S. 2086 (104^th): International Tax Simplification for American Competitiveness Act

S 2086 IS

To amend the Internal Revenue Code of 1986 to simplify certain rules relating to the taxation of United States business operating abroad, and for other purposes.

September 17, 1996

Mr. PRESSLER (for himself, Mr. LOTT, Mr. BAUCUS, Mr. HATCH, Mr. D’AMATO, Mr. NICKLES, Mr. GORTON, Mr. HATFIELD, Mr. BURNS, and Mrs. MURRAY) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to simplify certain rules relating to the taxation of United States business operating abroad, 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 ‘International Tax Simplification for American Competitiveness Act’.

(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 for this Act is as follows:

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

TITLE I--TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES

Sec. 101. United States shareholders of controlled foreign corporations not subject to PFIC inclusion.

Sec. 102. Election of mark to market for marketable stock in passive foreign investment company.

Sec. 103. Modification to definition of passive income.

Sec. 104. Modifications to asset valuation test.

Sec. 105. Effective date.

TITLE II--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

Sec. 201. Gain on certain stock sales by controlled foreign corporations treated as dividends.

Sec. 202. Miscellaneous modifications to subpart F.

Sec. 203. Indirect foreign tax credit allowed for certain lower tier companies.

Sec. 204. Exemption for active financing income.

Sec. 205. Repeal of separate foreign tax credit limitation for noncontrolled section 902 corporations.

Sec. 206. Countries in European Union treated as a single country under same country exceptions.

Sec. 207. Expansion of de minimis rule under subpart F.

Sec. 208. Subpart F earnings and profits determined under generally accepted accounting principles.

Sec. 209. Affiliated foreign insurance companies may offset losses.

TITLE III--OTHER PROVISIONS

Sec. 301. Exchange rate used in translating foreign taxes.

Sec. 302. Election to use simplified section 904 limitation for alternative minimum tax.

Sec. 303. Modification of section 1491.

Sec. 304. Modification of section 367(b).

Sec. 305. Increase in filing thresholds for returns as to organization of foreign corporations and acquisitions of stock in such corporations.

Sec. 306. Application of uniform capitalization rules to foreign persons.

Sec. 307. Extension of period to which excess foreign taxes may be carried.

Sec. 308. Recharacterization of overall domestic loss.

Sec. 309. Treatment of nonresident aliens engaged in international transportation services.

Sec. 310. Export property of FSC to include computer software.

Sec. 311. Special rules relating to financial services income.

Sec. 312. United States property not to include certain assets acquired by dealers in ordinary course of trade or business.

TITLE I--TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES

SEC. 101. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.

Section 1297, as redesignated by section 102, is amended by adding at the end the following new subsection:

‘(e) EXCEPTION FOR UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN CORPORATIONS-

‘(1) IN GENERAL- For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation.

‘(2) QUALIFIED PORTION- For purposes of this subsection, the term ‘qualified portion’ means the portion of the shareholder’s holding period--

‘(A) which is after December 31, 1996, and

‘(B) during which the shareholder is a United States shareholder (as defined in section 951(b)) of the corporation and the corporation is a controlled foreign corporation.

‘(3) NEW HOLDING PERIOD IF QUALIFIED PORTION ENDS-

‘(A) IN GENERAL- Except as provided in subparagraph (B), if the qualified portion of a shareholder’s holding period with respect to any stock ends after December 31, 1996, solely for purposes of this part, the shareholder’s holding period with respect to such stock shall be treated as beginning as of the first day following such period.

‘(B) EXCEPTION- Subparagraph (A) shall not apply if such stock was, with respect to such shareholder, stock in a passive foreign investment company at any time before the qualified portion of the shareholder’s holding period with respect to such stock and no election under section 1298(b)(1) is made.’

SEC. 102. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN PASSIVE FOREIGN INVESTMENT COMPANY.

(a) IN GENERAL- Part VI of subchapter P of chapter 1 is amended by redesignating subpart C as subpart D, by redesignating sections 1296 and 1297 as sections

1297 and 1298, respectively, and by inserting after subpart B the following new subpart:

‘Subpart C--Election of Mark to Market for Marketable Stock

‘Sec. 1296. Election of mark to market for marketable stock.

‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.

‘(a) GENERAL RULE- In the case of marketable stock in a passive foreign investment company which is owned (or treated under subsection (g) as owned) by a United States person at the close of any taxable year of such person, at the election of such person--

‘(1) If the fair market value of such stock as of the close of such taxable year exceeds its adjusted basis, such United States person shall include in gross income for such taxable year an amount equal to the amount of such excess.

‘(2) If the adjusted basis of such stock exceeds the fair market value of such stock as of the close of such taxable year, such United States person shall be allowed a deduction for such taxable year equal to the lesser of--

‘(A) the amount of such excess, or

‘(B) the unreversed inclusions with respect to such stock.

‘(b) BASIS ADJUSTMENTS-

‘(1) IN GENERAL- The adjusted basis of stock in a passive foreign investment company--

‘(A) shall be increased by the amount included in the gross income of the United States person under subsection (a)(1) with respect to such stock, and

‘(B) shall be decreased by the amount allowed as a deduction to the United States person under subsection (a)(2) with respect to such stock.

‘(2) SPECIAL RULE FOR STOCK CONSTRUCTIVELY OWNED- In the case of stock in a passive foreign investment company which the United States person is treated as owning under subsection (g)--

‘(A) the adjustments under paragraph (1) shall apply to such stock in the hands of the person actually holding such stock but only for purposes of determining the subsequent treatment under this chapter of the United States person with respect to such stock, and

‘(B) similar adjustments shall be made to the adjusted basis of the property by reason of which the United States person is treated as owning such stock.

‘(c) CHARACTER AND SOURCE RULES-

‘(1) Ordinary treatment-

‘(A) GAIN- Any amount included in gross income under subsection (a)(1), and any gain on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect), shall be treated as ordinary income.

‘(B) LOSS- Any--

‘(i) amount allowed as a deduction under subsection (a)(2), and

‘(ii) loss on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect) to the extent that the amount of such loss does not exceed the unreversed inclusions with respect to such stock,

shall be treated as an ordinary loss. The amount so treated shall be treated as a deduction allowable in computing adjusted gross income.

‘(2) SOURCE- The source of any amount included in gross income under subsection (a)(1) (or allowed as a deduction under subsection (a)(2)) shall be determined in the same manner as if such amount were gain or loss (as the case may be) from the sale of stock in the passive foreign investment company.

‘(d) UNREVERSED INCLUSIONS- For purposes of this section, the term ‘unreversed inclusions’ means, with respect to any stock in a passive foreign investment company, the excess (if any) of--

‘(1) the amount included in gross income of the taxpayer under subsection (a)(1) with respect to such stock for prior taxable years, over

‘(2) the amount allowed as a deduction under subsection (a)(2) with respect to such stock for prior taxable years.

The amount referred to in paragraph (1) shall include any amount which would have been included in gross income under subsection (a)(1) with respect to such stock for any prior taxable year but for section 1291.

‘(e) MARKETABLE STOCK- For purposes of this section--

‘(1) IN GENERAL- The term ‘marketable stock’ means--

‘(A) any stock which is regularly traded on--

‘(i) a national securities exchange which is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or

‘(ii) any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this part,

‘(B) to the extent provided in regulations, stock in any foreign corporation which is comparable to a regulated investment company and which offers for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, and

‘(C) to the extent provided in regulations, any option on stock described in subparagraph (A) or (B).

‘(2) SPECIAL RULE FOR REGULATED INVESTMENT COMPANIES- In the case of any regulated investment company which is offering for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, all stock in a passive foreign investment company which it owns directly or indirectly shall be treated as marketable stock for purposes of this section. Except as provided in regulations, similar treatment as marketable stock shall apply in the case of any other regulated investment company which publishes net asset valuations at least annually.

‘(f) TREATMENT OF CONTROLLED FOREIGN CORPORATIONS WHICH ARE SHAREHOLDERS IN PASSIVE FOREIGN INVESTMENT COMPANIES- In the case of a foreign corporation which is a controlled foreign corporation and which owns (or is treated under subsection (g) as owning) stock in a passive foreign investment company--

‘(1) this section (other than subsection (c)(2)) shall apply to such foreign corporation in the same manner as if such corporation were a United States person, and

‘(2) for purposes of subpart F of part III of subchapter N--

‘(A) any amount included in gross income under subsection (a)(1) shall be treated as foreign personal holding company income described in section 954(c)(1)(A), and

‘(B) any amount allowed as a deduction under subsection (a)(2) shall be treated as a deduction allocable to foreign personal holding company income so described.

‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN ENTITIES- Except as provided in regulations--

‘(1) IN GENERAL- For purposes of this section, stock owned, directly or indirectly, by or for a foreign partnership or foreign trust or foreign estate shall be considered as being owned proportionately by its partners or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.

‘(2) TREATMENT OF CERTAIN DISPOSITIONS- In any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of paragraph (1)--

‘(A) any disposition by the United States person or by any other person which results in the United States person being treated as no longer owning such stock, and

‘(B) any disposition by the person owning such stock,

shall be treated as a disposition by the United States person of the stock in the passive foreign investment company.

‘(h) COORDINATION WITH SECTION 851(b)- For purposes of paragraphs (2) and (3) of section 851(b), any amount included in gross income under subsection (a) shall be treated as a dividend.

‘(i) STOCK ACQUIRED FROM A DECEDENT- In the case of stock of a passive foreign investment company which is acquired by bequest, devise, or inheritance (or by the decedent’s estate) and with respect to which an election under this section was in effect as of the date of the decedent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquiring it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection).

‘(j) COORDINATION WITH SECTION 1291 FOR FIRST YEAR OF ELECTION-

‘(1) TAXPAYERS OTHER THAN REGULATED INVESTMENT COMPANIES-

‘(A) IN GENERAL- If the taxpayer elects the application of this section with respect to any marketable stock in a corporation after the

beginning of the taxpayer’s holding period in such stock, and if the requirements of subparagraph (B) are not satisfied, section 1291 shall apply to--

‘(i) any distributions with respect to, or disposition of, such stock in the first taxable year of the taxpayer for which such election is made, and

‘(ii) any amount which, but for section 1291, would have been included in gross income under subsection (a) with respect to such stock for such taxable year in the same manner as if such amount were gain on the disposition of such stock.

‘(B) REQUIREMENTS- The requirements of this subparagraph are met if, with respect to each of such corporation’s taxable years for which such corporation was a passive foreign investment company and which begin after December 31, 1986, and included any portion of the taxpayer’s holding period in such stock, such corporation was treated as a qualified electing fund under this part with respect to the taxpayer.

‘(2) SPECIAL RULES FOR REGULATED INVESTMENT COMPANIES-

‘(A) IN GENERAL- If a regulated investment company elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, then, with respect to such company’s first taxable year for which such company elects the application of this section with respect to such stock--

‘(i) section 1291 shall not apply to such stock with respect to any distribution or disposition during, or amount included in gross income under this section for, such first taxable year, but

‘(ii) such regulated investment company’s tax under this chapter for such first taxable year shall be increased by the aggregate amount of interest which would have been determined under section 1291(c)(3) if section 1291 were applied without regard to this subparagraph.

Clause (ii) shall not apply if for the preceding taxable year the company elected to mark to market the stock held by such company as of the last day of such preceding taxable year.

‘(B) DISALLOWANCE OF DEDUCTION- No deduction shall be allowed to any regulated investment company for the increase in tax under subparagraph (A)(ii).

‘(k) ELECTION- This section shall apply to marketable stock in a passive foreign investment company which is held by a United States person only if such person elects to apply this section with respect to such stock. Such an election shall apply to the taxable year for which made and all subsequent taxable years unless--

‘(1) such stock ceases to be marketable stock, or

‘(2) the Secretary consents to the revocation of such election.

‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING SUBJECT TO UNITED STATES TAX- If any individual becomes a United States person in a taxable year beginning after December 31, 1996, solely for purposes of this section, the adjusted basis (before adjustments under subsection (b)) of any marketable stock in a passive foreign investment company owned by such individual on the first day of such taxable year shall be treated as being the greater of its fair market value on such first day or its adjusted basis on such first day.’

(b) COORDINATION WITH INTEREST CHARGE, ETC-

(1) Paragraph (1) of section 1291(d) is amended by adding at the end the following new flush sentence:

‘Except as provided in section 1296(j), this section also shall not apply if an election under section 1296(k) is in effect for the taxpayer’s taxable year.’

(2) The subsection heading for subsection (d) of section 1291 is amended by striking ‘SUBPART B’ and inserting ‘SUBPARTS B AND C’.

(3) Subparagraph (A) of section 1291(a)(3) is amended to read as follows:

‘(A) HOLDING PERIOD- The taxpayer’s holding period shall be determined under section 1223; except that--

‘(i) for purposes of applying this section to an excess distribution, such holding period shall be treated as ending on the date of such distribution, and

‘(ii) if section 1296 applied to such stock with respect to the taxpayer for any prior taxable year, such holding period

shall be treated as beginning on the first day of the first taxable year beginning after the last taxable year for which section 1296 so applied.’

(c) TREATMENT OF MARK-TO-MARKET GAIN UNDER SECTION 4982-

(1) Subsection (e) of section 4982 is amended by adding at the end the following new paragraph:

‘(6) TREATMENT OF GAIN RECOGNIZED UNDER SECTION 1296- For purposes of determining a regulated investment company’s ordinary income--

‘(A) notwithstanding paragraph (1)(C), section 1296 shall be applied as if such company’s taxable year ended on October 31, and

‘(B) any ordinary gain or loss from an actual disposition of stock in a passive foreign investment company during the portion of the taxable year after October 31 shall be taken into account in determining such company’s ordinary income for the following taxable year.

This paragraph shall not apply to a company making an election under paragraph (4).’

(2) Subsection (b) of section 852 is amended by adding at the end the following new paragraph:

‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON STOCK IN PASSIVE FOREIGN INVESTMENT COMPANIES- To the extent provided in regulations, the taxable income of a regulated investment company (other than a company to which an election under section 4982(e)(4) applies) shall be computed without regard to any net reduction in the value of any stock with respect to which an election under section 1296(k) is in effect occurring after October 31 of the taxable year, and any such reduction shall be treated as occurring on the first day of the following taxable year.’

(3) Subsection (c)(2) of section 852 is amended by inserting after: ‘, without regard to any net reduction in the value of any stock of a passive foreign investment company with respect to which an election under section 1296(k) is in effect occurring after October 31 of such year,’ after ‘October 31 of such year’.

(d) CONFORMING AMENDMENTS-

(1) Sections 532(b)(4) and 542(c)(10) are each amended by striking ‘section 1296’ and inserting ‘section 1297’.

(2) Subsection (f) of section 551 is amended by striking ‘section 1297(b)(5)’ and inserting ‘section 1298(b)(5)’

(3) Subsections (a)(1) and (d) of section 1293 are each amended by striking ‘section 1297(a)’ and inserting ‘section 1298(a)’.

(4) Paragraph (3) of section 1297(b), as redesignated by subsection (a), is hereby repealed.

(5) The table of sections for subpart D of part VI of subchapter P of chapter 1, as redesignated by subsection (a), is amended to read as follows:

‘Sec. 1297. Passive foreign investment company.

‘Sec. 1298. Special rules.’

(6) The table of subparts for part VI of subchapter P of chapter 1 is amended by striking the last item and inserting the following new items:

‘Subpart C. Election of mark to market for marketable stock.

‘Subpart D. General provisions.’

(e) CLARIFICATION OF GAIN RECOGNITION ELECTION- The last sentence of section 1298(b)(1), as so redesignated, is amended by inserting ‘(determined without regard to the preceding sentence)’ after ‘investment company’.

SEC. 103. MODIFICATION TO DEFINITION OF PASSIVE INCOME.

Paragraph (1) of section 1297(b) (defining passive income), as redesignated by section 102, is amended by inserting before the period ‘without regard to paragraph (3) thereof’.

SEC. 104. MODIFICATIONS TO ASSET VALUATION TEST.

(a) IN GENERAL- Section 1297(a), as redesignated by section 102, is amended--

(1) by striking ‘(by value)’ in paragraph (2), and

(2) by striking the last two sentences and inserting:

‘The determination under paragraph (2) shall be made as provided under section 1298(f).’

(b) METHODS FOR VALUING ASSETS- Section 1298, as so redesignated, is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

‘(f) METHOD FOR VALUING ASSETS- For purposes of section 1297(a)(2)--

‘(1) PUBLICLY TRADED CORPORATIONS- In the case of a foreign corporation the stock in which is readily tradeable on an established securities market, the value of its assets shall be treated as being equal to the sum of--

‘(A) the aggregate value of its outstanding stock, plus

‘(B) its liabilities.

‘(2) OTHER CORPORATIONS- In the case of a foreign corporation to which paragraph (1) does not apply, the determination under subsection (a)(2) shall be based on the adjusted bases (as determined for purposes of computing earnings and profits) of its assets.’

SEC. 105. EFFECTIVE DATE.

The amendments made by this title shall apply to--

(1) taxable years of United States persons beginning after December 31, 1996, and

(2) taxable years of foreign corporations ending with or within such taxable years of United States persons.

TITLE II--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

SEC. 201. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN CORPORATIONS TREATED AS DIVIDENDS.

(a) GENERAL RULE- Section 964 (relating to miscellaneous provisions) is amended by adding at the end the following new subsection:

‘(e) GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN CORPORATIONS TREATED AS DIVIDENDS-

‘(1) IN GENERAL- If a controlled foreign corporation sells or exchanges stock in any other foreign corporation, gain recognized on such sale or exchange shall be included in the gross income of such controlled foreign corporation as a dividend to the same extent that it would have been so included under section 1248(a) if such controlled foreign corporation were a United States person. For purposes of determining the amount which would have been so includible, the determination of whether such other foreign corporation was a controlled foreign corporation shall be made without regard to the preceding sentence.

‘(2) SAME COUNTRY EXCEPTION NOT APPLICABLE- Clause (i) of section 954(c)(3)(A) shall not apply to any amount treated as a dividend by reason of paragraph (1).

‘(3) CLARIFICATION OF DEEMED SALES- For purposes of this subsection, a controlled foreign corporation shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such controlled foreign corporation is treated as having gain from the sale or exchange of such stock.’

(b) AMENDMENT OF SECTION 904(d)- Clause (i) of section 904(d)(2)(E) is amended by striking ‘and except as provided in regulations, the taxpayer was a United States shareholder in such corporation’.

(c) EFFECTIVE DATES-

(1) The amendment made by subsection (a) shall apply to gain recognized on transactions occurring after the date of the enactment of this Act.

(2) The amendment made by subsection (b) shall apply to distributions after the date of the enactment of this Act.

SEC. 202. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN DETERMINING PRO RATA SHARE-

(1) IN GENERAL- Paragraph (2) of section 951(a) (defining pro rata share of subpart F income) is amended by adding at the end the following new sentence:

‘For purposes of subparagraph (B), any gain included in the gross income of any person as a dividend under section 1248 shall be treated as a distribution received by such person with respect to the stock involved.’

(2) EFFECTIVE DATE- The amendment made by paragraph (1) shall apply to dispositions after the date of the enactment of this Act.

(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORATION-

(1) IN GENERAL- Section 961 (relating to adjustments to basis of stock in controlled foreign corporations and of other property) is amended by adding at the end the following new subsection:

‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORATION- Under regulations prescribed by the Secretary, if a United States shareholder is treated under section 958(a)(2) as owning any stock in a controlled foreign corporation which is actually owned by another controlled foreign corporation, adjustments similar to the adjustments provided by subsections (a) and (b) shall be made to the basis of such stock in the hands of such other controlled foreign corporation, but only for the purposes of determining the amount included under section 951 in the gross income of such United States shareholder (or any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder by reason of which such shareholder was treated as owning such stock, but only to the extent of such portion, and subject to such proof of

identity of such interest as the Secretary may prescribe by regulations).’

(2) EFFECTIVE DATE- The amendment made by paragraph (1) shall apply for purposes of determining inclusions for taxable years of United States shareholders beginning after December 31, 1996.

(c) DETERMINATION OF PREVIOUSLY TAXED INCOME IN SECTION 304 DISTRIBUTIONS, ETC-

(1) IN GENERAL- Section 959 (relating to exclusion from gross income of previously taxed earnings and profits) is amended by adding at the end the following new subsection:

‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS- If, by reason of--

‘(1) a transaction to which section 304 applies,

‘(2) the structure of a United States shareholder’s holdings in controlled foreign corporations, or

‘(3) other circumstances,

there would be a multiple inclusion of any item in income (or an inclusion or exclusion without an appropriate basis adjustment) by reason of this subpart, the Secretary may prescribe regulations providing such modifications in the application of this subpart as may be necessary to eliminate such multiple inclusion or provide such basis adjustment, as the case may be.’

(2) EFFECTIVE DATE- The amendment made by paragraph (1) shall take effect on the date of the enactment of this Act.

(d) CLARIFICATION OF TREATMENT OF BRANCH TAX EXEMPTIONS OR REDUCTIONS-

(1) IN GENERAL- Subsection (b) of section 952 is amended by adding at the end the following new sentence: ‘For purposes of this subsection, any exemption (or reduction) with respect to the tax imposed by section 884 shall not be taken into account.’

(2) EFFECTIVE DATE- The amendment made by paragraph (1) shall apply to taxable years beginning after December 31, 1986.

SEC. 203. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN LOWER TIER COMPANIES.

(a) SECTION 902 CREDIT-

(1) IN GENERAL- Subsection (b) of section 902 (relating to deemed taxes increased in case of certain 2nd and 3rd tier foreign corporations) is amended to read as follows:

‘(b) DEEMED TAXES INCREASED IN CASE OF CERTAIN LOWER TIER CORPORATIONS-

‘(1) IN GENERAL- If--

‘(A) any foreign corporation is a member of a qualified group, and

‘(B) such foreign corporation owns 10 percent or more of the voting stock of another member of such group from which it receives dividends in any taxable year,

such foreign corporation shall be deemed to have paid the same proportion of such other member’s post-1986 foreign income taxes as would be determined under subsection (a) if such foreign corporation were a domestic corporation.

‘(2) QUALIFIED GROUP- For purposes of paragraph (1), the term ‘qualified group’ means--

‘(A) the foreign corporation described in subsection (a), and

‘(B) any other foreign corporation if--

‘(i) the domestic corporation owns at least 5 percent of the voting stock of such other foreign corporation indirectly through a chain of foreign corporations connected through stock ownership of at least 10 percent of their voting stock,

‘(ii) the foreign corporation described in subsection (a) is the first tier corporation in such chain, and

‘(iii) such other corporation is not below the sixth tier in such chain.

The term ‘qualified group’ shall not include any foreign corporation below the third tier in the chain referred to in clause (i) unless such foreign corporation is a controlled foreign corporation (as defined in section 957) and the domestic corporation is a United States shareholder (as defined in section 951(b)) in such foreign corporation. Paragraph (1) shall apply to those taxes paid by a member of the qualified group below the third tier only with respect to periods during which it was a controlled foreign corporation.’

(2) CONFORMING AMENDMENTS-

(A) Subparagraph (B) of section 902(c)(3) is amended by adding ‘or’ at the end of clause (i) and by striking clauses (ii) and (iii) and inserting the following new clause:

‘(ii) the requirements of subsection (b)(2) are met with respect to such foreign corporation.’

(B) Subparagraph (B) of section 902(c)(4) is amended by striking ‘3rd foreign corporation’ and inserting ‘sixth tier foreign corporation’.

(C) The heading for paragraph (3) of section 902(c) is amended by striking ‘WHERE DOMESTIC CORPORATION ACQUIRES 10 PERCENT OF FOREIGN CORPORATION’ and inserting ‘WHERE FOREIGN CORPORATION FIRST QUALIFIES’.

(D) Paragraph (3) of section 902(c) is amended by striking ‘ownership’ each place it appears.

(b) SECTION 960 CREDIT- Paragraph (1) of section 960(a) (relating to special rules for foreign tax credits) is amended to read as follows:

‘(1) DEEMED PAID CREDIT- For purposes of subpart A of this part, if there is included under section 951(a) in the gross income of a domestic corporation any amount attributable to earnings and profits of a foreign corporation which is a member of a qualified group (as defined in section 902(b)) with respect to the domestic corporation, then, except to the extent provided in regulations, section 902 shall be applied as if the amount so included were a dividend paid by such foreign corporation (determined by applying section 902(c) in accordance with section 904(d)(3)(B)).’

(c) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to taxes of foreign corporations for taxable years of such corporations beginning after the date of enactment of this Act.

(2) SPECIAL RULE- In the case of any chain of foreign corporations described in clauses (i) and (ii) of section 902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended by this section), no liquidation, reorganization, or similar transaction in a taxable year beginning after the date of the enactment of this Act shall have the effect of permitting taxes to be taken into account under section 902 of the Internal Revenue Code of 1986 which could not have been taken into account under such section but for such transaction.

SEC. 204. EXEMPTION FOR ACTIVE FINANCING INCOME.

(a) EXEMPTION FROM FOREIGN PERSONAL HOLDING COMPANY INCOME- Subsection (c) of section 954 is amended by adding at the end the following new paragraph:

‘(4) CERTAIN INCOME DERIVED IN ACTIVE CONDUCT OF TRADE OR BUSINESS-

‘(A) IN GENERAL- For purposes of paragraph (1), foreign personal holding company income shall not include income which is--

‘(i) derived in or incident to the active conduct by a controlled foreign corporation of a banking, financing, or similar business, but only if the corporation is predominantly engaged in the active conduct of such business,

‘(ii) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company of its unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business, or

‘(iii) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company of an amount of its assets equal to--

‘(I) in the case of contracts regulated in the country in which sold as property, casualty, or health insurance contracts, one-third of its premiums earned on insurance contracts during the taxable year (as defined in section 832(b)(4)), and

‘(II) in the case of contracts regulated in the country in which sold as life insurance or annuity contracts, the greater of 10 percent of the reserves described in clause (ii) or $10,000,000,

which are not directly or indirectly attributable to the insurance or reinsurance of risks of persons who are related persons (within the meaning of subsection (d)(3)).

‘(B) APPLICABLE PRINCIPLES-

‘(i) BANKING, ETC. INCOME- The Secretary shall prescribe regulations which interpret subparagraph (A)(i) in accordance with the applicable principles of section 904(d)(2)(C).

‘(ii) LOOK-THRU RULES- The Secretary shall prescribe regulations consistent with the principles of section 904(d)(3) which provide that dividends, interest, income equivalent to interest, rents, or royalties received or accrued from a related person (within the meaning of subsection

(d)(3)) shall be subject to look-thru treatment for purposes of this section.

‘(iii) SPECIAL RULE FOR BANKING OR SECURITIES BUSINESS- In the case of a corporation described in subparagraph (C)(ii), the regulations under clauses (i) and (ii) shall be consistent with the applicable principles of section 1296(b) (as in effect on the day before the enactment of the International Tax Simplification for American Competitiveness Act).

‘(C) PREDOMINANTLY ENGAGED- For purposes of subparagraph (A)(i), a corporation shall be deemed predominantly engaged in the active conduct of a banking, financing or similar business only if--

‘(i) more than 70 percent of its gross income from such business is derived from transactions with unrelated persons (as defined in subsection (d)(3)), and more than 20 percent of its gross income from that business is derived from transactions with unrelated persons (as so defined) located within the country under the laws of which the controlled foreign corporation is created or organized, or

‘(ii) the corporation is--

‘(I) predominantly engaged in the active conduct of a banking or securities business (within the meaning of section 1296(b), as in effect before the enactment of the International Tax Simplification for Competitiveness Act), or

‘(II) a qualified bank affiliate or a qualified securities affiliate for purposes of section 1296(b) (as so in effect).

‘(D) QUALIFYING INSURANCE COMPANY- For purposes of clauses (ii) and (iii) of subparagraph (A), the term ‘qualifying insurance company’ means any entity which is subject to regulation as an insurance company under the laws of its country of incorporation and which realizes at least 50 percent of its gross income (other than gross income derived from investments) from premiums written on risks situated within its country of incorporation.’

(b) EXEMPTION FROM FOREIGN BASE COMPANY SERVICES INCOME- Paragraph (2) of section 954(e) is amended by striking ‘or’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘, or’, and by adding at the end the following:

‘(C) the active conduct by a controlled foreign corporation of a banking, financing, insurance, or similar business, but only if the corporation is predominantly engaged in the active conduct of that business (within the meaning of subsection (c)(4)(C)).’

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1996, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 205. REPEAL OF SEPARATE FOREIGN TAX CREDIT LIMITATION FOR NONCONTROLLED SECTION 902 CORPORATIONS.

(a) REPEAL OF SEPARATE BASKET-

(1) IN GENERAL- Subparagraph (E) of section 904(d)(1) is amended to read as follows:

‘(E) in the case of a corporation, dividends from noncontrolled section 902 corporations out of earnings and profits accumulated in taxable years beginning before January 1, 1997,’.

(2) CONFORMING AMENDMENTS-

(A) Subparagraph (E) of section 904(d)(2) is repealed.

(B) Section 904(d)(2)(A)(ii) is amended by striking ‘subparagraph (E)(iii) or’.

(C) Section 904(d)(2)(C)(iii)(II) is amended by inserting ‘out of earnings and profits accumulated in taxable years beginning before January 1, 1997’ after ‘corporation’.

(b) APPLICATION OF LOOK-THRU RULES TO NONCONTROLLED SECTION 902 CORPORATIONS-

(1) IN GENERAL- Section 904(d)(3) is amended by adding at the end the following new subparagraph:

‘(J) LOOK-THRU APPLIES TO NONCONTROLLED SECTION 902 CORPORATIONS-

‘(i) IN GENERAL- For purposes of this paragraph (other than subparagraph (E) thereof)--

‘(I) any foreign corporation which is a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as a controlled

foreign corporation with respect to the taxpayer, and

‘(II) the taxpayer shall be treated as a United States shareholder in such corporation.

‘(ii) NONCONTROLLED SECTION 902 CORPORATION- For purposes of this subsection, the term ‘noncontrolled section 902 corporation’ means, with respect to any taxpayer, any foreign corporation with respect to which the taxpayer meets the stock ownership requirements of subsection (a) or (b) of section 902 and which is not otherwise a controlled foreign corporation.’

(2) CONFORMING AMENDMENTS-

(A) Section 904(d)(5)(C) is amended by inserting ‘or noncontrolled section 902 corporations’ after ‘controlled foreign corporations’.

(B) The heading for section 904(d)(3) is amended by inserting ‘AND CERTAIN OTHER CORPORATIONS’ after ‘CORPORATIONS’.

(c) EFFECTIVE DATES-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1996, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

(2) DIVIDENDS- The amendments made by this section shall apply to dividends paid out of earnings and profits accumulated during taxable years of foreign corporations beginning after December 31, 1996. For purposes of the preceding sentence, the rules of section 316 of the Internal Revenue Code of 1986 shall apply.

SEC. 206. COUNTRIES IN EUROPEAN UNION TREATED AS A SINGLE COUNTRY UNDER SAME COUNTRY EXCEPTIONS.

(a) IN GENERAL- Subsection (d) of section 954 is amended by adding at the end the following new paragraph:

‘(5) COUNTRIES IN EUROPEAN UNION TREATED AS 1 COUNTRY-

‘(A) IN GENERAL- For purposes of this subsection, subsections (c), (e), and (g), and section 953(a)(1), in the case of a controlled foreign corporation which is created or organized under the laws of a country included in the European Union, all countries included in such Union shall be considered 1 country.

‘(B) EXCEPTION WHERE NO SUBSTANTIAL EFFECTIVE RATE OF TAX- Subparagraph (A) shall not apply to a controlled foreign corporation unless such corporation is subject to a substantial effective rate of foreign tax on income described in such subsection.’

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1996, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 207. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

(a) IN GENERAL- Subparagraph (A) of section 954(b)(3) (relating to de minimis, etc., rules) is amended to read as follows:

‘(A) DE MINIMIS RULE- If the sum of foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year is less than 10 percent of gross income, no part of the gross income for the taxable year shall be treated as foreign base company income or insurance income.’

(b) TECHNICAL AMENDMENTS-

(1) Clause (ii) of section 864(d)(5)(A) is amended by striking ‘5 percent or $1,000,000’ and inserting ‘10 percent’.

(2) Clause (i) of section 881(c)(5)(A) is amended by striking ‘5 percent or $1,000,000’ and inserting ‘10 percent’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

SEC. 208. SUBPART F EARNINGS AND PROFITS DETERMINED UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

(a) IN GENERAL- Subsection (a) of section 964 (relating to miscellaneous provisions) is amended by striking ‘rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary’ and inserting ‘generally accepted accounting principles in the United States’.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to distributions during, and the determination of the inclusion under section 951 of the Internal Revenue Code of 1986 with respect to, taxable years of foreign corporations beginning after December 31, 1996.

SEC. 209. AFFILIATED FOREIGN INSURANCE COMPANIES MAY OFFSET LOSSES.

(a) IN GENERAL- Section 953(d)(3) is amended by adding at the end the following new subparagraph:

‘(B) SPECIAL RULE WHERE 2 OR MORE ELECTING COMPANIES ARE AFFILIATED- If 2 or more corporations treated as domestic corporations under this subsection--

‘(i) were created or organized under the laws of the same foreign country,

‘(ii) are treated as members of the same affiliated group for purposes of chapter 6, and

‘(iii) elect the application of this subparagraph,

such corporations shall be treated as 1 corporation for purposes of subparagraph (A).’

(b) CONFORMING AMENDMENT- Section 953(d)(3) is amended by striking ‘If’ and inserting: ‘(A) IN GENERAL- If’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

TITLE III--OTHER PROVISIONS

SEC. 301. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

(a) ACCRUED TAXES TRANSLATED BY USING AVERAGE RATE FOR YEAR TO WHICH TAXES RELATE-

(1) IN GENERAL- Subsection (a) of section 986 (relating to translation of foreign taxes) is amended to read as follows:

‘(a) FOREIGN INCOME TAXES-

‘(1) TRANSLATION OF ACCRUED TAXES-

‘(A) IN GENERAL- For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.

‘(B) EXCEPTION FOR TAXES NOT PAID WITHIN FOLLOWING 2 YEARS-

‘(i) Subparagraph (A) shall not apply to any foreign income taxes paid after the date 2 years after the close of the taxable year to which such taxes relate.

‘(ii) Subparagraph (A) shall not apply to taxes paid before the beginning of the taxable year to which such taxes relate.

‘(C) EXCEPTION FOR INFLATIONARY CURRENCIES- Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency determined to be an inflationary currency under regulations prescribed by the Secretary.

‘(D) CROSS REFERENCE-

‘For adjustments where tax is not paid within 2 years, see section 905(c).

‘(2) TRANSLATION OF TAXES TO WHICH PARAGRAPH (1) DOES NOT APPLY- For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) of paragraph (1) does not apply--

‘(A) such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and

‘(B) any adjustment to the amount of such taxes shall be translated into dollars using--

‘(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or

‘(ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of the original payment of such foreign income taxes.

‘(3) 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 to any foreign country or to any possession of the United States.’

(2) ADJUSTMENT WHEN NOT PAID WITHIN 2 YEARS AFTER YEAR TO WHICH TAXES RELATE- Subsection (c) of section 905 is amended to read as follows:

‘(c) ADJUSTMENTS TO ACCRUED TAXES-

‘(1) IN GENERAL- If--

‘(A) accrued taxes when paid differ from the amounts claimed as credits by the taxpayer,

‘(B) accrued taxes are not paid before the date 2 years after the close of the taxable year to which such taxes relate, or

‘(C) any tax paid is refunded in whole or in part,

the taxpayer shall notify the Secretary, who shall redetermine the amount of the tax for the year or years affected.

‘(2) SPECIAL RULE FOR TAXES NOT PAID WITHIN 2 YEARS- In making the redetermination under paragraph (1), no credit shall be allowed for accrued taxes not paid before the date referred to in subparagraph (B) of paragraph (1). Any such taxes subsequently paid shall be taken into account for the taxable year to which they relate and a redetermination under this section shall be made on account of such payment.

‘(3) ADJUSTMENTS- The amount of tax due on any redetermination under paragraph (1) (if any) shall be paid by the taxpayer on notice and demand by the Secretary, and the amount of tax overpaid (if any) shall be credited or refunded to the taxpayer in accordance with subchapter B of chapter 66 (section 6511 et seq.).

‘(4) BOND REQUIREMENTS- In the case of any tax accrued but not paid, the Secretary, as a condition precedent to the allowance of the credit provided in this subpart, may require the taxpayer to give a bond, with sureties satisfactory to and approved by the Secretary, in such sum as the Secretary may require, conditioned on the payment by the taxpayer of any amount of tax found due on any such redetermination. Any such bond shall contain such further conditions as the Secretary may require.

‘(5) OTHER SPECIAL RULES- In any redetermination under paragraph (1) by the Secretary of the amount of tax due from the taxpayer for the year or years affected by a refund, the amount of the taxes refunded for which credit has been allowed under this section shall be reduced by the amount of any tax described in section 901 imposed by the foreign country or possession of the United States with respect to such refund; but no credit under this subpart, or deduction under section 164, shall be allowed for any taxable year with respect to any such tax imposed on the refund. No interest shall be assessed or collected on any amount of tax due on any redetermination by the Secretary, resulting from a refund to the taxpayer, for any period before the receipt of such refund, except to the extent interest was paid by the foreign country or possession of the United States on such refund for such period.’

(b) AUTHORITY TO USE AVERAGE RATES-

(1) IN GENERAL- Subsection (a) of section 986 (as amended by subsection (a)) is amended by redesignating paragraph (3) as paragraph (4) and inserting after paragraph (2) the following new paragraph:

‘(3) AUTHORITY TO PERMIT USE OF AVERAGE RATES- To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment.’

(2) DETERMINATION OF AVERAGE RATES- Subsection (c) of section 989 is amended by striking ‘and’ at the end of paragraph (4), by striking the period at the end of paragraph (5) and inserting ‘, and’, and by adding at the end the following new paragraph:

‘(6) setting forth procedures for determining the average exchange rate for any period.’

(3) CONFORMING AMENDMENTS- Subsection (b) of section 989 is amended by striking ‘weighted’ each place it appears.

(c) EFFECTIVE DATES-

(1) IN GENERAL- The amendments made by subsections (a)(1) and (b) shall apply to taxes paid or accrued in taxable years beginning after December 31, 1996.

(2) SUBSECTION (a)(2)- The amendment made by subsection (a)(2) shall apply to taxes which relate to taxable years beginning after December 31, 1996.

SEC. 302. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR ALTERNATIVE MINIMUM TAX.

(a) GENERAL RULE- Subsection (a) of section 59 (relating to alternative minimum tax foreign tax credit) is amended by adding at the end the following new paragraph:

‘(4) ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION-

‘(A) IN GENERAL- In determining the alternative minimum tax foreign tax credit for any taxable year to which an election under this paragraph applies--

‘(i) subparagraph (B) of paragraph (1) shall not apply, and

‘(ii) the limitation of section 904 shall be based on the proportion which--

‘(I) the taxpayer’s taxable income (as determined for purposes of the regular tax) from sources without the United States (but not in excess

of the taxpayer’s entire alternative minimum taxable income), bears to

‘(II) the taxpayer’s entire alternative minimum taxable income for the taxable year.

‘(B) ELECTION-

‘(i) IN GENERAL- An election under this paragraph may be made only for the taxpayer’s first taxable year which begins after December 31, 1996, and for which the taxpayer claims an alternative minimum tax foreign tax credit.

‘(ii) ELECTION REVOCABLE ONLY WITH CONSENT- An election under this paragraph, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.’

(b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

SEC. 303. MODIFICATION OF SECTION 1491.

(a) GENERAL RULE- So much of chapter 5 (relating to tax on transfers to avoid income tax) as precedes section 1492 is amended to read as follows:

‘CHAPTER 5--TREATMENT OF TRANSFERS TO AVOID INCOME TAX

‘Sec. 1491. Recognition of gain.

‘Sec. 1492. Exceptions.

‘SEC. 1491. RECOGNITION OF GAIN.

‘In the case of any transfer of property by a United States person to a foreign corporation as paid-in surplus or as a contribution to capital, to a foreign estate or trust, or to a foreign partnership, for purposes of this subtitle (other than for purposes of section 679), such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of--

‘(1) the fair market value of the property so transferred, over

‘(2) the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor.

If a trust which is not a foreign trust becomes a foreign trust, such trust shall be treated for purposes of this section as having transferred, immediately before becoming a foreign trust, all of its assets to a foreign trust.’

(b) CONFORMING AMENDMENTS-

(1) Section 1057 is hereby repealed.

(2) Section 1492 is amended to read as follows:

‘SEC. 1492. EXCEPTIONS.

‘The provisions of section 1491 shall not apply--

‘(1) if the transferee is an organization exempt from income tax under part I of subchapter F of chapter 1 (other than an organization described in section 401(a)),

‘(2) to a transfer described in section 367, or

‘(3) to any other transfer, to the extent provided in regulations in accordance with principles similar to the principles of section 367 or otherwise consistent with the purpose of section 1491.’

(3) Section 1494 is hereby repealed.

(4) Paragraph (8) of section 6501(c) is amended by inserting ‘or on any transfer by reason of section 1491’ after ‘section 367’.

(5) Subsection (a) of section 6038B is amended by striking ‘or’ at the end of paragraph (1), by adding ‘or’ at the end of paragraph (2), and by inserting after paragraph (2) the following new paragraph:

‘(3) makes any transfer described in section 1491,’.

(6) The table of sections for part IV of subchapter O of chapter 1 is amended by striking the item relating to section 1057.

(7) The table of chapters for subtitle A is amended by striking ‘Tax on’ in the item relating to chapter 5 and inserting ‘Treatment of’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to transfers after December 31, 1996.

SEC. 304. MODIFICATION OF SECTION 367(b).

(a) GENERAL RULE- Paragraph (1) of section 367(b) is amended to read as follows:

‘(1) IN GENERAL- In the case of any transaction described in section 332, 351, 354, 355, 356, or 361 in which the status of a foreign corporation as a corporation is a general condition for nonrecognition by 1 or more of the parties to the transaction, income shall be required to be recognized to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes. This subsection shall not apply to a transaction in which the foreign corporation is not treated as a corporation under subsection (a)(1).’

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to transfers after December 31, 1996.

SEC. 305. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO ORGANIZATION OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK IN SUCH CORPORATIONS.

(a) IN GENERAL- Subsection (a) of section 6046 (relating to returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock) is amended to read as follows:

‘(a) REQUIREMENT OF RETURN-

‘(1) IN GENERAL- A return complying with the requirements of subsection (b) shall be made by--

‘(A) each United States citizen or resident who becomes an officer or director of a foreign corporation if a United States person (as defined in section 7701(a)(30)) meets the stock ownership requirements of paragraph (2) with respect to such corporation,

‘(B) each United States person--

‘(i) who acquires stock which, when added to any stock owned on the date of such acquisition, meets the stock ownership requirements of paragraph (2) with respect to a foreign corporation, or

‘(ii) who acquires stock which, without regard to stock owned on the date of such acquisition, meets the stock ownership requirements of paragraph (2) with respect to a foreign corporation,

‘(C) each person (not described in subparagraph (B)) who is treated as a United States shareholder under section 953(c) with respect to a foreign corporation, and

‘(D) each person who becomes a United States person while meeting the stock ownership requirements of paragraph (2) with respect to stock of a foreign corporation.

In the case of a foreign corporation with respect to which any person is treated as a United States shareholder under section 953(c), subparagraph (A) shall be treated as including a reference to each United States person who is an officer or director of such corporation.

‘(2) STOCK OWNERSHIP REQUIREMENTS- A person meets the stock ownership requirements of this paragraph with respect to any corporation if such person owns 10 percent or more of--

‘(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or

‘(B) the total value of the stock of such corporation.’

(b) EFFECTIVE DATE- The amendment made by this section shall take effect on January 1, 1997.

SEC. 306. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN PERSONS.

(a) IN GENERAL- Section 263A(c) (relating to exceptions) is amended by adding at the end the following new paragraph:

‘(7) FOREIGN PERSONS- This section shall apply to any taxpayer who is not a United States person only for purposes of tax liability with respect to income which is effectively connected with the conduct of a trade or business in the United States.’

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1996. Section 481 of the Internal Revenue Code of 1986 shall not apply to any change in a method of accounting by reason of such amendment.

SEC. 307. EXTENSION OF PERIOD TO WHICH EXCESS FOREIGN TAXES MAY BE CARRIED.

(a) GENERAL RULE- Subsection (c) of section 904 (relating to carryback and carryover of excess tax paid) is amended--

(1) by inserting ‘in the third preceding taxable year,’ before ‘in the second preceding taxable year’, and

(2) by striking ‘in the first, second, third, fourth, or fifth’ and inserting ‘in any of the first 15’.

(b) EXCESS EXTRACTION TAXES- Paragraph (1) of section 907(f) is amended--

(1) by inserting ‘in the third preceding taxable year,’ before ‘in the second preceding taxable year’, and

(2) by striking ‘in the first, second, third, fourth, or fifth’ and inserting ‘in any of the first 15’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to excess foreign taxes for taxable years beginning after December 31, 1996.

SEC. 308. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

(a) GENERAL RULE- Section 904 is amended by redesignating subsections (g), (h), (i), and (j) as subsections (h), (i), (j), and (k), respectively, and by inserting after subsection (f) the following new subsection:

‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC LOSS-

‘(1) GENERAL RULE- For purposes of this subpart, in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 1996, that portion of the taxpayer’s taxable income from sources within the United States for each succeeding taxable year which is equal to the lesser of--

‘(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or

‘(B) 50 percent of the taxpayer’s taxable income from sources within the United States for such succeeding taxable year,

shall be treated as income from sources without the United States (and not as income from sources within the United States).

‘(2) OVERALL DOMESTIC LOSS DEFINED- For purposes of this subsection--

‘(A) IN GENERAL- The term ‘overall domestic loss’ means any domestic loss to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding taxable year by reason of a carryback. For purposes of the preceding sentence, the term ‘domestic loss’ means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year).

‘(B) TAXPAYER MUST HAVE ELECTED FOREIGN TAX CREDIT FOR YEAR OF LOSS- The term ‘overall domestic loss’ shall not include any loss for any taxable year unless the taxpayer chose the benefits of this subpart for such taxable year.

‘(3) CHARACTERIZATION OF SUBSEQUENT INCOME-

‘(A) IN GENERAL- Any income from sources within the United States that is treated as income from sources without the United States under paragraph (1) shall be allocated among and increase the income categories in proportion to the loss from sources within the United States previously allocated to those income categories.

‘(B) INCOME CATEGORY- For purposes of this paragraph, the term ‘income category’ has the meaning given to such term by subsection (f)(5)(E)(i).

‘(4) COORDINATION WITH SUBSECTION (f)- The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this subsection with the provisions of subsection (f).’

(b) CONFORMING AMENDMENT- Subparagraph (A) of section 936(a)(2) is amended by striking ‘section 904(f)’ and inserting ‘subsections (f) and (g) of section 904’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to losses for taxable years beginning after December 31, 1996.

SEC. 309. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL TRANSPORTATION SERVICES.

(a) SOURCING RULES-

(1) IN GENERAL- Section 861(a)(3) is amended by adding at the end the following new flush sentence:

‘In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual’s temporary presence in the United States as a member of the crew of a foreign aircraft or vessel engaged in transportation between the United States and a foreign country or a possession of the United States.’

(2) TRANSPORTATION INCOME- Subparagraph (B) of section 863(c)(2) is amended by inserting ‘the taxpayer is a citizen or resident alien and’ after ‘unless’.

(b) EXCLUSION FROM INCOME- Section 872(b) is amended by redesignating paragraphs (6) and (7) as paragraphs (7) and (8), respectively, and by inserting after paragraph (5) the following new paragraph:

‘(6) PERSONAL SERVICES OF CREW MEMBERS- Income derived by an individual resident of a foreign country from personal services as an individual crew member on board a vessel or aircraft to which paragraph (1) or (2) applies.’

(c) PRESENCE IN UNITED STATES-

(1) IN GENERAL- Paragraph (7) of section 7701(b) is amended by adding at the end the following new subparagraph:

‘(D) CREW MEMBERS TEMPORARILY PRESENT- If an individual is temporarily present in the United States as a member of

the crew of a foreign aircraft or vessel engaged in transportation between the United States and a foreign country or a possession of the United States, such individual shall not be treated as present in the United States on any such day.’

(2) CONFORMING AMENDMENT- Subparagraph (A) of section 7701(b)(7) is amended by striking ‘or (C)’ and inserting ‘, (C), or (D)’.

(d) EFFECTIVE DATES-

(1) IN GENERAL- The amendments made by this section shall apply to remuneration for services performed after the date of the enactment of this Act.

(2) PRESENCE- The amendment made by subsection (c) shall apply to taxable years beginning after December 31, 1996.

SEC. 310. EXPORT PROPERTY OF FSC TO INCLUDE COMPUTER SOFTWARE.

(a) IN GENERAL- Section 927(a)(2) is amended by adding at the end the following new sentence: ‘Computer software (whether or not patented) shall not be treated as described in subparagraph (B).’

(b) EFFECTIVE DATE- The amendment made by this section shall apply to sales, exchanges, or other dispositions after the date of the enactment of this Act.

SEC. 311. SPECIAL RULES RELATING TO FINANCIAL SERVICES INCOME.

(a) EXCEPTION FOR INTEREST ON CERTAIN SECURITIES- Subparagraph (B) of section 904(d)(2) (relating to high withholding tax interest) is amended by redesignating clause (iii) as clause (iv) and by inserting after clause (ii) the following new clause:

‘(iii) EXCEPTION FOR INTEREST ON DEALER PROPERTY- The term ‘high withholding tax interest’ shall not include any interest on a security (within the meaning of section 475(c)(2)) which is received or accrued by a person that holds the security in connection with the holder’s activities as a dealer in securities (within the meaning of section 475(c)(1)).’

(b) DE MINIMIS RULE- Subparagraph (C) of section 904(d)(2) (relating to financial services income) is amended by adding at the end the following new clause:

‘(iv) DE MINIMIS RULE- If the financial services income (as defined by clause (i)) of any person exceeds 80 percent of gross income, the entire gross income for the taxable year shall be treated as financial services income.’

(c) EXCEPTION FOR INCOME ON DEALER PROPERTY- Subsection 904(g) is amended by redesignating paragraph (11) as paragraph (12) and by adding after paragraph (10) the following new paragraph:

‘(11) EXCEPTION FOR INCOME ON DEALER PROPERTY- Paragraph (1) shall not apply to any amount derived from a United States-owned foreign corporation that is derived from income on a security (within the meaning of section 475(c)(2)) which is received or accrued by a person that holds the security in connection with the holder’s activities as a dealer in securities (within the meaning of section 475(c)(1)).’

(d) EFFECTIVE DATES-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

(2) DEEMED PAID CREDITS- In the case of any credit under section 901 of the Internal Revenue Code of 1986 by reason of section 902 or 960 of such Code, the amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1996, and to taxable years of United States shareholders in such corporations with or within which such taxable years of foreign corporations end.

SEC. 312. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

(a) IN GENERAL- Section 956(c)(2) is amended by striking ‘and’ at the end of subparagraph (H), by striking the period at the end of subparagraph (I) and inserting a semicolon, and by adding at the end the following new subparagraphs:

‘(J) deposits of cash or securities made or received on commercial terms in the ordinary course of a United States or foreign person’s business as a dealer in securities or in commodities, but only to the extent such deposits are made or received as collateral or margin for (i) a securities loan, notional principal contract, options contract, forward contract, or futures contract, or (ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin;

‘(K) an obligation of a United States person to the extent the principal amount of the obligation does not exceed the fair market value of readily marketable securities sold or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a United States or foreign person which is a dealer in securities or commodities; and

‘(L) securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if (i) the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and (ii) the dealer disposes of the securities (or they mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business.

For purposes of subparagraphs (J), (K), and (L), the term ‘dealer in securities’ has the meaning given such term by section 475(c)(1), and the term ‘dealer in commodities’ means a futures commission merchant or any person which would be a dealer in securities if securities under section 475(c)(2) included commodities, evidences of an interest in commodities, and derivative instruments in respect of commodities (other than any activity gain or loss from which is described in section 1256(a)(3)).’

(b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1996, and to taxable years of United States shareholders or with or within which such taxable years of foreign corporations end.

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