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S. 586: Corporate Tax Dodging Prevention Act

The text of the bill below is as of Mar 9, 2017 (Introduced).


II

115th CONGRESS

1st Session

S. 586

IN THE SENATE OF THE UNITED STATES

March 9, 2017

(for himself and Mr. Schatz) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to modify the treatment of foreign corporations, and for other purposes.

1.

Short title

This Act may be cited as the Corporate Tax Dodging Prevention Act.

2.

Deferral of Active Income of Controlled Foreign Corporations

(a)

In general

Section 952 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

(e)

Special Application of Subpart

(1)

In general

For taxable years beginning after December 31, 2017, notwithstanding any other provision of this subpart, the term subpart F income means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.

(2)

Applicable rules

Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.

.

(b)

Treatment of previously deferred foreign income

(1)

In general

Section 965 of the Internal Revenue Code of 1986 is amended to read as follows:

965.

Inclusion of previously deferred foreign income

(a)

Inclusion as subpart F income

The subpart F income (determined under section 952 without regard to this section) of a controlled foreign corporation for its last taxable year beginning before January 1, 2018, shall be increased by the accumulated deferred foreign income of the corporation.

(b)

Accumulated deferred foreign income

For purposes of this section—

(1)

In general

The term accumulated deferred foreign income means the excess of—

(A)

the undistributed earnings of the controlled foreign corporation, over

(B)

the undistributed U.S. earnings of such controlled foreign corporation.

(2)

Undistributed earnings

(A)

In general

The term undistributed earnings means the earnings and profits of the controlled foreign corporation described in section 959(c)(3), determined—

(i)

as of the close of the taxable year described in subsection (a)(1),

(ii)

without diminution by reason of distributions made during such taxable year, and

(iii)

without regard to this section.

(B)

Special rule for current year distributions

For purposes of this chapter, any determination with respect to the treatment of distributions described in subparagraph (A)(ii) shall be made after the application of this section to the earnings and profits described in subparagraph (A).

(3)

Undistributed U.S. earnings

The term undistributed U.S. earnings has the meaning given the term post-1986 undistributed U.S. earnings in section 245(a)(5) (as in effect for taxable years beginning before 2018), determined—

(A)

without regard to post-1986 each place it appears in the matter before subparagraph (A), and

(B)

without regard to the last sentence thereof.

(c)

Election To pay liability in installments

(1)

In general

In the case of a United States shareholder with respect to one or more controlled foreign corporations to which subsection (a) applies, such United States shareholder may elect to pay the net tax liability under this section 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 due date for the first installment shall be the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year of such United States shareholder in which the increase in subpart F income under subsection (a) is included in such shareholder's gross income under section 951(a)(1) and the due date for each succeeding installment shall be 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—

(A)

an assessment of an addition to tax for failure to pay timely with respect to any installment required under this subsection,

(B)

a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case),

(C)

a cessation of business by the taxpayer, or

(D)

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 under this section in installments and a deficiency has been assessed, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency 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 deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This paragraph 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)

Rules relating to interest

(A)

In general

In the case of any net tax liability prorated to an installment under this subsection, the last date prescribed for payment of the tax for purposes of section 6601(a) shall be the last date for payment of the installment rather than the last date for payment of tax for the taxable year in which the net tax liability arose.

(B)

Special rules for deficiencies

(i)

Interest payable for entire period

Subparagraph (A) shall not apply to any deficiency prorated to an installment under paragraph (4).

(ii)

Payment of interest attributable to prior periods

In the case of a deficiency to which paragraph (4) applies, interest with respect to such deficiency which is assigned under paragraph (4) 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)

Period of assessment

Notwithstanding section 6501, the period for assessing the net tax liability under this section for which an election is made under paragraph (1) shall not expire before the due date for the last installment.

(7)

Election

Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year of such United States shareholder in which the increase in subpart F income under subsection (a) is included in such shareholder's gross income under section 951(a)(1) and shall be made in such manner as the Secretary may provide.

(8)

Net tax liability under this section

For purposes of this subsection—

(A)

In general

The net tax liability under this section with respect to any United States shareholder 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 without regard to this section.

(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.

(C)

Regulations

The Secretary shall prescribe such regulations as may be necessary for the determination under this subsection of the net tax liability under this section in the case of any pass-thru entity.

(d)

Regulations

The Secretary shall promulgate such regulations as necessary to carry out the purposes of this section, including regulations for the application of this section to pass-through entities all or part of which are owned by one or more domestic corporations.

.

(2)

Conforming amendments

(A)

Section 56(g)(4)(C) of the Internal Revenue Code of 1986 is amended by striking clause (vi).

(B)

Paragraph (3) of section 245(a) of such Code is amended—

(i)

by striking post-1986 in subparagraph (A), and

(ii)

by striking total post-1986 in subparagraph (B).

(C)

Paragraph (4) of section 245(a) of such Code is amended to read as follows:

(4)

Undistributed earnings

The term undistributed earnings means the amount of the earnings and profits of the controlled foreign corporation (computed in accordance with sections 964(a) and 986)—

(A)

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

(B)

without diminution by reason of dividends distributed during such taxable year.

.

(D)

Paragraph (5) of section 245(a) of such Code is amended—

(i)

by striking post-1986 both places it appears in the matter preceding subparagraph (A), and

(ii)

by striking Post-1986 undistributed in the heading thereof and inserting Undistributed.

(E)

Paragraph (6) of section 245(a) of such Code is amended—

(i)

by striking beginning after December 31, 1986 and inserting which is after the first taxable year of such corporation, and

(ii)

by striking post-1986 both places it appears.

(F)

Paragraph (2) of section 6601(b) of such Code is amended—

(i)

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

(ii)

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

(G)

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

Sec. 965. Inclusion of previously deferred foreign income.

.

(3)

Effective date

The amendments made by this subsection shall apply to taxable years beginning after December 31, 2017.

3.

Modifications of foreign tax credit rules applicable to large integrated oil companies which are dual capacity taxpayers

(a)

In general

Section 901 of the Internal Revenue Code of 1986 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

(n)

Special rules relating to large integrated oil companies which are dual capacity taxpayers

(1)

General rule

Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer which is a large integrated oil company to a foreign country or possession of the United States for any period shall not be considered a tax—

(A)

if, for such period, the foreign country or possession does not impose a generally applicable income tax, or

(B)

to the extent such amount exceeds the amount (determined in accordance with regulations) which—

(i)

is paid by such dual capacity taxpayer pursuant to the generally applicable income tax imposed by the country or possession, or

(ii)

would be paid if the generally applicable income tax imposed by the country or possession were applicable to such dual capacity taxpayer.

Nothing in this paragraph shall be construed to imply the proper treatment of any such amount not in excess of the amount determined under subparagraph (B).
(2)

Dual capacity taxpayer

For purposes of this subsection, the term dual capacity taxpayer means, with respect to any foreign country or possession of the United States, a person who—

(A)

is subject to a levy of such country or possession, and

(B)

receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession.

(3)

Generally applicable income tax

For purposes of this subsection—

(A)

In general

The term generally applicable income tax means an income tax (or a series of income taxes) which is generally imposed under the laws of a foreign country or possession on income derived from the conduct of a trade or business within such country or possession.

(B)

Exceptions

Such term shall not include a tax unless it has substantial application, by its terms and in practice, to—

(i)

persons who are not dual capacity taxpayers, and

(ii)

persons who are citizens or residents of the foreign country or possession.

(4)

Large integrated oil company

For purposes of this subsection, the term large integrated oil company means, with respect to any taxable year, an integrated oil company (as defined in section 291(b)(4)) which—

(A)

had gross receipts in excess of $1,000,000,000 for such taxable year, and

(B)

has an average daily worldwide production of crude oil of at least 500,000 barrels for such taxable year.

.

(b)

Effective date

(1)

In general

The amendments made by this section shall apply to taxes paid or accrued in taxable years beginning after the date of the enactment of this Act.

(2)

Contrary treaty obligations upheld

The amendments made by this section shall not apply to the extent contrary to any treaty obligation of the United States.

4.

Reinstitution of per country foreign tax credit

(a)

In general

Subsection (a) of section 904 of the Internal Revenue Code of 1986 is amended to read as follows:

(a)

Limitation

The amount of the credit in respect of the tax paid or accrued to any foreign country or possession of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to such taxpayer's entire taxable income for the same taxable year.

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after December 31, 2017.

5.

Treatment of foreign corporations managed and controlled in the United States as domestic corporations

(a)

In general

Section 7701 of the Internal Revenue Code of 1986 is amended by redesignating subsection (p) as subsection (q) and by inserting after subsection (o) the following new subsection:

(p)

Certain corporations managed and controlled in the United States treated as domestic for income tax

(1)

In general

Notwithstanding subsection (a)(4), in the case of a corporation described in paragraph (2) if—

(A)

the corporation would not otherwise be treated as a domestic corporation for purposes of this title, but

(B)

the management and control of the corporation occurs, directly or indirectly, primarily within the United States,

then, solely for purposes of chapter 1 (and any other provision of this title relating to chapter 1), the corporation shall be treated as a domestic corporation.
(2)

Corporation described

(A)

In general

A corporation is described in this paragraph if—

(i)

the stock of such corporation is regularly traded on an established securities market, or

(ii)

the aggregate gross assets of such corporation (or any predecessor thereof), including assets under management for investors, whether held directly or indirectly, at any time during the taxable year or any preceding taxable year is $50,000,000 or more.

(B)

General exception

A corporation shall not be treated as described in this paragraph if—

(i)

such corporation was treated as a corporation described in this paragraph in a preceding taxable year,

(ii)

such corporation—

(I)

is not regularly traded on an established securities market, and

(II)

has, and is reasonably expected to continue to have, aggregate gross assets (including assets under management for investors, whether held directly or indirectly) of less than $50,000,000, and

(iii)

the Secretary grants a waiver to such corporation under this subparagraph.

(3)

Management and control

(A)

In general

The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of a corporation is to be treated as occurring primarily within the United States.

(B)

Executive officers and senior management

Such regulations shall provide that—

(i)

the management and control of a corporation shall be treated as occurring primarily within the United States if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the United States, and

(ii)

individuals who are not executive officers and senior management of the corporation (including individuals who are officers or employees of other corporations in the same chain of corporations as the corporation) shall be treated as executive officers and senior management if such individuals exercise the day-to-day responsibilities of the corporation described in clause (i).

(C)

Corporations primarily holding investment assets

Such regulations shall also provide that the management and control of a corporation shall be treated as occurring primarily within the United States if—

(i)

the assets of such corporation (directly or indirectly) consist primarily of assets being managed on behalf of investors, and

(ii)

decisions about how to invest the assets are made in the United States.

.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning on or after the date which is 2 years after the date of the enactment of this Act.

6.

Restrictions on deduction for interest expense of members of financial reporting groups with excess domestic indebtedness

(a)

In general

Section 163 of the Internal Revenue Code of 1986 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

(n)

Restriction on deduction for interest expense of members of financial reporting groups with excess domestic indebtedness

(1)

In general

In the case of any corporation which is a member of an applicable financial reporting group the common parent of which is a foreign corporation, the deduction allowed under this chapter for interest paid or accrued by the corporation during the taxable year shall not exceed the applicable limitation for the taxable year.

(2)

Carryforward

Any amount disallowed under paragraph (1) for any taxable year shall be treated as interest paid or accrued in the succeeding taxable year.

(3)

Applicable limitation

For purposes of this subsection—

(A)

In general

The applicable limitation with respect to a taxpayer for any taxable year is the sum of—

(i)

the greater of—

(I)

the taxpayer’s allocable share of the applicable financial reporting group’s net interest expense for the taxable year, or

(II)

10 percent of the taxpayer’s adjusted taxable income for the taxable year, plus

(ii)

the excess limitation carryforwards to the taxable year from any preceding taxable year.

(B)

Limitation not less than includible interest

The applicable limitation under subparagraph (A) for any taxable year shall not be less than the amount of interest includible in the gross income of the taxpayer for the taxable year.

(C)

Excess limitation carryforward

If the applicable limitation of a taxpayer for any taxable year (determined without regard to carryforwards under subparagraph (A)(ii)) exceeds the interest paid or accrued by the taxpayer during the taxable year, such excess shall be an excess limitation carryforward to the 1st succeeding taxable year and the 2nd and 3rd succeeding taxable years to the extent not previously taken into account under this paragraph.

(4)

Allocable share of net interest expense

For purposes of this subsection—

(A)

In general

A taxpayer’s allocable share of an applicable financial reporting group’s net interest expense for any taxable year shall be the amount (not less than zero) which bears the same ratio to such net interest expense as—

(i)

the net earnings of the taxpayer, bears to

(ii)

the aggregate net earnings of all members of the applicable financial reporting group.

(B)

Net earnings

The term net earnings means, with respect to any taxpayer, the earnings of the taxpayer—

(i)

computed without regard to any reduction allowable for—

(I)

net interest expense,

(II)

taxes, or

(III)

depreciation, amortization, or depletion, and

(ii)

computed with such other adjustments as the Secretary may by regulations prescribe.

(C)

Burden on taxpayer

If a taxpayer elects not to compute its allocable share, or fails to establish to the satisfaction of the Secretary the amount of its allocable share, for any taxable year, the allocable share shall be zero.

(5)

Net interest expense and net earnings determinations

For purposes of this subsection—

(A)

Net interest expense

Any determination of net interest expense for any taxable year shall be made—

(i)

on the basis of the applicable financial statement of the applicable financial reporting group for the last financial reporting year ending with or within the taxable year, and

(ii)

under United States tax principles.

(B)

Net earnings

Any determination of net earnings for any taxable year shall be made on the basis of the applicable financial statement of the applicable financial reporting group for the last financial reporting year ending with or within the taxable year.

(C)

Applicable financial statement

The term applicable financial statement means a statement for financial reporting purposes which is made on the basis of—

(i)

generally accepted accounting principles,

(ii)

international financial reporting standards, or

(iii)

any other method specified by the Secretary in regulations.

A statement under clause (ii) or (iii) may be used as an applicable financial statement by a group only if there is no statement of the group under any preceding clause.
(6)

Applicable financial reporting group

For purposes of this subsection—

(A)

In general

The term applicable financial reporting group means, with respect to any corporation, a group of which such corporation is a member and which files an applicable financial statement.

(B)

Exception for groups with minimal domestic net interest expense

Such term shall not include a group if the aggregate net interest expense for which a deduction is allowable to all members of the group under this chapter (determined without regard to this subsection or any other limitation on deductibility of interest under this chapter) is less than $5,000,000.

(C)

Exception for certain financial entities

A corporation which is described in section 864(f)(4)(B), or is treated as described in section 864(f)(4)(B) by reason of paragraph (4)(C) or (5)(A) of section 864(f) (without regard to whether an election is made under such paragraph (5)(A)), shall not be treated as a member of an applicable financial reporting group of which it is otherwise a member and this subsection shall not apply to such corporation.

(7)

Other definitions and rules

For purposes of this subsection—

(A)

Adjusted taxable income

The term adjusted taxable income has the meaning given such term by subsection (j)(6)(A).

(B)

Net interest expense

The term net interest expense has the meaning given such term by subsection (j)(6)(B).

(C)

Treatment of affiliated group

All members of the same affiliated group (within the meaning of section 1504(a)) shall be treated as one taxpayer.

(8)

Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations providing—

(A)

for the coordination of the application of this subsection and other provisions of this chapter relating to the deductibility of interest,

(B)

for the waiver of certain adjustments required under United States tax principles in appropriate cases for purposes of applying this subsection,

(C)

for the determination of which financial institutions are eligible for the exception from membership in an applicable financial reporting group under paragraph (6)(C) and the application of this subsection to the other members of the group which are not so excepted, and

(D)

for the application of this subsection in the case of pass thru entities and for the treatment of pass thru entities as corporations in cases where necessary to prevent the avoidance of the purposes of this subsection.

.

(b)

Coordination with limitation on related party indebtedness

Paragraph (2) of section 163(j) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

(D)

Coordination with limitation on excess domestic indebtedness

This subsection shall not apply to any corporation for any taxable year to which subsection (n) applies to such corporation.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2017.

7.

Modifications to rules relating to inverted corporations

(a)

In general

Subsection (b) of section 7874 of the Internal Revenue Code of 1986 is amended to read as follows:

(b)

Inverted corporations treated as domestic corporations

(1)

In general

Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if—

(A)

such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting 80 percent for 60 percent, or

(B)

such corporation is an inverted domestic corporation.

(2)

Inverted domestic corporation

For purposes of this subsection, a foreign corporation shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—

(A)

the entity completes after May 8, 2014, the direct or indirect acquisition of—

(i)

substantially all of the properties held directly or indirectly by a domestic corporation, or

(ii)

substantially all of the assets of, or substantially all of the properties constituting a trade or business of, a domestic partnership, and

(B)

after the acquisition, more than 50 percent of the stock (by vote or value) of the entity is held—

(i)

in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or

(ii)

in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership.

(3)

Exception for corporations with substantial business activities in foreign country of organization

A foreign corporation described in paragraph (2) shall not be treated as an inverted domestic corporation if after the acquisition the expanded affiliated group which includes the entity has substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. For purposes of subsection (a)(2)(B)(iii) and the preceding sentence, the term substantial business activities shall have the meaning given such term under regulations in effect on May 8, 2014, except that the Secretary may issue regulations increasing the threshold percent in any of the tests under such regulations for determining if business activities constitute substantial business activities for purposes of this paragraph.

.

(b)

Conforming amendments

(1)

Clause (i) of section 7874(a)(2)(B) of the Internal Revenue Code of 1986 is amended by striking after March 4, 2003, and inserting after March 4, 2003, and before May 9, 2014,.

(2)

Subsection (c) of section 7874 of such Code is amended—

(A)

in paragraph (2)—

(i)

by striking subsection (a)(2)(B)(ii) and inserting subsections (a)(2)(B)(ii) and (b)(2)(B), and

(ii)

by inserting or (b)(2)(A) after (a)(2)(B)(i) in subparagraph (B),

(B)

in paragraph (3), by inserting or (b)(2)(B), as the case may be, after (a)(2)(B)(ii),

(C)

in paragraph (5), by striking subsection (a)(2)(B)(ii) and inserting subsections (a)(2)(B)(ii) and (b)(2)(B), and

(D)

in paragraph (6), by inserting or inverted domestic corporation, as the case may be, after surrogate foreign corporation.

(c)

Effective date

The amendments made by this section shall apply to taxable years ending after May 8, 2014.