[Congressional Record Volume 151, Number 41 (Monday, April 11, 2005)]
[Senate]
[Page S3424]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KYL:
  S. 750. A bill to amend the Internal Revenue Code of 1986 to allow 
look-through treatment of payments between related foreign 
corporations; to the Committee on Finance.
  Mr. KYL. Mr. President, the 108th Congress began the necessary 
process, as part of the American Jobs Creation Act, of rationalizing 
the way the United States taxes the foreign income of U.S.-based 
companies, thereby helping U.S. employers to be more competitive in 
international markets. There was one provision, however, that passed 
both the Senate and the House but that was dropped out of the 
conference report at the eleventh hour for reasons that were unrelated 
to the merits of the provision. That provision extended the general 
rule of tax deferral to dividends, interest, rents and royalties that 
are paid out in the ordinary course of active business activities by 
one foreign affiliate of a U.S. company to another affiliate in another 
country. Today, I am introducing legislation to make this important 
change.
  The United States taxes U.S. companies on their worldwide income, but 
the general rule is that foreign subsidiary income is not taxed by the 
United States until the subsidiary earnings are brought back to the 
U.S. parent, usually in the form of a dividend. Subpart F of the 
Internal Revenue Code sets forth a number of exceptions to this general 
rule. Subpart F imposes current tax on subsidiary earnings generally 
when that income is passive in nature. One such exception taxes the 
U.S. parent when a subsidiary receives dividends, interest, rents or 
royalties from another subsidiary that is located in a different 
country. If the two subsidiaries are in the same country, however, 
current taxation does not apply.
  The proposal I am introducing today would extend this ``same-
country'' treatment to payments between related foreign subsidiaries 
that are located in different countries. This proposal is identical to 
the one that passed the Senate last year.
  Today's global economy is significantly different from the 
environment that existed when the subpart F rules were first introduced 
in 1962. As the global economy has changed, the traditional model for 
operating a global business has changed as well. In today's world, it 
makes no sense to impose a tax penalty when a company wants to fund the 
operations of a subsidiary in one country from the active business 
earnings of a subsidiary in a second country. For example, to operate 
efficiently, a U.S.-based manufacturer will probably establish 
specialized manufacturing sites, distribution hubs, and service 
centers. As a result, multiple related-party entities may be required 
to fulfill a specific customer order. U.S. tax law today 
inappropriately increases the cost for these foreign subsidiaries to 
serve their customers in a very competitive business environment by 
imposing current tax on these related-party payments, even though the 
income remains deployed in the foreign market.
  Further, financial institutions have established foreign subsidiaries 
with headquarters in a financial center, such as London, and branches 
in multiple countries in the same geographic region. This permits an 
efficient ``hub and spoke'' form of regional operation; however, this 
efficient business model may make it difficult for the same country 
exception under current law to be met for payments of dividends and 
interest.
  Under the existing rules, American companies are at a real and 
significant competitive disadvantage as compared to foreign-based 
companies. By creating current U.S. taxation of active business income 
when subsidiaries make cross-border payments, U.S.-based multinationals 
are penalized for responding to market or investment opportunities by 
redeploying active foreign earnings among foreign businesses conducted 
through multiple subsidiaries. To remove this impediment, subpart F 
should be amended to provide a general exception for interaffiliate 
payments of dividends, interest, rents or royalties that are generated 
from an active business.
  The right answer is to apply ``look-through'' treatment to payments 
of dividends, interest, rents and royalties between subsidiaries. If 
the underlying earnings would not have been subject to subpart F, the 
payments should not be subpart F income. Look-through treatment for 
payments of dividends, interest, rents and royalties should be 
permitted as long as the payments are made out of active business, non-
subpart F, income. ``Look-through'' principles are already well-
developed for other purposes of the Internal Revenue Code. For example, 
a look-through approach to the characterization of foreign income is 
used for purposes of calculating foreign tax credits. A consistent 
application of look-through principles would simplify the interaction 
between subpart F and the foreign tax credit rules.
  If we want to keep U.S.-based multinational companies--who employ 
millions of workers here at home--headquartered in the United States, 
we must modernize our tax rules so that our companies can be 
competitive around the globe I urge my colleagues to cosponsor this 
legislation to make a modest change in the law that will enhance the 
position of U.S.-based employers trying to succeed in competitive 
foreign markets.
                                 ______