[Congressional Record Volume 149, Number 37 (Friday, March 7, 2003)]
[Extensions of Remarks]
[Page E400]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




TO CLARIFY THE TREATMENT FOR FOREIGN TAX CREDIT LIMITATION PURPOSES OF 
                CERTAIN TRANSFER OF INTANGIBLE PROPERTY

                                 ______
                                 

                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                        Thursday, March 6, 2003

  Mr. SHAW. Mr. Speaker, along with my colleague, Mark Foley, I am 
introducing a bill that would eliminate a trap for the unwary that was 
inadvertently created with the Taxpayer Act of 1997. The bill would 
clarify the treatment for foreign tax credit limitation purposes of the 
income inclusions that arise upon a transfer of intangible property to 
a foreign corporation.
  Section 367(d) of the Internal Revenue Code provides for income 
inclusions in the form of deemed royalties upon the transfer of 
intangible property by a U.S. person to a foreign corporation. Prior to 
the 1997 Act, these income inclusions under section 367(d) were deemed 
to be U.S.-source income and thus were not eligible for foreign tax 
credits. The international joint venture reforms included in the 1997 
Act eliminated this special source rule and provided that deemed 
royalties under section 367(d) are treated as foreign source income for 
foreign tax credit purposes to the same extent as an actual royalty 
payment.
  The amendments made by the 1997 Act were intended to eliminate the 
penalty that was provided by the prior-law deemed U.S. source rule and 
that had operated to discourage taxpayers from transferring intangible 
property in a transaction that would be covered by section 367(d). 
Prior to the 1997 Act, in order to avoid this penalty, taxpayers 
licensed intangible property to foreign corporations instead of 
transferring such property in a transaction that would be subject to 
section 367(d). The 1997 Act's elimination of the penalty source rule 
of section 367(d) was intended to allow taxpayers to transfer 
intangible property to a foreign corporation in a transaction that 
gives rise to deemed royalty payments under section 367(d) instead of 
having to structure the transaction with the foreign corporation as a 
license in exchange for actual royalty payments.
  However, the intended goal of the 1997 Act provision is achieved only 
if the deemed royalty payments under section 367(d) not only are 
sourced for foreign tax credit purposes in the same manner as actual 
royalty payments, but also are characterized for foreign tax credit 
limitation purposes in the same manner as actual royalty payments. 
Without a clarification that deemed royalty payments are characterized 
for foreign tax credit limitation purposes in the same manner as an 
actual royalty payment, there is a risk in many cases that such deemed 
royalties would be characterized in a manner that leads to a foreign 
tax credit result that is equally as disadvantageous as the result that 
arose under the penalty source rule that was intended to be eliminated 
by the 1997 Act.
  The bill I am introducing today provides the needed clarification 
that deemed royalties under section 367(d) are treated for foreign tax 
credit limitation purposes in the same manner as an actual royalty, 
ensuring that the penalty that was intended to be eliminated with the 
1997 Act is in fact eliminated. Without this clarification, a taxpayer 
that transfers intangible property in reliance on the 1997 Act will 
find that its transfer is in fact effectively subject to the penalty 
that the taxpayer believed had been eliminated. Without the 
clarification, those taxpayers that have structured their transactions 
in reliance on the 1997 Act provision will be worse off than they would 
have been if the purported repeal of the penalty source rule had never 
occurred and they had continued to structure their transactions to 
avoid that penalty. This bill will achieve the intended goals of the 
1997 Act and prevent a terrible trap for the unwary that has been 
inadvertently created.

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