II
Calendar No. 817
106TH CONGRESS
2D SESSION
H. R. 4986
[Report No. 106–416]
IN THE SENATE OF THE UNITED STATES
SEPEMBER 14, 2000
Received; read twice and referred to the Committee on Finance
SEPTEMBER 20, 2000
Reported by Mr. ROTH with amendments
[Omit the part struck through and insert the part printed in italic]
AN ACT
To amend the Internal Revenue Code of 1986 to repeal
the provisions relating to foreign sales corporations
(FSCs) and to exclude extraterritorial income from gross
income.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘FSC Repeal and Extraterritorial Income Exclusion Act
of 2000’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.
Subpart C of part III of subchapter N of chapter 1
(relating to taxation of foreign sales corporations) is here-
by repealed.
SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to items specifically excluded from gross
income) is amended by inserting before section 115 the
following new section:
‘‘SEC. 114. EXTRATERRITORIAL INCOME.
‘‘(a) EXCLUSION.—Gross income does not include
extraterritorial income.
‘‘(b) EXCEPTION.—Subsection (a) shall not apply to
extraterritorial income which is not qualifying foreign
trade income as determined under subpart E of part III
of subchapter N.
‘‘(c) DISALLOWANCE OF DEDUCTIONS.—
‘‘(1) IN GENERAL.—Any deduction of a tax-
payer 
allocated 
under 
paragraph 
(2) 
to
extraterritorial income of the taxpayer excluded from
gross income under subsection (a) shall not be al-
lowed.
‘‘(2) ALLOCATION.—Any deduction of the tax-
payer properly apportioned and allocated to the
extraterritorial income derived by the taxpayer from
any transaction shall be allocated on a proportionate
basis between—
‘‘(A) the extraterritorial income derived
from such transaction which is excluded from
gross income under subsection (a), and
‘‘(B) the extraterritorial income derived
from such transaction which is not so excluded.
‘‘(d) DENIAL OF CREDITS FOR CERTAIN FOREIGN
TAXES.—Notwithstanding any other provision of this
chapter, no credit shall be allowed under this chapter for
any income, war profits, and excess profits taxes paid or
accrued to any foreign country or possession of the United
States with respect to extraterritorial income which is ex-
cluded from gross income under subsection (a).
‘‘(e) EXTRATERRITORIAL INCOME.—For purposes of
this section, the term ‘extraterritorial income’ means the
gross income of the taxpayer attributable to foreign trad-
ing gross receipts (as defined in section 942) of the tax-
payer.’’.
(b) QUALIFYING FOREIGN TRADE INCOME.—Part III
of subchapter N of chapter 1 is amended by inserting after
subpart D the following new subpart:
‘‘Subpart E—Qualifying Foreign Trade Income
‘‘Sec. 941. Qualifying foreign trade income.
‘‘Sec. 942. Foreign trading gross receipts.
‘‘Sec. 943. Other definitions and special rules.
‘‘SEC. 941. QUALIFYING FOREIGN TRADE INCOME.
‘‘(a) QUALIFYING FOREIGN TRADE INCOME.—For
purposes of this subpart and section 114—
‘‘(1) IN GENERAL.—The term ‘qualifying for-
eign trade income’ means, with respect to any trans-
action, the amount of gross income which, if ex-
cluded, will result in a reduction of the taxable in-
come of the taxpayer from such transaction equal to
the greatest of—
‘‘(A) 30 percent of the foreign sale and
leasing income derived by the taxpayer from
such transaction,
‘‘(B) 1.2 percent of the foreign trading
gross receipts derived by the taxpayer from the
transaction, or
‘‘(C) 15 percent of the foreign trade in-
come derived by the taxpayer from the trans-
action.
In no event shall the amount determined under sub-
paragraph (B) exceed 200 percent of the amount de-
termined under subparagraph (C).
‘‘(2) ALTERNATIVE COMPUTATION.—A taxpayer
may compute its qualifying foreign trade income
under a subparagraph of paragraph (1) other than
the subparagraph which results in the greatest
amount of such income.
‘‘(3) LIMITATION ON USE OF FOREIGN TRADING
GROSS RECEIPTS METHOD.—If any person computes
its qualifying foreign trade income from any trans-
action with respect to any property under paragraph
(1)(B), the qualifying foreign trade income of such
person (or any related person) with respect to any
other transaction involving such property shall be
zero.
‘‘(4) RULES
FOR
MARGINAL
COSTING.—The
Secretary shall prescribe regulations setting forth
rules for the allocation of expenditures in computing
foreign trade income under paragraph (1)(C) in
those cases where a taxpayer is seeking to establish
or maintain a market for qualifying foreign trade
property.
‘‘(5) PARTICIPATION IN INTERNATIONAL BOY-
COTTS, ETC.—Under regulations prescribed by the
Secretary, the qualifying foreign trade income of a
taxpayer for any taxable year shall be reduced (but
not below zero) by the sum of—
‘‘(A) an amount equal to such income mul-
tiplied by the international boycott factor deter-
mined under section 999, and
‘‘(B) any illegal bribe, kickback, or other
payment (within the meaning of section 162(c))
paid by or on behalf of the taxpayer directly or
indirectly to an official, employee, or agent in
fact of a government.
‘‘(b) FOREIGN TRADE INCOME.—For purposes of
this subpart—
‘‘(1) IN GENERAL.—The term ‘foreign trade in-
come’ means the taxable income of the taxpayer at-
tributable to foreign trading gross receipts of the
taxpayer.
‘‘(2) SPECIAL
RULE
FOR
COOPERATIVES.—In
any case in which an organization to which part I
of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products
sells qualifying foreign trade property, in computing
the taxable income of such cooperative, there shall
not be taken into account any deduction allowable
under subsection (b) or (c) of section 1382 (relating
to patronage dividends, per-unit retain allocations,
and nonpatronage distributions).
‘‘(c) FOREIGN SALE AND LEASING INCOME.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘foreign sale and
leasing income’ means, with respect to any
transaction—
‘‘(A) foreign trade income properly allo-
cable to activities which—
‘‘(i) 
are 
described 
in 
paragraph
(2)(A)(i) or (3) of section 942(b), and
‘‘(ii) are performed by the taxpayer
(or any person acting under a contract
with such taxpayer) outside the United
States, or
‘‘(B) foreign trade income derived by the
taxpayer in connection with the lease or rental
of qualifying foreign trade property for use by
the lessee outside the United States.
‘‘(2) SPECIAL
RULES
FOR
LEASED
PROP-
ERTY.—
‘‘(A) SALES INCOME.—The term ‘foreign
sale and leasing income’ includes any foreign
trade income derived by the taxpayer from the
sale of property described in paragraph (1)(B).
‘‘(B) LIMITATION IN CERTAIN CASES.—Ex-
cept as provided in regulations, in the case of
property which—
‘‘(i) was manufactured, produced,
grown, or extracted by the taxpayer, or
‘‘(ii) was acquired by the taxpayer
from a related person for a price which
was not determined in accordance with the
rules of section 482,
the amount of foreign trade income which may be
treated as foreign sale and leasing income under
paragraph (1)(B) or subparagraph (A) of this para-
graph with respect to any transaction involving such
property shall not exceed the amount which would
have been determined if the taxpayer had acquired
such property for the price determined in accordance
with the rules of section 482.
‘‘(3) SPECIAL RULES.—
‘‘(A) EXCLUDED PROPERTY.—Foreign sale
and leasing income shall not include any income
properly allocable to excluded property de-
scribed 
in 
subparagraph 
(B) 
of 
section
943(a)(3) (relating to intangibles).
‘‘(B) ONLY
DIRECT
EXPENSES
TAKEN
INTO
ACCOUNT.—For purposes of this sub-
section, any expense other than a directly allo-
cable expense shall not be taken into account in
computing foreign trade income.
‘‘SEC. 942. FOREIGN TRADING GROSS RECEIPTS.
‘‘(a) FOREIGN TRADING GROSS RECEIPTS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section, for purposes of this subpart,
the term ‘foreign trading gross receipts’ means the
gross receipts of the taxpayer which are—
‘‘(A) from the sale, exchange, or other dis-
position of qualifying foreign trade property,
‘‘(B) from the lease or rental of qualifying
foreign trade property for use by the lessee out-
side the United States,
‘‘(C) for services which are related and
subsidiary to—
‘‘(i) any sale, exchange, or other dis-
position of qualifying foreign trade prop-
erty by such taxpayer, or
‘‘(ii) any lease or rental of qualifying
foreign trade property described in sub-
paragraph (B) by such taxpayer,
‘‘(D) for engineering or architectural serv-
ices for construction projects located (or pro-
posed for location) outside the United States, or
strumentality thereof) of the country or posses-
sion in which the property is manufactured,
produced, grown, or extracted.
‘‘(3) ELECTION
TO
EXCLUDE
CERTAIN
RE-
CEIPTS.—The term ‘foreign trading gross receipts’
shall not include gross receipts of a taxpayer from
a transaction if the taxpayer elects not to have such
receipts taken into account for purposes of this sub-
part.
‘‘(b) FOREIGN
ECONOMIC
PROCESS
REQUIRE-
MENTS.—
‘‘(1) IN GENERAL.—Except as provided in sub-
section (c), a taxpayer shall be treated as having for-
eign trading gross receipts from any transaction only
if economic processes with respect to such trans-
action take place outside the United States as re-
quired by paragraph (2).
‘‘(2) REQUIREMENT.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met with respect to the
gross receipts of a taxpayer derived from any
transaction if—
‘‘(i) such taxpayer (or any person act-
ing under a contract with such taxpayer)
has participated outside the United States
in the solicitation (other than advertising),
the negotiation, or the making of the con-
tract relating to such transaction, and
‘‘(ii) the foreign direct costs incurred
by the taxpayer attributable to the trans-
action equal or exceed 50 percent of the
total direct costs attributable to the trans-
action.
‘‘(B) ALTERNATIVE 85-PERCENT TEST.—A
taxpayer shall be treated as satisfying the re-
quirements of subparagraph (A)(ii) with respect
to any transaction if, with respect to each of at
least 2 subparagraphs of paragraph (3), the
foreign direct costs incurred by such taxpayer
attributable to activities described in such sub-
paragraph equal or exceed 85 percent of the
total direct costs attributable to activities de-
scribed in such subparagraph.
‘‘(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,
‘‘(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
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
‘‘(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
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),
‘‘(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.—
‘‘(A) IN GENERAL.—The term ‘transaction’
means—
‘‘(i) any sale, exchange, or other dis-
position,
‘‘(ii) any lease or rental, and
‘‘(iii) any furnishing of services.
‘‘(B) GROUPING
OF
TRANSACTIONS.—To
the extent provided in regulations, any provision
of this subpart which, but for this subpara-
graph, would be applied on a transaction-by-
transaction basis may be applied by the tax-
payer on the basis of groups of transactions
based on product lines or recognized industry or
trade usage. Such regulations may permit dif-
ferent groupings for different purposes.
‘‘(2) UNITED
STATES
DEFINED.—The term
‘United States’ includes the Commonwealth of Puer-
to Rico. The preceding sentence shall not apply for
purposes of determining whether a corporation is a
domestic corporation.
‘‘(3) RELATED PERSON.—A person shall be re-
lated to another person if such persons are treated
as a single employer under subsection (a) or (b) of
section 52 or subsection (m) or (o) of section 414,
except that determinations under subsections (a)
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
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.
‘‘(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.—