S. 2091 (112th): United States Job Creation and International Tax Reform Act of 2012

S 2091 IS

To amend the Internal Revenue Code of 1986 to reform the international tax system of the United States, and for other purposes.

February 9, 2012

Mr. ENZI introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to reform the international tax system of the United States, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

(a) Short Title- This Act may be cited as the ‘United States Job Creation and International Tax Reform Act of 2012’.

(b) Amendment of 1986 Code- Except as otherwise expressly provided, whenever in this Act an amendment 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 provision of the Internal Revenue Code of 1986.

(c) Table of Contents- The table of contents of this Act is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I--PARTICIPATION EXEMPTION SYSTEM FOR TAXATION OF FOREIGN INCOME

Sec. 101. Deduction for dividends received by domestic corporations from certain foreign corporations.

Sec. 102. Application of dividends received deduction to certain sales and exchanges of stock.

Sec. 103. Deduction for foreign intangible income derived from trade or business within the United States.

Sec. 104. Treatment of deferred foreign income upon transition to participation exemption system of taxation.

TITLE II--OTHER INTERNATIONAL TAX REFORMS

Subtitle A--Modifications of Subpart F

Sec. 201. Treatment of low-taxed foreign income as subpart F income.

Sec. 202. Permanent extension of look-thru rule for controlled foreign corporations.

Sec. 203. Permanent extension of exceptions for active financing income.

Sec. 204. Foreign base company income not to include sales or services income.

Subtitle B--Modifications Related to Foreign Tax Credit

Sec. 211. Modification of application of sections 902 and 960 with respect to post-2012 earnings.

Sec. 212. Separate foreign tax credit basket for foreign intangible income.

Sec. 213. Inventory property sales source rule exceptions not to apply for foreign tax credit limitation.

Subtitle C--Allocation of Interest on Worldwide Basis

Sec. 221. Acceleration of election to allocate interest on a worldwide basis.

TITLE I--PARTICIPATION EXEMPTION SYSTEM FOR TAXATION OF FOREIGN INCOME

SEC. 101. DEDUCTION FOR DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM CERTAIN FOREIGN CORPORATIONS.

(a) Allowance of Deduction- Part VIII of subchapter B of chapter 1 is amended by inserting after section 245 the following new section:

‘SEC. 245A. DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM CERTAIN FOREIGN CORPORATIONS.

‘(a) In General- In the case of any dividend received from a controlled foreign corporation by a domestic corporation which is a United States shareholder with respect to such controlled foreign corporation, there shall be allowed as a deduction an amount equal to 95 percent of the qualified foreign-source portion of the dividend.

‘(b) Treatment of Electing Noncontrolled Section 902 Corporations as Controlled Foreign Corporations-

‘(1) IN GENERAL- If a domestic corporation elects the application of this subsection for any noncontrolled section 902 corporation with respect to the domestic corporation, then, for purposes of this title--

‘(A) the noncontrolled section 902 corporation shall be treated as a controlled foreign corporation with respect to the domestic corporation, and

‘(B) the domestic corporation shall be treated as a United States shareholder with respect to the noncontrolled section 902 corporation.

‘(2) ELECTION-

‘(A) TIME OF ELECTION- Any election under this subsection with respect to any noncontrolled section 902 corporation shall be made not later than the due date for filing the return of tax for the first taxable year of the taxpayer with respect to which the foreign corporation is a noncontrolled section 902 corporation with respect to the taxpayer (or, if later, the first taxable year of the taxpayer for which this section is in effect).

‘(B) REVOCATION OF ELECTION- Any election under this subsection, once made, may be revoked only with the consent of the Secretary.

‘(C) CONTROLLED GROUPS- If a domestic corporation making an election under this subsection with respect to any noncontrolled section 902 corporation is a member of a controlled group of corporations (within the meaning of section 1563(a), except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears therein), then, except as otherwise provided by the Secretary, such election shall apply to all members of such group.

‘(c) Qualified Foreign-Source Portion of Dividends- For purposes of this section--

‘(1) QUALIFIED FOREIGN-SOURCE PORTION-

‘(A) IN GENERAL- The qualified foreign-source portion of any dividend is an amount which bears the same ratio to such dividend as--

‘(i) the post-2012 undistributed qualified foreign earnings, bears to

‘(ii) the total post-2012 undistributed earnings.

‘(B) POST-2012 UNDISTRIBUTED EARNINGS- The term ‘post-2012 undistributed earnings’ means the amount of the earnings and profits of a controlled foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 2012--

‘(i) as of the close of the taxable year of the controlled foreign corporation in which the dividend is distributed, and

‘(ii) without diminution by reason of dividends distributed during such taxable years.

‘(C) POST-2012 UNDISTRIBUTED QUALIFIED FOREIGN EARNINGS- The term ‘post-2012 undistributed qualified foreign earnings’ means the portion of the post-2012 undistributed earnings which is attributable to income other than--

‘(i) income described in section 245(a)(5)(A), or

‘(ii) dividends described in section 245(a)(5)(B).

‘(2) ORDERING RULE FOR DISTRIBUTIONS OF EARNINGS AND PROFITS- Distributions shall be treated as first made out of earnings and profits of a controlled foreign corporation which are not post-2012 undistributed earnings and then out of post-2012 undistributed earnings.

‘(d) Disallowance of Foreign Tax Credit, etc-

‘(1) IN GENERAL- No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the qualified foreign-source portion of any dividend.

‘(2) DENIAL OF DEDUCTION- No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1).

‘(3) COORDINATION WITH SECTION 78- Section 78 shall not apply to any tax for which credit is not allowable under section 901 by reason of paragraph (1).

‘(4) TREATMENT OF NONDEDUCTIBLE PORTION IN APPLYING FOREIGN TAX CREDIT LIMIT- For purposes of applying the limitation under section 904(a), the remaining 5 percent of the qualified foreign-source portion of any dividend with respect to which a deduction is not allowable to the domestic corporation under subsection (a) shall be treated as income from sources within the United States.

‘(e) Special Rules for Hybrid Dividends-

‘(1) IN GENERAL- Subsection (a) shall not apply to any dividend received by a United States shareholder from a controlled foreign corporation if the dividend is a hybrid dividend.

‘(2) HYBRID DIVIDENDS OF TIERED CONTROLLED FOREIGN CORPORATIONS- If a controlled foreign corporation with respect to which a domestic corporation is a United States shareholder receives a hybrid dividend from any other controlled foreign corporation with respect to which such domestic corporation is also a United States shareholder, then, notwithstanding any other provision of this title--

‘(A) the hybrid dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the receiving controlled foreign corporation for the taxable year of the controlled foreign corporation in which the dividend was received, and

‘(B) the United States shareholder shall include in gross income an amount equal to the shareholder’s pro rata share (determined in the same manner as under section 951(a)(2)) of the subpart F income described in subparagraph (A).

‘(3) DENIAL OF FOREIGN TAX CREDIT, ETC- The rules of subsection (d) shall apply to any hybrid dividend received by, or any amount included under paragraph (2) in the gross income of, a United States shareholder, except that, for purposes of applying subsection (d)(4), all of such dividend or amount shall be treated as income from sources within the United States.

‘(4) HYBRID DIVIDEND- The term ‘hybrid dividend’ means an amount received from a controlled foreign corporation--

‘(A) which is treated as a dividend for purposes of this title, and

‘(B) for which the controlled foreign corporation received a deduction (or similar tax benefit) under the laws of the country in which the controlled foreign corporation was created or organized.

‘(f) Definitions- For purposes of this section--

‘(1) UNITED STATES SHAREHOLDER- The term ‘United States shareholder’ has the meaning given such term in section 951(b).

‘(2) CONTROLLED FOREIGN CORPORATION- The term ‘controlled foreign corporation’ has the meaning given such term in section 957(a).

‘(3) NONCONTROLLED SECTION 902 CORPORATION- The term ‘noncontrolled section 902 corporation’ has the meaning given such term in section 904(d)(2)(E)(i).

‘(g) Regulations- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section.’.

(b) Application of Holding Period Requirement- Subsection (c) of section 246 is amended--

(1) by striking ‘or 245’ in paragraph (1) and inserting ‘245, or 245A’, and

(2) by adding at the end the following new paragraph:

‘(5) SPECIAL RULES FOR QUALIFIED FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED FROM CONTROLLED FOREIGN CORPORATIONS-

‘(A) 1-year HOLDING PERIOD REQUIREMENT- For purposes of section 245A--

‘(i) paragraph (1)(A) shall be applied--

‘(I) by substituting ‘365 days’ for ‘45 days’ each place it appears, and

‘(II) by substituting ‘731-day period’ for ‘91-day period’, and

‘(ii) paragraph (2) shall not apply.

‘(B) STATUS MUST BE MAINTAINED DURING HOLDING PERIOD- For purposes of section 245A, the holding period requirement of this subsection shall be treated as met only if--

‘(i) the controlled foreign corporation referred to in section 245A(a) is a controlled foreign corporation at all times during such period, and

‘(ii) the taxpayer is a United States shareholder (as defined in section 951) with respect to such controlled foreign corporation at all times during such period.

‘(C) SPECIAL RULES FOR ELECTING NONCONTROLLED SECTION 902 CORPORATIONS- In the case of an election under section 245A(b) to treat a noncontrolled section 902 corporation as a controlled foreign corporation, the requirements of subparagraph (B) shall be treated as met for any continuous period ending on the day before the effective date of the election for which the taxpayer met the ownership requirements of section 904(d)(2)(E) with respect to such corporation.’.

(c) Application of Rules Generally Applicable to Deductions for Dividends Received-

(1) TREATMENT OF DIVIDENDS FROM TAX-EXEMPT CORPORATIONS- Paragraph (1) of section 246(a) is amended by striking ‘and 245’ and inserting ‘245, and 245A’.

(2) ASSETS GENERATING TAX-EXEMPT PORTION OF DIVIDEND NOT TAKEN INTO ACCOUNT IN ALLOCATING AND APPORTIONING DEDUCTIBLE EXPENSES- Paragraph (3) of section 864(e) is amended by striking ‘or 245(a)’ and inserting ‘, 245(a), or 245A’.

(3) COORDINATION WITH SECTION 1059- Subparagraph (B) of section 1059(b)(2) is amended by striking ‘or 245’ and inserting ‘245, or 245A’.

(d) Conforming Amendments-

(1) Clause (vi) of section 56(g)(4)(C) is amended by inserting ‘245A or’ before ‘965’.

(2) Subsection (b) of section 951 is amended--

(A) by striking ‘subpart’ and inserting ‘title’, and

(B) by adding at the end the following: ‘Such term shall include, with respect to any entity treated as a controlled foreign corporation under section 245A(b), any domestic corporation treated as a United States shareholder with respect to such entity under such section.’.

(3) Subsection (a) of section 957 is amended--

(A) by striking ‘subpart’ in the matter preceding paragraph (1) and inserting ‘title’, and

(B) by adding at the end the following: ‘Such term shall include any entity treated as a controlled foreign corporation under section 245A(b).’.

(4) The table of sections for part VIII of subchapter B of chapter 1 is amended by inserting after the item relating to section 245 the following new item:

‘Sec. 245A. Dividends received by domestic corporations from certain foreign corporations.’.

(e) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 102. APPLICATION OF DIVIDENDS RECEIVED DEDUCTION TO CERTAIN SALES AND EXCHANGES OF STOCK.

(a) Sales by United States Persons of Stock in CFC- Section 1248 is amended by redesignating subsection (j) as subsection (k) and by inserting after subsection (i) the following new subsection:

‘(j) Coordination With Dividends Received Deduction-

‘(1) IN GENERAL- In the case of the sale or exchange by a domestic corporation of stock in a foreign corporation held for 1 year or more, any amount received by the domestic corporation which is treated as a dividend by reason of this section shall be treated as a dividend for purposes of applying section 245A.

‘(2) LOSSES DISALLOWED- If a domestic corporation--

‘(A) sells or exchanges stock in a foreign corporation in a taxable year of the domestic corporation with or within which a taxable year of the foreign corporation beginning after December 31, 2012, ends, and

‘(B) met the ownership requirements of subsection (a)(2) with respect to such stock,

no deduction shall be allowed to the domestic corporation with respect to any loss from the sale or exchange.’.

(b) Sale by a CFC of a Lower Tier CFC- Section 964(e) is amended by adding at the end the following new paragraph:

‘(4) COORDINATION WITH DIVIDENDS RECEIVED DEDUCTION-

‘(A) IN GENERAL- If, for any taxable year of a controlled foreign corporation beginning after December 31, 2012, any amount is treated as a dividend under paragraph (1) by reason of a sale or exchange by the controlled foreign corporation of stock in another foreign corporation held for 1 year or more, then, notwithstanding any other provision of this title--

‘(i) the qualified foreign-source portion of such dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the selling controlled foreign corporation for such taxable year,

‘(ii) a United States shareholder with respect to the selling controlled foreign corporation shall include in gross income for the taxable year of the shareholder with or within which such taxable year of the controlled foreign corporation ends an amount equal to the shareholder’s pro rata share (determined in the same manner as under section 951(a)(2)) of the amount treated as subpart F income under clause (i), and

‘(iii) the deduction under section 245A(a) shall be allowable to the United States shareholder with respect to the subpart F income included in gross income under clause (ii) in the same manner as if such subpart F income were a dividend received by the shareholder from the selling controlled foreign corporation.

‘(B) EFFECT OF LOSS ON EARNINGS AND PROFITS- For purposes of this title, in the case of a sale or exchange by a controlled foreign corporation of stock in another foreign corporation in a taxable year of the selling controlled foreign corporation beginning after December 31, 2012, to which this paragraph would apply if gain were recognized, the earnings and profits of the selling controlled foreign corporation shall not be reduced by reason of any loss from such sale or exchange.

‘(C) QUALIFIED FOREIGN-SOURCE PORTION- For purposes of this paragraph, the qualified foreign-source portion of any amount treated as a dividend under paragraph (1) shall be determined in the same manner as under section 245A(c).’.

SEC. 103. DEDUCTION FOR FOREIGN INTANGIBLE INCOME DERIVED FROM TRADE OR BUSINESS WITHIN THE UNITED STATES.

(a) In General- Part VIII of subchapter B of chapter 1 is amended by adding at the end the following new section:

‘SEC. 250. FOREIGN INTANGIBLE INCOME DERIVED FROM TRADE OR BUSINESS WITHIN THE UNITED STATES.

‘(a) In General- In the case of a domestic corporation, there shall be allowed as a deduction an amount equal to 50 percent of the qualified foreign intangible income of such domestic corporation for the taxable year.

‘(b) Qualified Foreign Intangible Income-

‘(1) IN GENERAL- The term ‘qualified foreign intangible income’ means, with respect to any domestic corporation, foreign intangible income which is derived by the domestic corporation from the active conduct of a trade or business within the United States with respect to the intangible property giving rise to the income.

‘(2) REQUIREMENTS RELATING TO TRADE OR BUSINESS WITHIN THE UNITED STATES- For purposes of this section, foreign intangible income shall be treated as derived by a domestic corporation from the active conduct of a trade or business within the United States only if--

‘(A) the domestic corporation developed, created, or produced within the United States the intangible property giving rise to the income, or

‘(B) in any case in which the domestic corporation acquired such intangible property, the domestic corporation added substantial value to the property through the active conduct of such trade or business within the United States.

‘(c) Foreign Intangible Income- For purposes of this section--

‘(1) IN GENERAL- The term ‘foreign intangible income’ means any intangible income which is derived in connection with--

‘(A) property which is sold, leased, licensed, or otherwise disposed of for use, consumption, or disposition outside the United States, or

‘(B) services provided with respect to persons or property located outside the United States.

‘(2) EXCEPTIONS FOR CERTAIN INCOME- The following amounts shall not be taken into account in computing foreign intangible income:

‘(A) Any amount treated as received by the domestic corporation under section 367(d)(2) with respect to any intangible property.

‘(B) Any payment under a cost-sharing arrangement entered into under section 482.

‘(C) Any amount received from a controlled foreign corporation with respect to which the domestic corporation is a United States shareholder to the extent such amount is attributable or properly allocable to income which is--

‘(i) effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or

‘(ii) subpart F income.

For purposes of clause (ii), amounts not otherwise treated as subpart F income shall be so treated if the amount creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or any other controlled foreign corporation.

‘(3) INTANGIBLE INCOME- The term ‘intangible income’ means gross income from--

‘(A) the sale, lease, license, or other disposition of property in which intangible property is used directly or indirectly, or

‘(B) the provision of services related to intangible property or in connection with property in which intangible property is used directly or indirectly,

to the extent that such gross income is properly attributable to such intangible property.

‘(4) DEDUCTIONS TO BE TAKEN INTO ACCOUNT- The gross income of a domestic corporation taken into account under this subsection shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions properly allocable to such income.

‘(5) INTANGIBLE PROPERTY- The term ‘intangible property’ has the meaning given such term by section 936(h)(3)(B).

‘(d) Regulations- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this section.’.

(b) Conforming Amendment- The table of sections for part VIII of subchapter B of chapter 1 is amended by adding at the end the following new item:

‘Sec. 250. Foreign intangible income derived from trade or business within the United States.’.

(c) Effective Date- The amendments made by this section shall apply to taxable years of domestic corporations beginning after December 31, 2012.

SEC. 104. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

(a) In General- Section 965 is amended to read as follows:

‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

‘(a) Deduction Allowed- In the case of a domestic corporation which elects the application of this section to any controlled foreign corporation with respect to which it is a United States shareholder, there shall be allowed as a deduction for the taxable year of the United States shareholder with or within which the first taxable year of the controlled foreign corporation beginning after December 31, 2012, ends an amount equal to 70 percent of the amount determined under subsection (b) for the taxable year.

‘(b) Eligible Amount- For purposes of subsection (a)--

‘(1) IN GENERAL- The amount determined under this subsection for a United States shareholder with respect to any controlled foreign corporation for the taxable year of the shareholder described in subsection (a) is the lesser of--

‘(A) the shareholder’s pro rata share of the earnings and profits of the controlled foreign corporation described in section 959(c)(3) as of the close of the taxable year preceding the first taxable year of the controlled foreign corporation beginning after December 31, 2012, or

‘(B) an amount equal to the sum of--

‘(i) the dividends received by the shareholder during such taxable year from the controlled foreign corporation which are attributable to the earnings and profits described in subparagraph (A), plus

‘(ii) the increase in subpart F income required to be included in gross income of the shareholder for the taxable year by reason of the election under paragraph (2).

‘(2) ELECTION OF DEEMED SUBPART F INCLUSION- A United States shareholder may elect for purposes of paragraph (1)(B)(ii) to treat all (or any portion) of the shareholder’s pro rata share of the earnings and profits of a controlled foreign corporation described in paragraph (1)(A) as subpart F income includible in the gross income of the shareholder for the taxable year of the shareholder described in subsection (a).

‘(3) ORDERING RULE- For purposes of paragraph (1)(B)(i), distributions shall be treated as first made out of earnings and profits of a controlled foreign corporation described in paragraph (1)(A).

‘(4) DIVIDEND- The term ‘dividend’ shall not include amounts includible in gross income as a dividend under section 78.

‘(c) Disallowance of Foreign Tax Credit, etc- In the case of a domestic corporation making an election under subsection (a) with respect to any controlled foreign corporation--

‘(1) IN GENERAL- No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the earnings and profits taken into account in determining the amount under subsection (b).

‘(2) DENIAL OF DEDUCTION- No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1).

‘(3) COORDINATION WITH SECTION 78- Section 78 shall not apply to any tax for which credit is not allowable under section 901 by reason of paragraph (1).

‘(4) TREATMENT OF NONDEDUCTIBLE PORTION IN APPLYING FOREIGN TAX CREDIT LIMIT- For purposes of applying the limitation under section 904(a), the remaining 30 percent of the amount determined under subsection (b) with respect to which a deduction is not allowable under subsection (a) shall be treated as income from sources within the United States.

‘(d) Election To Pay Liability for Deemed Subpart F Income in Installments-

‘(1) IN GENERAL- In the case of a United States shareholder with respect to 1 or more controlled foreign corporations to which elections under subsections (a) and (b)(2) apply, such United States shareholder may elect to pay the net tax liability determined with respect to its deemed subpart F inclusions with respect to such corporations under subsection (b)(2) for the taxable year described in subsection (a) in 2 or more (but not exceeding 8) equal installments.

‘(2) DATE FOR PAYMENT OF INSTALLMENTS- If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year for which the election was made and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made.

‘(3) ACCELERATION OF PAYMENT- If there is an addition to tax for failure to pay timely assessed with respect to any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed).

‘(4) PRORATION OF DEFICIENCY TO INSTALLMENTS- If an election is made under paragraph (1) to pay the net tax liability described in paragraph (1) in installments and a deficiency has been assessed which increases such net tax liability, the increase shall be prorated to the installments payable under paragraph (1). The part of the increase so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the increase so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.

‘(5) TIME FOR PAYMENT OF INTEREST- Interest payable under section 6601 on the unpaid portion of any amount of tax the time for payment of which as been extended under this subsection shall be paid annually at the same time as, and as part of, each installment payment of such tax. In the case of a deficiency to which paragraph (4) applies, interest with respect to such deficiency which is assigned under the preceding sentence to any installment the date for payment of which has arrived on or before the date of the assessment of the deficiency, shall be paid upon notice and demand from the Secretary.

‘(6) NET TAX LIABILITY FOR DEEMED SUBPART F INCLUSIONS- For purposes of this subsection--

‘(A) IN GENERAL- The net tax liability described in paragraph (1) with respect to any United States shareholder for any taxable year is the excess (if any) of--

‘(i) such taxpayer’s net income tax for the taxable year, over

‘(ii) such taxpayer’s net income tax for such taxable year determined as if the elections under subsection (b)(2) with respect to 1 or more controlled foreign corporations had not been made.

‘(B) NET INCOME TAX- The term ‘net income tax’ means the net income tax (as defined in section 38(c)(1)) reduced by the credit allowed under section 38.

‘(e) Special Rules- For purposes of this section--

‘(1) ELECTIONS- Any election under subsection (a), (b)(2), or (d)(1) shall be made not later than the due date (including extensions) for the return of tax for the taxable year for which made and shall be made in such manner as the Secretary may provide.

‘(2) SECTION NOT TO APPLY TO NONCONTROLLED SECTION 902 CORPORATIONS TREATED AS CFCS- No election may be made under subsection (a) with respect to a controlled foreign corporation which was a noncontrolled section 902 corporation which a United States shareholder elected under section 245A(b) to treat as a controlled foreign corporation.

‘(3) PRO RATA SHARE- A shareholder’s pro rata share of any earnings and profits shall be determined in the same manner as under section 951(a)(2).’

(b) Conforming Amendments-

(1) Clause (vi) of section 56(g)(4)(C), as amended by this Act, is amended--

(A) by striking ‘965’ and inserting ‘965(b)’, and

(B) by inserting ‘AND INCLUSIONS’ after ‘CERTAIN DISTRIBUTIONS’ in the heading thereof.

(2) Paragraph (2) of section 6601(b) is amended--

(A) by striking ‘section 6156(a)’ in the matter preceding subparagraph (A) and inserting ‘section 965(d)(1) or 6156(a)’, and

(B) by striking ‘section 6156(b)’ in subparagraph (A) and inserting ‘section 965(d)(2) or 6156(b), as the case may be’.

(3) The table of section for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 965 and inserting the following:

‘Sec. 965. Treatment of deferred foreign income upon transition to participation exemption system of taxation.’.

(c) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

TITLE II--OTHER INTERNATIONAL TAX REFORMS

Subtitle A--Modifications of Subpart F

SEC. 201. TREATMENT OF LOW-TAXED FOREIGN INCOME AS SUBPART F INCOME.

(a) In General- Subsection (a) of section 952 is amended by redesignating paragraphs (3), (4), and (5) as paragraphs (4), (5), and (6), respectively, and by inserting after paragraph (2) the following new paragraph:

‘(3) low-taxed income (as defined under subsection (e)),’.

(b) Low-Taxed Income- Section 952 is amended by adding at the end the following new subsection:

‘(e) Low-Taxed Income-

‘(1) IN GENERAL- For purposes of subsection (a), except as provided in paragraph (2), the term ‘low-taxed income’ means, with respect to any taxable year of a controlled foreign corporation, the entire gross income of the controlled foreign corporation unless the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax (determined under rules similar to the rules of section 954(b)(4)) imposed by a foreign country in excess of one-half of the highest rate of tax under section 11(b) for taxable years of United States corporations beginning in the same calendar year as the taxable year of the controlled foreign corporation begins.

‘(2) EXCEPTION FOR QUALIFIED BUSINESS INCOME- For purposes of paragraph (1), qualified business income--

‘(A) shall be taken into account in determining the effective rate of income tax at which the entire gross income of the controlled foreign corporation is taxed, but

‘(B) the amount of gross income treated as low-taxed income under paragraph (1) shall be reduced by the amount of the qualified business income.

‘(3) QUALIFIED BUSINESS INCOME- For purposes of this subsection--

‘(A) IN GENERAL- The term ‘qualified business income’ means, with respect to any controlled foreign corporation, income derived by the controlled foreign corporation in a foreign country but only if--

‘(i) such income is attributable to the active conduct of a trade or business of such corporation in such foreign country,

‘(ii) the corporation maintains an office or fixed place of business in such foreign country, and

‘(iii) officers and employees of the corporation physically located at such office or place of business in such foreign country conducted (or significantly contributed to the conduct of) activities within the foreign country which are substantial in relation to the activities necessary for the active conduct of the trade or business to which such income is attributable.

‘(B) EXCEPTION FOR INTANGIBLE INCOME- For purposes of subparagraph (A), qualified business income of a controlled foreign corporation shall not include intangible income (as defined in section 250(c)(3)).

‘(4) DETERMINATION OF EFFECTIVE RATE OF FOREIGN INCOME TAX AND QUALIFIED BUSINESS INCOME-

‘(A) COUNTRY-BY-COUNTRY DETERMINATION- For purposes of determining the effective rate of income tax imposed by any foreign country under paragraph (1) and qualified business income under paragraph (3), each such paragraph shall be applied separately with respect to--

‘(i) each foreign country in which a controlled foreign corporation conducts any trade or business, and

‘(ii) the entire gross income and qualified business income derived with respect to such foreign country.

‘(B) TREATMENT OF LOSSES- For purposes of determining the effective rate of income tax imposed by any foreign country under paragraph (1)--

‘(i) such effective rate shall be determined without regard to any losses carried to the relevant taxable year, and

‘(ii) to the extent the income of the controlled foreign corporation reduces losses in the relevant taxable year, such effective rate shall be treated as being the effective rate which would have been imposed on such income without regard to such losses.

‘(5) DEDUCTIONS TO BE TAKEN INTO ACCOUNT- The gross income of a controlled foreign corporation taken into account under this subsection shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income.’.

(c) Conforming Amendments-

(1) Subsection (a) of section 952 is amended--

(A) by striking ‘paragraph (4)’ in the next to last sentence and inserting ‘paragraph (5)’, and

(B) by striking ‘paragraph (5)’ in the last sentence and inserting ‘paragraph (6)’.

(2) Subsection (d) of section 952 is amended by striking ‘subsection (a)(5)’ and inserting ‘subsection (a)(6)’.

(3) Paragraphs (1) and (2) of section 999(c) are each amended by striking ‘section 952(a)(3)’ and inserting ‘section 952(a)(4)’.

(d) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 202. PERMANENT EXTENSION OF LOOK-THRU RULE FOR CONTROLLED FOREIGN CORPORATIONS.

(a) In General- Section 954(c)(6)(C) is amended by striking ‘and before January 1, 2012,’.

(b) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2011, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 203. PERMANENT EXTENSION OF EXCEPTIONS FOR ACTIVE FINANCING INCOME.

(a) Exception From Insurance Income- Section 953(e)(10) is amended--

(1) by striking ‘and before January 1, 2012,’, and

(2) by striking the last sentence.

(b) Exception From Foreign Personal Holding Company Income- Section 954(h)(9) is amended by striking ‘and before January 1, 2012,’.

(c) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2011, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 204. FOREIGN BASE COMPANY INCOME NOT TO INCLUDE SALES OR SERVICES INCOME.

(a) Repeal- Paragraphs (2) and (3) of section 954(a) are repealed.

(b) Conforming Amendments-

(1) Section 954(d) is amended by adding at the end the following new paragraph:

‘(5) TERMINATION- This subsection shall not apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.’.

(2) Section 954(e) is amended by adding at the end the following new paragraph:

‘(3) TERMINATION- This subsection shall not apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.’.

(c) Effective Date- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2012, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

Subtitle B--Modifications Related to Foreign Tax Credit

SEC. 211. MODIFICATION OF APPLICATION OF SECTIONS 902 AND 960 WITH RESPECT TO POST-2012 EARNINGS.

(a) Section 902 Not To Apply to Dividends From Post-2012 Earnings- Section 902 is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection:

‘(d) Section Not To Apply to Dividends From Post-2012 Earnings-

‘(1) IN GENERAL- This section shall not apply to the portion of any dividend paid by a foreign corporation to the extent such portion is made out of earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 2012.

‘(2) COORDINATION WITH DISTRIBUTIONS FROM PRE-2013 EARNINGS AND PROFITS- For purposes of this section--

‘(A) ORDERING RULE- Any distribution in a taxable year beginning after December 31, 2012, shall be treated as first made out of earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning before January 1, 2013.

‘(B) POST-1986 UNDISTRIBUTED EARNINGS- Post-1986 undistributed earnings shall not include earnings and profits described in paragraph (1).’

(b) Determination of Section 960 Credit on Current Year Basis- Section 960 is amended by adding at the end the following new subsection:

‘(d) Deemed Paid Credit for Subpart F Inclusions Attributable to Post-2012 Earnings-

‘(1) IN GENERAL- For purposes of this subpart, if there is included in the gross income of a domestic corporation any amount under section 951(a)--

‘(A) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, and

‘(B) which is attributable to the earnings and profits of the controlled foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 2012,

then subsections (a), (b), and (c) shall not apply and such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as are properly attributable to the amount so included.

‘(2) FOREIGN INCOME TAXES- For purposes of this subsection, the term ‘foreign income taxes’ means any income, war profits, or excess profits taxes paid or accrued by the controlled foreign corporation to any foreign country or possession of the United States.

‘(3) REGULATIONS- The Secretary shall provide such regulations as may be necessary or appropriate to carry out the provisions of this subsection.’.

SEC. 212. SEPARATE FOREIGN TAX CREDIT BASKET FOR FOREIGN INTANGIBLE INCOME.

(a) In General- Paragraph (1) of section 904(d) is amended by striking ‘and’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘, and’, and by adding at the end the following:

‘(C) foreign intangible income (as defined in paragraph (2)(J)).’.

(b) Foreign Intangible Income-

(1) IN GENERAL- Section 904(d)(2) is amended by redesignating subparagraphs (J) and (K) as subparagraphs (K) and (L) and by inserting after subparagraph (I) the following:

‘(J) FOREIGN INTANGIBLE INCOME- For purposes of this section--

‘(i) IN GENERAL- The term ‘foreign intangible income’ has the meaning given such term by section 250(c).

‘(ii) COORDINATION- Passive category income and general category income shall not include foreign intangible income.’

(2) GENERAL CATEGORY INCOME- Section 904(d)(2)(A)(ii) is amended by inserting ‘or foreign intangible income’ after ‘passive category income’.

(c) Effective Dates-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years beginning after December 31, 2012.

(2) TRANSITIONAL RULE- For purposes of section 904(d)(1) of the Internal Revenue Code of 1986 (as amended by this Act)--

(A) taxes carried from any taxable year beginning before January 1, 2013, to any taxable year beginning on or after such date, with respect to any item of income, shall be treated as described in the subparagraph of such section 904(d)(1) in which such income would be described without regard to the amendments made by this section, and

(B) any carryback of taxes with respect to foreign intangible income from a taxable year beginning on or after January 1, 2013, to a taxable year beginning before such date shall be allocated to the general income category.

SEC. 213. INVENTORY PROPERTY SALES SOURCE RULE EXCEPTIONS NOT TO APPLY FOR FOREIGN TAX CREDIT LIMITATION.

(a) In General- Section 904 is amended by redesignating subsection (l) as subsection (m) and by inserting after subsection (k) the following new subsection:

‘(l) Inventory Property Sales Source Rule Exceptions Not To Apply- Any amount which would be treated as derived from sources without the United States by reason of the application of section 862(a)(6) or 863(b)(2) for any taxable year shall be treated as derived from sources within the United States for purposes of this section.’.

(b) Effective Date- The amendment made by this section shall apply to taxable years beginning after December 31, 2012.

Subtitle C--Allocation of Interest on Worldwide Basis

SEC. 221. ACCELERATION OF ELECTION TO ALLOCATE INTEREST ON A WORLDWIDE BASIS.

Section 864(f)(6) is amended by striking ‘December 31, 2020’ and inserting ‘December 31, 2012’.

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