the term ‘qualified foreign country’ means 
any foreign country if—
‘‘(I) such foreign country is a 
member of the multinational economic 
association of which the treaty coun-
try is a member, and 
‘‘(II) such foreign country has a 
tax treaty with the United States pro-
viding a withholding tax rate reduc-
tion which is not less than the with-
holding tax rate reduction applicable 
(without regard to this subsection) to 
the payment received by such foreign 
corporation. 
‘‘(5) EXCEPTION
FOR
CORPORATIONS
WITH 
SUBSTANTIAL
BUSINESS
ACTIVITIES
IN
TREATY 
COUNTRY.—Paragraph (1) shall not apply to a pay-
ment received by a foreign corporation if such cor-
poration has substantial business activities in the 
treaty country and if such corporation establishes to 
the satisfaction of the Secretary that the payment is 
subject to an effective rate of income tax imposed by 
such country greater than 90 percent of the max-
imum rate of tax specified in section 11.
‘‘(6) EXCEPTION FOR PAYMENTS RECEIVED BY 
CONTROLLED
FOREIGN
CORPORATION.—Paragraph 
(1) shall not apply to any deductible foreign pay-
ment made by a corporation if the recipient of the 
payment is a controlled foreign corporation and the 
payor is a United States shareholder (as defined in 
section 951(b)) of such corporation. 
‘‘(7) CONDUIT PAYMENTS.—Under regulations 
prescribed by the Secretary, paragraph (1) shall not 
apply to a payment received by a foreign entity re-
ferred to in paragraph (1) if—
‘‘(A) within a reasonable period after such 
entity receives such payment, such entity makes 
a comparable payment directly or indirectly to 
another related person, 
‘‘(B) such related person is a resident of a 
foreign country with which the United States 
has an income tax treaty, 
‘‘(C) such related person is predominantly 
owned by individuals who are residents of such 
country, and 
‘‘(D) the withholding tax rate applicable 
under such treaty is equal to or greater than 
the withholding tax rate applicable (without re-
gard to this paragraph) to the payment received 
by such foreign entity. 
A similar rule shall apply where the payment is in-
cludible in the gross income of a related person by 
reason of a foreign law comparable to subpart F of 
part III of subchapter N.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 3. TRANSFER PRICE REDUCED BY DEFLECTED TAX 
HAVEN INCOME. 
(a) IN GENERAL.—Section 482 of the Internal Rev-
enue Code of 1986 (relating to allocation of income and 
deductions among taxpayers) is amended by inserting ‘‘(a) 
In General.—’’ before ‘‘In the case of two or more’’ and 
by adding at the end the following new subsection: 
‘‘(b) SPECIAL RULE FOR RELATED-PARTY INBOUND 
AND OUTBOUND TRANSACTIONS.—
‘‘(1) IN GENERAL.—In the case of property or 
services to which this subsection applies, the transfer 
price under this section for such property or service 
shall be the transfer price determined without regard 
to this subsection—
‘‘(A) in the case of a related-party inbound 
transaction, reduced by the deflected tax haven
income with respect to such property or service, 
or 
‘‘(B) in the case of a related-party out-
bound transaction, increased by the deflected 
tax haven income with respect to such property 
or service. 
‘‘(2) PROPERTY OR SERVICES TO WHICH SUB-
SECTION APPLIES.—
‘‘(A) IN
GENERAL.—This subsection ap-
plies to any property or services if there is a re-
lated-party inbound or outbound transaction 
with respect to such property or services. 
‘‘(B) RELATED-PARTY
INBOUND
TRANS-
ACTION.—A related-party inbound transaction 
is any transaction where—
‘‘(i) property is acquired directly or 
indirectly by a foreign-controlled domestic 
corporation from a foreign related person, 
or 
‘‘(ii) the services are performed di-
rectly or indirectly for a foreign-controlled 
domestic corporation by a foreign related 
person.
‘‘(C) RELATED-PARTY OUTBOUND TRANS-
ACTION.—A related-party outbound transaction 
is any transaction where—
‘‘(i) property is sold directly or indi-
rectly by a foreign-controlled domestic cor-
poration to a foreign related person, or 
‘‘(ii) services are performed directly or 
indirectly by a foreign-controlled domestic 
corporation for a foreign related person. 
‘‘(3) DEFLECTED
TAX
HAVEN
INCOME.—For 
purposes of this subsection—
‘‘(A) IN
GENERAL.—The term ‘deflected 
tax haven income’ means income (whether in 
the form of profits, commissions, fees, or other-
wise) derived by a foreign related person in con-
nection with any transaction related to property 
or services to which this subsection applies if 
such income would be treated as foreign base 
company sales income (as defined in section 
954(d)) or foreign base company services in-
come (as defined in section 954(e)) were such 
foreign related person treated as a controlled 
foreign corporation. 
‘‘(B) EXCEPTION
FOR
INCOME
SUBJECT 
TO FOREIGN TAXES.—
‘‘(i) HIGH TAXES.—Such term shall 
not include any item of income with re-
spect to which the requirements of section 
954(b)(4) are met. 
‘‘(ii) OTHER TAXES.—If the taxpayer 
establishes to the satisfaction of the Sec-
retary that an item of income was subject 
to an income tax imposed by a foreign 
country and the effective rate of such tax 
(and such effective rate was not greater 
than 90 percent of the maximum rate of 
tax specified in section 11), the term ‘de-
flected tax haven income’ shall not include 
the same proportion of such income as 
such effective rate of tax bears to 90 per-
cent. 
‘‘(4) OTHER
DEFINITIONS.—For purposes of 
this subsection—
‘‘(A) FOREIGN
RELATED
PERSON.—The 
term ‘foreign related person’ means any foreign 
person who is related (within the meaning of 
subsection (a)) to the foreign-controlled domes-
tic corporation. 
‘‘(B) 
FOREIGN-CONTROLLED
DOMESTIC 
CORPORATION.—The term ‘foreign-controlled
domestic corporation’ means any domestic cor-
poration which is 25-percent foreign-owned (as 
defined in section 6038A(c)).’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to property acquired, and services 
performed, after the date of the enactment of this Act.
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