[Congressional Record Volume 144, Number 146 (Wednesday, October 14, 1998)]
[Senate]
[Page S12561]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MACK:
  S. 2630. A bill to amend the Internal Revenue Code of 1986 to provide 
a special rule regarding allocation of interest expense of qualified 
infrastructure indebtedness of taxpayers; to the Committee on Finance.


                            tax legislation

 Mr. MACK. Mr. President, today I am introducing legislation to 
remedy a problem in the way the U.S. taxes the foreign operations of 
U.S. electric and gas utilities. With the 1992 passage of the National 
Energy Policy Act, Congress gave a green light to U.S. utilities 
wishing to do business abroad, lifting a long-standing prohibition. 
U.S. utilities were allowed to compete for the foreign business 
opportunities created by the privatization of national utilities and 
the need for the construction of facilities to meet increased energy 
demands abroad.
  Since 1992, U.S. utility companies have made significant investments 
in utility operations in the United Kingdom, Australia, Eastern Europe, 
the Far East and South America. These investments in foreign utilities 
have created domestic jobs in the fields of design, architecture, 
engineering, construction, and heavy equipment manufacturing. They also 
allow U.S. utilities an opportunity to diversify and grow.
  Unfortunately, the Internal Revenue Code penalizes these investments 
by subjecting them to double-taxation. U.S. companies with foreign 
operations receive tax credits for a portion of the taxes they pay to 
foreign countries, to reduce the double-taxation that would otherwise 
result from the U.S. policy of taxing worldwide income. The size of 
these foreign tax credits are affected by a number of factors, as U.S. 
tax laws recalculate the amount of foreign income that is recognized 
for tax credit purposes.
  Section 864 of the tax code allocates deductible interest expenses 
between the U.S. and foreign operations based on the relative book 
values of assets located in the U.S. and abroad. By ignoring business 
realities and the peculiar circumstances of U.S. utilities, this 
allocation rule overtaxes them. Because U.S. utilities were until 
recently prevented from operating abroad, their foreign plants and 
equipment have been recently-acquired and consequently have not been 
much depreciated, in contrast to their domestic assets which are in 
most cases fully-depreciated. Thus a disproportionate amount of 
interest expenses are allocated to foreign income, reducing the foreign 
income base that is recognized for U.S. tax purposes thus the size of 
the corresponding foreign tax credits.
  As the allocation rules increase the double-taxation of foreign 
income by reducing foreign tax credits, they also increase domestic 
taxation by shifting interest deductions from U.S. to foreign 
operations. The unfairness of this misallocation is magnified by the 
fact that interest expenses are usually associated with domestically-
regulated debt, which is tied to domestic production and is not as 
fungible as the tax code assumes.
  The result of this economically-irrational taxation scheme is a very 
high effective tax rate on certain foreign investment and a loss of 
U.S. foreign tax credits. Rather than face this double-tax penalty, 
some U.S. utilities have actually chosen not to invest overseas and 
others have pulled back from their initial investments.
  One solution to this problem is found in the legislation that I am 
introducing today. This remedy is to exempt from the interest 
allocation rules of Section 864 the debt associated with a U.S. 
utility's furnishing and sale of electricity or natural gas in the 
United States. This proposed rule is similar to the rule governing 
``non-recourse'' debt, which is not subjected to foreign allocation. In 
both cases, lenders look to specific cash flows for repayment and 
specific assets as collateral. These loans are thus distinguishable 
from the typical risks of general credit lending transactions.
  The specific cash flow aspect of non-recourse financing is a critical 
element of the non-recourse debt exception, and logic requires that the 
same tax treatment should be given to analogous utility debt. Thus, my 
bill would exempt from allocation to foreign source income the interest 
on debt incurred in the trade or business of furnishing or selling 
electricity or natural gas in the United States. The current situation 
is a very real problem that must be remedied, and I urge my colleagues 
to support the solution I am proposing.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2630

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

     SECTION 1. TREATMENT OF INTEREST EXPENSE OF QUALIFIED 
                   INFRASTRUCTURE INDEBTEDNESS.

       (a) In General.--Section 864(e) of the Internal Revenue 
     Code of 1986 (relating to rules for allocating interest, 
     etc.) is amended by redesignating paragraphs (6) and (7) as 
     paragraphs (7) and (8), respectively, and inserting after 
     paragraph (5) the following new paragraph:
       ``(6) Treatment of certain interest expense relating to 
     qualified infrastructure indebtedness.--
       ``(A) In general.--Interest expense attributable to 
     qualified infrastructure indebtedness of a taxpayer shall be 
     allocated and apportioned solely to sources within the United 
     States and the taxpayer's assets (whether or not held in the 
     United States) shall be reduced by the amount of qualified 
     infrastructure indebtedness.
       ``(B) Qualified infrastructure indebtedness.--
       ``(i) In general.--For purposes of this paragraph, the term 
     `qualified infrastructure indebtedness' means debt incurred 
     to carry on, or to acquire, build, or finance property used 
     predominantly in, the trade or business of the furnishing or 
     sale of electrical energy or natural gas in the United 
     States. The determination of whether debt constitutes 
     qualified infrastructure indebtedness under the previous 
     sentence shall be made at the time the debt is incurred.
       ``(ii) Required rate regulation.--The rates for the 
     furnishing or sale of electrical energy or natural gas by a 
     trade or business under clause (i) must be established or 
     approved by--

       ``(I) the District of Columbia or a State or political 
     subdivision thereof,
       ``(II) any agency or instrumentality of the United States, 
     or
       ``(III) a public service or public utility commission or 
     other similar body of the District of Columbia or of any 
     State or political subdivision thereof.

       ``(iii) Limitation.--If the rate regulation under clause 
     (ii) applies only to a portion of the trade or business of 
     the furnishing or sale of electrical energy or natural gas, 
     the debt incurred to carry on, or to acquire, build, or 
     finance property used in, such trade or business shall 
     constitute qualified infrastructure indebtedness only to the 
     extent that the ratio of the total outstanding qualified 
     infrastructure indebtedness with respect to such trade or 
     business (including such debt) to the total outstanding 
     indebtedness with respect to such trade or business does not 
     exceed the ratio of the assets used in the portion of the 
     trade or business that is subject to such rate regulation to 
     the total assets used in such trade or business. For purposes 
     of the determination under the preceding sentence, assets 
     shall be measured using book value for taxation purposes 
     unless the taxpayer makes an election to use fair market 
     value. Such election shall apply to the taxable year for 
     which the election is made and all subsequent taxable years 
     unless revoked with the consent of the Secretary.''
       (b) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to debt incurred in taxable years beginning after the 
     date of enactment of this Act.
       (2) Outstanding debt.--In the case of debt outstanding as 
     of the date of enactment of this Act, the determination of 
     whether such debt constitutes ``qualified infrastructure 
     indebtedness'' shall be made by applying the rules of section 
     864(e)(6)(B) of the Internal Revenue Code of 1986, as added 
     by this section, on the date such debt was incurred.
                                 ______