[Congressional Record Volume 158, Number 22 (Thursday, February 9, 2012)]
[Senate]
[Pages S497-S502]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ENZI:
  S. 2091. A bill to amend the Internal Revenue Code of 1986 to reform 
the international tax system of the United States, and for other 
purposes; to the Committee on Finance.
  Mr. ENZI. Mr. President, I rise to speak about a bill I am 
introducing today, the United States Job Creation and International Tax 
Reform Act of 2012. The name says it all. This is a bill that would 
incentivize American companies to create jobs in the United States 
while at the same time leveling the playing field for U.S. companies in 
the global marketplace. This bill would reform and modernize the rules 
for taxing the global operations of American companies and would help 
America become a more attractive location to base a business that 
serves customers all over the world.
  Unfortunately, our current tax rules do just the opposite. In fact, 
many businesses could be better off if they were headquartered outside 
the United States. That is not right, and Congress should fix it. This 
bill would do that.
  I wish to thank Senator Hatch and members of his staff who have been 
helpful in working through the complexities of this international tax.
  I also wish to mention Eric Oman, a member of my staff and a CPA, who 
worked with me in developing this legislation. He has lived overseas 
and worked with the U.S. tax laws overseas. That is the kind of 
expertise we need to reform international tax law.
  I wish to thank all who testified before the Finance Committee, 
especially Scott Naatjes, who is the vice president and general tax 
counsel of Cargill. This man has dealt with the complex accounting of 
foreign earnings and the money to be repatriated to the United States, 
an actual practitioner whom we relied on. He gave us insight into years 
of records that have to be reviewed for a single item in the complex 
web of the current international tax system in order to bring the money 
back to the United States.
  Finally, I wish to thank Dave Camp, the chairman of the House, Ways, 
and Means Committee, who kick-started the discussion on tax reform when 
he released his discussion draft last October.
  Enacted in the 1960s, our current international tax rules have passed 
their expiration date. Many of the U.S. major trading partners, 
including Canada, Japan, the United Kingdom, and most of Europe have 
moved to what are called territorial tax systems. That is actually a 
word for a global tax system. These types of tax systems tax the income 
generated within their borders and exempt foreign earnings from tax.
  The United States, on the other hand, taxes the worldwide income of 
U.S. companies and provides deferral of the U.S. tax until the foreign 
earnings are brought home. Deferral of the tax until the earnings are 
brought home encourages them not to bring the money home. It actually 
incentivizes them to leave their money abroad and to expand over there. 
Because the United States has nearly the highest corporate tax rate in 
the world, companies don't bring those earnings back and, as I said, 
reinvest outside the United States. That certainly is not a recipe for 
U.S. growth and U.S. job creation.
  The dominance of U.S.-headquartered companies in the global 
marketplace is waning. Thirty-six percent of the Fortune Global 500 
companies were headquartered in the United States in 2000. In 2009, 
that number dropped to 28 percent. That is from 36 percent to 28 
percent among the Fortune Global 500 companies headquartered in the 
United States. Clearly, America is losing ground and our current 
international tax rules are a big part of the problem.
  The bill I am introducing would help to right the ship by pulling our 
international tax rules into the 21st century so U.S. companies are not 
at a competitive disadvantage with foreign companies because of 
American tax rules that are outdated by changes most other countries 
have already made. The bill would give U.S. companies incentives to 
create jobs in the United States and undertake activities in the United 
States in order to win globally.
  First, if the foreign earnings have already been subject to a tax in 
a foreign country, this bill would provide a 95-percent exemption from 
the U.S. tax on those foreign earnings. This would allow for American-
managed capital to be put to the most productive use and help stabilize 
our economy.
  Second, this bill would allow foreign earnings that are currently 
sitting overseas to be brought back to America at a reduced rate--not a 
zero tax rate but a greatly reduced rate--and with the ability to pay 
that, the taxes that are owed in installments. That gets the cash back 
now and still gets some taxation for us instead of leaving it all 
overseas. This provision would serve as a transition to the new 
territorial system by allowing U.S. companies to unlock a significant 
amount of capital currently being held offshore and quickly move into 
the new territorial system, and that means more jobs and a better 
economy. It also emphasizes one of the things I talk about with any of 
the tax changes--as one of the few accountants--we have to transition 
into these things if we want the companies stable enough that they can 
exist through the change in the Tax Code, and that provides for a 
transition as well.
  Third, this bill would reduce the U.S. tax burden on income generated 
by American companies from ideas and innovations. This bill would 
encourage companies to develop and keep rights to ideas and inventions 
in the United States. When families tune in to ``60 Minutes'' on Sunday 
evenings, they would hear fewer stories about how U.S. companies are 
moving their profits to tax haven countries and avoiding U.S. tax on 
those earnings. Families would hear fewer stories about how the U.S. 
multinational companies set up post office boxes in the Cayman Islands 
and Switzerland without a single employee or officer of the company 
anywhere on site and attribute a significant portion of their foreign 
earnings to those jurisdictions.
  Instead, families would hear more stories about how U.S. companies 
are generating the ideas and inventions of tomorrow right here in 
America.

[[Page S498]]

  This bill can be a first step in tax reform. We have a lot of work to 
do in many other areas of tax law in order to make it simpler, fairer, 
and more transparent. We need to be looking at the individual tax 
system, the corporate tax system, and particularly how we tax the 
passthrough entities such as partnerships and S corporations that have 
to pay the tax on the money when it is still invested in the business.
  I also recognize, as we move forward in these other areas, it may be 
appropriate to make changes to this bill. This is exactly how the 
legislative process should work, and I look forward to getting back to 
conducting the Senate's business in regular order, where we work 
through the issues in the committee first and offer amendments to 
improve the bills that ultimately come to the Senate floor, where there 
is a shot for everybody else to make amendments.
  But today with the introduction of this bill, we move from discussion 
to action with respect to a single piece of the tax reform. The 
Simpson-Bowles deficit commission recommended a move to a territorial 
system, and I am glad to be moving the conversation forward on this 
recommendation with the introduction of this bill. I hope this bill 
will begin a discussion, a discussion of fairness that needs to begin 
yesterday.
  I hope Members and their staff will review the bill and the detailed 
explanation we have prepared. I also ask that all interested 
stakeholders review the bill and reach out to my staff and the staff of 
the Finance Committee to discuss what they like, what they don't like, 
and their suggestions for improvements. That is the way bills are 
supposed to work.
  The international tax rules are not easy or simple and reforming them 
will be a heavy lift. But those things are worth doing, and when they 
are worth doing, they are rarely easy or simple.
  I look forward to joining with my colleagues to pass international 
tax reforms that our American companies and our country desperately 
need.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2091

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

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF 
                   CONTENTS.

       (a) Short Title.--This Act may be cited as the ``United 
     States Job Creation and International Tax Reform Act of 
     2012''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents of this Act 
     is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.

 TITLE I--PARTICIPATION EXEMPTION SYSTEM FOR TAXATION OF FOREIGN INCOME

Sec. 101. Deduction for dividends received by domestic corporations 
              from certain foreign corporations.
Sec. 102. Application of dividends received deduction to certain sales 
              and exchanges of stock.
Sec. 103. Deduction for foreign intangible income derived from trade or 
              business within the United States.
Sec. 104. Treatment of deferred foreign income upon transition to 
              participation exemption system of taxation.

               TITLE II--OTHER INTERNATIONAL TAX REFORMS

                 Subtitle A--Modifications of Subpart F

Sec. 201. Treatment of low-taxed foreign income as subpart F income.
Sec. 202. Permanent extension of look-thru rule for controlled foreign 
              corporations.
Sec. 203. Permanent extension of exceptions for active financing 
              income.
Sec. 204. Foreign base company income not to include sales or services 
              income.

        Subtitle B--Modifications Related to Foreign Tax Credit

Sec. 211. Modification of application of sections 902 and 960 with 
              respect to post-2012 earnings.
Sec. 212. Separate foreign tax credit basket for foreign intangible 
              income.
Sec. 213. Inventory property sales source rule exceptions not to apply 
              for foreign tax credit limitation.

         Subtitle C--Allocation of Interest on Worldwide Basis

Sec. 221. Acceleration of election to allocate interest on a worldwide 
              basis.

 TITLE I--PARTICIPATION EXEMPTION SYSTEM FOR TAXATION OF FOREIGN INCOME

     SEC. 101. DEDUCTION FOR DIVIDENDS RECEIVED BY DOMESTIC 
                   CORPORATIONS FROM CERTAIN FOREIGN CORPORATIONS.

       (a) Allowance of Deduction.--Part VIII of subchapter B of 
     chapter 1 is amended by inserting after section 245 the 
     following new section:

     ``SEC. 245A. DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM 
                   CERTAIN FOREIGN CORPORATIONS.

       ``(a) In General.--In the case of any dividend received 
     from a controlled foreign corporation by a domestic 
     corporation which is a United States shareholder with respect 
     to such controlled foreign corporation, there shall be 
     allowed as a deduction an amount equal to 95 percent of the 
     qualified foreign-source portion of the dividend.
       ``(b) Treatment of Electing Noncontrolled Section 902 
     Corporations as Controlled Foreign Corporations.--
       ``(1) In general.--If a domestic corporation elects the 
     application of this subsection for any noncontrolled section 
     902 corporation with respect to the domestic corporation, 
     then, for purposes of this title--
       ``(A) the noncontrolled section 902 corporation shall be 
     treated as a controlled foreign corporation with respect to 
     the domestic corporation, and
       ``(B) the domestic corporation shall be treated as a United 
     States shareholder with respect to the noncontrolled section 
     902 corporation.
       ``(2) Election.--
       ``(A) Time of election.--Any election under this subsection 
     with respect to any noncontrolled section 902 corporation 
     shall be made not later than the due date for filing the 
     return of tax for the first taxable year of the taxpayer with 
     respect to which the foreign corporation is a noncontrolled 
     section 902 corporation with respect to the taxpayer (or, if 
     later, the first taxable year of the taxpayer for which this 
     section is in effect).
       ``(B) Revocation of election.--Any election under this 
     subsection, once made, may be revoked only with the consent 
     of the Secretary.
       ``(C) Controlled groups.--If a domestic corporation making 
     an election under this subsection with respect to any 
     noncontrolled section 902 corporation is a member of a 
     controlled group of corporations (within the meaning of 
     section 1563(a), except that `more than 50 percent' shall be 
     substituted for `at least 80 percent' each place it appears 
     therein), then, except as otherwise provided by the 
     Secretary, such election shall apply to all members of such 
     group.
       ``(c) Qualified Foreign-source Portion of Dividends.--For 
     purposes of this section--
       ``(1) Qualified foreign-source portion.--
       ``(A) In general.--The qualified foreign-source portion of 
     any dividend is an amount which bears the same ratio to such 
     dividend as--
       ``(i) the post-2012 undistributed qualified foreign 
     earnings, bears to
       ``(ii) the total post-2012 undistributed earnings.
       ``(B) Post-2012 undistributed earnings.--The term `post-
     2012 undistributed earnings' means the amount of the earnings 
     and profits of a controlled foreign corporation (computed in 
     accordance with sections 964(a) and 986) accumulated in 
     taxable years beginning after December 31, 2012--
       ``(i) as of the close of the taxable year of the controlled 
     foreign corporation in which the dividend is distributed, and
       ``(ii) without diminution by reason of dividends 
     distributed during such taxable years.
       ``(C) Post-2012 undistributed qualified foreign earnings.--
     The term `post-2012 undistributed qualified foreign earnings' 
     means the portion of the post-2012 undistributed earnings 
     which is attributable to income other than--
       ``(i) income described in section 245(a)(5)(A), or
       ``(ii) dividends described in section 245(a)(5)(B).
       ``(2) Ordering rule for distributions of earnings and 
     profits.--Distributions shall be treated as first made out of 
     earnings and profits of a controlled foreign corporation 
     which are not post-2012 undistributed earnings and then out 
     of post-2012 undistributed earnings.
       ``(d) Disallowance of Foreign Tax Credit, etc.--
       ``(1) In general.--No credit shall be allowed under section 
     901 for any taxes paid or accrued (or treated as paid or 
     accrued) with respect to the qualified foreign-source portion 
     of any dividend.
       ``(2) Denial of deduction.--No deduction shall be allowed 
     under this chapter for any tax for which credit is not 
     allowable under section 901 by reason of paragraph (1).
       ``(3) Coordination with section 78.--Section 78 shall not 
     apply to any tax for which credit is not allowable under 
     section 901 by reason of paragraph (1).
       ``(4) Treatment of nondeductible portion in applying 
     foreign tax credit limit.--For purposes of applying the 
     limitation under section 904(a), the remaining 5 percent of 
     the qualified foreign-source portion of any dividend with 
     respect to which a deduction is not allowable to the domestic 
     corporation under subsection (a) shall be treated as income 
     from sources within the United States.

[[Page S499]]

       ``(e) Special Rules for Hybrid Dividends.--
       ``(1) In general.--Subsection (a) shall not apply to any 
     dividend received by a United States shareholder from a 
     controlled foreign corporation if the dividend is a hybrid 
     dividend.
       ``(2) Hybrid dividends of tiered controlled foreign 
     corporations.--If a controlled foreign corporation with 
     respect to which a domestic corporation is a United States 
     shareholder receives a hybrid dividend from any other 
     controlled foreign corporation with respect to which such 
     domestic corporation is also a United States shareholder, 
     then, notwithstanding any other provision of this title--
       ``(A) the hybrid dividend shall be treated for purposes of 
     section 951(a)(1)(A) as subpart F income of the receiving 
     controlled foreign corporation for the taxable year of the 
     controlled foreign corporation in which the dividend was 
     received, and
       ``(B) the United States shareholder shall include in gross 
     income an amount equal to the shareholder's pro rata share 
     (determined in the same manner as under section 951(a)(2)) of 
     the subpart F income described in subparagraph (A) .
       ``(3) Denial of foreign tax credit, etc.--The rules of 
     subsection (d) shall apply to any hybrid dividend received 
     by, or any amount included under paragraph (2) in the gross 
     income of, a United States shareholder, except that, for 
     purposes of applying subsection (d)(4), all of such dividend 
     or amount shall be treated as income from sources within the 
     United States.
       ``(4) Hybrid dividend.--The term `hybrid dividend' means an 
     amount received from a controlled foreign corporation--
       ``(A) which is treated as a dividend for purposes of this 
     title, and
       ``(B) for which the controlled foreign corporation received 
     a deduction (or similar tax benefit) under the laws of the 
     country in which the controlled foreign corporation was 
     created or organized.
       ``(f) Definitions.--For purposes of this section--
       ``(1) United states shareholder.--The term `United States 
     shareholder' has the meaning given such term in section 
     951(b).
       ``(2) Controlled foreign corporation.--The term `controlled 
     foreign corporation' has the meaning given such term in 
     section 957(a).
       ``(3) Noncontrolled section 902 corporation.--The term 
     `noncontrolled section 902 corporation' has the meaning given 
     such term in section 904(d)(2)(E)(i).
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provisions of this section.''.
       (b) Application of Holding Period Requirement.--Subsection 
     (c) of section 246 is amended--
       (1) by striking ``or 245'' in paragraph (1) and inserting 
     ``245, or 245A'', and
       (2) by adding at the end the following new paragraph:
       ``(5) Special rules for qualified foreign-source portion of 
     dividends received from controlled foreign corporations.--
       ``(A) 1-year holding period requirement.--For purposes of 
     section 245A--
       ``(i) paragraph (1)(A) shall be applied--

       ``(I) by substituting `365 days' for `45 days' each place 
     it appears, and
       ``(II) by substituting `731-day period' for `91-day 
     period', and

       ``(ii) paragraph (2) shall not apply.
       ``(B) Status must be maintained during holding period.--For 
     purposes of section 245A, the holding period requirement of 
     this subsection shall be treated as met only if--
       ``(i) the controlled foreign corporation referred to in 
     section 245A(a) is a controlled foreign corporation at all 
     times during such period, and
       ``(ii) the taxpayer is a United States shareholder (as 
     defined in section 951) with respect to such controlled 
     foreign corporation at all times during such period.
       ``(C) Special rules for electing noncontrolled section 902 
     corporations.--In the case of an election under section 
     245A(b) to treat a noncontrolled section 902 corporation as a 
     controlled foreign corporation, the requirements of 
     subparagraph (B) shall be treated as met for any continuous 
     period ending on the day before the effective date of the 
     election for which the taxpayer met the ownership 
     requirements of section 904(d)(2)(E) with respect to such 
     corporation.''.
       (c) Application of Rules Generally Applicable to Deductions 
     for Dividends Received.--
       (1) Treatment of dividends from tax-exempt corporations.--
     Paragraph (1) of section 246(a) is amended by striking ``and 
     245'' and inserting ``245, and 245A''.
       (2) Assets generating tax-exempt portion of dividend not 
     taken into account in allocating and apportioning deductible 
     expenses.--Paragraph (3) of section 864(e) is amended by 
     striking ``or 245(a)'' and inserting ``, 245(a), or 245A''.
       (3) Coordination with section 1059.--Subparagraph (B) of 
     section 1059(b)(2) is amended by striking ``or 245'' and 
     inserting ``245, or 245A''.
       (d) Conforming Amendments.--
       (1) Clause (vi) of section 56(g)(4)(C) is amended by 
     inserting ``245A or'' before ``965''.
       (2) Subsection (b) of section 951 is amended--
       (A) by striking ``subpart'' and inserting ``title'', and
       (B) by adding at the end the following: ``Such term shall 
     include, with respect to any entity treated as a controlled 
     foreign corporation under section 245A(b), any domestic 
     corporation treated as a United States shareholder with 
     respect to such entity under such section.''.
       (3) Subsection (a) of section 957 is amended--
       (A) by striking ``subpart'' in the matter preceding 
     paragraph (1) and inserting ``title'', and
       (B) by adding at the end the following: ``Such term shall 
     include any entity treated as a controlled foreign 
     corporation under section 245A(b).''.
       (4) The table of sections for part VIII of subchapter B of 
     chapter 1 is amended by inserting after the item relating to 
     section 245 the following new item:

``Sec. 245A. Dividends received by domestic corporations from certain 
              foreign corporations.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2012, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 102. APPLICATION OF DIVIDENDS RECEIVED DEDUCTION TO 
                   CERTAIN SALES AND EXCHANGES OF STOCK.

       (a) Sales by United States Persons of Stock in CFC.--
     Section 1248 is amended by redesignating subsection (j) as 
     subsection (k) and by inserting after subsection (i) the 
     following new subsection:
       ``(j) Coordination With Dividends Received Deduction.--
       ``(1) In general.--In the case of the sale or exchange by a 
     domestic corporation of stock in a foreign corporation held 
     for 1 year or more, any amount received by the domestic 
     corporation which is treated as a dividend by reason of this 
     section shall be treated as a dividend for purposes of 
     applying section 245A.
       ``(2) Losses disallowed.--If a domestic corporation--
       ``(A) sells or exchanges stock in a foreign corporation in 
     a taxable year of the domestic corporation with or within 
     which a taxable year of the foreign corporation beginning 
     after December 31, 2012, ends, and
       ``(B) met the ownership requirements of subsection (a)(2) 
     with respect to such stock,
     no deduction shall be allowed to the domestic corporation 
     with respect to any loss from the sale or exchange.''.
       (b) Sale by a CFC of a Lower Tier CFC.--Section 964(e) is 
     amended by adding at the end the following new paragraph:
       ``(4) Coordination with dividends received deduction.--
       ``(A) In general.--If, for any taxable year of a controlled 
     foreign corporation beginning after December 31, 2012, any 
     amount is treated as a dividend under paragraph (1) by reason 
     of a sale or exchange by the controlled foreign corporation 
     of stock in another foreign corporation held for 1 year or 
     more, then, notwithstanding any other provision of this 
     title--
       ``(i) the qualified foreign-source portion of such dividend 
     shall be treated for purposes of section 951(a)(1)(A) as 
     subpart F income of the selling controlled foreign 
     corporation for such taxable year,
       ``(ii) a United States shareholder with respect to the 
     selling controlled foreign corporation shall include in gross 
     income for the taxable year of the shareholder with or within 
     which such taxable year of the controlled foreign corporation 
     ends an amount equal to the shareholder's pro rata share 
     (determined in the same manner as under section 951(a)(2)) of 
     the amount treated as subpart F income under clause (i), and
       ``(iii) the deduction under section 245A(a) shall be 
     allowable to the United States shareholder with respect to 
     the subpart F income included in gross income under clause 
     (ii) in the same manner as if such subpart F income were a 
     dividend received by the shareholder from the selling 
     controlled foreign corporation.
       ``(B) Effect of loss on earnings and profits.--For purposes 
     of this title, in the case of a sale or exchange by a 
     controlled foreign corporation of stock in another foreign 
     corporation in a taxable year of the selling controlled 
     foreign corporation beginning after December 31, 2012, to 
     which this paragraph would apply if gain were recognized, the 
     earnings and profits of the selling controlled foreign 
     corporation shall not be reduced by reason of any loss from 
     such sale or exchange.
       ``(C) Qualified foreign-source portion.--For purposes of 
     this paragraph, the qualified foreign-source portion of any 
     amount treated as a dividend under paragraph (1) shall be 
     determined in the same manner as under section 245A(c).''.

     SEC. 103. DEDUCTION FOR FOREIGN INTANGIBLE INCOME DERIVED 
                   FROM TRADE OR BUSINESS WITHIN THE UNITED 
                   STATES.

       (a) In General.--Part VIII of subchapter B of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 250. FOREIGN INTANGIBLE INCOME DERIVED FROM TRADE OR 
                   BUSINESS WITHIN THE UNITED STATES.

       ``(a) In General.--In the case of a domestic corporation, 
     there shall be allowed as a deduction an amount equal to 50 
     percent of the qualified foreign intangible income of such 
     domestic corporation for the taxable year.
       ``(b) Qualified Foreign Intangible Income.--

[[Page S500]]

       ``(1) In general.--The term `qualified foreign intangible 
     income' means, with respect to any domestic corporation, 
     foreign intangible income which is derived by the domestic 
     corporation from the active conduct of a trade or business 
     within the United States with respect to the intangible 
     property giving rise to the income.
       ``(2) Requirements relating to trade or business within the 
     united states.--For purposes of this section, foreign 
     intangible income shall be treated as derived by a domestic 
     corporation from the active conduct of a trade or business 
     within the United States only if--
       ``(A) the domestic corporation developed, created, or 
     produced within the United States the intangible property 
     giving rise to the income, or
       ``(B) in any case in which the domestic corporation 
     acquired such intangible property, the domestic corporation 
     added substantial value to the property through the active 
     conduct of such trade or business within the United States.
       ``(c) Foreign Intangible Income.--For purposes of this 
     section--
       ``(1) In general.--The term `foreign intangible income' 
     means any intangible income which is derived in connection 
     with--
       ``(A) property which is sold, leased, licensed, or 
     otherwise disposed of for use, consumption, or disposition 
     outside the United States, or
       ``(B) services provided with respect to persons or property 
     located outside the United States.
       ``(2) Exceptions for certain income.--The following amounts 
     shall not be taken into account in computing foreign 
     intangible income:
       ``(A) Any amount treated as received by the domestic 
     corporation under section 367(d)(2) with respect to any 
     intangible property.
       ``(B) Any payment under a cost-sharing arrangement entered 
     into under section 482.
       ``(C) Any amount received from a controlled foreign 
     corporation with respect to which the domestic corporation is 
     a United States shareholder to the extent such amount is 
     attributable or properly allocable to income which is--
       ``(i) effectively connected with the conduct of a trade or 
     business within the United States and subject to tax under 
     this chapter, or
       ``(ii) subpart F income.

     For purposes of clause (ii), amounts not otherwise treated as 
     subpart F income shall be so treated if the amount creates 
     (or increases) a deficit which under section 952(c) may 
     reduce the subpart F income of the payor or any other 
     controlled foreign corporation.
       ``(3) Intangible income.--The term `intangible income' 
     means gross income from--
       ``(A) the sale, lease, license, or other disposition of 
     property in which intangible property is used directly or 
     indirectly, or
       ``(B) the provision of services related to intangible 
     property or in connection with property in which intangible 
     property is used directly or indirectly,
     to the extent that such gross income is properly attributable 
     to such intangible property.
       ``(4) Deductions to be taken into account.--The gross 
     income of a domestic corporation taken into account under 
     this subsection shall be reduced, under regulations 
     prescribed by the Secretary, so as to take into account 
     deductions properly allocable to such income.
       ``(5) Intangible property.--The term `intangible property' 
     has the meaning given such term by section 936(h)(3)(B).
       ``(d) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provisions of this section.''.
       (b) Conforming Amendment.--The table of sections for part 
     VIII of subchapter B of chapter 1 is amended by adding at the 
     end the following new item:

``Sec. 250. Foreign intangible income derived from trade or business 
              within the United States.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of domestic corporations 
     beginning after December 31, 2012.

     SEC. 104. TREATMENT OF DEFERRED FOREIGN INCOME UPON 
                   TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF 
                   TAXATION.

       (a) In General.--Section 965 is amended to read as follows:

     ``SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON 
                   TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF 
                   TAXATION.

       ``(a) Deduction Allowed.--In the case of a domestic 
     corporation which elects the application of this section to 
     any controlled foreign corporation with respect to which it 
     is a United States shareholder, there shall be allowed as a 
     deduction for the taxable year of the United States 
     shareholder with or within which the first taxable year of 
     the controlled foreign corporation beginning after December 
     31, 2012, ends an amount equal to 70 percent of the amount 
     determined under subsection (b) for the taxable year.
       ``(b) Eligible Amount.--For purposes of subsection (a)--
       ``(1) In general.--The amount determined under this 
     subsection for a United States shareholder with respect to 
     any controlled foreign corporation for the taxable year of 
     the shareholder described in subsection (a) is the lesser 
     of--
       ``(A) the shareholder's pro rata share of the earnings and 
     profits of the controlled foreign corporation described in 
     section 959(c)(3) as of the close of the taxable year 
     preceding the first taxable year of the controlled foreign 
     corporation beginning after December 31, 2012, or
       ``(B) an amount equal to the sum of--
       ``(i) the dividends received by the shareholder during such 
     taxable year from the controlled foreign corporation which 
     are attributable to the earnings and profits described in 
     subparagraph (A), plus
       ``(ii) the increase in subpart F income required to be 
     included in gross income of the shareholder for the taxable 
     year by reason of the election under paragraph (2).
       ``(2) Election of deemed subpart f inclusion.--A United 
     States shareholder may elect for purposes of paragraph 
     (1)(B)(ii) to treat all (or any portion) of the shareholder's 
     pro rata share of the earnings and profits of a controlled 
     foreign corporation described in paragraph (1)(A) as subpart 
     F income includible in the gross income of the shareholder 
     for the taxable year of the shareholder described in 
     subsection (a).
       ``(3) Ordering rule.--For purposes of paragraph (1)(B)(i), 
     distributions shall be treated as first made out of earnings 
     and profits of a controlled foreign corporation described in 
     paragraph (1)(A).
       ``(4) Dividend.--The term `dividend' shall not include 
     amounts includible in gross income as a dividend under 
     section 78.
       ``(c) Disallowance of Foreign Tax Credit, etc.--In the case 
     of a domestic corporation making an election under subsection 
     (a) with respect to any controlled foreign corporation--
       ``(1) In general.--No credit shall be allowed under section 
     901 for any taxes paid or accrued (or treated as paid or 
     accrued) with respect to the earnings and profits taken into 
     account in determining the amount under subsection (b).
       ``(2) Denial of deduction.--No deduction shall be allowed 
     under this chapter for any tax for which credit is not 
     allowable under section 901 by reason of paragraph (1).
       ``(3) Coordination with section 78.--Section 78 shall not 
     apply to any tax for which credit is not allowable under 
     section 901 by reason of paragraph (1).
       ``(4) Treatment of nondeductible portion in applying 
     foreign tax credit limit.--For purposes of applying the 
     limitation under section 904(a), the remaining 30 percent of 
     the amount determined under subsection (b) with respect to 
     which a deduction is not allowable under subsection (a) shall 
     be treated as income from sources within the United States.
       ``(d) Election to Pay Liability for Deemed Subpart F Income 
     in Installments.--
       ``(1) In general.--In the case of a United States 
     shareholder with respect to 1 or more controlled foreign 
     corporations to which elections under subsections (a) and 
     (b)(2) apply, such United States shareholder may elect to pay 
     the net tax liability determined with respect to its deemed 
     subpart F inclusions with respect to such corporations under 
     subsection (b)(2) for the taxable year described in 
     subsection (a) in 2 or more (but not exceeding 8) equal 
     installments.
       ``(2) Date for payment of installments.--If an election is 
     made under paragraph (1), the first installment shall be paid 
     on the due date (determined without regard to any extension 
     of time for filing the return) for the return of tax for the 
     taxable year for which the election was made and each 
     succeeding installment shall be paid on the due date (as so 
     determined) for the return of tax for the taxable year 
     following the taxable year with respect to which the 
     preceding installment was made.
       ``(3) Acceleration of payment.--If there is an addition to 
     tax for failure to pay timely assessed with respect to any 
     installment required under this subsection, a liquidation or 
     sale of substantially all the assets of the taxpayer 
     (including in a title 11 or similar case), a cessation of 
     business by the taxpayer, or any similar circumstance, then 
     the unpaid portion of all remaining installments shall be due 
     on the date of such event (or in the case of a title 11 or 
     similar case, the day before the petition is filed).
       ``(4) Proration of deficiency to installments.--If an 
     election is made under paragraph (1) to pay the net tax 
     liability described in paragraph (1) in installments and a 
     deficiency has been assessed which increases such net tax 
     liability, the increase shall be prorated to the installments 
     payable under paragraph (1). The part of the increase so 
     prorated to any installment the date for payment of which has 
     not arrived shall be collected at the same time as, and as a 
     part of, such installment. The part of the increase so 
     prorated to any installment the date for payment of which has 
     arrived shall be paid upon notice and demand from the 
     Secretary. This subsection shall not apply if the deficiency 
     is due to negligence, to intentional disregard of rules and 
     regulations, or to fraud with intent to evade tax.
       ``(5) Time for payment of interest.--Interest payable under 
     section 6601 on the unpaid portion of any amount of tax the 
     time for payment of which as been extended under this 
     subsection shall be paid annually at the same time as, and as 
     part of, each installment payment of such tax. In the case of 
     a deficiency to which paragraph (4) applies, interest with 
     respect to such deficiency which is assigned under the 
     preceding sentence to

[[Page S501]]

     any installment the date for payment of which has arrived on 
     or before the date of the assessment of the deficiency, shall 
     be paid upon notice and demand from the Secretary.
       ``(6) Net tax liability for deemed subpart f inclusions.--
     For purposes of this subsection--
       ``(A) In general.--The net tax liability described in 
     paragraph (1) with respect to any United States shareholder 
     for any taxable year is the excess (if any) of--
       ``(i) such taxpayer's net income tax for the taxable year, 
     over
       ``(ii) such taxpayer's net income tax for such taxable year 
     determined as if the elections under subsection (b)(2) with 
     respect to 1 or more controlled foreign corporations had not 
     been made.
       ``(B) Net income tax.--The term `net income tax' means the 
     net income tax (as defined in section 38(c)(1)) reduced by 
     the credit allowed under section 38.
       ``(e) Special Rules.--For purposes of this section--
       ``(1) Elections.--Any election under subsection (a), 
     (b)(2), or (d)(1) shall be made not later than the due date 
     (including extensions) for the return of tax for the taxable 
     year for which made and shall be made in such manner as the 
     Secretary may provide.
       ``(2) Section not to apply to noncontrolled section 902 
     corporations treated as cfcs.--No election may be made under 
     subsection (a) with respect to a controlled foreign 
     corporation which was a noncontrolled section 902 corporation 
     which a United States shareholder elected under section 
     245A(b) to treat as a controlled foreign corporation.
       ``(3) Pro rata share.--A shareholder's pro rata share of 
     any earnings and profits shall be determined in the same 
     manner as under section 951(a)(2).''
       (b) Conforming Amendments.--
       (1) Clause (vi) of section 56(g)(4)(C), as amended by this 
     Act, is amended--
       (A) by striking ``965'' and inserting ``965(b)'', and
       (B) by inserting ``and inclusions'' after ``certain 
     distributions'' in the heading thereof.
       (2) Paragraph (2) of section 6601(b) is amended--
       (A) by striking ``section 6156(a)'' in the matter preceding 
     subparagraph (A) and inserting ``section 965(d)(1) or 
     6156(a)'', and
       (B) by striking ``section 6156(b)'' in subparagraph (A) and 
     inserting ``section 965(d)(2) or 6156(b), as the case may 
     be''.
       (3) The table of section for subpart F of part III of 
     subchapter N of chapter 1 is amended by striking the item 
     relating to section 965 and inserting the following:

``Sec. 965. Treatment of deferred foreign income upon transition to 
              participation exemption system of taxation.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2012, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

               TITLE II--OTHER INTERNATIONAL TAX REFORMS

                 Subtitle A--Modifications of Subpart F

     SEC. 201. TREATMENT OF LOW-TAXED FOREIGN INCOME AS SUBPART F 
                   INCOME.

       (a) In General.--Subsection (a) of section 952 is amended 
     by redesignating paragraphs (3), (4), and (5) as paragraphs 
     (4), (5), and (6), respectively, and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) low-taxed income (as defined under subsection 
     (e)),''.
       (b) Low-taxed Income.--Section 952 is amended by adding at 
     the end the following new subsection:
       ``(e) Low-taxed Income.--
       ``(1) In general.--For purposes of subsection (a), except 
     as provided in paragraph (2), the term `low-taxed income' 
     means, with respect to any taxable year of a controlled 
     foreign corporation, the entire gross income of the 
     controlled foreign corporation unless the taxpayer 
     establishes to the satisfaction of the Secretary that such 
     income was subject to an effective rate of income tax 
     (determined under rules similar to the rules of section 
     954(b)(4)) imposed by a foreign country in excess of one-half 
     of the highest rate of tax under section 11(b) for taxable 
     years of United States corporations beginning in the same 
     calendar year as the taxable year of the controlled foreign 
     corporation begins.
       ``(2) Exception for qualified business income.--For 
     purposes of paragraph (1), qualified business income--
       ``(A) shall be taken into account in determining the 
     effective rate of income tax at which the entire gross income 
     of the controlled foreign corporation is taxed, but
       ``(B) the amount of gross income treated as low-taxed 
     income under paragraph (1) shall be reduced by the amount of 
     the qualified business income.
       ``(3) Qualified business income.--For purposes of this 
     subsection--
       ``(A) In general.--The term `qualified business income' 
     means, with respect to any controlled foreign corporation, 
     income derived by the controlled foreign corporation in a 
     foreign country but only if--
       ``(i) such income is attributable to the active conduct of 
     a trade or business of such corporation in such foreign 
     country,
       ``(ii) the corporation maintains an office or fixed place 
     of business in such foreign country, and
       ``(iii) officers and employees of the corporation 
     physically located at such office or place of business in 
     such foreign country conducted (or significantly contributed 
     to the conduct of) activities within the foreign country 
     which are substantial in relation to the activities necessary 
     for the active conduct of the trade or business to which such 
     income is attributable.
       ``(B) Exception for intangible income.--For purposes of 
     subparagraph (A), qualified business income of a controlled 
     foreign corporation shall not include intangible income (as 
     defined in section 250(c)(3)).
       ``(4) Determination of effective rate of foreign income tax 
     and qualified business income.--
       ``(A) Country-by-country determination.--For purposes of 
     determining the effective rate of income tax imposed by any 
     foreign country under paragraph (1) and qualified business 
     income under paragraph (3), each such paragraph shall be 
     applied separately with respect to--
       ``(i) each foreign country in which a controlled foreign 
     corporation conducts any trade or business, and
       ``(ii) the entire gross income and qualified business 
     income derived with respect to such foreign country.
       ``(B) Treatment of losses.--For purposes of determining the 
     effective rate of income tax imposed by any foreign country 
     under paragraph (1)--
       ``(i) such effective rate shall be determined without 
     regard to any losses carried to the relevant taxable year, 
     and
       ``(ii) to the extent the income of the controlled foreign 
     corporation reduces losses in the relevant taxable year, such 
     effective rate shall be treated as being the effective rate 
     which would have been imposed on such income without regard 
     to such losses.
       ``(5) Deductions to be taken into account.--The gross 
     income of a controlled foreign corporation taken into account 
     under this subsection shall be reduced, under regulations 
     prescribed by the Secretary, so as to take into account 
     deductions (including taxes) properly allocable to such 
     income.''.
       (c) Conforming Amendments.--
       (1) Subsection (a) of section 952 is amended--
       (A) by striking ``paragraph (4)'' in the next to last 
     sentence and inserting ``paragraph (5)'', and
       (B) by striking ``paragraph (5)'' in the last sentence and 
     inserting ``paragraph (6)''.
       (2) Subsection (d) of section 952 is amended by striking 
     ``subsection (a)(5)'' and inserting ``subsection (a)(6)''.
       (3) Paragraphs (1) and (2) of section 999(c) are each 
     amended by striking ``section 952(a)(3)'' and inserting 
     ``section 952(a)(4)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2012, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 202. PERMANENT EXTENSION OF LOOK-THRU RULE FOR 
                   CONTROLLED FOREIGN CORPORATIONS.

       (a) In General.--Section 954(c)(6)(C) is amended by 
     striking ``and before January 1, 2012,''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2011, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 203. PERMANENT EXTENSION OF EXCEPTIONS FOR ACTIVE 
                   FINANCING INCOME.

       (a) Exception From Insurance Income.--Section 953(e)(10) is 
     amended--
       (1) by striking ``and before January 1, 2012,'', and
       (2) by striking the last sentence.
       (b) Exception From Foreign Personal Holding Company 
     Income.--Section 954(h)(9) is amended by striking ``and 
     before January 1, 2012,''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2011, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 204. FOREIGN BASE COMPANY INCOME NOT TO INCLUDE SALES OR 
                   SERVICES INCOME.

       (a) Repeal.--Paragraphs (2) and (3) of section 954(a) are 
     repealed.
       (b) Conforming Amendments.--
       (1) Section 954(d) is amended by adding at the end the 
     following new paragraph:
       ``(5) Termination.--This subsection shall not apply to 
     taxable years of foreign corporations beginning after 
     December 31, 2012, and to taxable years of United States 
     shareholders with or within which such taxable years of 
     foreign corporations end.''.
       (2) Section 954(e) is amended by adding at the end the 
     following new paragraph:
       ``(3) Termination.--This subsection shall not apply to 
     taxable years of foreign corporations beginning after 
     December 31, 2012, and to taxable years of United States 
     shareholders with or within which such taxable years of 
     foreign corporations end.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2012, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

[[Page S502]]

        Subtitle B--Modifications Related to Foreign Tax Credit

     SEC. 211. MODIFICATION OF APPLICATION OF SECTIONS 902 AND 960 
                   WITH RESPECT TO POST-2012 EARNINGS.

       (a) Section 902 Not to Apply to Dividends From Post-2012 
     Earnings.--Section 902 is amended by redesignating subsection 
     (d) as subsection (e) and by inserting after subsection (c) 
     the following new subsection:
       ``(d) Section Not to Apply to Dividends From Post-2012 
     Earnings.--
       ``(1) In general.--This section shall not apply to the 
     portion of any dividend paid by a foreign corporation to the 
     extent such portion is made out of earnings and profits of 
     the foreign corporation (computed in accordance with sections 
     964(a) and 986) accumulated in taxable years beginning after 
     December 31, 2012.
       ``(2) Coordination with distributions from pre-2013 
     earnings and profits.--For purposes of this section--
       ``(A) Ordering rule.--Any distribution in a taxable year 
     beginning after December 31, 2012, shall be treated as first 
     made out of earnings and profits of the foreign corporation 
     (computed in accordance with sections 964(a) and 986) 
     accumulated in taxable years beginning before January 1, 
     2013.
       ``(B) Post-1986 undistributed earnings.--Post-1986 
     undistributed earnings shall not include earnings and profits 
     described in paragraph (1).''
       (b) Determination of Section 960 Credit on Current Year 
     Basis.--Section 960 is amended by adding at the end the 
     following new subsection:
       ``(d) Deemed Paid Credit for Subpart F Inclusions 
     Attributable to Post-2012 Earnings.--
       ``(1) In general.--For purposes of this subpart, if there 
     is included in the gross income of a domestic corporation any 
     amount under section 951(a)--
       ``(A) with respect to any controlled foreign corporation 
     with respect to which such domestic corporation is a United 
     States shareholder, and
       ``(B) which is attributable to the earnings and profits of 
     the controlled foreign corporation (computed in accordance 
     with sections 964(a) and 986) accumulated in taxable years 
     beginning after December 31, 2012,

     then subsections (a), (b), and (c) shall not apply and such 
     domestic corporation shall be deemed to have paid so much of 
     such foreign corporation's foreign income taxes as are 
     properly attributable to the amount so included.
       ``(2) Foreign income taxes.--For purposes of this 
     subsection, the term `foreign income taxes' means any income, 
     war profits, or excess profits taxes paid or accrued by the 
     controlled foreign corporation to any foreign country or 
     possession of the United States.
       ``(3) Regulations.--The Secretary shall provide such 
     regulations as may be necessary or appropriate to carry out 
     the provisions of this subsection.''.

     SEC. 212. SEPARATE FOREIGN TAX CREDIT BASKET FOR FOREIGN 
                   INTANGIBLE INCOME.

       (a) In General.--Paragraph (1) of section 904(d) is amended 
     by striking ``and'' at the end of subparagraph (A), by 
     striking the period at the end of subparagraph (B) and 
     inserting ``, and'', and by adding at the end the following:
       ``(C) foreign intangible income (as defined in paragraph 
     (2)(J)).''.
       (b) Foreign Intangible Income.--
       (1) In general.--Section 904(d)(2) is amended by 
     redesignating subparagraphs (J) and (K) as subparagraphs (K) 
     and (L) and by inserting after subparagraph (I) the 
     following:
       ``(J) Foreign intangible income.--For purposes of this 
     section--
       ``(i) In general.--The term `foreign intangible income' has 
     the meaning given such term by section 250(c).
       ``(ii) Coordination.--Passive category income and general 
     category income shall not include foreign intangible 
     income.''
       (2) General category income.--Section 904(d)(2)(A)(ii) is 
     amended by inserting ``or foreign intangible income'' after 
     ``passive category income''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2012.
       (2) Transitional rule.--For purposes of section 904(d)(1) 
     of the Internal Revenue Code of 1986 (as amended by this 
     Act)--
       (A) taxes carried from any taxable year beginning before 
     January 1, 2013, to any taxable year beginning on or after 
     such date, with respect to any item of income, shall be 
     treated as described in the subparagraph of such section 
     904(d)(1) in which such income would be described without 
     regard to the amendments made by this section, and
       (B) any carryback of taxes with respect to foreign 
     intangible income from a taxable year beginning on or after 
     January 1, 2013, to a taxable year beginning before such date 
     shall be allocated to the general income category.

     SEC. 213. INVENTORY PROPERTY SALES SOURCE RULE EXCEPTIONS NOT 
                   TO APPLY FOR FOREIGN TAX CREDIT LIMITATION.

       (a) In General.--Section 904 is amended by redesignating 
     subsection (l) as subsection (m) and by inserting after 
     subsection (k) the following new subsection:
       ``(l) Inventory Property Sales Source Rule Exceptions Not 
     to Apply.--Any amount which would be treated as derived from 
     sources without the United States by reason of the 
     application of section 862(a)(6) or 863(b)(2) for any taxable 
     year shall be treated as derived from sources within the 
     United States for purposes of this section.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2012.

         Subtitle C--Allocation of Interest on Worldwide Basis

     SEC. 221. ACCELERATION OF ELECTION TO ALLOCATE INTEREST ON A 
                   WORLDWIDE BASIS.

       Section 864(f)(6) is amended by striking ``December 31, 
     2020'' and inserting ``December 31,
                                 ______