109 HR 1303 IH: Fairness and Accountability in International Taxation Act of 2005 U.S. House of Representatives 2005-03-15 text/xml EN Pursuant to Title 17 Section 105 of the United States Code, this file is not subject to copyright protection and is in the public domain.

I 109th CONGRESS 1st Session H. R. 1303 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. Sánchez 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. Velázquez, 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.

1.

Short title

This Act may be cited as the Fairness and Accountability in International Taxation Act of 2005.

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.

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.