[Congressional Record Volume 153, Number 71 (Wednesday, May 2, 2007)]
[Senate]
[Pages S5507-S5508]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KYL:
  S. 1273. A bill to amend the Internal Revenue Code of 1986 to allow 
permanent look-through treatment of payments between related foreign 
corporations; to the Committee on Finance.
  Mr. KYL. Mr. President, today I am introducing legislation to make 
permanent a provision of our tax that was enacted in 2006 as part of 
the Increase Prevention and Reconciliation Act, but expires at the end 
of 2008. The controlled-foreign corporation (CFC) look-through 
provision allows U.S.-based multinational companies to better compete 
with foreign companies by enabling them to be more flexible in their 
overseas operations. In this age of global competition, I hope my 
colleagues will agree that the United States needs to maintain a 
business climate that encourages U.S.-based companies to grow and 
succeed. The CFC look-through provision is an important part of that 
effort.
  For several years now, I have been encouraging my colleagues to 
recognize that our tax system puts many of our best U.S. employers at a 
competitive disadvantage as compared to foreign-based companies. Many 
foreign countries only impose tax on income earned within their 
borders; the United States taxes U.S. companies on their worldwide 
income.
  The general rule is that income from a foreign subsidiary is not 
taxed by the United States until those 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, imposing current U.S. tax, instead of allowing deferral of 
taxation, on subsidiary earnings generally when that income is passive 
in nature. One exception to the general deferral rule imposes tax on 
the U.S. parent when a foreign-based 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, U.S. tax is generally deferred until the income is repatriated 
to the U.S. parent.
  In 2005, I introduced legislation to extend this ``same-country'' 
treatment, the CFC look-through provision, to payments between related 
foreign subsidiaries that are located in different countries, and I was 
pleased that the 2006 tax reconciliation bill included this provision. 
Today, I am introducing legislation to make the CFC look-through 
permanent.
  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 another country. For example, to operate 
efficiently, a U.S.-based manufacturer could 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. Before the CFC look-through was enacted last 
year, U.S. tax law inappropriately increased the cost for these foreign

[[Page S5508]]

subsidiaries to serve their customers in a very competitive business 
environment by imposing current tax on these related-party payments, 
even though the income continues to be used in active operations in the 
foreign market.

  In another example, 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 made it difficult for the same-
country exception to be met for payments of dividends and interest.
  Before the CFC look-through was enacted, American companies were at a 
real and significant competitive disadvantage as compared to foreign-
based companies. U.S.-based multinationals were penalized for 
responding to market or investment opportunities by redeploying active 
foreign earnings among foreign businesses conducted through multiple 
subsidiaries. To remove this impediment, Congress amended subpart F to 
provide a general exception for inter-affiliate payments of dividends, 
interest, rents or royalties that are generated from an active 
business.
  Congress was right 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 simplifies the interaction between subpart F 
and the foreign tax credit rules.
  If we want to keep U.S.-based multinational companies, which 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 permanent this modest change in the law that will enhance the 
position of U.S.-based employers trying to succeed in competitive 
foreign markets.
                                 ______