[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4986 Introduced in House (IH)]







106th CONGRESS
  2d Session
                                H. R. 4986

  To amend the Internal Revenue Code of 1986 to repeal the provisions 
     relating to foreign sales corporations (FSCs) and to exclude 
               extraterritorial income from gross income.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 27, 2000

  Mr. Archer 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 repeal the provisions 
     relating to foreign sales corporations (FSCs) and to exclude 
               extraterritorial income from gross income.

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

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

    Subpart C of part III of subchapter N of chapter 1 (relating to 
taxation of foreign sales corporations) is hereby repealed.

SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
before section 115 the following new section:

``SEC. 114. EXTRATERRITORIAL INCOME.

    ``(a) Exclusion.--Gross income shall not include extraterritorial 
income.
    ``(b) Exception.--Subsection (a) shall not apply to 
extraterritorial income which is not qualifying foreign trade income as 
determined under subpart E of part III of subchapter N.
    ``(c) Disallowance of Deductions.--
            ``(1) In general.--Any deduction of a taxpayer allocated 
        under paragraph (2) to extraterritorial income of the taxpayer 
        excluded from gross income under subsection (a) shall not be 
        allowed.
            ``(2) Allocation.--Any deduction of the taxpayer properly 
        apportioned and allocated to the extraterritorial income 
        derived by the taxpayer from any transaction shall be allocated 
        on a proportionate basis between--
                    ``(A) the extraterritorial income derived from such 
                transaction which is excluded from gross income under 
                subsection (a), and
                    ``(B) the extraterritorial income derived from such 
                transaction which is not so excluded.
    ``(d) Denial of Credits for Certain Foreign Taxes.--Notwithstanding 
any other provision of this chapter, no credit shall be allowed under 
this chapter for any income, war profits, and excess profits taxes paid 
or accrued with respect to extraterritorial income which is excluded 
from gross income under subsection (a).
    ``(e) Extraterritorial Income.--For purposes of this section, the 
term `extraterritorial income' means the gross income of the taxpayer 
attributable to foreign trading gross receipts (as defined in section 
942) of the taxpayer.''
    (b) Qualifying Foreign Trade Income.--Part III of subchapter N of 
chapter 1 is amended by inserting after subpart D the following new 
subpart:

              ``Subpart E--Qualifying Foreign Trade Income

                              ``Sec. 941. Qualifying foreign trade 
                                        income.
                              ``Sec. 942. Foreign trading gross 
                                        receipts.
                              ``Sec. 943. Other definitions and special 
                                        rules.

``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

    ``(a) Qualifying Foreign Trade Income.--For purposes of this 
subpart and section 114--
            ``(1) In general.--The term `qualifying foreign trade 
        income' means, with respect to any transaction, the amount of 
        gross income which, if excluded, will result in a reduction of 
        the taxable income of the taxpayer from such transaction equal 
        to the greatest of--
                    ``(A) 30 percent of the foreign sale and leasing 
                income derived by the taxpayer from such transaction,
                    ``(B) 1.2 percent of the foreign trading gross 
                receipts derived by the taxpayer from the transaction, 
                or
                    ``(C) 15 percent of the foreign trade income 
                derived by the taxpayer from the transaction.
        In no event shall the amount determined under subparagraph (B) 
        exceed 200 percent of the amount determined under subparagraph 
        (C).
            ``(2) Alternative computation.--A taxpayer may compute its 
        qualifying foreign trade income under a subparagraph of 
        paragraph (1) other than the subparagraph which results in the 
        greatest amount of such income.
            ``(3) Limitation on use of foreign trading gross receipts 
        method.--If any person computes its qualifying foreign trade 
        income from any transaction with respect to any property under 
        paragraph (1)(B), the qualifying foreign trade income of any 
        related person with respect to any transaction involving such 
        property shall be zero.
            ``(4) Rules for marginal costing.--The Secretary shall 
        prescribe regulations setting forth rules for the allocation of 
        expenditures in computing foreign trade income under paragraph 
        (1)(C) in those cases where a taxpayer is seeking to establish 
        or maintain a market for qualifying foreign trade property.
            ``(5) Participation in international boycotts, etc.--Under 
        regulations prescribed by the Secretary, the qualifying foreign 
        trade income of a taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                    ``(A) an amount equal to such income multiplied by 
                the international boycott factor determined under 
                section 999, and
                    ``(B) any illegal bribe, kickback, or other payment 
                (within the meaning of section 162(c)) paid by or on 
                behalf of the taxpayer directly or indirectly to an 
                official, employee, or agent in fact of a government.
    ``(b) Foreign Trade Income.--
            ``(1) In general.--For purposes of this subpart, the term 
        `foreign trade income' means the taxable income of the taxpayer 
        attributable to foreign trading gross receipts of the taxpayer.
            ``(2) Special rule for cooperatives.--In any case in which 
        an organization to which part I of subchapter T applies which 
        is engaged in the marketing of agricultural or horticultural 
        products sells qualifying foreign trade property, in computing 
        the taxable income of such cooperative, there shall not be 
        taken into account any deduction allowable under subsection (b) 
        or (c) of section 1382 (relating to patronage dividends, per-
        unit retain allocations, and nonpatronage distributions).
    ``(c) Foreign Sale and Leasing Income.--For purposes of this 
section, the term `foreign sale and leasing income' means, with respect 
to any transaction--
            ``(1) foreign trade income properly allocable to 
        activities--
                    ``(A) which are described in paragraph (2)(A)(i) or 
                (3) of section 942(b), and
                    ``(B) which are performed by the taxpayer (or any 
                person acting under a contract with such taxpayer) 
                outside the United States, and
            ``(2) foreign trade income derived by the taxpayer from the 
        lease or rental of qualifying foreign trade property for use by 
        the lessee outside the United States.
Foreign sale and leasing income shall not include any income properly 
allocable to excluded property described in subparagraph (B) of section 
943(a)(3) (relating to intangibles).

``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

    ``(a) Foreign Trading Gross Receipts.--
            ``(1) In general.--Except as otherwise provided in this 
        section, for purposes of this subpart, the term `foreign 
        trading gross receipts' means the gross receipts of the 
        taxpayer which are--
                    ``(A) from the sale, exchange, or other disposition 
                of qualifying foreign trade property,
                    ``(B) from the lease or rental of qualifying 
                foreign trade property for use by the lessee outside 
                the United States,
                    ``(C) for services which are related and subsidiary 
                to--
                            ``(i) any sale, exchange, or other 
                        disposition of qualifying foreign trade 
                        property by such taxpayer, or
                            ``(ii) any lease or rental of qualifying 
                        foreign trade property described in 
                        subparagraph (B) by such taxpayer,
                    ``(D) for engineering or architectural services for 
                construction projects located (or proposed for 
                location) outside the United States, or
                    ``(E) for the performance of managerial services 
                for a person other than a related person in furtherance 
                of the production of foreign trading gross receipts 
                described in subparagraph (A), (B), or (C).
        Subparagraph (E) shall not apply to a taxpayer for any taxable 
        year unless at least 50 percent of its foreign trading gross 
        receipts (determined without regard to this sentence) for such 
        taxable year is derived from activities described in 
        subparagraph (A), (B), or (C).
            ``(2) Certain receipts excluded on basis of use; subsidized 
        receipts excluded.--The term `foreign trading gross receipts' 
        shall not include receipts of a taxpayer from a transaction 
        if--
                    ``(A) the qualifying foreign trade property or 
                services--
                            ``(i) are for ultimate use in the United 
                        States, or
                            ``(ii) are for use by the United States or 
                        any instrumentality thereof and such use of 
                        qualifying foreign trade property or services 
                        is required by law or regulation, or
                    ``(B) such transaction is accomplished by a subsidy 
                granted by the United States or any instrumentality 
                thereof.
            ``(3) Election to exclude certain receipts.--The term 
        `foreign trading gross receipts' shall not include gross 
        receipts of a taxpayer from a transaction with respect to any 
        property if the taxpayer elects not to have such receipts taken 
        into account for purposes of this subpart.
    ``(b) Foreign Economic Process Requirements.--
            ``(1) In general.--Except as provided in subsection (c), a 
        taxpayer shall be treated as having foreign trading gross 
        receipts from any transaction only if economic processes with 
        respect to such transaction take place outside the United 
        States as required by paragraph (2).
            ``(2) Requirement.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to the gross receipts of 
                a taxpayer derived from any transaction if--
                            ``(i) such taxpayer (or any person acting 
                        under a contract with such taxpayer) has 
                        participated outside the United States in the 
                        solicitation (other than advertising), the 
                        negotiation, or the making of the contract 
                        relating to such transaction, and
                            ``(ii) the foreign direct costs incurred by 
                        the taxpayer attributable to the transaction 
                        equal or exceed 50 percent of the total direct 
                        costs attributable to the transaction.
                    ``(B) Alternative 85-percent test.--A taxpayer 
                shall be treated as satisfying the requirements of 
                subparagraph (A)(ii) with respect to any transaction 
                if, with respect to each of at least 2 subparagraphs of 
                paragraph (3), the foreign direct costs incurred by 
                such taxpayer attributable to activities described in 
                such subparagraph equal or exceed 85 percent of the 
                total direct costs attributable to activities described 
                in such subparagraph.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Total direct costs.--The term `total 
                        direct costs' means, with respect to any 
                        transaction, the total direct costs incurred by 
                        the taxpayer attributable to activities 
                        described in paragraph (3) performed at any 
                        location by the taxpayer or any person acting 
                        under a contract with such taxpayer.
                            ``(ii) Foreign direct costs.--The term 
                        `foreign direct costs' means, with respect to 
                        any transaction, the portion of the total 
                        direct costs which are attributable to 
                        activities performed outside the United States.
            ``(3) Activities relating to qualifying foreign trade 
        property.--The activities described in this paragraph are any 
        of the following with respect to qualifying foreign trade 
        property--
                    ``(A) advertising and sales promotion,
                    ``(B) the processing of customer orders and the 
                arranging for delivery,
                    ``(C) transportation from the time of acquisition 
                by the taxpayer (or, in the case of a commission 
                relationship, from the beginning of such relationship 
                for such transaction) to the delivery to the customer,
                    ``(D) the determination and transmittal of a final 
                invoice or statement of account and the receipt of 
                payment, and
                    ``(E) the assumption of credit risk.
            ``(4) Economic processes performed by related persons.--A 
        taxpayer shall be treated as meeting the requirements of this 
        subsection with respect to any transaction involving any 
        property if any related person has met such requirements in 
        such transaction or any other transaction involving such 
        property.
    ``(c) Exception From Foreign Economic Process Requirement.--
            ``(1) In general.--The requirements of subsection (b) shall 
        be treated as met for any taxable year if the foreign trading 
        gross receipts of the taxpayer for such year do not exceed 
        $5,000,000.
            ``(2) Receipts of related persons aggregated.--All related 
        persons shall be treated as one person for purposes of 
        paragraph (1), and the limitation under paragraph (1) shall be 
        allocated among such persons in a manner provided in 
        regulations prescribed by the Secretary.
            ``(3) Special rule for pass-thru entities.--In the case of 
        a partnership, S corporation, or other pass-thru entity, the 
        limitation under paragraph (1) shall apply with respect to the 
        partnership, S corporation, or entity and with respect to each 
        partner, shareholder, or other owner.

``SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

    ``(a) Qualifying Foreign Trade Property.--For purposes of this 
subpart--
            ``(1) In general.--The term `qualifying foreign trade 
        property' means property--
                    ``(A) manufactured, produced, grown, or extracted 
                within or outside the United States,
                    ``(B) held primarily for sale, lease, or rental, in 
                the ordinary course of trade or business for direct 
                use, consumption, or disposition outside the United 
                States, and
                    ``(C) not more than 50 percent of the fair market 
                value of which is attributable to articles 
                manufactured, produced, grown, or extracted outside the 
                United States or other value added outside the United 
                States.
        For purposes of subparagraph (C), the fair market value of any 
        article imported into the United States shall be its appraised 
        value, as determined by the Secretary under section 402 of the 
        Tariff Act of 1930 (19 U.S.C. 1401a) in connection with its 
        importation.
            ``(2) U.S. taxation to ensure consistent treatment.--
        Property which (without regard to this paragraph) is qualifying 
        foreign trade property and which is manufactured, produced, 
        grown, or extracted outside the United States shall be treated 
        as qualifying foreign trade property only if it is 
        manufactured, produced, grown, or extracted by--
                    ``(A) a domestic corporation,
                    ``(B) an individual who is a citizen or resident of 
                the United States,
                    ``(C) a foreign corporation with respect to which 
                an election under subsection (e) (relating to foreign 
                corporations electing to be subject to United States 
                taxation) is in effect, or
                    ``(D) a partnership or other pass-thru entity all 
                of the partners or owners of which are described in 
                subparagraph (A), (B), or (C).
        Except as otherwise provided by the Secretary, tiered 
        partnerships or pass-thru entities shall be treated as 
        described in subparagraph (D) if each of the partnerships or 
        entities is directly or indirectly wholly owned by persons 
        described in subparagraph (A), (B), or (C).
            ``(3) Excluded property.--The term `qualifying foreign 
        trade property' shall not include--
                    ``(A) property leased or rented by the taxpayer for 
                use by any related person,
                    ``(B) patents, inventions, models, designs, 
                formulas, or processes whether or not patented, 
                copyrights (other than films, tapes, records, or 
                similar reproductions, and other than computer software 
                (whether or not patented), for commercial or home use), 
                goodwill, trademarks, trade brands, franchises, or 
                other like property,
                    ``(C) oil or gas (or any primary product thereof),
                    ``(D) products the transfer of which is prohibited 
                or curtailed to effectuate the policy set forth in 
                paragraph (2)(C) of section 3 of Public Law 96-72, or
                    ``(E) any unprocessed timber which is a softwood.
        For purposes of subparagraph (E), the term `unprocessed timber' 
        means any log, cant, or similar form of timber.
            ``(4) Property in short supply.--If the President 
        determines that the supply of any property described in 
        paragraph (1) is insufficient to meet the requirements of the 
        domestic economy, the President may by Executive order 
        designate the property as in short supply. Any property so 
        designated shall not be treated as qualifying foreign trade 
        property during the period beginning with the date specified in 
        the Executive order and ending with the date specified in an 
        Executive order setting forth the President's determination 
        that the property is no longer in short supply.
    ``(b) Other Definitions and Rules.--For purposes of this subpart--
            ``(1) Transaction.--
                    ``(A) In general.--The term `transaction' means--
                            ``(i) any sale, exchange, or other 
                        disposition,
                            ``(ii) any lease or rental, and
                            ``(iii) any furnishing of services.
                    ``(B) Grouping of transactions.--To the extent 
                provided in regulations, any provision of this subpart 
                which, but for this subparagraph, would be applied on a 
                transaction-by-transaction basis may be applied by the 
                taxpayer on the basis of groups of transactions based 
                on product lines or recognized industry or trade usage. 
                Such regulations may permit different groupings for 
                different purposes.
            ``(2) United states defined.--The term `United States' 
        includes the Commonwealth of Puerto Rico. The preceding 
        sentence shall not apply for purposes of determining whether a 
        corporation is a domestic corporation.
            ``(3) Related person.--A person shall be related to another 
        person if such persons are treated as a single employer under 
        subsection (a) or (b) of section 52 or subsection (m) or (o) of 
        section 414.
            ``(4) Gross and taxable income.--Section 114 shall not be 
        taken into account in determining the amount of gross income or 
        foreign trade income from any transaction.
    ``(c) Source Rule.--Under regulations, the foreign trade income of 
a taxpayer from any transaction which is treated as from sources 
without the United States shall not exceed--
            ``(1) in the case of a taxpayer computing its qualifying 
        foreign trade income under section 941(a)(1)(B), the amount of 
        the taxpayer's foreign trade income which would (but for this 
        subsection) be treated as from sources without the United 
        States if the foreign trade income were reduced by an amount 
        equal to 4 percent of the foreign trading gross receipts with 
        respect to the transaction, and
            ``(2) in the case of a taxpayer computing its qualifying 
        foreign trade income under section 941(a)(1)(C), 50 percent of 
        the amount of the taxpayer's foreign trade income which would 
        (but for this subsection) be treated as from sources without 
        the United States.
    ``(d) Treatment of Withholding Taxes.--
            ``(1) In general.--For purposes of section 114(d), any 
        withholding tax (as defined in section 901(k)(1)(B)) shall not 
        be treated as paid or accrued with respect to extraterritorial 
        income which is excluded from gross income under section 
        114(a).
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        taxpayer with respect to extraterritorial income from any 
        transaction if the taxpayer computes its qualifying foreign 
        trade income with respect to the transaction under section 
        941(a)(1)(A).
    ``(e) Election To Be Treated as Domestic Corporation.--
            ``(1) In general.--An applicable foreign corporation may 
        elect to be treated as a domestic corporation for all purposes 
        of this title if such corporation waives all benefits to such 
        corporation granted by the United States under any treaty.
            ``(2) Applicable foreign corporation.--For purposes of 
        paragraph (1), the term `applicable foreign corporation' means 
        any foreign corporation if, at the time of the election--
                    ``(A) such corporation manufactures, produces, 
                grows, or extracts property in the ordinary course of 
                such corporation's trade or business, or
                    ``(B) substantially all of the gross receipts of 
                such corporation may reasonably be expected to be 
                foreign trading gross receipts.
            ``(3) Period of election.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), an election under paragraph (1) shall 
                apply to the taxable year for which made and all 
                subsequent taxable years unless revoked.
                    ``(B) Termination.--If a corporation which made an 
                election under paragraph (1) for any taxable year fails 
                to meet the requirements of subparagraph (A) or (B) of 
                paragraph (2) for any subsequent taxable year, such 
                election shall not apply to any taxable year beginning 
                after such subsequent taxable year.
            ``(4) Special rules.--
                    ``(A) Requirements.--This subsection shall not 
                apply to an applicable foreign corporation unless such 
                corporation meets such requirements as the Secretary 
                shall prescribe to ensure that the taxes imposed by 
                this chapter on such corporation are paid.
                    ``(B) Effect of election or termination.--
                            ``(i) Election.--For purposes of section 
                        367, a foreign corporation making an election 
                        under this subsection shall be treated as 
                        transferring (as of the first day of the first 
                        taxable year to which the election applies) all 
                        of its assets to a domestic corporation in 
                        connection with an exchange to which section 
                        354 applies.
                            ``(ii) Termination.--For purposes of 
                        section 367, if--
                                    ``(I) an election is made by a 
                                corporation under paragraph (1) for any 
                                taxable year, and
                                    ``(II) such election ceases to 
                                apply for any subsequent taxable year,
                such corporation shall be treated as a domestic 
                corporation transferring (as of the 1st day of such 
                subsequent taxable year) all of its property to a 
                foreign corporation in connection with an exchange to 
                which section 354 applies.
                    ``(C) Eligibility for election.--The Secretary may 
                by regulation designate one or more classes of 
                corporations which may not make the election under this 
                subsection.
    ``(f) Rules Relating to Allocations of Qualifying Foreign Trade 
Income From Shared Partnerships.--If--
            ``(1) a partnership maintains a separate account for 
        transactions (to which this subpart applies) with each partner,
            ``(2) distributions to each partner with respect to such 
        transactions are based on the amounts in the separate account 
        maintained with respect to such partner, and
            ``(3) such partnership meets such other requirements as the 
        Secretary may by regulations prescribe,
then such partnership shall allocate to each partner items of income, 
gain, loss, and deduction (including qualifying foreign trade income) 
from any transaction to which this subpart applies on the basis of such 
separate account.''

SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

            (1) The second sentence of section 56(g)(4)(B)(i) is 
        amended by inserting before the period ``or under section 
        114''.
            (2) Section 275(a) is amended--
                    (A) by striking ``or'' at the end of paragraph 
                (4)(A), by striking the period at the end of paragraph 
                (4)(B) and inserting ``, or'', and by adding at the end 
                of paragraph (4) the following new subparagraph:
                    ``(C) such taxes are paid or accrued with respect 
                to qualifying foreign trade income (as defined in 
                section 941).'', and
                    (B) by adding at the end the following the 
                following new sentence: ``A rule similar to the rule of 
                section 943(d) shall apply for purposes of paragraph 
                (4)(C).''
            (3) Paragraph (3) of section 864(e) is amended--
                    (A) by striking ``For purposes of'' and inserting:
                    ``(A) In general.--For purposes of'', and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(B) Assets producing exempt extraterritorial 
                income.--For purposes of allocating and apportioning 
                any interest expense, there shall not be taken into 
                account any qualifying foreign trade property (as 
                defined in section 943(a)) which is located outside the 
                United States (as defined in section 943(b)(2)) and 
                which is held by the taxpayer for lease or rental in 
                the ordinary course of trade or business for use by the 
                lessee outside the United States (as so defined).''
            (4) Section 999(c)(1) is amended by inserting 
        ``941(a)(5),'' after ``908(a),''.
            (5) The table of sections for part III of subchapter B of 
        chapter 1 is amended by inserting before the item relating to 
        section 115 the following new item:

                              ``Sec. 114. Extraterritorial income.''
            (6) The table of subparts for part III of subchapter N of 
        chapter 1 is amended by striking the item relating to subpart E 
        and inserting the following new item:

                              ``Subpart E. Qualifying foreign trade 
                                        income.''

SEC. 5. EFFECTIVE DATE.

    (a) In General.--The amendments made by this Act shall apply to 
transactions after September 30, 2000.
    (b) No New FSCs.--No corporation may elect after September 30, 
2000, to be a FSC (as defined in section 922 of the Internal Revenue 
Code of 1986, as in effect before the amendments made by this Act).
    (c) Transition Period for Existing Foreign Sales Corporations.--
Except as provided in subsection (d)--
            (1) In general.--In the case of any transaction in the 
        ordinary course of trade or business involving a FSC (as so 
        defined) in existence on September 30, 2000, and at all times 
        thereafter, the amendments made by this Act shall not apply 
        to--
                    (A) transactions by the FSC before January 1, 2002, 
                and
                    (B) transactions by the FSC after December 31, 
                2001, pursuant to a binding contract (by the FSC) in 
                effect on September 30, 2000, and at all times 
                thereafter.
            (2) Election to have amendments apply earlier.--A taxpayer 
        may elect to have the amendments made by this Act apply to any 
        transaction by a FSC to which such amendments would apply but 
        for the application of paragraph (1). Such election shall be 
        effective for the taxable year for which made and all 
        subsequent taxable years, and, once made, may be revoked only 
        with the consent of the Secretary of the Treasury.
    (d) Consistent Treatment Required.--If, but for this subsection, 
the amendments made by this Act would apply to some but not all of the 
transactions in the ordinary course of trade or business by related 
parties involving the same property, such parties shall elect, at such 
time and in such manner as the Secretary of the Treasury shall 
prescribe, whether to have such amendments apply to all or none of such 
transactions.
                                 <all>