[Senate Report 105-83]
[From the U.S. Government Publishing Office]
Calendar No. 165
105th Congress Report
SENATE
1st Session 105-83
_______________________________________________________________________
EXTENSION OF NONDISCRIMINATORY (MOST-FAVORED-NATION TREATMENT) TO THE
PRODUCTS OF THE LAO PEOPLE'S DEMOCRATIC REPUBLIC
_______
September 17, 1997.--Ordered to be printed
_______________________________________________________________________
Mr. Roth, from the Committee on Finance, submitted the following
R E P O R T
[To accompany S. 1093]
[Including cost estimate of the Congressional Budget Office]
The Committee on Finance, to which was referred the bill
(S. 1093) to authorize the extension of nondiscriminatory,
most-favored-nation (MFN) tariff treatment (i.e., normal trade
relations) to products of the Lao People's Democratic Republic
(``Laos''), having considered the same, reports favorably
thereon with an amendment in the nature of a substitute and
recommends that the bill, as amended, do pass.
I. Background
General Note 3 of the Harmonized Tariff Schedule of the
United States (``HTSUS'') currently lists Laos among those
countries whose products are denied MFN tariff treatment. As
such, imports from Laos are subject to substantially higher
duty rates under HTSUS column 2.
Title IV of the Trade Act of 1974, as amended by the
Customs and Trade Act of 1990 (``Title IV''), which governs the
extension of MFN status to non-market economy countries, has
never applied to Laos. The provisions in Title IV apply only to
countries denied MFN status as of January 3, 1975. Laos' MFN
status was withdrawn later in 1975, when the President imposed
a trade embargo on Laos following the Communist revolution in
that country.
II. Summary of the Bill, As Amended
A. Title I--Extension of Most-Favored-Nation Treatment to Laos
Section 101 sets forth six Congressional findings that
support removing Laos from the list of countries denied MFN
treatment under General Note 3 of the HTSUS and extending to
Laos permanent unconditional nondiscriminatory MFN status.
First, Laos is striving to shed centralized government control
of its economy in favor of market-oriented reforms. Second,
extension of unconditional MFN treatment would help Laos to
develop its economy based on free-market principles and to
become competitive in the global marketplace. Third,
establishing normal commercial relations on a reciprocal basis
with Laos will promote U.S. exports to the rapidly-growing
Southeast Asian region and expand opportunities for U.S.
business and investment in Laos. Fourth, U.S. and Laotian
commercial interests would benefit from a commercial agreement
between the two countries that provides for market access and
the protection of intellectual property rights. Fifth, economic
reform in Laos is increasingly important as that country
integrates into the Association of Southeast Asian Nations'
(ASEAN) Free Trade Area and accedes to the World Trade
Organization (WTO). Finally, expanding bilateral trade
relations, that include a commercial agreement, may promote
further progress by Laos on human rights and democratic rule
and help Laos adopt regional and world trading rules and
principles.
Section 102(a) would grant Laotian imports unconditional
MFN tariff treatment by striking Laos from the list of those
countries denied MFN treatment under General Note 3 of the
HTSUS.
Section 102(b) states that subsection (a) applies to goods
entered, or withdrawn from warehouse for consumption after
December 31, 1997.
Section 103 would require the President to submit a report
to Congress, no later than 18 months after the enactment of the
Act, on trade relations between the United States and Laos
pursuant to the trade agreement between the two countries.
B. Title II--International Shipping Income Disclosure
Penalties for Failure To File Disclosure of Exemption for Income From
the International Operation of Ships by Foreign Persons
Present Law
The United States generally imposes a 4-percent tax on the
U.S.-source gross transportation income of foreign persons that
is not effectively connected with the foreign person's conduct
of a U.S. trade or business (sec. 887 of the Internal Revenue
Code of 1986). Foreign persons generally are subject to U.S.
tax at regular graduated rates on net income, including
transportation income, that is effectively connected with a
U.S. trade or business (secs. 871(b) and 882).
Transportation income is any income derived from, or in
connection with, the use (or hiring or leasing for use) of a
vessel or aircraft (or a container used in connection
therewith) or the performance of services directly related to
such use (sec. 863(c)(3)). Income attributable to
transportation that begins and ends in the United States is
treated as derived from sources in the United States (sec.
863(c)(1)). Transportation income attributable to
transportation that either begins or ends in the United States
is treated as derived 50 percent from U.S. sources and 50
percent from foreign sources (sec. 863(c)(2)). U.S.-source
transportation income is treated as effectively connected with
a foreign person's conduct of a U.S. trade or business only if
the foreign person has a fixed place of business in the United
States that is involved in the earning of such income and
substantially all of such income of the foreign person is
attributable to regularly scheduled transportation (sec.
887(b)(4)).
An exemption from U.S. tax is provided for income derived
by a nonresident alien individual or foreign corporation from
the international operation of a ship, provided that the
foreign country in which such individual is resident or such
corporation is organized grants an equivalent exemption to
individual residents of the United States or corporations
organized in the United States (secs. 872(b)(1) and 883(a)(1)).
Pursuant to guidance published by the Internal Revenue
Service, a nonresident alien individual or foreign corporation
that is entitled to an exemption from U.S. tax for its income
from the international operation of ships must file a U.S.
income tax return and must attach to such return a statement
claiming the exemption (Rev. Proc. 91-12, 1991-1 C.B. 473). If
the foreign person is claiming an exemption based on an
applicable income tax treaty, the foreign person must disclose
that fact as required by the Secretary of the Treasury (sec.
6114). The penalty for failure to make disclosure of a treaty-
based position as required under section 6114 is $1,000 for an
individual and $10,000 for a corporation (sec. 6712).
At the time the 4-percent tax on U.S.-source gross
transportation income was enacted, concern was expressed about
whether compliance with the tax, which is collected by means of
the filing of a return, would be adequate. It was intended that
the tax-writing committees of Congress and the Secretary of the
Treasury would study the issue of compliance and that the
Secretary would make recommendations if compliance did not
prove adequate.\1\
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\1\ Joint Committee on Taxation, General Explanation of the Tax
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 930.
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Reasons for Change
The Committee understands that there is an extremely high
level of noncompliance with the U.S. tax rules by foreign
persons that have U.S.-source shipping income. The Committee
believes that, in order to address these noncompliance
problems, it is appropriate to impose significant penalties for
a failure to satisfy the filing requirements for claiming the
exemption from U.S. tax that is available to certain foreign
persons with respect to income from the international operation
of ships.
Explanation of Provision
Under section 201 of the bill, a foreign person that
claims exemption from U.S. tax for income from the
international operation of ships, but does not satisfy the
filing requirements for claiming such exemption, is subject to
the penalty of the denial of such exemption and any deductions
or credits otherwise allowable in determining the U.S. tax
liability with respect to such income. If a foreign person that
has a fixed place of business in the United States fails to
satisfy the filing requirements for claiming an exemption from
U.S. tax for its income from the international operation of
ships, such person is subject to the additional penalty that
foreign source income from the international operation of ships
would be treated as effectively connected with the conduct of a
U.S. trade or business, but only to the extent that such income
is attributable to such fixed place of business in the United
States. Income so treated as effectively connected with a U.S.
trade or business is subject to U.S. tax at graduated rates
(and is subject to the disallowance of deductions and credits
described above). These penalties are subject to a reasonable
cause exception. The provision would not apply to the extent
the application would be contrary to any treaty obligation of
the United States.
The bill also provides for the provision of information by
the U.S. Customs Service to the Secretary of the Treasury
regarding foreign-flagged ships engaged in shipping to or from
the United States.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1997 and before April 1, 2000.
III. General Explanation
A. Presidential and Congressional Action
1. Presidential action.--On August 13, 1997, the United
States and Laos concluded a bilateral investment treaty and a
bilateral agreement on trade relations and protection of
intellectual property rights. The trade agreement includes a
proposal for a reciprocal extension of MFN tariff treatment
between the United States and Laos. Entry into force of this
agreement would be contingent on Congress passing legislation
extending MFN status to Laos.
2. Congressional action.--On July 30, 1997, Senators Kerry
and McCain introduced legislation (S. 1093), which would
provide Laos permanent MFN tariff status, by striking it from
the list of those countries denied MFN treatment under General
Note 3 of the HTSUS. The bill was referred to the Committee on
Finance, which requested public comments on the legislation on
August 8, 1997. As of the deadline of September 5, 1997, the
Committee had received 21 comments in support and none in
opposition to granting Laos unconditional MFN status.
B. U.S.-Laotian Trade
Two-way trade between the United States and Laos has
remained at modest levels. In 1996, the amount of trade between
the two countries was valued at $19.7 million and the balance
in U.S. merchandise trade with Laos was a deficit of
approximately $13 million. U.S. exports to Laos in 1996 totaled
$3.4 million and included mainly capital goods. U.S. imports
from Laos in 1996 totaled $16.3 million, chiefly textiles.
C. Committee Views
In approving MFN status for Laos, the Committee believes
that establishing normal bilateral economic and commercial
relations between the United States and Laos would help
integrate Laos into the world economic system and promote
economic growth based on free market principles. The Committee
also believes that these developments would, in turn, help
direct Laos towards broadening democratic civil society,
strengthening the rule of law and respect for human rights, and
achieving political stability. The Committee also hopes that
establishing normal trade relations with Laos will encourage
that country to provide further assistance to the United States
in accounting for all American service personnel who were held
prisoners of war or reported as missing in action in Laos
during the Vietnam War.
The Committee expects that providing unconditional MFN
status to Laos will expand opportunities for U.S. business and
investment in the Laotian economy and will also promote U.S.
exports to the rapidly growing Southeast Asian region as a
whole. U.S. companies operating in Laos will be in a position
to provide substantial assistance for Laos' return to a market-
based economy, thereby further stimulating economic growth and
improving the standard of living for the Laotian people. By
facilitating Laos' integration into the world economy, MFN
status will also encourage Laos' adoption of regional and world
trading rules and principles and promote effective protection
of intellectual-property rights. To this end, the Committee
urges the Administration to press the Laotian Government to
institute further reforms of its trade regime and to seek entry
into the World Trade Organization.
Accordingly, the Committee supports the enactment of S.
1093, as amended, and the extension of unconditional MFN
treatment to Laos.
IV. Vote of the Committee
In compliance with section 133 of the Legislative
Reorganization Act of 1946, the Committee states that S. 1093,
as amended, was ordered favorably reported unanimously by voice
vote.
V. Budgetary Impact
In compliance with sections 308 and 403 of the
Congressional Budget Act of 1974, and paragraph 11(a) of Rule
XXVI of the Standing Rules of the Senate, the following letter
has been received from the Congressional Budget Office on the
budgetary impact of the legislation:
VI. Regulatory Impact
In compliance with paragraph 11(b) of Rule XXVI of the
Standing Rules of the Senate, the Committee states that the
legislation will not significantly regulate any individuals or
businesses, will not impact on the personal privacy of
individuals, and will result in no significant additional
paperwork.
VII. Changes in Existing Law
In compliance with paragraph 12 of Rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
the legislation, as reported, are shown as follows (existing
law proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
HARMONIZED TARIFF SCHEDULE OF THE
UNITED STATES
* * * * * * *
general notes
3. Rates of Duty. The rates of duty in the ``Rates of
Duty'' columns designated 1 (``General'' and ``Special'') and 2
of the tariff schedule apply to goods imported into the customs
territory of the United States as hereinafter provided in this
note:
(a) * * *
(b) Rate of Duty Column 2.\1\ Notwithstanding any of the foregoing
provisions of this note, the rates of duty shown in column 2
shall apply to products, whether imported directly or
indirectly, of the following countries and areas pursuant to
section 401 of the Tariff Classification Act of 1962, to
section 231 or 257(e)(2) of the Trade Expansion Act of 1962, to
section 404(a) of the Trade Act of 1974 or to any other
applicable section of law, or to action taken by the President
thereunder:
Afghanistan [Laos] Vietnam
Cuba North Korea
* * * * * * *
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Sec. 872. Gross income.
(a) General rule.
* * * * * * *
(b) Exclusions.
* * * * * * *
(1) Ships operated by certain nonresidents. [Gross
income] Except as provided in section 883(d), gross
income derived by an individual resident of a foreign
country from the international operation of a ship or
ships if such foreign country grants an equivalent
exemption to individual residents to the United States.
* * * * * * *
Sec. 883. Exclusions from gross income.
(a) Income of foreign corporations from ships and aircraft.
The following items shall not be included in gross income
of a foreign corporation, and shall be exempt from taxation
under this subtitle:
(1) Ships operated by certain foreign corporations.
[Gross income] Except as provided in subsection (d),
gross income derived by a corporation organized in a
foreign country from the international operation of a
ship or ships if such foreign country grants an
equivalent exemption to corporations organized in the
United States.
* * * * * * *
(d) Penalties for Failure to Disclose Position That Certain
International Shipping Income Is Not Includible in
Gross Income._
(1) In general.--A taxpayer who, with respect to any
tax imposed by this title, takes the position that any
of its gross income derived from the international
operation of a ship or ships is not includible in gross
income by reason of subsection (a)(1) or section
872(b)(1) (or by reason of any applicable treaty) shall
be entitled to such treatment only if such position is
disclosed (in such manner as the Secretary may
prescribe) on the return of tax for such tax (or any
statement attached to such return).
(2) Additional penalties for failing to disclose
position.--If a taxpayer fails to meet the requirement
of paragraph (1) with respect to any taxable year--
(A) the amount of the income from
international operation of a ship or ships--
(i) which is from sources without the
United States, and
(ii) which is attributable to a fixed
place of business in the United States,
shall be treated for purposes of this title as effectively
connected with the conduct of a trade or business within the
United States, and
(B) no deductions or credits shall be allowed
which are attributable to income from the
international operation of a ship or ships.
(3) Reasonable cause exception.--This subsection
shall not apply to a failure to disclose a position if
it is shown that such failure is due to reasonable
cause and not due to willful neglect.