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‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) TOTAL DIRECT COSTS.—The term
‘total direct costs’ means, with respect to
any transaction, the total direct costs in-
curred by the taxpayer attributable to ac-
tivities described in paragraph (3) per-
formed at any location by the taxpayer or
any person acting under a contract with
such taxpayer.
‘‘(ii) FOREIGN
DIRECT
COSTS.—The
term ‘foreign direct costs’ means, with re-
spect to any transaction, the portion of the
total direct costs which are attributable to
activities performed outside the United
States.
‘‘(3) ACTIVITIES
RELATING
TO
QUALIFYING
FOREIGN
TRADE
PROPERTY.—The activities de-
scribed in this paragraph are any of the following
with respect to qualifying foreign trade property—
‘‘(A) advertising and sales promotion,
‘‘(B) the processing of customer orders
and the arranging for delivery,
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‘‘(C) transportation outside the United
States in connection with delivery to the cus-
tomer,
‘‘(D) the determination and transmittal of
a final invoice or statement of account or the
receipt of payment, and
‘‘(E) the assumption of credit risk.
‘‘(4) ECONOMIC
PROCESSES
PERFORMED
BY
RELATED PERSONS.—A taxpayer shall be treated as
meeting the requirements of this subsection with re-
spect to any sales transaction involving any property
if any related person has met such requirements in
such transaction or any other sales transaction in-
volving such property.
‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROC-
ESS REQUIREMENT.—
‘‘(1) IN GENERAL.—The requirements of sub-
section (b) shall be treated as met for any taxable
year if the foreign trading gross receipts of the tax-
payer for such year do not exceed $5,000,000.
‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE-
GATED.—All related persons shall be treated as one
person for purposes of paragraph (1), and the limi-
tation under paragraph (1) shall be allocated among
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such persons in a manner provided in regulations
prescribed by the Secretary.
‘‘(3) SPECIAL
RULE
FOR
PASS-THRU
ENTI-
TIES.—In the case of a partnership, S corporation,
or other pass-thru entity, the limitation under para-
graph (1) shall apply with respect to the partner-
ship, S corporation, or entity and with respect to
each partner, shareholder, or other owner.
‘‘SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.
‘‘(a) QUALIFYING FOREIGN TRADE PROPERTY.—For
purposes of this subpart—
‘‘(1) IN GENERAL.—The term ‘qualifying for-
eign trade property’ means property—
‘‘(A) manufactured, produced, grown, or
extracted within or outside the United States,
‘‘(B) held primarily for sale, lease, or rent-
al, in the ordinary course of trade or business
for direct use, consumption, or disposition out-
side the United States, and
‘‘(C) not more than 50 percent of the fair
market value of which is attributable to—
‘‘(i) articles manufactured, produced,
grown, or extracted outside the United
States, and
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‘‘(ii) direct costs for labor (determined
under the principles of section 263A) per-
formed outside the United States.
For purposes of subparagraph (C), the fair market
value of any article imported into the United States
shall be its appraised value, as determined by the
Secretary under section 402 of the Tariff Act of
1930 (19 U.S.C. 1401a) in connection with its im-
portation, and the direct costs for labor under clause
(ii) do not include costs that would be treated under
the principles of section 263A as direct labor costs
attributable to articles described in clause (i).
‘‘(2) U.S. TAXATION TO ENSURE CONSISTENT
TREATMENT.—Property which (without regard to
this paragraph) is qualifying foreign trade property
and which is manufactured, produced, grown, or ex-
tracted outside the United States shall be treated as
qualifying foreign trade property only if it is manu-
factured, produced, grown, or extracted by—
‘‘(A) a domestic corporation,
‘‘(B) an individual who is a citizen or resi-
dent of the United States,
‘‘(C) a foreign corporation with respect to
which an election under subsection (e) (relating
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to foreign corporations electing to be subject to
United States taxation) is in effect, or
‘‘(D) a partnership or other pass-thru enti-
ty all of the partners or owners of which are de-
scribed in subparagraph (A), (B), or (C).
Except as otherwise provided by the Secretary,
tiered partnerships or pass-thru entities shall be
treated as described in subparagraph (D) if each of
the partnerships or entities is directly or indirectly
wholly owned by persons described in subparagraph
(A), (B), or (C).
‘‘(3) EXCLUDED PROPERTY.—The term ‘quali-
fying foreign trade property’ shall not include—
‘‘(A) property leased or rented by the tax-
payer for use by any related person,
‘‘(B) patents, inventions, models, designs,
formulas, or processes whether or not patented,
copyrights (other than films, tapes, records, or
similar reproductions, and other than computer
software (whether or not patented), for com-
mercial or home use), goodwill, trademarks,
trade brands, franchises, or other like property,
‘‘(C) oil or gas (or any primary product
thereof),
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‘‘(D) products the transfer of which is pro-
hibited or curtailed to effectuate the policy set
forth in paragraph (2)(C) of section 3 of Public
Law 96–72, or
‘‘(E) any unprocessed timber which is a
softwood.
For purposes of subparagraph (E), the term ‘un-
processed timber’ means any log, cant, or similar
form of timber.
‘‘(4) PROPERTY
IN
SHORT
SUPPLY.—If the
President determines that the supply of any prop-
erty described in paragraph (1) is insufficient to
meet the requirements of the domestic economy, the
President may by Executive order designate the
property as in short supply. Any property so des-
ignated shall not be treated as qualifying foreign
trade property during the period beginning with the
date specified in the Executive order and ending
with the date specified in an Executive order setting
forth the President’s determination that the prop-
erty is no longer in short supply.
‘‘(b) OTHER DEFINITIONS AND RULES.—For pur-
poses of this subpart—
‘‘(1) TRANSACTION.—
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and (b) of section 52 shall be made without regard
to section 1563(b).
‘‘(4) GROSS
AND
TAXABLE
INCOME.—Section
114 shall not be taken into account in determining
the amount of gross income or foreign trade income
from any transaction.
‘‘(c) SOURCE RULE.—Under regulations, in the case
of qualifying foreign trade property manufactured, pro-
duced, grown, or extracted within the United States, the
amount of income of a taxpayer from any sales transaction
with respect to such property which is treated as from
sources without the United States shall not exceed—
‘‘(1) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(B), the amount of the taxpayer’s foreign
trade income which would (but for this subsection)
be treated as from sources without the United
States if the foreign trade income were reduced by
an amount equal to 4 percent of the foreign trading
gross receipts with respect to the transaction, and
‘‘(2) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(C), 50 percent of the amount of the tax-
payer’s foreign trade income which would (but for
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this subsection) be treated as from sources without
the United States.
‘‘(d) TREATMENT OF WITHHOLDING TAXES.—
‘‘(1) IN
GENERAL.—For purposes of section
114(d), any withholding tax shall not be treated as
paid or accrued with respect to extraterritorial in-
come which is excluded from gross income under
section 114(a). For purposes of this paragraph, the
term ‘withholding tax’ means any tax which is im-
posed on a basis other than residence and for which
credit is allowable under section 901 or 903.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply to any taxpayer with respect to extraterritorial
income from any transaction if the taxpayer com-
putes its qualifying foreign trade income with re-
spect to the transaction under section 941(a)(1)(A).
‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR-
PORATION.—
‘‘(1) IN GENERAL.—An applicable foreign cor-
poration may elect to be treated as a domestic cor-
poration for all purposes of this title if such corpora-
tion waives all benefits to such corporation granted
by the United States under any treaty. No election
under section 1362(a) may be made with respect to
such corporation.
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‘‘(2) APPLICABLE
FOREIGN
CORPORATION.—
For purposes of paragraph (1), the term ‘applicable
foreign corporation’ means any foreign corporation
if—
‘‘(A) such corporation manufactures, pro-
duces, grows, or extracts property in the ordi-
nary course of such corporation’s trade or busi-
ness, or
‘‘(B) substantially all of the gross receipts
of such corporation may reasonably be expected
to be foreign trading gross receipts.
‘‘(3) PERIOD OF ELECTION.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this paragraph, an election under
paragraph (1) shall apply to the taxable year
for which made and all subsequent taxable
years unless revoked by the taxpayer. Any rev-
ocation of such election shall apply to taxable
years beginning after such revocation.
‘‘(B) TERMINATION.—If a corporation
which made an election under paragraph (1) for
any taxable year fails to meet the requirements
of subparagraph (A) or (B) of paragraph (2)
for any subsequent taxable year, such election
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shall not apply to any taxable year beginning
after such subsequent taxable year.
‘‘(C) EFFECT OF REVOCATION OR TERMI-
NATION.—If a corporation which made an elec-
tion under paragraph (1) revokes such election
or such election is terminated under subpara-
graph (B), such corporation (and any successor
corporation) may not make such election for
any of the 5 taxable years beginning with the
first taxable year for which such election is not
in effect as a result of such revocation or termi-
nation.
‘‘(4) SPECIAL RULES.—
‘‘(A) 
REQUIREMENTS.—This 
subsection
shall not apply to an applicable foreign corpora-
tion if such corporation fails to meet the re-
quirements (if any) which the Secretary may
prescribe to ensure that the taxes imposed by
this chapter on such corporation are paid.
‘‘(B) EFFECT OF ELECTION, REVOCATION,
AND TERMINATION.—
‘‘(i) ELECTION.—For purposes of sec-
tion 367, a foreign corporation making an
election under this subsection shall be
treated as transferring (as of the first day
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of the first taxable year to which the elec-
tion applies) all of its assets to a domestic
corporation in connection with an exchange
to which section 354 applies.
‘‘(ii) 
REVOCATION
AND
TERMI-
NATION.—For purposes of section 367,
if—
‘‘(I) an election is made by a cor-
poration under paragraph (1) for any
taxable year, and
‘‘(II) such election ceases to
apply for any subsequent taxable year,
such corporation shall be treated as a domestic
corporation transferring (as of the 1st day of
the first such subsequent taxable year to which
such election ceases to apply) all of its property
to a foreign corporation in connection with an
exchange to which section 354 applies.
‘‘(C) ELIGIBILITY
FOR
ELECTION.—The
Secretary may by regulation designate one or
more classes of corporations which may not
make the election under this subsection.
‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI-
FYING FOREIGN TRADE INCOME FROM SHARED PART-
NERSHIPS.—
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‘‘(1) IN GENERAL.—If—
‘‘(A) a partnership maintains a separate
account for transactions (to which this subpart
applies) with each partner,
‘‘(B) distributions to each partner with re-
spect to such transactions are based on the
amounts in the separate account maintained
with respect to such partner, and
‘‘(C) such partnership meets such other re-
quirements as the Secretary may by regulations
prescribe,
then such partnership shall allocate to each partner
items of income, gain, loss, and deduction (including
qualifying foreign trade income) from any trans-
action to which this subpart applies on the basis of
such separate account.
‘‘(2) SPECIAL
RULES.—For purposes of this
subpart, in the case of a partnership to which para-
graph (1) applies—
‘‘(A) any partner’s interest in the partner-
ship shall not be taken into account in deter-
mining whether such partner is a related person
with respect to any other partner, and
‘‘(B) the election under section 942(a)(3)
shall be made separately by each partner with
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respect to any transaction for which the part-
nership maintains separate accounts for each
partner.
‘‘(g) EXCLUSION FOR PATRONS OF AGRICULTURAL
AND HORTICULTURAL COOPERATIVES.—Any amount de-
scribed in paragraph (1) or (3) of section 1385(a)—
‘‘(1) which is received by a person from an or-
ganization to which part I of subchapter T applies
which is engaged in the marketing of agricultural or
horticultural products, and
‘‘(2) which is designated by the organization as
allocable to qualifying foreign trade income in a
written notice mailed to its patrons during the pay-
ment period described in section 1382(d),
shall be treated as qualifying foreign trade income of such
person for purposes of section 114. The taxable income
of the organization shall not be reduced under section
1382 by reason of any amount to which the preceding sen-
tence applies.’’.
SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.
(1) 
The 
second 
sentence 
of 
section
56(g)(4)(B)(i) is amended by inserting before the
period ‘‘or under section 114’’.
(2) Section 245 is amended by adding at the
end the following new subsection:
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‘‘(d) CERTAIN DIVIDENDS ALLOCABLE TO QUALI-
FYING FOREIGN TRADE INCOME.—In the case of a domes-
tic corporation which is a United States shareholder (as
defined in section 951(b)) of a controlled foreign corpora-
tion (as defined in section 957), there shall be allowed as
a deduction an amount equal to 100 percent of any divi-
dend received from such controlled foreign corporation
which is distributed out of earnings and profits attrib-
utable to qualifying foreign trade income (as defined in
section 941(a)).’’.
(3) Section 275(a) is amended—
(A) by striking ‘‘or’’ at the end of para-
graph (4)(A), by striking the period at the end
of paragraph (4)(B) and inserting ‘‘, or’’, and
by adding at the end of paragraph (4) the fol-
lowing new subparagraph:
‘‘(C) such taxes are paid or accrued with
respect to qualifying foreign trade income (as
defined in section 941).’’; and
(B) by adding at the end the following the
following new sentence: ‘‘A rule similar to the
rule of section 943(d) shall apply for purposes
of paragraph (4)(C).’’.
(4) Paragraph (3) of section 864(e) is
amended—
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(A) by striking ‘‘For purposes of’’ and in-
serting:
‘‘(A) IN GENERAL.—For purposes of’’; and
(B) by adding at the end the following new
subparagraph:
‘‘(B) 
ASSETS
PRODUCING
EXEMPT
EXTRATERRITORIAL INCOME.—For purposes of
allocating and apportioning any interest ex-
pense, there shall not be taken into account any
qualifying foreign trade property (as defined in
section 943(a)) which is held by the taxpayer
for lease or rental in the ordinary course of
trade or business for use by the lessee outside
the United States (as defined in section
943(b)(2)).’’.
(5) Section 903 is amended by striking
‘‘164(a)’’ and inserting ‘‘114, 164(a),’’.
(6) Section 999(c)(1) is amended by inserting
‘‘941(a)(5),’’ after ‘‘908(a),’’.
(7) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting be-
fore the item relating to section 115 the following
new item:
‘‘Sec. 114. Extraterritorial income.’’.
(8) The table of subparts for part III of sub-
chapter N of chapter 1 is amended by striking the
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taxable year for which made and all subsequent tax-
able years, and, once made, may be revoked only
with the consent of the Secretary of the Treasury.
(3) RELATED PERSON.—For purposes of this
subsection, the term ‘‘related person’’ has the mean-
ing given to such term by section 943(b)(3) of such
Code, as added by this Act.
(d) SPECIAL RULES RELATING TO LEASING TRANS-
ACTIONS.—
(1) SALES INCOME.—If foreign trade income in
connection with the lease or rental of property de-
scribed in section 927(a)(1)(B) of such Code (as in
effect before the amendments made by this Act) is
treated as exempt foreign trade income for purposes
of section 921(a) of such Code (as so in effect), such
property shall be treated as property described in
section 941(c)(1)(B) of such Code (as added by this
Act) for purposes of applying section 941(c)(2) of
such Code (as so added) to any subsequent trans-
action involving such property to which the amend-
ments made by this Act apply.
(2) LIMITATION ON USE OF GROSS RECEIPTS
METHOD.—If any person computed its foreign trade
income from any transaction with respect to any
property on the basis of a transfer price determined