[Congressional Record Volume 145, Number 85 (Wednesday, June 16, 1999)]
[Senate]
[Pages S7131-S7132]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MACK:
  S. 1226. A bill to amend the Internal Revenue Code of 1986 to provide 
that interest on indebtedness used to finance the furnishing or sale of 
rate-regulated electric energy or natural gas in the United States 
shall be allocated solely to sources within the United States; to the 
Committee on Finance.

[[Page S7132]]

 ALLOCATION TO SOURCES WITHIN THE UNITED STATES OF INTEREST EXPENSE ON 
 INDEBTEDNESS FINANCING RATE-REGULATED ELECTRIC ENERGY OR NATURAL GAS 
                       INFRASTRUCTURE INVESTMENTS

  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.
  The allocation rules increase the double-taxation of foreign income 
by reducing foreign tax credits, thereby increasing domestic taxation. 
The unfairness of this result is magnified by the fact that the 
interest expenses--which are the reason the foreign tax credit 
shrinks--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. 1226

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

     SECTION 1. ALLOCATION TO SOURCES WITHIN THE UNITED STATES OF 
                   INTEREST EXPENSE ON INDEBTEDNESS FINANCING 
                   RATE-REGULATED ELECTRIC ENERGY OR NATURAL GAS 
                   INFRASTRUCTURE INVESTMENTS.

       (a) In General.--Subsection (e) of section 864 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 by inserting after paragraph (5) the 
     following new paragraph:
       ``(6) Treatment of certain interest expense relating to 
     qualified infrastructure indebtedness.--
       ``(A) In general.--Interest on any qualified infrastructure 
     indebtedness shall be allocated and apportioned solely to 
     sources within the United States, and such indebtedness shall 
     not be taken into account in allocating and apportioning 
     other interest expense.
       ``(B) Qualified infrastructure indebtedness.--For purposes 
     of this paragraph, the term `qualified infrastructure 
     indebtedness' means any indebtedness incurred--
       ``(i) to carry on the trade or business of the furnishing 
     or sale of electric energy or natural gas in the United 
     States, or
       ``(ii) to acquire, construct, or otherwise finance property 
     used predominantly in such trade or business.
       ``(C) Rate regulation.--
       ``(i) In general.--If only a portion of the furnishing or 
     sale referred to in subparagraph (B)(i) in a trade or 
     business is rate regulated, the term `qualified 
     infrastructure indebtedness' shall not include nonqualified 
     indebtedness.
       ``(ii) Nonqualified indebtedness.--For purposes of clause 
     (i), the term `nonqualified indebtedness' means so much of 
     the indebtedness which would (but for clause (i)) be 
     qualified infrastructure indebtedness as exceeds the amount 
     which bears the same ratio to the aggregate indebtedness of 
     the taxpayer as the value of the assets used in the 
     furnishing or sale referred to in subparagraph (B)(i) which 
     is rate-regulated bears to the value of the total assets of 
     the taxpayer.
       ``(iii) Rate-regulated defined.--For purposes of this 
     subparagraph, furnishing or sale is rate-regulated if the 
     rates for the furnishing or sale, as the case may be, have 
     been established or approved by a State or political 
     subdivision thereof, by an agency or instrumentality of the 
     United States, or by a public service or public utility 
     commission or other similar body of the District of Columbia 
     or of any State or political subdivision thereof.
       ``(iv) Asset values.--For purposes of clause (ii), assets 
     shall be treated as having a value equal to their adjusted 
     bases (within the meaning of section 1016) unless the 
     taxpayer elects to use fair market value for all assets. Such 
     an election, once made, shall be irrevocable.
       ``(v) Time for making determination.--The determination of 
     whether indebtedness is qualified infrastructure indebtedness 
     or nonqualified indebtedness shall be made at the time the 
     indebtedness is incurred.
       ``(vi) Separate application to electric energy and natural 
     gas.--This subparagraph shall be applied separately to 
     electric energy and natural gas.''
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to indebtedness incurred in taxable years beginning 
     after the date of enactment of this Act.
       (2) Outstanding debt.--In the case of indebtedness 
     outstanding as of the date of enactment of this Act, the 
     determination of whether such indebtedness constitutes 
     qualified infrastructure indebtedness shall be made by 
     applying the rules of subparagraphs (B) and (C) of section 
     864(e)(6) of the Internal Revenue Code of 1986, as added by 
     this section, on the date such indebtedness was incurred.
                                 ______