[Congressional Record (Bound Edition), Volume 146 (2000), Part 18]
[Senate]
[Pages 25792-25797]
[From the U.S. Government Publishing Office, www.gpo.gov]



      FSC REPEAL AND EXTRATERRITORIAL INCOME EXCLUSION ACT OF 2000

  Mr. LOTT. Mr. President, I ask unanimous consent that the Senate turn 
to Calendar No. 817, H.R. 4986, regarding foreign sales corporations, 
and following the reporting by the clerk, the committee amendments be 
immediately withdrawn, the compromise text regarding FSCs, which is 
contained in the tax conference report, be added as an amendment, which 
I will send to the desk, the bill then be immediately read for a third 
time, and passage occur, all without any intervening action, motion, or 
debate.
  The PRESIDING OFFICER. Is there objection?
  Mr. WELLSTONE. Mr. President, reserving the right to object.
  Mr. GRAMM. Could we have order, Mr. President.
  The PRESIDING OFFICER. There will be order in the Senate, please.
  Mr. WELLSTONE. Some of us had amendments we wanted to offer. That is 
part of the legislative process. I want to have 10 minutes to speak on 
an amendment I wanted to offer on this bill.
  Mr. LOTT. Mr. President, I respond to the Senator that I had planned 
to ask for a period of morning business with Senators permitted to 
speak for up to 10 minutes each. I will be glad to specify that the 
Senator would have the first 10 minutes to comment on this issue.
  The PRESIDING OFFICER. Is there objection?
  Mr. DURBIN. Mr. President, reserving the right to object, in the 
interest of allowing the Senate to vote, and following the majority 
leader's suggestion, I ask unanimous consent for 10 minutes in morning 
business to address this issue.
  The PRESIDING OFFICER. Is there objection?
  Mr. LOTT. Mr. President, is there objection to my request?
  The PRESIDING OFFICER. Is there objection?
  Mr. WELLSTONE. I will not object.
  The PRESIDING OFFICER. Is there an objection?
  Without objection, it is so ordered.
  The clerk will report the bill by title.
  The legislative clerk read as follows:

       An act (H.R. 4986) to amend the Internal Revenue Code of 
     1986 to repeal the provisions relating to foreign sales 
     corporations (FSCs) and to exclude extraterritorial income 
     from gross income.

  The Senate proceeded to consider the bill, which had been reported 
from the Committee on Finance, with amendments as follows:
  (Omit the parts in boldface brackets and insert the parts printed in 
italic.)

                               H.R. 4986

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

     SECTION 1. SHORT TITLE.

       (a) Short Title.--This Act may be cited as the ``FSC Repeal 
     and Extraterritorial Income Exclusion Act of 2000''.
       (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.

     SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

       Subpart C of part III of subchapter N of chapter 1 
     (relating to taxation of foreign sales corporations) is 
     hereby repealed.

     SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

       (a) In General.--Part III of subchapter B of chapter 1 
     (relating to items specifically excluded from gross income) 
     is amended by inserting before section 115 the following new 
     section:

     ``SEC. 114. EXTRATERRITORIAL INCOME.

       ``(a) Exclusion.--Gross income does not include 
     extraterritorial income.
       ``(b) Exception.--Subsection (a) shall not apply to 
     extraterritorial income which is not qualifying foreign trade 
     income as determined under subpart E of part III of 
     subchapter N.
       ``(c) Disallowance of Deductions.--
       ``(1) In general.--Any deduction of a taxpayer allocated 
     under paragraph (2) to extraterritorial income of the 
     taxpayer excluded from gross income under subsection (a) 
     shall not be allowed.
       ``(2) Allocation.--Any deduction of the taxpayer properly 
     apportioned and allocated

[[Page 25793]]

     to the extraterritorial income derived by the taxpayer from 
     any transaction shall be allocated on a proportionate basis 
     between--
       ``(A) the extraterritorial income derived from such 
     transaction which is excluded from gross income under 
     subsection (a), and
       ``(B) the extraterritorial income derived from such 
     transaction which is not so excluded.
       ``(d) Denial of Credits for Certain Foreign Taxes.--
     Notwithstanding any other provision of this chapter, no 
     credit shall be allowed under this chapter for any income, 
     war profits, and excess profits taxes paid or accrued to any 
     foreign country or possession of the United States with 
     respect to extraterritorial income which is excluded from 
     gross income under subsection (a).
       ``(e) Extraterritorial Income.--For purposes of this 
     section, the term `extraterritorial income' means the gross 
     income of the taxpayer attributable to foreign trading gross 
     receipts (as defined in section 942) of the taxpayer.''.
       (b) Qualifying Foreign Trade Income.--Part III of 
     subchapter N of chapter 1 is amended by inserting after 
     subpart D the following new subpart:

              ``Subpart E--Qualifying Foreign Trade Income

``Sec. 941. Qualifying foreign trade income.
``Sec. 942. Foreign trading gross receipts.
``Sec. 943. Other definitions and special rules.

     ``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

       ``(a) Qualifying Foreign Trade Income.--For purposes of 
     this subpart and section 114--
       ``(1) In general.--The term `qualifying foreign trade 
     income' means, with respect to any transaction, the amount of 
     gross income which, if excluded, will result in a reduction 
     of the taxable income of the taxpayer from such transaction 
     equal to the greatest of--
       ``(A) 30 percent of the foreign sale and leasing income 
     derived by the taxpayer from such transaction,
       ``(B) 1.2 percent of the foreign trading gross receipts 
     derived by the taxpayer from the transaction, or
       ``(C) 15 percent of the foreign trade income derived by the 
     taxpayer from the transaction.
     In no event shall the amount determined under subparagraph 
     (B) exceed 200 percent of the amount determined under 
     subparagraph (C).
       ``(2) Alternative computation.--A taxpayer may compute its 
     qualifying foreign trade income under a subparagraph of 
     paragraph (1) other than the subparagraph which results in 
     the greatest amount of such income.
       ``(3) Limitation on use of foreign trading gross receipts 
     method.--If any person computes its qualifying foreign trade 
     income from any transaction with respect to any property 
     under paragraph (1)(B), the qualifying foreign trade income 
     of such person (or any related person) with respect to any 
     other transaction involving such property shall be zero.
       ``(4) Rules for marginal costing.--The Secretary shall 
     prescribe regulations setting forth rules for the allocation 
     of expenditures in computing foreign trade income under 
     paragraph (1)(C) in those cases where a taxpayer is seeking 
     to establish or maintain a market for qualifying foreign 
     trade property.
       ``(5) Participation in international boycotts, etc.--Under 
     regulations prescribed by the Secretary, the qualifying 
     foreign trade income of a taxpayer for any taxable year shall 
     be reduced (but not below zero) by the sum of--
       ``(A) an amount equal to such income multiplied by the 
     international boycott factor determined under section 999, 
     and
       ``(B) any illegal bribe, kickback, or other payment (within 
     the meaning of section 162(c)) paid by or on behalf of the 
     taxpayer directly or indirectly to an official, employee, or 
     agent in fact of a government.
       ``(b) Foreign Trade Income.--For purposes of this subpart--
       ``(1) In general.--The term `foreign trade income' means 
     the taxable income of the taxpayer attributable to foreign 
     trading gross receipts of the taxpayer.
       ``(2) Special rule for cooperatives.--In any case in which 
     an organization to which part I of subchapter T applies which 
     is engaged in the marketing of agricultural or horticultural 
     products sells qualifying foreign trade property, in 
     computing the taxable income of such cooperative, there shall 
     not be taken into account any deduction allowable under 
     subsection (b) or (c) of section 1382 (relating to patronage 
     dividends, per-unit retain allocations, and nonpatronage 
     distributions).
       ``(c) Foreign Sale and Leasing Income.--For purposes of 
     this section--
       ``(1) In general.--The term `foreign sale and leasing 
     income' means, with respect to any transaction--
       ``(A) foreign trade income properly allocable to activities 
     which--
       ``(i) are described in paragraph (2)(A)(i) or (3) of 
     section 942(b), and
       ``(ii) are performed by the taxpayer (or any person acting 
     under a contract with such taxpayer) outside the United 
     States, or
       ``(B) foreign trade income derived by the taxpayer in 
     connection with the lease or rental of qualifying foreign 
     trade property for use by the lessee outside the United 
     States.
       ``(2) Special rules for leased property.--
       ``(A) Sales income.--The term `foreign sale and leasing 
     income' includes any foreign trade income derived by the 
     taxpayer from the sale of property described in paragraph 
     (1)(B).
       ``(B) Limitation in certain cases.--Except as provided in 
     regulations, in the case of property which--
       ``(i) was manufactured, produced, grown, or extracted by 
     the taxpayer, or
       ``(ii) was acquired by the taxpayer from a related person 
     for a price which was not determined in accordance with the 
     rules of section 482,

     the amount of foreign trade income which may be treated as 
     foreign sale and leasing income under paragraph (1)(B) or 
     subparagraph (A) of this paragraph with respect to any 
     transaction involving such property shall not exceed the 
     amount which would have been determined if the taxpayer had 
     acquired such property for the price determined in accordance 
     with the rules of section 482.
       ``(3) Special rules.--
       ``(A) Excluded property.--Foreign sale and leasing income 
     shall not include any income properly allocable to excluded 
     property described in subparagraph (B) of section 943(a)(3) 
     (relating to intangibles).
       ``(B) Only direct expenses taken into account.--For 
     purposes of this subsection, any expense other than a 
     directly allocable expense shall not be taken into account in 
     computing foreign trade income.

     ``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

       ``(a) Foreign Trading Gross Receipts.--
       ``(1) In general.--Except as otherwise provided in this 
     section, for purposes of this subpart, the term `foreign 
     trading gross receipts' means the gross receipts of the 
     taxpayer which are--
       ``(A) from the sale, exchange, or other disposition of 
     qualifying foreign trade property,
       ``(B) from the lease or rental of qualifying foreign trade 
     property for use by the lessee outside the United States,
       ``(C) for services which are related and subsidiary to--
       ``(i) any sale, exchange, or other disposition of 
     qualifying foreign trade property by such taxpayer, or
       ``(ii) any lease or rental of qualifying foreign trade 
     property described in subparagraph (B) by such taxpayer,
       ``(D) for engineering or architectural services for 
     construction projects located (or proposed for location) 
     outside the United States, or
       ``(E) for the performance of managerial services for a 
     person other than a related person in furtherance of the 
     production of foreign trading gross receipts described in 
     subparagraph (A), (B), or (C).

     Subparagraph (E) shall not apply to a taxpayer for any 
     taxable year unless at least 50 percent of its foreign 
     trading gross receipts (determined without regard to this 
     sentence) for such taxable year is derived from activities 
     described in subparagraph (A), (B), or (C).
       ``(2) Certain receipts excluded on basis of use; subsidized 
     receipts excluded.--The term `foreign trading gross receipts' 
     shall not include receipts of a taxpayer from a transaction 
     if--
       ``(A) the qualifying foreign trade property or services--
       ``(i) are for ultimate use in the United States, or
       ``(ii) are for use by the United States or any 
     instrumentality thereof and such use of qualifying foreign 
     trade property or services is required by law or regulation, 
     or
       ``(B) such transaction is accomplished by a subsidy granted 
     by the government (or any instrumentality thereof) of the 
     country or possession in which the property is manufactured, 
     produced, grown, or extracted.
       ``(3) Election to exclude certain receipts.--The term 
     `foreign trading gross receipts' shall not include gross 
     receipts of a taxpayer from a transaction if the taxpayer 
     elects not to have such receipts taken into account for 
     purposes of this subpart.
       ``(b) Foreign Economic Process Requirements.--
       ``(1) In general.--Except as provided in subsection (c), a 
     taxpayer shall be treated as having foreign trading gross 
     receipts from any transaction only if economic processes with 
     respect to such transaction take place outside the United 
     States as required by paragraph (2).
       ``(2) Requirement.--
       ``(A) In general.--The requirements of this paragraph are 
     met with respect to the gross receipts of a taxpayer derived 
     from any transaction if--
       ``(i) such taxpayer (or any person acting under a contract 
     with such taxpayer) has participated outside the United 
     States in the solicitation (other than advertising), the 
     negotiation, or the making of the contract relating to such 
     transaction, and
       ``(ii) the foreign direct costs incurred by the taxpayer 
     attributable to the transaction equal or exceed 50 percent of 
     the total direct costs attributable to the transaction.
       ``(B) Alternative 85-percent test.--A taxpayer shall be 
     treated as satisfying the requirements of subparagraph 
     (A)(ii) with respect to any transaction if, with respect to

[[Page 25794]]

     each of at least 2 subparagraphs of paragraph (3), the 
     foreign direct costs incurred by such taxpayer attributable 
     to activities described in such subparagraph equal or exceed 
     85 percent of the total direct costs attributable to 
     activities described in such subparagraph.
       ``(C) Definitions.--For purposes of this paragraph--
       ``(i) Total direct costs.--The term `total direct costs' 
     means, with respect to any transaction, the total direct 
     costs incurred by the taxpayer attributable to activities 
     described in paragraph (3) performed at any location by the 
     taxpayer or any person acting under a contract with such 
     taxpayer.
       ``(ii) Foreign direct costs.--The term `foreign direct 
     costs' means, with respect to any transaction, the portion of 
     the total direct costs which are attributable to activities 
     performed outside the United States.
       ``(3) Activities relating to qualifying foreign trade 
     property.--The activities described in this paragraph are any 
     of the following with respect to qualifying foreign trade 
     property--
       ``(A) advertising and sales promotion,
       ``(B) the processing of customer orders and the arranging 
     for delivery,
       ``(C) transportation outside the United States in 
     connection with delivery to the customer,
       ``(D) the determination and transmittal of a final invoice 
     or statement of account or the receipt of payment, and
       ``(E) the assumption of credit risk.
       ``(4) Economic processes performed by related persons.--A 
     taxpayer shall be treated as meeting the requirements of this 
     subsection with respect to any sales transaction involving 
     any property if any related person has met such requirements 
     in such transaction or any other sales transaction involving 
     such property.
       ``(c) Exception From Foreign Economic Process 
     Requirement.--
       ``(1) In general.--The requirements of subsection (b) shall 
     be treated as met for any taxable year if the foreign trading 
     gross receipts of the taxpayer for such year do not exceed 
     $5,000,000.
       ``(2) Receipts of related persons aggregated.--All related 
     persons shall be treated as one person for purposes of 
     paragraph (1), and the limitation under paragraph (1) shall 
     be allocated among such persons in a manner provided in 
     regulations prescribed by the Secretary.
       ``(3) Special rule for pass-thru entities.--In the case of 
     a partnership, S corporation, or other pass-thru entity, the 
     limitation under paragraph (1) shall apply with respect to 
     the partnership, S corporation, or entity and with respect to 
     each partner, shareholder, or other owner.

     ``SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

       ``(a) Qualifying Foreign Trade Property.--For purposes of 
     this subpart--
       ``(1) In general.--The term `qualifying foreign trade 
     property' means property--
       ``(A) manufactured, produced, grown, or extracted within or 
     outside the United States,
       ``(B) held primarily for sale, lease, or rental, in the 
     ordinary course of trade or business for direct use, 
     consumption, or disposition outside the United States, and
       ``(C) not more than 50 percent of the fair market value of 
     which is attributable to--
       ``(i) articles manufactured, produced, grown, or extracted 
     outside the United States, and
       ``(ii) direct costs for labor (determined under the 
     principles of section 263A) performed outside the United 
     States.

     For purposes of subparagraph (C), the fair market value of 
     any article imported into the United States shall be its 
     appraised value, as determined by the Secretary under section 
     402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection 
     with its importation, and the direct costs for labor under 
     clause (ii) do not include costs that would be treated under 
     the principles of section 263A as direct labor costs 
     attributable to articles described in clause (i).
       ``(2) U.S. taxation to ensure consistent treatment.--
     Property which (without regard to this paragraph) is 
     qualifying foreign trade property and which is manufactured, 
     produced, grown, or extracted outside the United States shall 
     be treated as qualifying foreign trade property only if it is 
     manufactured, produced, grown, or extracted by--
       ``(A) a domestic corporation,
       ``(B) an individual who is a citizen or resident of the 
     United States,
       ``(C) a foreign corporation with respect to which an 
     election under subsection (e) (relating to foreign 
     corporations electing to be subject to United States 
     taxation) is in effect, or
       ``(D) a partnership or other pass-thru entity all of the 
     partners or owners of which are described in subparagraph 
     (A), (B), or (C).
     Except as otherwise provided by the Secretary, tiered 
     partnerships or pass-thru entities shall be treated as 
     described in subparagraph (D) if each of the partnerships or 
     entities is directly or indirectly wholly owned by persons 
     described in subparagraph (A), (B), or (C).
       ``(3) Excluded property.--The term `qualifying foreign 
     trade property' shall not include--
       ``(A) property leased or rented by the taxpayer for use by 
     any related person,
       ``(B) patents, inventions, models, designs, formulas, or 
     processes whether or not patented, copyrights (other than 
     films, tapes, records, or similar reproductions, and other 
     than computer software (whether or not patented), for 
     commercial or home use), goodwill, trademarks, trade brands, 
     franchises, or other like property,
       ``(C) oil or gas (or any primary product thereof),
       ``(D) products the transfer of which is prohibited or 
     curtailed to effectuate the policy set forth in paragraph 
     (2)(C) of section 3 of Public Law 96-72, or
       ``(E) any unprocessed timber which is a softwood.
     For purposes of subparagraph (E), the term `unprocessed 
     timber' means any log, cant, or similar form of timber.
       ``(4) Property in short supply.--If the President 
     determines that the supply of any property described in 
     paragraph (1) is insufficient to meet the requirements of the 
     domestic economy, the President may by Executive order 
     designate the property as in short supply. Any property so 
     designated shall not be treated as qualifying foreign trade 
     property during the period beginning with the date specified 
     in the Executive order and ending with the date specified in 
     an Executive order setting forth the President's 
     determination that the property is no longer in short supply.
       ``(b) Other Definitions and Rules.--For purposes of this 
     subpart--
       ``(1) Transaction.--
       ``(A) In general.--The term `transaction' means--
       ``(i) any sale, exchange, or other disposition,
       ``(ii) any lease or rental, and
       ``(iii) any furnishing of services.
       ``(B) Grouping of transactions.--To the extent provided in 
     regulations, any provision of this subpart which, but for 
     this subparagraph, would be applied on a transaction-by-
     transaction basis may be applied by the taxpayer on the basis 
     of groups of transactions based on product lines or 
     recognized industry or trade usage. Such regulations may 
     permit different groupings for different purposes.
       ``(2) United states defined.--The term `United States' 
     includes the Commonwealth of Puerto Rico. The preceding 
     sentence shall not apply for purposes of determining whether 
     a corporation is a domestic corporation.
       ``(3) Related person.--A person shall be related to another 
     person if such persons are treated as a single employer under 
     subsection (a) or (b) of section 52 or subsection (m) or (o) 
     of section 414, except that determinations under subsections 
     (a) and (b) of section 52 shall be made without regard to 
     section 1563(b).
       ``(4) Gross and taxable income.--Section 114 shall not be 
     taken into account in determining the amount of gross income 
     or foreign trade income from any transaction.
       ``(c) Source Rule.--Under regulations, in the case of 
     qualifying foreign trade property manufactured, produced, 
     grown, or extracted within the United States, the amount of 
     income of a taxpayer from any sales transaction with respect 
     to such property which is treated as from sources without the 
     United States shall not exceed--
       ``(1) in the case of a taxpayer computing its qualifying 
     foreign trade income under section 941(a)(1)(B), the amount 
     of the taxpayer's foreign trade income which would (but for 
     this subsection) be treated as from sources without the 
     United States if the foreign trade income were reduced by an 
     amount equal to 4 percent of the foreign trading gross 
     receipts with respect to the transaction, and
       ``(2) in the case of a taxpayer computing its qualifying 
     foreign trade income under section 941(a)(1)(C), 50 percent 
     of the amount of the taxpayer's foreign trade income which 
     would (but for this subsection) be treated as from sources 
     without the United States.
       ``(d) Treatment of Withholding Taxes.--
       ``(1) In general.--For purposes of section 114(d), any 
     withholding tax shall not be treated as paid or accrued with 
     respect to extraterritorial income which is excluded from 
     gross income under section 114(a). For purposes of this 
     paragraph, the term `withholding tax' means any tax which is 
     imposed on a basis other than residence and for which credit 
     is allowable under section 901 or 903.
       ``(2) Exception.--Paragraph (1) shall not apply to any 
     taxpayer with respect to extraterritorial income from any 
     transaction if the taxpayer computes its qualifying foreign 
     trade income with respect to the transaction under section 
     941(a)(1)(A).
       ``(e) Election To Be Treated as Domestic Corporation.--
       ``(1) In general.--An applicable foreign corporation may 
     elect to be treated as a domestic corporation for all 
     purposes of this title if such corporation waives all 
     benefits to such corporation granted by the United States 
     under any treaty. No election under section 1362(a) may be 
     made with respect to such corporation.
       ``(2) Applicable foreign corporation.--For purposes of 
     paragraph (1), the term `applicable foreign corporation' 
     means any foreign corporation if--
       ``(A) such corporation manufactures, produces, grows, or 
     extracts property in the ordinary course of such 
     corporation's trade or business, or

[[Page 25795]]

       ``(B) substantially all of the gross receipts of such 
     corporation may reasonably be expected to be foreign trading 
     gross receipts.
       ``(3) Period of election.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, an election under paragraph (1) shall apply to the 
     taxable year for which made and all subsequent taxable years 
     unless revoked by the taxpayer. Any revocation of such 
     election shall apply to taxable years beginning after such 
     revocation.
       ``(B) Termination.--If a corporation which made an election 
     under paragraph (1) for any taxable year fails to meet the 
     requirements of subparagraph (A) or (B) of paragraph (2) for 
     any subsequent taxable year, such election shall not apply to 
     any taxable year beginning after such subsequent taxable 
     year.
       ``(C) Effect of revocation or termination.--If a 
     corporation which made an election under paragraph (1) 
     revokes such election or such election is terminated under 
     subparagraph (B), such corporation (and any successor 
     corporation) may not make such election for any of the 5 
     taxable years beginning with the first taxable year for which 
     such election is not in effect as a result of such revocation 
     or termination.
       ``(4) Special rules.--
       ``(A) Requirements.--This subsection shall not apply to an 
     applicable foreign corporation if such corporation fails to 
     meet the requirements (if any) which the Secretary may 
     prescribe to ensure that the taxes imposed by this chapter on 
     such corporation are paid.
       ``(B) Effect of election, revocation, and termination.--
       ``(i) Election.--For purposes of section 367, a foreign 
     corporation making an election under this subsection shall be 
     treated as transferring (as of the first day of the first 
     taxable year to which the election applies) all of its assets 
     to a domestic corporation in connection with an exchange to 
     which section 354 applies.
       ``(ii) Revocation and termination.--For purposes of section 
     367, if--

       ``(I) an election is made by a corporation under paragraph 
     (1) for any taxable year, and
       ``(II) such election ceases to apply for any subsequent 
     taxable year,

     such corporation shall be treated as a domestic corporation 
     transferring (as of the 1st day of the first such subsequent 
     taxable year to which such election ceases to apply) all of 
     its property to a foreign corporation in connection with an 
     exchange to which section 354 applies.
       ``(C) Eligibility for election.--The Secretary may by 
     regulation designate one or more classes of corporations 
     which may not make the election under this subsection.
       ``(f) Rules Relating to Allocations of Qualifying Foreign 
     Trade Income From Shared Partnerships.--
       ``(1) In general.--If--
       ``(A) a partnership maintains a separate account for 
     transactions (to which this subpart applies) with each 
     partner,
       ``(B) distributions to each partner with respect to such 
     transactions are based on the amounts in the separate account 
     maintained with respect to such partner, and
       ``(C) such partnership meets such other requirements as the 
     Secretary may by regulations prescribe,
     then such partnership shall allocate to each partner items of 
     income, gain, loss, and deduction (including qualifying 
     foreign trade income) from any transaction to which this 
     subpart applies on the basis of such separate account.
       ``(2) Special rules.--For purposes of this subpart, in the 
     case of a partnership to which paragraph (1) applies--
       ``(A) any partner's interest in the partnership shall not 
     be taken into account in determining whether such partner is 
     a related person with respect to any other partner, and
       ``(B) the election under section 942(a)(3) shall be made 
     separately by each partner with respect to any transaction 
     for which the partnership maintains separate accounts for 
     each partner.
       ``(g) Exclusion for Patrons of Agricultural and 
     Horticultural Cooperatives.--Any amount described in 
     paragraph (1) or (3) of section 1385(a)--
       ``(1) which is received by a person from an organization to 
     which part I of subchapter T applies which is engaged in the 
     marketing of agricultural or horticultural products, and
       ``(2) which is designated by the organization as allocable 
     to qualifying foreign trade income in a written notice mailed 
     to its patrons during the payment period described in section 
     1382(d),
     shall be treated as qualifying foreign trade income of such 
     person for purposes of section 114. The taxable income of the 
     organization shall not be reduced under section 1382 by 
     reason of any amount to which the preceding sentence 
     applies.''.

     SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

       (1) The second sentence of section 56(g)(4)(B)(i) is 
     amended by inserting before the period ``or under section 
     114''.
       [(2) Section 245 is amended by adding at the end the 
     following new subsection:
       [``(d) Certain Dividends Allocable to Qualifying Foreign 
     Trade Income.--In the case of a domestic corporation which is 
     a United States shareholder (as defined in section 951(b)) of 
     a controlled foreign corporation (as defined in section 957), 
     there shall be allowed as a deduction an amount equal to 100 
     percent of any dividend received from such controlled foreign 
     corporation which is distributed out of earnings and profits 
     attributable to qualifying foreign trade income (as defined 
     in section 941(a)).''.]
       [(3)] (2) Section 275(a) is amended--
       (A) by striking ``or'' at the end of paragraph (4)(A), by 
     striking the period at the end of paragraph (4)(B) and 
     inserting ``, or'', and by adding at the end of paragraph (4) 
     the following new subparagraph:
       ``(C) such taxes are paid or accrued with respect to 
     qualifying foreign trade income (as defined in section 
     941).''; and
       (B) by adding at the end the following the following new 
     sentence: ``A rule similar to the rule of section 943(d) 
     shall apply for purposes of paragraph (4)(C).''.
       [(4)] (3) Paragraph (3) of section 864(e) is amended--
       (A) by striking ``For purposes of'' and inserting:
       ``(A) In general.--For purposes of''; and
       (B) by adding at the end the following new subparagraph:
       ``(B) Assets producing exempt extraterritorial income.--For 
     purposes of allocating and apportioning any interest expense, 
     there shall not be taken into account any qualifying foreign 
     trade property (as defined in section 943(a)) which is held 
     by the taxpayer for lease or rental in the ordinary course of 
     trade or business for use by the lessee outside the United 
     States (as defined in section 943(b)(2)).''.
       [(5)] (4) Section 903 is amended by striking ``164(a)'' and 
     inserting ``114, 164(a),''.
       [(6)] (5) Section 999(c)(1) is amended by inserting 
     ``941(a)(5),'' after ``908(a),''.
       [(7)] (6) The table of sections for part III of subchapter 
     B of chapter 1 is amended by inserting before the item 
     relating to section 115 the following new item:

``Sec. 114. Extraterritorial income.''.
       [(8)] (7) The table of subparts for part III of subchapter 
     N of chapter 1 is amended by striking the item relating to 
     subpart E and inserting the following new item:

``Subpart E. Qualifying foreign trade income.''.
       [(9)] (8) The table of subparts for part III of subchapter 
     N of chapter 1 is amended by striking the item relating to 
     subpart C.

     SEC. 5. EFFECTIVE DATE.

       (a) In General.--The amendments made by this Act shall 
     apply to transactions after September 30, 2000.
       (b) No New FSCs; Termination of Inactive FSCs.--
       (1) No new fscs.--No corporation may elect after September 
     30, 2000, to be a FSC (as defined in section 922 of the 
     Internal Revenue Code of 1986, as in effect before the 
     amendments made by this Act).
       (2) Termination of inactive fscs.--If a FSC has no foreign 
     trade income (as defined in section 923(b) of such Code, as 
     so in effect) for any period of 5 consecutive taxable years 
     beginning after December 31, 2001, such FSC shall cease to be 
     treated as a FSC for purposes of such Code for any taxable 
     year beginning after such period.
       (c) Transition Period for Existing Foreign Sales 
     Corporations.--
       (1) In general.--In the case of a FSC (as so defined) in 
     existence on September 30, 2000, and at all times thereafter, 
     the amendments made by this Act shall not apply to any 
     transaction in the ordinary course of trade or business 
     involving a FSC which occurs--
       (A) before January 1, 2002; or
       (B) after December 31, 2001, pursuant to a binding 
     contract--
       (i) which is between the FSC (or any related person) and 
     any person which is not a related person; and
       (ii) which is in effect on September 30, 2000, and at all 
     times thereafter.
     For purposes of this paragraph, a binding contract shall 
     include a purchase option, renewal option, or replacement 
     option which is included in such contract and which is 
     enforceable against the seller or lessor.
       (2) Election to have amendments apply earlier.--A taxpayer 
     may elect to have the amendments made by this Act apply to 
     any transaction by a FSC or any related person to which such 
     amendments would apply but for the application of paragraph 
     (1). Such election shall be effective for the taxable year 
     for which made and all subsequent taxable years, and, once 
     made, may be revoked only with the consent of the Secretary 
     of the Treasury.
       (3) Related person.--For purposes of this subsection, the 
     term ``related person'' has the meaning given to such term by 
     section 943(b)(3) of such Code, as added by this Act.
       (d) Special Rules Relating to Leasing Transactions.--
       (1) Sales income.--If foreign trade income in connection 
     with the lease or rental of property described in section 
     927(a)(1)(B) of such Code (as in effect before the amendments 
     made by this Act) is treated as exempt foreign trade income 
     for purposes of section 921(a) of such Code (as so in 
     effect), such property shall be treated as property described 
     in section 941(c)(1)(B) of such Code (as added by this Act) 
     for purposes of applying section 941(c)(2) of such Code (as 
     so

[[Page 25796]]

     added) to any subsequent transaction involving such property 
     to which the amendments made by this Act apply.
       (2) Limitation on use of gross receipts method.--If any 
     person computed its foreign trade income from any transaction 
     with respect to any property on the basis of a transfer price 
     determined under the method described in section 925(a)(1) of 
     such Code (as in effect before the amendments made by this 
     Act), then the qualifying foreign trade income (as defined in 
     section 941(a) of such Code, as in effect after such 
     amendment) of such person (or any related person) with 
     respect to any other transaction involving such property (and 
     to which the amendments made by this Act apply) shall be 
     zero.

 Mr. McCAIN. Mr. President, I oppose H.R. 4986, the FSC Repeal 
and Extraterritorial Income Exclusion Act of 2000. Unfortunately, this 
legislation is an example of corporate welfare. Further, it does not 
adequately change the old Foreign Sales Corporation (FSC) program to 
prevent disputes with the European Union.
  I am concerned that this legislation is an example of the costly 
corporate welfare that cripples our ability to respond to truly urgent 
social needs such as health care, education, and national security. The 
FSC benefits many major U.S. corporations, including General Electric, 
Boeing, Motorola, Caterpillar, Allied Signal, and Cisco Systems. In 
addition, the FSC also helps foreign firms, like Rolls Royce, that have 
plants located in America. However, few of these benefits actually 
trickle down to help the American worker. Instead, as the Congressional 
Budget Office points out, ``many FSCs are largely paper corporations 
with very few employees.'' On February 24, 2000, the Appellate Body of 
the World Trade Organization upheld a decision that this provision is 
an export subsidy and violates our WTO obligations.
  This pending legislation is the third version of an export subsidy 
that was first introduced as the Domestic International Sales 
Corporation provision in the Revenue Act of 1971. However, this version 
of the bill does little to change the effects of the FSC, and actually 
makes it a bigger corporate giveaway. This legislation technically 
eliminates the FSC, but then replaces it with a new extraterritorial 
tax system that essentially maintains the current subsidy. In addition, 
this new scheme expands the subsidy to include full benefits for 
defense contractors and extends benefits to agricultural cooperatives. 
In order to meet WTO concerns, this legislation also allows foreign 
firms greater ability to utilize the FSC. The total cost of rewriting 
and expanding the FSC subsidy will cost the American taxpayers $42 
billion between 2001 and 2010--all of which will come out of the 
surplus.
  There is also extensive evidence that this export subsidy does not 
work very well. In a recent report, the Congressional Research Service 
states that the FSC increased the quantity of U.S. exports by a range 
of two-tenths of one percent to four-tenths of one percent. This report 
also states that ``traditional economic analysis indicates that FSC 
reduces overall U.S. economic welfare.'' The CBO agrees that ``export 
subsidies, such as FSCs, reduce global economic welfare and typically 
even reduce the welfare of the country granting the subsidy, even 
though domestic export-producing industries benefit.'' CBO also points 
out that FSCs increase both imports and exports, due to the effects of 
export subsidies on foreign exchange rates. This ``beggar-thy-
neighbor'' effect will actually cause U.S. domestic companies in 
import-competing industries to reduce domestic investment and 
employment.
  Finally, there is no assurance that this system actually fixes the 
problem. The European Union has agreed to wait until November, before 
announcing a $4 billion list of retaliatory tariffs against the FSC 
subsidy. However, they have not agreed to the actual changes in this 
legislation. The EU still has concerns about provisions in this 
legislation that grandfather the FSC, and they intend to have it 
reviewed by the WTO. It is fair to expect that we will end up debating 
this issue again within the next two years. It makes more sense for the 
Senate to eliminate the FSC completely in line with our obligations to 
the WTO.
  Mr. President, our country is now in a position where we can begin 
paying down the national debt. Every American shoulders somewhere in 
the range of $19,000 in federal debt, because of the fiscal 
irresponsibility of their elected officials. I would like to make it 
clear that I remain a staunch supporter of free trade and open markets. 
However, if we intend to support a free trade regime that helps 
American consumers and taxpayers, we must not continue our policy of 
giving large corporations and special interests giant export subsidies.
  This FSC legislation is simply an unnecessary federal subsidy that 
does not provide a fair return to the taxpayers who bear the heavy 
burden of its cost. I urge my colleagues to oppose this legislation, 
and instead examine the prospect of completely eliminating the FSC 
subsidy.
  Mr. BAUCUS. Mr. President, I rise to support the legislation before 
us today on Foreign Sales Corporations, FSC. However, I really object 
to the fact that we even have to address the issue of the FSC during 
this session of Congress.
  The European Union, despite rhetoric in support for the WTO, is 
taking action after action that raises real doubt about their 
commitment. Let's quickly review the history that brought us to this 
place today.
  The United States created the DISC in the early 1970s. Given the 
different nature of the U.S. and the European tax systems, the purpose 
was to put American exporters on an equal footing with their European 
competitors. In the 1980s, in response to a negative finding at the 
GATT, we replaced it with the FSC to make it GATT-compatible. The 
Europeans accepted this alteration.
  Fast forward to the 1990s. The EU lost cases to the United States on 
beef hormones and on bananas. These were difficult issues for Europe. 
Yet, the EU did not seek a negotiated solution. Nor did they try to 
take corrective action. Instead, the EU used every legal and procedural 
trick in the GATT and WTO book to weasel out. They lost at every turn. 
This behavior of the EU, honoring the letter of the WTO while ignoring 
its spirit, is inappropriate and irresponsible. The EU should be a 
leader in ensuring that the credibility and integrity of the WTO 
process is maintained. They shouldn't be taking cheap legal dodges. Why 
should other WTO members comply promptly with WTO decisions if the EU 
thumbs its nose at the system?
  Finally, the EU could no longer delay and circumvent implementation 
of these WTO decisions. The U.S. retaliates. Then, all of a sudden, we 
find ourselves challenged at the WTO on FSC. As far as I know, European 
companies did not beat a path to EU headquarters in Brussels insisting 
that they take us on over the FSC. Trade ministers in European capitals 
did not rush to Brussels with demands to file this case against us. 
Rather, the EU bureaucrats, angry at having lost two important cases to 
the United States, were going to fight back. So, we end up with the FSC 
case, and another example of the EU undermining the global trade 
system.
  Deputy Secretary of the Treasury Stu Eizenstadt has done yeoman's 
work in trying to resolve this problem. The legislation before us is 
the fruit of his labor. And we should all thank him for working so 
hard, with so many diverse interests, to craft a solution. Yet, from 
Europe, all we have heard is a series of denunciations. An insistence 
that this legislation violates the WTO. An apparent eagerness to move 
ahead with a massive multi-billion dollar retaliation list against the 
United States. What a travesty!
  I support this change in our law. And I express my appreciation to 
the other Senators who have allowed this legislation to move forward 
under unanimous consent, despite their interest in offering amendments 
to the bill. But I also call on the political leadership in Europe to 
step back and look at what their representatives in Brussels are doing. 
Please reflect on the danger to the integrity of the WTO of the actions 
that your EU bureaucrats have taken.
  The committee amendments were withdrawn.
  The amendment (No. 4356) was agreed to.

[[Page 25797]]

  (The text of the amendment is printed in today's Record under 
``Amendments Submitted.'')
  The bill (H.R. 4986), as amended, was read the third time and passed.
  Mr. ROTH. Mr. President, this bill passed by the Senate satisfies the 
United States' WTO obligations and ensures that U.S. companies will 
compete on a level playing field in the global marketplace.
  By enacting this legislation, we will avoid a needless trade dispute, 
protect the American economy, and satisfy our international obligations 
to our trading partners. This bill also represents a continuation of 
this Senate's outstanding record of accomplishment in promoting free 
trade. This legislation is the third significant piece of trade 
legislation passed by the Senate this year. I believe you would have to 
search long and hard to find a better record of trade legislation.
  I don't believe it is necessary to go through the extended history of 
the dispute between the United States and the European Union that gave 
rise to the need for the bill before us. The bill represents a good 
faith attempt to comply with the WTO's ruling that the current FSC 
provisions constitute an illegal export subsidy. This bill withdraws 
the current FSC provisions and, in their place, makes fundamental 
adjustments to the Internal Revenue Code that incorporate territorial 
features akin to those of several European tax systems. The bill not 
only addresses the specific concerns raised by the WTO, it also takes 
into account the comments received from the EU in the course of 
consultations over the last eight months.
  I want to stress the need to pass this bill. Failure to do so could 
result in the imposition of retaliatory duties against American exports 
to the European Union. Under the WTO rules, the EU will have the right 
to retaliate against U.S. exports as of today unless this legislation 
is passed. A failure to enact this legislation would prove costly for 
the American worker, the American farmer, and for American business.
  So it is with a great sense of satisfaction that we pass this bill 
today. I compliment the Senate on its farsighted vote for passage of 
this legislation.
  The staff of the Joint Committee on Taxation has prepared a technical 
explanation of H.R. 4986, as amended by the Senate. This explanation, 
entitled the ``Technical Explanation of the Senate Amendment to H.R. 
4986, the `FSC Repeal and Extraterritorial Income Exclusion Act of 
2000', November 1, 2000 (JCX-111-00),'' provides a detailed description 
of this bill and embodies the Finance Committee's legislative intent 
regarding H.R. 4986. Taxpayers may rely on this technical explanation 
(JCX-111-00) in interpreting the provisions of H.R. 4986. In addition, 
regulations issued by the Department of Treasury should be consistent 
with the language and intent of this technical explanation.

                          ____________________