[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 315 Introduced in Senate (IS)]







105th CONGRESS
  1st Session
                                 S. 315

 To amend the Internal Revenue Code of 1986 to reduce tax benefits for 
             foreign corporations, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           February 12, 1997

  Mr. Harkin 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 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.
                                 <all>