEFIT

11 WAS OBTAINED.—An economic benefit under

12 any tax law shall be treated as having accrued

13 in the taxable year of the controlled foreign cor14 poration in which such corporation actually ob15 tained the benefit, notwithstanding the fact that

16 such benefit may have been allowable for any

17 preceding or succeeding taxable year and was

18 carried forward or back, for any reason, to the

19 taxable year.

20 ‘‘(3) LIMITATION ON APPLICATION OF PARA21 GRAPH (1) IN CERTAIN CASES.—For purposes of this

22 section—

23 ‘‘(A) IN GENERAL.—The term ‘foreign

24 base company manufacturing related income’

25 shall not include any income of a controlled for-
7

•HR 389 IH

1 eign corporation from the manufacture or sale

2 of personal property if—

3 ‘‘(i) such corporation is not a corpora4 tion significantly engaged in manufactur5 ing,

6 ‘‘(ii) the investment in the expansion

7 of an existing facility which gave rise to a

8 tax holiday for such facility was not a sub9 stantial investment, or

10 ‘‘(iii) the personal property was used,

11 consumed, or otherwise disposed of in the

12 country in which such property was manu13 factured.

14 ‘‘(B) CORPORATION SIGNIFICANTLY EN15 GAGED IN MANUFACTURING DEFINED.—

16 ‘‘(i) GENERAL RULE.—A corporation

17 shall be deemed to be significantly engaged

18 in manufacturing if the value of real prop19 erty and other capital assets owned or con20 trolled by the corporation and dedicated to

21 manufacturing operations is more than 10

22 percent of the total value of all real prop23 erty and other capital assets owned or con24 trolled by such corporation.
8

•HR 389 IH

1 ‘‘(ii) SPECIAL RULE FOR ASSESSING

2 PROPERTY VALUE.—The value of any

3 property owned by the corporation is the

4 basis of such corporation in such property.

5 The basis of the corporation in any prop6 erty which was acquired other than by pur7 chase shall be the fair market value of

8 such property at the time of such acquisi9 tion. Any property controlled but not

10 owned by such corporation under any lease

11 (or any other instrument which gives such

12 corporation any right of use or occupancy

13 with respect to such property) shall be

14 treated as property acquired other than by

15 purchase in the manner provided in the

16 preceding sentence.

17 ‘‘(C) SUBSTANTIAL INVESTMENT DE18 FINED.—The term ‘substantial investment’

19 means any amount which—

20 ‘‘(i) was added to the capital account

21 for an existing facility during the 3-year

22 period ending on the last day of any tax23 able year with respect to which such facil24 ity is a tax holiday plant, and
9

•HR 389 IH

1 ‘‘(ii) caused the sum of all amounts

2 added to such account during such period

3 to exceed 20 percent of the total value of

4 such facility (determined in the manner

5 provided in subparagraph (B)(ii)) on the

6 first day of such period.’’

7 (c) TECHNICAL AND CONFORMING AMENDMENTS.—

8 (1) The last sentence of subsection (b)(4) of

9 such section 954 is amended by striking out ‘‘sub10 section (a)(5).’’ and by inserting in lieu thereof

11 ‘‘subsection (a)(5) or foreign base company manu12 facturing related income described in subsection

13 (a)(6).’’

14 (2) Subsection (b)(5) of such section 954 is

15 amended by striking out ‘‘and the foreign base com16 pany oil related income’’ and by inserting in lieu

17 thereof ‘‘the foreign base company oil related in18 come, and the foreign base company manufacturing

19 related income’’.

20 (3) Subsection (b) of such section 954 is

21 amended by inserting at the end thereof the follow22 ing new paragraph:

23 ‘‘(9) FOREIGN BASE COMPANY MANUFACTURING

24 RELATED INCOME NOT TREATED AS ANOTHER KIND

25 OF BASE COMPANY INCOME.—Income of a corpora-
10

•HR 389 IH

1 tion which is foreign base company manufacturing

2 related income shall not be treated as foreign base

3 company income of such corporation under any

4 paragraph of subsection (a) other than paragraph

5 (6).’’

6 (d) EFFECTIVE DATES.—

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

8 this section shall apply to taxable years of foreign

9 corporations beginning after December 31, 1988,

10 and to taxable years of United States shareholders

11 in which, or with which, such taxable years of for12 eign corporations end.

13 (2) INVESTMENTS BEFORE THE DATE OF EN14 ACTMENT NOT TAKEN INTO ACCOUNT.—No facility

15 of a foreign controlled corporation shall be treated

16 as a tax holiday plant (within the meaning of section

17 954(h)(2)(A) of such Code, as amended by this sec18 tion) or as a runaway plant (within the meaning of

19 section 954(h)(2)(B) of such Code, as amended by

20 this section) on the basis of any amount paid or in21 curred with respect to such facility and added to the

22 capital account for such facility before the date of

23 the enactment of this Act.

Æ