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 earn-
ings 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 for-
eign manufacturing subsidiaries in order to avoid Federal
taxes by including in gross income of United States
shareholders in foreign corporations the retained earn-
ings of any such subsidiary which are attributable to
manufacturing operations in runaway plants or tax ha-
vens.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Foreign Subsidiary
Tax Equity Act’’.
SEC. 2. INCOME FROM RUNAWAY PLANTS OR FROM MANU-
FACTURING 
OPERATIONS 
LOCATED 
IN 
A
COUNTRY WHICH PROVIDES A TAX HOLIDAY
INCLUDED IN SUBPART F INCOME.
(a) FOREIGN BASE COMPANY MANUFACTURING RE-
LATED
INCOME
ADDED
TO
CURRENTLY
TAXED
AMOUNTS.—Subsection (a) of section 954 of the Internal
Revenue Code of 1986 (defining foreign base company in-
come) is amended by striking ‘‘and’’ at the end of para-
graph (4), by striking the period at the end of paragraph
(5) and inserting ‘‘, and’’, and by adding at the end there-
of the following new paragraph:
‘‘(6) the foreign base company manufacturing
related income for the taxable year (determined
under subsection (h) and reduced as provided in
subsection (b)(5)).’’
(b) DEFINITION OF FOREIGN BASE COMPANY MANU-
FACTURING RELATED INCOME.—Section 954 of such
Code is amended by adding at the end thereof the follow-
ing new subsection:
‘‘(h) FOREIGN BASE COMPANY MANUFACTURING
RELATED INCOME.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘foreign base company manufacturing
related income’ means income (whether in the form
of profits, commissions, fees, or otherwise) derived in
connection with the manufacture for or sale to any
person of personal property by the controlled foreign
corporation where the property sold was manufac-
tured by the controlled foreign corporation in any
country other than the United States if such prop-
erty or any component of such property was manu-
factured—
‘‘(A) in a tax holiday plant, or
‘‘(B) in a runaway plant.
‘‘(2) OTHER DEFINITIONS; SPECIAL RULES.—
For purposes of this subsection—
‘‘(A) TAX HOLIDAY PLANT DEFINED.—The
term ‘tax holiday plant’ means any facility—
‘‘(i) operated by the controlled foreign
corporation in connection with the manu-
facture of personal property, and
‘‘(ii) with respect to which any eco-
nomic benefit under any tax law of the
country in which such facility is located ac-
crued—
‘‘(I) to such corporation,
‘‘(II) for the purpose of providing
an incentive to such corporation to es-
tablish, maintain, or expand such fa-
cility, and
‘‘(III) for the taxable year of
such corporation during which the
personal property referred to in para-
graph (1) was manufactured.
‘‘(B) RUNAWAY
PLANT
DEFINED.—The
term ‘runaway plant’ means any facility—
‘‘(i) for the manufacture of personal
property of which not less than 10 percent
is used, consumed, or otherwise disposed of
in the United States, and
‘‘(ii) which is established or main-
tained by the controlled foreign corporation
in a country in which the effective tax rate
imposed by such country on the corpora-
tion is less than 90 percent of the effective
tax rate which would be imposed on such
corporation under this title.
‘‘(C) ECONOMIC BENEFIT UNDER ANY TAX
LAW
DEFINED.—The term ‘economic benefit
under any tax law’ includes—
‘‘(i) any exclusion or deduction of any
amount from gross income derived in con-
nection with—
‘‘(I) the operation of any manu-
facturing facility, or
‘‘(II) the manufacture or sale of
any personal property,
which would otherwise be subject to tax
under the law of such country;
‘‘(ii) any reduction in the rate of any
tax which would otherwise be imposed
under the laws of such country with re-
spect to any facility or property referred to
in clause (i) (including any ad valorem tax
or excise tax with respect to such prop-
erty);
‘‘(iii) any credit against any tax which
would otherwise be assessed against any
such facility or property or any income de-
rived in connection with the operation of
any such facility or the manufacture or
sale of any such property; and
‘‘(iv) any abatement of any amount of
tax otherwise due and any other reduction
in the actual amount of tax paid to such
country.
‘‘(D) MANUFACTURE DEFINED.—The term
‘manufacture’ or ‘manufacturing’ includes any
production, processing, assembling, or finishing
of any personal property or any component of
eign corporation from the manufacture or sale
of personal property if—
‘‘(i) such corporation is not a corpora-
tion significantly engaged in manufactur-
ing,
‘‘(ii) the investment in the expansion
of an existing facility which gave rise to a
tax holiday for such facility was not a sub-
stantial investment, or
‘‘(iii) the personal property was used,
consumed, or otherwise disposed of in the
country in which such property was manu-
factured.
‘‘(B) CORPORATION
SIGNIFICANTLY
EN-
GAGED IN MANUFACTURING DEFINED.—
‘‘(i) GENERAL RULE.—A corporation
shall be deemed to be significantly engaged
in manufacturing if the value of real prop-
erty and other capital assets owned or con-
trolled by the corporation and dedicated to
manufacturing operations is more than 10
percent of the total value of all real prop-
erty and other capital assets owned or con-
trolled by such corporation.
‘‘(ii) SPECIAL RULE FOR ASSESSING
PROPERTY
VALUE.—The value of any
property owned by the corporation is the
basis of such corporation in such property.
The basis of the corporation in any prop-
erty which was acquired other than by pur-
chase shall be the fair market value of
such property at the time of such acquisi-
tion. Any property controlled but not
owned by such corporation under any lease
(or any other instrument which gives such
corporation any right of use or occupancy
with respect to such property) shall be
treated as property acquired other than by
purchase in the manner provided in the
preceding sentence.
‘‘(C) 
SUBSTANTIAL
INVESTMENT
DE-
FINED.—The term ‘substantial investment’
means any amount which—
‘‘(i) was added to the capital account
for an existing facility during the 3-year
period ending on the last day of any tax-
able year with respect to which such facil-
ity is a tax holiday plant, and
‘‘(ii) caused the sum of all amounts
added to such account during such period
to exceed 20 percent of the total value of
such facility (determined in the manner
provided in subparagraph (B)(ii)) on the
first day of such period.’’
(c) TECHNICAL AND CONFORMING AMENDMENTS.—
(1) The last sentence of subsection (b)(4) of
such section 954 is amended by striking out ‘‘sub-
section (a)(5).’’ and by inserting in lieu thereof
‘‘subsection (a)(5) or foreign base company manu-
facturing related income described in subsection
(a)(6).’’
(2) Subsection (b)(5) of such section 954 is
amended by striking out ‘‘and the foreign base com-
pany oil related income’’ and by inserting in lieu
thereof ‘‘the foreign base company oil related in-
come, and the foreign base company manufacturing
related income’’.
(3) Subsection (b) of such section 954 is
amended by inserting at the end thereof the follow-
ing new paragraph:
‘‘(9) FOREIGN BASE COMPANY MANUFACTURING
RELATED INCOME NOT TREATED AS ANOTHER KIND
OF BASE COMPANY INCOME.—Income of a corpora-
tion which is foreign base company manufacturing
related income shall not be treated as foreign base
company income of such corporation under any
paragraph of subsection (a) other than paragraph
(6).’’
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years of foreign
corporations beginning after December 31, 1988,
and to taxable years of United States shareholders
in which, or with which, such taxable years of for-
eign corporations end.
(2) INVESTMENTS BEFORE THE DATE OF EN-
ACTMENT NOT TAKEN INTO ACCOUNT.—No facility
of a foreign controlled corporation shall be treated
as a tax holiday plant (within the meaning of section
954(h)(2)(A) of such Code, as amended by this sec-
tion) or as a runaway plant (within the meaning of
section 954(h)(2)(B) of such Code, as amended by
this section) on the basis of any amount paid or in-
curred with respect to such facility and added to the
capital account for such facility before the date of
the enactment of this Act.
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