[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 599 Introduced in House (IH)]
105th CONGRESS
1st Session
H. R. 599
To amend the Internal Revenue Code of 1986 to reduce tax benefits for
foreign corporations, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
February 5, 1997
Mr. Evans (for himself, Mr. Lipinski, Mr. Frank of Massachusetts, Mr.
Sabo, Mr. Dellums, Mr. DeFazio, and Mr. Sanders) introduced the
following bill; which was referred to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to reduce tax benefits for
foreign corporations, 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.
This Act may be cited as the ``Corporate Welfare Reduction Act of
1997''.
SEC. 2. FOREIGN OIL AND GAS INCOME.
(a) Special Rules for Foreign Tax Credit With Respect to Foreign
Oil and Gas Income.--
(1) Certain taxes not creditable.--
(A) In general.--Subsection (a) of section 907 of
the Internal Revenue Code of 1986 (relating to
reduction in amount allowed as foreign tax under
section 901) is amended to read as follows:
``(a) Certain Taxes Not Creditable.--
``(1) In general.--For purposes of this subtitle, the term
`income, war profits, and excess profits taxes' shall not
include--
``(A) any taxes which are paid or accrued to any
foreign country with respect to foreign oil and gas
income and which are not imposed under a generally
applicable income tax law of such country, and
``(B) any taxes (not described in subparagraph (A))
which are paid or accrued to any foreign country with
respect to foreign oil and gas income to the extent
that the foreign law imposing such amount of tax is
structured, or in fact operates, so that the amount of
tax imposed with respect to foreign oil and gas income
will generally be materially greater, over a reasonable
period of time, than the amount generally imposed on
income that is not foreign oil and gas income.
In computing the amount not treated as tax under subparagraph
(B), such amount shall be treated as a deduction under the
foreign law.
``(2) Foreign oil and gas income.--For purposes of this
paragraph, the term `foreign oil and gas income' means the
amount of foreign oil and gas extraction income and foreign oil
related income.
``(3) Generally applicable income tax law.--For purposes of
this paragraph, the term `generally applicable income tax law'
means any law of a foreign country imposing an income tax if
such tax generally applies to all income from sources within
such foreign country--
``(A) without regard to the residence or
nationality of the person earning such income, and
``(B) in the case of any income earned by a
corporation, partnership, or other entity, without
regard to--
``(i) where such corporation, partnership,
or other entity is organized, and
``(ii) the residence or nationality of the
persons owning interests in such corporation,
partnership, or entity.''
(B) Conforming amendment.--Section 907 of such Code
is amended by striking subsections (b), (c)(3), (c)(4),
(c)(5), and (f).
(2) Separate baskets for foreign oil and gas extraction
income and foreign oil related income.--
(A) In general.--Paragraph (1) of section 904(d) of
such Code (relating to separate application of section
with respect to certain categories of income) is
amended by striking ``and'' at the end of subparagraph
(H), by redesignating subparagraph (I) as subparagraph
(K) and by inserting after subparagraph (H) the
following new subparagraphs:
``(I) foreign oil and gas extraction income,
``(J) foreign oil related income, and''.
(B) Definitions.--Paragraph (2) of section 904(d)
of such Code is amended by redesignating subparagraphs
(H) and (I) as subparagraphs (J) and (K), respectively,
and by inserting after subparagraph (G) the following
new subparagraphs:
``(H) Foreign oil and gas extraction income.--The
term `foreign oil and gas extraction income' has the
meaning given such term by section 907(c)(1). Such term
shall not include any dividend from a noncontrolled
section 902 corporation.
``(I) Foreign oil related income.--The term
`foreign oil related income' has the meaning given such
term by section 907(c)(2). Such term shall not include
any dividend from a noncontrolled section 902
corporation and any shipping income.''
(C) Conforming amendment.--Clause (i) of section
904(d)(3)(F) of such Code is amended by striking ``or
(E)'' and inserting ``(E), (I), or (J)''.
(3) Effective date.--
(A) In general.--Except as otherwise provided in
this paragraph, the amendments made by this subsection
shall apply to taxable years beginning after December
31, 1997.
(B) Disallowance rule.--
(i) Section 907(a) of such Code (as amended
by paragraph (1)) shall apply to taxes paid or
accrued after December 31, 1997, in taxable
years ending after such date.
(ii) In determining the amount of taxes
deemed to be paid in a taxable year beginning
after December 31, 1997, under section 902 or
960 of such Code, section 907(a) of such Code
(as amended by paragraph (1)) shall apply to
all taxes whether paid or accrued before, on,
or after December 31, 1997.
(C) Loss rule.--Notwithstanding the amendments made
by paragraph (1)(B), section 907(c)(4) of such Code
shall continue to apply with respect to foreign oil and
gas extraction losses for taxable years beginning
before January 1, 1998.
(D) Transitional rules.--
(i) Any taxes paid or accrued in a taxable
year beginning before January 1, 1998, with
respect to income which was described in
subparagraph (I) of section 904(d)(1) of such
Code (as in effect on the day before the date
of the enactment of this Act) shall be treated
as taxes paid or accrued with respect to
foreign oil and gas extraction income or
foreign oil related income (as the case may be)
to the extent such taxes were paid or accrued
with respect to such type of income.
(ii) Any unused oil and gas extraction
taxes which under section 907(f) of such Code
(as so in effect) would have been allowed as a
carryover to the taxpayer's first taxable year
beginning after December 31, 1997 (determined
without regard to the limitation of paragraph
(2) of such section 907(f) for such first
taxable year), shall be allowed as carryovers
under section 904(c) of such Code in the same
manner as if they were unused taxes under
section 904(c) with respect to foreign oil and
gas extraction income.
(b) Elimination of Deferral for Foreign Oil and Gas Extraction
Income.--
(1) General rule.--Paragraph (1) of section 954(g) of the
Internal Revenue Code of 1986 (defining foreign base company
oil related income) is amended to read as follows:
``(1) In general.--Except as otherwise provided in this
subsection, the term `foreign oil and gas income' means any
income of a kind which would be taken into account in
determining the amount of--
``(A) foreign oil and gas extraction income (as
defined in section 907(c)(1)), or
``(B) foreign oil related income (as defined in
section 907(c)(2)).''
(2) Conforming amendments.--
(A)(i) Subsections (a)(5), (b)(5), and (b)(8) of
section 954 of such Code are each amended by striking
``base company oil related income'' each place it
appears (including in the heading of subsection (b)(8))
and inserting ``oil and gas income''.
(ii) Subsection (b)(4) of section 954 of such Code
is amended by striking ``base company oil-related
income'' and inserting ``oil and gas income''.
(B) The subsection heading for subsection (g) of
section 954 of such Code is amended by striking
``Foreign Base Company Oil Related Income'' and
inserting ``Foreign Oil and Gas Income''.
(C) Subparagraph (A) of section 954(g)(2) of such
Code is amended by striking ``foreign base company oil
related income'' and inserting ``foreign oil and gas
income''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years of foreign corporations beginning
after December 31, 1997, and to taxable years of United States
shareholders in which or with which such taxable years of
foreign corporations end.
SEC. 3. TRANSFER PRICING.
(a) Authority of Secretary When Legal Limits on Transfer by
Taxpayer.--Section 482 of the Internal Revenue Code of 1986 (relating
to allocation of income and deductions among taxpayers) is amended by
adding at the end the following: ``The authority of the Secretary under
this section shall not be limited by any restriction (by any law or
agreement) on the ability of such interests, organizations, trades, or
businesses to transfer or receive money or other property.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 4. EXCLUSION OF FOREIGN EARNED INCOME USED FOR FOREIGN TUITION
COSTS IN LIEU OF $70,000 EXCLUSION, OTHER THAN FOR
EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS.
(a) In General.--Paragraph (1) of section 911(a) of the Internal
Revenue Code of 1986 (relating to exclusion from income) is amended by
striking ``foreign earned income'' and inserting ``applicable foreign-
earned amount''.
(b) Tuition Exclusion in Lieu of Income Exclusion.--Subsection (b)
of section 911 of such Code is amended--
(1) by redesignating paragraphs (1) and (2) as paragraphs
(2) and (3), respectively,
(2) by inserting after the heading the following new
paragraph:
``(1) Applicable foreign-earned amount.--For purposes of
this section, the term `applicable foreign-earned amount'
means--
``(A) foreign earned income, in the case of an
individual who is an employee of an organization
described in paragraph (3) or (4) of section 501(c) and
exempt from tax under section 501(a), and
``(B) the foreign tuition amount, in the case of an
individual not described in subparagraph (A).'', and
(3) by adding at the end the following new paragraphs:
``(4) Foreign tuition amount.--
``(A) In general.--For purposes of this section,
the term `foreign tuition amount' means so much of the
foreign earned income of the individual as does not
exceed the tuition paid by the individual during the
taxable year for the education of a dependent child--
``(i) in the country in which is located
the abode referred to in clause (i) or (ii) of
subsection (c)(2)(B),
``(ii) at an educational organization
described in section 170(b)(1)(A)(ii), and
``(iii) during the taxable year or during
the first 5 months of the next taxable year.
For purposes of this subparagraph, the term `education'
does not include education above the secondary school
level.
``(B) Dependent child.--For purposes of
subparagraph (A), the term `dependent child' means an
individual who is a son or daughter of the taxpayer and
is a dependent of the taxpayer (within the meaning of
section 152). Rules similar to the rules of section
152(b)(2) shall apply for purposes of this
subparagraph.
``(5) Special rule if employed by tax-exempt organization
for part of year.--For purposes of this subsection, a qualified
individual who is an employee described in paragraph (1)(A) for
less than the entire taxable year shall be treated, for the
taxable year--
``(A) as being such an employee, if such individual
was such an employee for at least a 6-month period
during the taxable year, and
``(B) as not being such an employee, if such
individual is not described in subparagraph (A).
An individual may elect to be treated as not described in
subparagraph (A) for the taxable year.''
(b) Conforming Amendments.--
(1) Paragraph (4) of section 86(f) of such Code is amended
by striking ``section 911(b)(1)'' and inserting ``section
911(b)(2)''.
(2) Subsection (b) of section 911 of such Code is amended
in the heading by striking ``Foreign Earned Income'' and
inserting ``Applicable Foreign-Earned Amount''.
(3) Paragraph (2) of section 911(b) of such Code (as
redesignated by this section) is amended in the heading by
striking ``Definition'' and inserting ``Foreign earned
income''.
(4) Subparagraph (E) of section 911(c)(3) of such Code is
amended by striking ``subsection (b)(2)'' and inserting
``subsection (b)(3)''.
(5) Paragraph (4) of section 911(d) of such Code is amended
by striking ``subsections (b)(2)(A) and'' and inserting
``subsections (b)(3)(A) and''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
SEC. 5. DISPOSITION OF STOCK IN DOMESTIC CORPORATIONS BY 10-PERCENT
FOREIGN SHAREHOLDERS.
(a) General Rule.--Subpart D of part II of subchapter N of chapter
1 of the Internal Revenue Code of 1986 (relating to miscellaneous
provisions) is amended by adding at the end the following new section:
``SEC. 899. DISPOSITION OF STOCK IN DOMESTIC CORPORATIONS BY 10-PERCENT
FOREIGN SHAREHOLDERS.
``(a) General Rule.--
``(1) Treatment as effectively connected with united states
trade or business.--For purposes of this title, if any
nonresident alien individual or foreign corporation is a 10-
percent shareholder in any domestic corporation, any gain or
loss of such individual or foreign corporation from the
disposition of any stock in such domestic corporation shall be
taken into account--
``(A) in the case of a nonresident alien
individual, under section 871(b)(1), or
``(B) in the case of a foreign corporation, under
section 882(a)(1),
as if the taxpayer were engaged during the taxable year in a
trade or business within the United States through a permanent
establishment in the United States and as if such gain or loss
were effectively connected with such trade or business and
attributable to such permanent establishment. Notwithstanding
section 865, any such gain or loss shall be treated as from
sources in the United States.
``(2) 26-percent minimum tax on nonresident alien
individuals.--
``(A) In general.--In the case of any nonresident
alien individual, the amount determined under section
55(b)(1)(A) shall not be less than 26 percent of the
lesser of--
``(i) the individual's alternative minimum
taxable income (as defined in section 55(b)(2))
for the taxable year, or
``(ii) the individual's net taxable stock
gain for the taxable year.
``(B) Net taxable stock gain.--For purposes of
subparagraph (A), the term `net taxable stock gain'
means the excess of--
``(i) the aggregate gains for the taxable
year from dispositions of stock in domestic
corporations with respect to which such
individual is a 10-percent shareholder, over
``(ii) the aggregate of the losses for the
taxable year from dispositions of such stock.
``(C) Coordination with section 897(a)(2).--Section
897(a)(2)(A) shall not apply to any nonresident alien
individual for any taxable year for which such
individual has a net taxable stock gain, but the amount
of such net taxable stock gain shall be increased by
the amount of such individual's net United States real
property gain (as defined in section 897(a)(2)(B)) for
such taxable year.
``(b) 10-Percent Shareholder.--
``(1) In general.--For purposes of this section, the term
`10-percent shareholder' means any person who at any time
during the shorter of--
``(A) the period beginning on January 1, 1997, and
ending on the date of the disposition, or
``(B) the 5-year period ending on the date of the
disposition,
owned 10 percent or more (by vote or value) of the stock in the
domestic corporation.
``(2) Constructive ownership.--
``(A) In general.--Section 318(a) (relating to
constructive ownership of stock) shall apply for
purposes of paragraph (1).
``(B) Modifications.--For purposes of subparagraph
(A)--
``(i) paragraph (2)(C) of section 318(a)
shall be applied by substituting `10 percent'
for `50 percent', and
``(ii) paragraph (3)(C) of section 318(a)
shall be applied--
``(I) by substituting `10 percent'
for `50 percent', and
``(II) in any case where such
paragraph would not apply but for
subclause (I), by considering a
corporation as owning the stock (other
than stock in such corporation) owned
by or for any shareholder of such
corporation in that proportion which
the value of the stock which such
shareholder owns in such corporation
bears to the value of all stock in such
corporation.
``(3) Treatment of stock held by certain partnerships.--
``(A) In general.--For purposes of this section,
if--
``(i) a partnership is a 10-percent
shareholder in any domestic corporation, and
``(ii) 10 percent or more of the capital or
profits interests in such partnership is held
(directly or indirectly) by nonresident alien
individuals or foreign corporations,
each partner in such partnership who is not otherwise a
10-percent shareholder in such corporation shall, with
respect to the stock in such corporation held by the
partnership, be treated as a 10-percent shareholder in
such corporation.
``(B) Exception.--
``(i) In general.--Subparagraph (A) shall
not apply with respect to stock in a domestic
corporation held by any partnership if, at all
times during the 5-year period ending on the
date of the disposition involved--
``(I) the aggregate bases of the
stock and securities in such domestic
corporation held by such partnership
were less than 25 percent of the
partnership's net adjusted asset cost,
and
``(II) the partnership did not own
50 percent or more (by vote or value)
of the stock in such domestic
corporation.
The Secretary may by regulations disregard any
failure to meet the requirements of subclause
(I) where the partnership normally met such
requirements during such 5-year period.
``(ii) Net adjusted asset cost.--For
purposes of clause (i), the term `net adjusted
asset cost' means--
``(I) the aggregate bases of all of
the assets of the partnership other
than cash and cash items, reduced by
``(II) the portion of the
liabilities of the partnership not
allocable (on a proportionate basis) to
assets excluded under subclause (I).
``(C) Exception not to apply to 50-percent
partners.--Subparagraph (B) shall not apply in the case
of any partner owning (directly or indirectly) more
than 50 percent of the capital or profits interests in
the partnership at any time during the 5-year period
ending on the date of the disposition.
``(D) Special rules.--For purposes of subparagraphs
(B) and (C)--
``(i) Treatment of predecessors.--Any
reference to a partnership or corporation shall
be treated as including a reference to any
predecessor thereof.
``(ii) Partnership not in existence.--If
any partnership was not in existence throughout
the entire 5-year period ending on the date of
the disposition, only the portion of such
period during which the partnership (or any
predecessor) was in existence shall be taken
into account.
``(E) Other pass-thru entities; tiered entities.--
Rules similar to the rules of the preceding provisions
of this paragraph shall also apply in the case of any
pass-thru entity other than a partnership and in the
case of tiered partnerships and other entities.
``(c) Coordination With Nonrecognition Provisions; Etc.--
``(1) Coordination with nonrecognition provisions.--
``(A) In general.--Except as provided in
subparagraph (B), any nonrecognition provision shall
apply for purposes of this section to a transaction
only in the case of--
``(i) an exchange of stock in a domestic
corporation for other property the sale of
which would be subject to taxation under this
chapter, or
``(ii) a distribution with respect to which
gain or loss would not be recognized under
section 336 if the sale of the distributed
property by the distributee would be subject to
tax under this chapter.
``(B) Regulations.--The Secretary shall prescribe
regulations (which are necessary or appropriate to
prevent the avoidance of Federal income taxes)
providing--
``(i) the extent to which nonrecognition
provisions shall, and shall not, apply for
purposes of this section, and
``(ii) the extent to which--
``(I) transfers of property in a
reorganization, and
``(II) changes in interests in, or
distributions from, a partnership,
trust, or estate,
shall be treated as sales of property at fair
market value.
``(C) Nonrecognition provision.--For purposes of
this paragraph, the term `nonrecognition provision'
means any provision of this title for not recognizing
gain or loss.
``(2) Certain other rules made applicable.--For purposes of
this section, rules similar to the rules of subsections (g) and
(j) of section 897 shall apply.
``(d) Certain Interest Treated as Stock.--For purposes of this
section--
``(1) any option or other right to acquire stock in a
domestic corporation,
``(2) the conversion feature of any debt instrument issued
by a domestic corporation, and
``(3) to the extent provided in regulations, any other
interest in a domestic corporation other than an interest
solely as creditor,
shall be treated as stock in such corporation.
``(e) Treatment of Certain Gain as a Dividend.--In the case of any
gain which would be subject to tax by reason of this section but for a
treaty and which results from any distribution in liquidation or
redemption, for purposes of this subtitle, such gain shall be treated
as a dividend to the extent of the earnings and profits of the domestic
corporation attributable to the stock. Rules similar to the rules of
section 1248(c) (determined without regard to paragraph (2)(D) thereof)
shall apply for purposes of the preceding sentence.
``(f) Regulations.--The Secretary shall prescribe such regulations
as may be appropriate to carry out the purposes of this section,
including--
``(1) regulations coordinating the provisions of this
section with the provisions of section 897, and
``(2) regulations aggregating stock held by a group of
persons acting together.''
(b) Withholding of Tax.--Subchapter A of chapter 3 of such Code is
amended by adding at the end the following new section:
``SEC. 1447. WITHHOLDING OF TAX ON CERTAIN STOCK DISPOSITIONS.
``(a) General Rule.--Except as otherwise provided in this section,
in the case of any disposition of stock in a domestic corporation by a
foreign person who is a 10-percent shareholder in such corporation, the
withholding agent shall deduct and withhold a tax equal to 10 percent
of the amount realized on the disposition.
``(b) Exceptions.--
``(1) Stock which is not regularly traded.--In the case of
a disposition of stock which is not regularly traded, a
withholding agent shall not be required to deduct and withhold
any amount under subsection (a) if--
``(A) the transferor furnishes to such withholding
agent an affidavit by such transferor stating, under
penalty of perjury, that section 899 does not apply to
such disposition because--
``(i) the transferor is not a foreign
person, or
``(ii) the transferor is not a 10-percent
shareholder, and
``(B) such withholding agent does not know (or have
reason to know) that such affidavit is not correct.
``(2) Stock which is regularly traded.--
``(A) In general.--Except as provided in
subparagraph (B), a withholding agent shall not be
required to deduct and withhold any amount under
subsection (a) with respect to any disposition of
regularly traded stock if such withholding agent does
not know (or have reason to know) that section 899
applies to such disposition.
``(B) Special rule where substantial disposition.--
If--
``(i) there is a disposition of regularly
traded stock in a corporation, and
``(ii) the amount of stock involved in such
disposition constitutes 1 percent or more (by
vote or value) of the stock in such
corporation,
subparagraph (A) shall not apply but paragraph (1)
shall apply as if the disposition involved stock which
was not regularly traded.
``(C) Notification by foreign person.--If section
899 applies to any disposition by a foreign person of
regularly traded stock, such foreign person shall
notify the withholding agent that section 899 applies
to such disposition.
``(3) Nonrecognition transactions.--A withholding agent
shall not be required to deduct and withhold any amount under
subsection (a) in any case where gain or loss is not recognized
by reason of section 899(c) (or the regulations prescribed
under such section).
``(c) Special Rule Where No Withholding.--If--
``(1) there is no amount deducted and withheld under this
section with respect to any disposition to which section 899
applies, and
``(2) the foreign person does not pay the tax imposed by
this subtitle to the extent attributable to such disposition on
the date prescribed therefor,
for purposes of determining the amount of such tax, the foreign
person's basis in the stock disposed of shall be treated as zero or
such other amount as the Secretary may determine (and, for purposes of
section 6501, the underpayment of such tax shall be treated as due to a
willful attempt to evade such tax).
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Withholding agent.--The term `withholding agent'
means--
``(A) the last United States person to have the
control, receipt, custody, disposal, or payment of the
amount realized on the disposition, or
``(B) if there is no such United States person, the
person prescribed in regulations.
``(2) Foreign person.--The term `foreign person' means any
person other than a United States person.
``(3) Regularly traded stock.--The term `regularly traded
stock' means any stock of a class which is regularly traded on
an established securities market.
``(4) Authority to prescribe reduced amount.--At the
request of the person making the disposition or the withholding
agent, the Secretary may prescribe a reduced amount to be
withheld under this section if the Secretary determines that to
substitute such reduced amount will not jeopardize the
collection of the tax imposed by section 871(b)(1) or
882(a)(1).
``(5) Other terms.--Except as provided in this section,
terms used in this section shall have the same respective
meanings as when used in section 899.
``(6) Certain rules made applicable.--Rules similar to the
rules of section 1445(e) shall apply for purposes of this
section.
``(e) Regulations.--The Secretary shall prescribe such regulations
as may be appropriate to carry out the purposes of this section,
including regulations coordinating the provisions of this section with
the provisions of sections 1445 and 1446.''
(c) Exception From Branch Profits Tax.--Subparagraph (C) of section
884(d)(2) of such Code is amended to read as follows:
``(C) gain treated as effectively connected with
the conduct of a trade or business within the United
States under--
``(i) section 897 in the case of the
disposition of a United States real property
interest described in section 897(c)(1)(A)(ii),
or
``(ii) section 899,''.
(d) Reports With Respect to Certain Distributions.--Paragraph (2)
of section 6038B(a) of such Code (relating to notice of certain
transfers to foreign persons) is amended by striking ``section 336''
and inserting ``section 302, 331, or 336''.
(e) Clerical Amendments.--
(1) The table of sections for subpart D of part II of
subchapter N of chapter 1 of such Code is amended by adding at
the end the following new item:
``Sec. 899. Dispositions of stock in
domestic corporations by 10-
percent foreign shareholders.''
(2) The table of sections for subchapter A of chapter 3 of
such Code is amended by adding at the end the following new
item:
``Sec. 1447. Withholding of tax on
certain stock dispositions.''
(f) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
dispositions after the date of the enactment of this Act,
except that section 1447 of such Code (as added by this
section) shall not apply to any disposition before the date 6
months after the date of the enactment of this Act.
(2) Coordination with treaties.--
(A) In general.--Sections 899 (other than
subsection (e) thereof) and 1447 of such Code (as added
by this section) shall not apply to any disposition if
such disposition is by a qualified resident of a
foreign country and the application of such sections to
such disposition would be contrary to any treaty
between the United States and such foreign country
which is in effect on the date of the enactment of this
Act and at the time of such disposition.
(B) Qualified resident.--For purposes of
subparagraph (A), the term ``qualified resident'' means
any resident of the foreign country entitled to the
benefits of the treaty referred to in subparagraph (A);
except that such term shall not include a corporation
unless such corporation is a qualified resident of such
country (as defined in section 884(e)(4) of such Code).
SEC. 6. PORTFOLIO DEBT.
(a) In General.--Section 871(h)(3) of the Internal Revenue Code of
1986 is amended to read as follows:
``(3) Portfolio interest to include only interest on
government obligations.--The term `portfolio interest' shall
include only interest paid on an obligation issued by a
governmental entity.''
(b) Conforming Amendments.--
(1) Section 881(c)(3) of such Code is amended--
(A) in subparagraph (A), by adding ``or'' at the
end, and
(B) by striking subparagraph (B) and redesignating
subparagraph (C) as subparagraph (B).
(2) Section 881(c)(4) of such Code is amended--
(A) by striking ``section 871(h)(4)'' and inserting
``section 871(h)(3) or (4)'', and
(B) in the heading, by inserting ``interest on non-
government obligations or'' after ``include''.
(c) Effective Date.--The amendments made by this section shall
apply to interest received after December 31, 1997, with respect to
obligations issued after such date.
SEC. 7. SOURCE OF INCOME FROM CERTAIN SALES OF INVENTORY PROPERTY.
(a) General Rule.--Subsection (b) of section 865 of the Internal
Revenue Code of 1986 (relating to exception for inventory property) is
amended to read as follows:
``(b) Inventory Property.--
``(1) Income attributable to production activity.--In the
case of income from the sale of inventory property produced (in
whole or in part) by the taxpayer--
``(A) a portion (determined under regulations) of
such income shall be allocated to production activity
(and sourced in the United States or outside the United
States depending on where such activity occurs), and
``(B) the remaining portion of such income shall be
sourced under the other provisions of this section.
The regulations prescribed under subparagraph (A) shall provide
that at least 50 percent of such income shall be allocated to
production activities.
``(2) Sales income.--
``(A) United states residents.--Income from the
sale of inventory property by a United States resident
shall be sourced outside the United States if--
``(i) the property is sold for use,
consumption, or disposition outside the United
States and an office or another fixed place of
business of the taxpayer outside the United
States participated materially in the sale, and
``(ii) such sale is not (directly or
indirectly) to an affiliate of the taxpayer.
``(B) Nonresident.--Income from the sale of
inventory property by a nonresident shall be sourced in
the United States if--
``(i) the taxpayer has an office or other
fixed place of business in the United States,
and
``(ii) such sale is through such office or
other fixed place of business.
This subparagraph shall not apply if the requirements of
clauses (i) and (ii) of subparagraph (A) are met with respect
to such sale.
``(3) Coordination with treaties.--For purposes of
paragraph (2)(A)(i), a United States resident shall not be
treated as having an office or fixed place of business in a
foreign country if a treaty prevents such country from imposing
an income tax on the income.''
(b) Effective Date.--The amendments made by this section shall
apply to income from sales occurring after December 31, 1997.
SEC. 8. ENHANCEMENT OF BENEFITS FOR FOREIGN SALES CORPORATIONS.
(a) In General.--Subsection (a) of section 923 of the Internal
Revenue Code of 1986 is amended--
(1) in paragraph (2), by striking ``32 percent'' and
inserting ``34 percent'', and
(2) in paragraph (3), by striking ``\16/23\'' and inserting
``\17/23\''.
(b) Special Rules Relating to Corporate Preference Items.--
Paragraph (4) of section 291(a) of such Code is amended--
(1) in subparagraph (A), by striking ```30 percent' for `32
percent''' and inserting ```32 percent' for `34 percent''', and
(2) in subparagraph (B), by striking ```\15/23\' for `\16/
23\''' and inserting ```\16/23\' for `\17/23\'''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 1997.
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