[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1303 Introduced in House (IH)]






109th CONGRESS
  1st Session
                                H. R. 1303

To amend the Internal Revenue Code of 1986 to prevent corporations from 
 exploiting tax treaties to evade taxation of United States income and 
 to prevent manipulation of transfer prices by deflection of income to 
                              tax havens.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             March 15, 2005

  Mr. Doggett (for himself, Mr. Levin, Mr. Neal of Massachusetts, Mr. 
Lewis of Georgia, Mr. McDermott, Mr. McNulty, Mr. Jefferson, Mr. Stark, 
Mr. Abercrombie, Mr. Ackerman, Mr. Andrews, Mr. Baird, Ms. Baldwin, Ms. 
 Corrine Brown of Florida, Mr. Brown of Ohio, Mrs. Capps, Mr. Capuano, 
   Ms. Carson, Mr. Conyers, Mr. Crowley, Mr. Davis of Illinois, Mr. 
   DeFazio, Ms. DeGette, Mr. Delahunt, Ms. DeLauro, Mr. Edwards, Mr. 
 Evans, Mr. Farr, Mr. Fattah, Mr. Filner, Mr. Gene Green of Texas, Mr. 
Grijalva, Mr. Hastings of Florida, Mr. Hinchey, Mr. Hinojosa, Mr. Holt, 
  Ms. Hooley, Mr. Jackson of Illinois, Ms. Jackson-Lee of Texas, Ms. 
 Kaptur, Mr. Kennedy of Rhode Island, Ms. Kilpatrick of Michigan, Mr. 
Kind, Mr. Kucinich, Ms. Lee, Mr. Markey, Mr. McGovern, Mr. Meehan, Mr. 
     Meek of Florida, Ms. Millender-McDonald, Mr. George Miller of 
    California, Mr. Nadler, Mr. Olver, Mr. Owens, Mr. Pallone, Mr. 
 Pascrell, Ms. Roybal-Allard, Mr. Rush, Mr. Ryan of Ohio, Ms. Linda T. 
Sanchez of California, Ms. Loretta Sanchez of California, Mr. Sanders, 
Ms. Schakowsky, Mr. Schiff, Mr. Sherman, Ms. Slaughter, Ms. Solis, Mr. 
 Strickland, Mr. Tierney, Mrs. Jones of Ohio, Mr. Udall of New Mexico, 
 Ms. Velazquez, Ms. Waters, Ms. Watson, and Mr. Waxman) 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 prevent corporations from 
 exploiting tax treaties to evade taxation of United States income and 
 to prevent manipulation of transfer prices by deflection of income to 
                              tax havens.

    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 ``Fairness and Accountability in 
International Taxation Act of 2005''.

SEC. 2. DENIAL OF TREATY BENEFITS FOR CERTAIN DEDUCTIBLE PAYMENTS.

    (a) In General.--Section 894 of the Internal Revenue Code of 1986 
(relating to income affected by treaty) is amended by adding at the end 
the following new subsection:
    ``(d) Denial of Treaty Benefits for Certain Deductible Payments.--
            ``(1) In general.--A foreign entity shall not be entitled 
        under any income tax treaty of the United States with a foreign 
        country to any reduced rate of any withholding tax imposed by 
        this title on any deductible foreign payment unless such entity 
        is predominantly owned by individuals who are residents of such 
        foreign country.
            ``(2) Deductible foreign payment.--For purposes of 
        paragraph (1), the term `deductible foreign payment' means any 
        payment--
                    ``(A) which is made by a domestic entity directly 
                or indirectly to a related person which is a foreign 
                entity, and
                    ``(B) which is allowable as a deduction under this 
                chapter.
            ``(3) Domestic and foreign entities; related person.--For 
        purposes of this subsection--
                    ``(A) Domestic entity.--The term `domestic entity' 
                means any domestic corporation or domestic partnership.
                    ``(B) Foreign entity.--The term `foreign entity' 
                means any foreign corporation or foreign partnership.
                    ``(C) Related person.--The term `related person' 
                has the meaning given such term by section 954(d)(3) 
                (determined by substituting `domestic entity' for 
                `controlled foreign corporation' each place it 
                appears).
            ``(4) Predominant ownership.--For purposes of this 
        subsection--
                    ``(A) In general.--An entity is predominantly owned 
                by individuals who are residents of a foreign country 
                if--
                            ``(i) in the case of a corporation, more 
                        than 50 percent (by value) of the stock of such 
                        corporation is owned (within the meaning of 
                        section 883(c)(4)) by individuals who are 
                        residents of such foreign country, or
                            ``(ii) in the case of a partnership, more 
                        than 50 percent (by value) of the beneficial 
                        interests in such partnership are so owned.
                    ``(B) Publicly traded corporations.--A foreign 
                corporation also shall be treated as predominantly 
                owned by individuals who are residents of a foreign 
                country if--
                            ``(i)(I) the stock of such corporation is 
                        primarily and regularly traded on an 
                        established securities market in such foreign 
                        country, and
                            ``(II) such corporation has activities 
                        within such foreign country which are 
                        substantial in relation to the total activities 
                        of such corporation and its related persons, or
                            ``(ii) such corporation is wholly owned 
                        (directly or indirectly) by another foreign 
                        corporation which is described in clause (i).
                    ``(C) Special rule.--
                            ``(i) In general.--A foreign corporation 
                        shall be treated as meeting the requirements of 
                        subparagraph (A) if--
                                    ``(I) such requirements would be 
                                met if `30 percent' were substituted 
                                for `50 percent' in subparagraph 
                                (A)(i),
                                    ``(II) the treaty country is a 
                                member of a multinational economic 
                                association such as the European Union, 
                                and
                                    ``(III) at least 50 percent of the 
                                value of the stock of the corporation 
                                is owned (within the meaning of section 
                                883(c)(4)) by individuals who are 
                                residents of the treaty country or 
                                other qualified foreign countries.
                            ``(ii) Qualified foreign country.--For 
                        purposes of this subparagraph, the term 
                        `qualified foreign country' means any foreign 
                        country if--
                                    ``(I) such foreign country is a 
                                member of the multinational economic 
                                association of which the treaty country 
                                is a member, and
                                    ``(II) such foreign country has a 
                                tax treaty with the United States 
                                providing a withholding tax rate 
                                reduction which is not less than the 
                                withholding tax rate reduction 
                                applicable (without regard to this 
                                subsection) to the payment received by 
                                such foreign corporation.
            ``(5) Exception for corporations with substantial business 
        activities in treaty country.--Paragraph (1) shall not apply to 
        a payment received by a foreign corporation if such corporation 
        has substantial business activities in the treaty country and 
        if such corporation establishes to the satisfaction of the 
        Secretary that the payment is subject to an effective rate of 
        income tax imposed by such country greater than 90 percent of 
        the maximum rate of tax specified in section 11.
            ``(6) Exception for payments received by controlled foreign 
        corporation.--Paragraph (1) shall not apply to any deductible 
        foreign payment made by a corporation if the recipient of the 
        payment is a controlled foreign corporation and the payor is a 
        United States shareholder (as defined in section 951(b)) of 
        such corporation.
            ``(7) Conduit payments.--Under regulations prescribed by 
        the Secretary, paragraph (1) shall not apply to a payment 
        received by a foreign entity referred to in paragraph (1) if--
                    ``(A) within a reasonable period after such entity 
                receives such payment, such entity makes a comparable 
                payment directly or indirectly to another related 
                person,
                    ``(B) such related person is a resident of a 
                foreign country with which the United States has an 
                income tax treaty,
                    ``(C) such related person is predominantly owned by 
                individuals who are residents of such country, and
                    ``(D) the withholding tax rate applicable under 
                such treaty is equal to or greater than the withholding 
                tax rate applicable (without regard to this paragraph) 
                to the payment received by such foreign entity.
        A similar rule shall apply where the payment is includible in 
        the gross income of a related person by reason of a foreign law 
        comparable to subpart F of part III of subchapter N.''
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 3. TRANSFER PRICE REDUCED BY DEFLECTED TAX HAVEN INCOME.

    (a) In General.--Section 482 of the Internal Revenue Code of 1986 
(relating to allocation of income and deductions among taxpayers) is 
amended by inserting ``(a) In General.--'' before ``In the case of two 
or more'' and by adding at the end the following new subsection:
    ``(b) Special Rule for Related-Party Inbound and Outbound 
Transactions.--
            ``(1) In general.--In the case of property or services to 
        which this subsection applies, the transfer price under this 
        section for such property or service shall be the transfer 
        price determined without regard to this subsection--
                    ``(A) in the case of a related-party inbound 
                transaction, reduced by the deflected tax haven income 
                with respect to such property or service, or
                    ``(B) in the case of a related-party outbound 
                transaction, increased by the deflected tax haven 
                income with respect to such property or service.
            ``(2) Property or services to which subsection applies.--
                    ``(A) In general.--This subsection applies to any 
                property or services if there is a related-party 
                inbound or outbound transaction with respect to such 
                property or services.
                    ``(B) Related-party inbound transaction.--A 
                related-party inbound transaction is any transaction 
                where--
                            ``(i) property is acquired directly or 
                        indirectly by a foreign-controlled domestic 
                        corporation from a foreign related person, or
                            ``(ii) the services are performed directly 
                        or indirectly for a foreign-controlled domestic 
                        corporation by a foreign related person.
                    ``(C) Related-party outbound transaction.--A 
                related-party outbound transaction is any transaction 
                where--
                            ``(i) property is sold directly or 
                        indirectly by a foreign-controlled domestic 
                        corporation to a foreign related person, or
                            ``(ii) services are performed directly or 
                        indirectly by a foreign-controlled domestic 
                        corporation for a foreign related person.
            ``(3) Deflected tax haven income.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `deflected tax haven 
                income' means income (whether in the form of profits, 
                commissions, fees, or otherwise) derived by a foreign 
                related person in connection with any transaction 
                related to property or services to which this 
                subsection applies if such income would be treated as 
                foreign base company sales income (as defined in 
                section 954(d)) or foreign base company services income 
                (as defined in section 954(e)) were such foreign 
                related person treated as a controlled foreign 
                corporation.
                    ``(B) Exception for income subject to foreign 
                taxes.--
                            ``(i) High taxes.--Such term shall not 
                        include any item of income with respect to 
                        which the requirements of section 954(b)(4) are 
                        met.
                            ``(ii) Other taxes.--If the taxpayer 
                        establishes to the satisfaction of the 
                        Secretary that an item of income was subject to 
                        an income tax imposed by a foreign country and 
                        the effective rate of such tax (and such 
                        effective rate was not greater than 90 percent 
                        of the maximum rate of tax specified in section 
                        11), the term `deflected tax haven income' 
                        shall not include the same proportion of such 
                        income as such effective rate of tax bears to 
                        90 percent.
            ``(4) Other definitions.--For purposes of this subsection--
                    ``(A) Foreign related person.--The term `foreign 
                related person' means any foreign person who is related 
                (within the meaning of subsection (a)) to the foreign-
                controlled domestic corporation.
                    ``(B) Foreign-controlled domestic corporation.--The 
                term `foreign-controlled domestic corporation' means 
                any domestic corporation which is 25-percent foreign-
                owned (as defined in section 6038A(c)).''
    (b) Effective Date.--The amendment made by this section shall apply 
to property acquired, and services performed, after the date of the 
enactment of this Act.
                                 <all>