[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status was withdrawn later in 1975, when the President imposed 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\
---------------------------------------------------------------------------
    \1\ Joint Committee on Taxation, General Explanation of the Tax 
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 930.
---------------------------------------------------------------------------
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.

                                 

                                     
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