House Report 113-428 - PERMANENT CFC LOOK-THROUGH ACT OF 2014

[House Report 113-428]
[From the U.S. Government Publishing Office]

113th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 113-428

======================================================================

PERMANENT CFC LOOK-THROUGH ACT OF 2014

_______

May 2, 2014.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed

_______

Mr. Camp, from the Committee on Ways and Means, submitted the following

R E P O R T

together with

DISSENTING VIEWS

[To accompany H.R. 4464]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the
bill (H.R. 4464) to amend the Internal Revenue Code of 1986 to
make permanent the look-through treatment of payments between
related controlled foreign corporations, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.

CONTENTS

Page
I. SUMMARY AND BACKGROUND...........................................2
A. Purpose and Summary................................. 2
B. Background and Need for Legislation................. 2
C. Legislative History................................. 2
II. EXPLANATION OF THE BILL..........................................3
A. Look-Through Treatment of Payments Between Related
Controlled Foreign Corporations Under Foreign
Personal Holding Company Rules (sec. 954(c)(6) of
the Code).......................................... 3
III. VOTES OF THE COMMITTEE...........................................5
IV. BUDGET EFFECTS OF THE BILL.......................................6
A. Committee Estimate of Budgetary Effects............. 6
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 6
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 6
D. Macroeconomic Impact Analysis....................... 7
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......7
A. Committee Oversight Findings and Recommendations.... 7
B. Statement of General Performance Goals and
Objectives......................................... 7
C. Information Relating to Unfunded Mandates........... 8
D. Applicability of House Rule XXI 5(b)................ 8
E. Tax Complexity Analysis............................. 8
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 8
G. Duplication of Federal Programs..................... 8
H. Disclosure of Directed Rule Makings................. 9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............9
VII. DISSENTING VIEWS................................................11

The amendment is as follows:
Strike all after the enacting clause and insert the
following:

SECTION 1. SHORT TITLE.

This Act may be cited as the ``Permanent CFC Look-Through Act of
2014''.

SEC. 2. LOOK-THROUGH TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED
FOREIGN CORPORATIONS MADE PERMANENT.

(a) In General.--Paragraph (6) of section 954(c) of the Internal
Revenue Code of 1986 is amended by striking subparagraph (C).
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2013, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.

I. SUMMARY AND BACKGROUND

A. Purpose and Summary

Identical to a provision contained in the discussion draft
of the ``Tax Reform Act of 2014'' released on February 26,
2014, the bill, H.R. 4464, reported by the Committee on Ways
and Means, provides permanent look-through treatment of
payments between related controlled foreign corporations. Under
current law, the temporary look-through treatment of payments
between related controlled foreign corporations expired for
taxable years beginning after December 31, 2013.

B. Background and Need for Legislation

While the Committee continues actively to pursue
comprehensive tax reform as a critical means of promoting
economic growth and job creation, the Committee also believes
that it is important to provide permanent, immediate tax relief
to worldwide American companies to help encourage economic
growth and job creation. By allowing worldwide American
companies to deploy capital from one foreign subsidiary to
another foreign subsidiary in a tax-efficient manner, H.R. 4464
will enable American employers to be competitive against
foreign multinational corporations that are not subject to an
onerous worldwide tax system.

C. Legislative History

BACKGROUND

H.R. 4464 was introduced on April 10, 2014, and was
referred to the Committee on Ways and Means.

COMMITTEE ACTION

The Committee on Ways and Means marked up H.R. 4464, the
Permanent CFC Look-Through Act of 2014, on April 29, 2014, and
ordered the bill, as amended, favorably reported (with a quorum
being present).

COMMITTEE HEARINGS

The need for permanent look-through treatment of payments
between related controlled foreign corporations was discussed
at no fewer than five hearings during the 112th and 113th
Congresses:
Full Committee hearing on Fundamental Tax
Reform (January 20, 2011);
Full Committee hearing on The Need for
Comprehensive Tax Reform to Help American Companies
Compete in the Global Market and Create Jobs for
American Workers (May 12, 2011);
Select Revenue Measures Subcommittee
hearing on Ways and Means International Tax Reform
Discussion Draft (November 17, 2011);
Full Committee hearing on Tax Havens, Base
Erosion and Profit-Shifting (June 13, 2013); and
Full Committee hearing on the Benefits of
Permanent Tax Policy for America's Job Creators (April
8, 2014).

II. EXPLANATION OF THE BILL

A. Look-Through Treatment of Payments Between Related Controlled
Foreign Corporations Under Foreign Personal Holding Company Rules (sec.
954(c)(6) of the Code)

PRESENT LAW

In general

The rules of subpart F\1\ require U.S. shareholders with a
10-percent or greater interest in a controlled foreign
corporation (``CFC'') to include certain income of the CFC
(referred to as ``subpart F income'') on a current basis for
U.S. tax purposes, regardless of whether the income is
distributed to the shareholders.
---------------------------------------------------------------------------
\1\Secs. 951-965.
---------------------------------------------------------------------------
Subpart F income includes foreign base company income. One
category of foreign base company income is foreign personal
holding company income. For subpart F purposes, foreign
personal holding company income generally includes dividends,
interest, rents, and royalties, among other types of income.
There are several exceptions to these rules. For example,
foreign personal holding company income does not include
dividends and interest received by a CFC from a related
corporation organized and operating in the same foreign country
in which the CFC is organized, or rents and royalties received
by a CFC from a related corporation for the use of property
within the country in which the CFC is organized. Interest,
rent, and royalty payments do not qualify for this exclusion to
the extent that such payments reduce the subpart F income of
the payor. In addition, subpart F income of a CFC does not
include any item of income from sources within the United
States that is effectively connected with the conduct by such
CFC of a trade or business within the United States (``ECI'')
unless such item is exempt from taxation (or is subject to a
reduced rate of tax) pursuant to a tax treaty.

The ``look-thru rule''

Under the ``look-thru rule,''\2\ dividends, interest
(including factoring income that is treated as equivalent to
interest under section 954(c)(1)(E)), rents, and royalties
received or accrued by one CFC from a related CFC are not
treated as foreign personal holding company income to the
extent attributable or properly allocable to income of the
payor that is neither subpart F income nor treated as ECI. For
this purpose, a related CFC is a CFC that controls or is
controlled by the other CFC, or a CFC that is controlled by the
same person or persons that control the other CFC. Ownership of
more than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
---------------------------------------------------------------------------
\2\Sec. 954(c)(6).
---------------------------------------------------------------------------
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out the look-thru rule,
including such regulations as are necessary or appropriate to
prevent the abuse of the purposes of such rule.
The look-thru rule applies to taxable years of foreign
corporations beginning after December 31, 2005 and before
January 1, 2014, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.

REASONS FOR CHANGE

The Committee believes that it is appropriate to make
permanent the look-thru rule to provide certainty for
businesses and to help U.S. companies with overseas operations
compete more effectively with foreign firms.

EXPLANATION OF PROVISION

The proposal makes the application of the look-thru rule
permanent.

EFFECTIVE DATE

The proposal is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

IV. BUDGET EFFECTS OF THE BILL

A. Committee Estimate of Budgetary Effects

In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 4464, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2014-2024.

Fiscal Years
[Billions of Dollars]
----------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-19 2014-24
----------------------------------------------------------------------------------------------------------------
-0.8 -1.3 -1.4 -1.5 -1.7 -1.8 -1.9 -2.1 -2.4 -2.6 -2.9 -8.4 -20.3
----------------------------------------------------------------------------------------------------------------
fNOTE: Details do not add to totals due to rounding.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority

In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing tax
provisions involve increased tax expenditures. (See amounts in
table in Part IV.A., above.)

C. Cost Estimate Prepared by the Congressional Budget Office

In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.

U.S. Congress,
Congressional Budget Office,
Washington, DC, May 1, 2014.
Hon. Dave Camp,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4464, the
Permanent CFC Look-Through Act of 2014.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Logan
Timmerhoff.
Sincerely,
Douglas W. Elmendorf.
Enclosure.

H.R. 4464--Permanent CFC Look-Through Act of 2014

H.R. 4464 would amend the Internal Revenue Code to make
permanent the ``look-through rule'' that applied to the taxable
years of foreign corporations beginning after December 31, 2005
and before January 1, 2014. This treatment would be permanently
effective for taxable years beginning after December 31, 2013.
The ``look-through rule'' determines the tax treatment of
payments between related controlled foreign corporations (CFCs)
under foreign personal holding company rules. Under this rule,
dividends, interest, rents, and royalties received or accrued
by one CFC from a related CFC are not treated as foreign
personal holding company income for tax purposes if they meet
certain characteristics.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 4464 would reduce revenues, thus
increasing federal deficits, by about $20 billion over the
2014-2024 period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
direct spending and revenues. Enacting H.R. 4464 would result
in revenue losses in each year beginning in 2014. The estimated
increases in the deficit are shown in the following table.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Logan
Timmerhoff. The estimate was approved by David Weiner,
Assistant Director for Tax Analysis.

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4464, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON APRIL 29, 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-2019 2014-2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects........... 808 1,254 1,388 1,527 1,666 1,792 1,934 2,137 2,381 2,589 2,856 8,434 20,331
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not sum to totals because of rounding.

D. Macroeconomic Impact Analysis

In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986: the effects of the bill on economic activity are so small
as to be incalculable within the context of a model of the
aggregate economy.

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

A. Committee Oversight Findings and Recommendations

With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 4464 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.

B. Statement of General Performance Goals and Objectives

With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.

C. Information Relating to Unfunded Mandates

This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.

D. Applicability of House Rule XXI 5(b)

Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.

E. Tax Complexity Analysis

Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code and has widespread applicability to
individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Code and that
have ``widespread applicability'' to individuals or small
businesses, within the meaning of the rule.

F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits

With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill, and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.

G. Duplication of Federal Programs

In compliance with Sec. 3(j)(2) of H. Res. 5 (113th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).

H. Disclosure of Directed Rule Makings

In compliance with Sec. 3(k) of H. Res. 5 (113th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, 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):

INTERNAL REVENUE CODE OF 1986

* * * * * * *

Subtitle A--Income Taxes

* * * * * * *

CHAPTER 1--NORMAL TAXES AND SURTAXES

* * * * * * *

Subchapter N--Tax Based on Income From Sources Within or Without the
United States

* * * * * * *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

* * * * * * *

Subpart F--Controlled Foreign Corporations

* * * * * * *

SEC. 954. FOREIGN BASE COMPANY INCOME.

(a) * * *

* * * * * * *

(6) Look-thru rule for related controlled foreign
corporations.--
(A) * * *

* * * * * * *

[(C) Application.--Subparagraph (A) shall
apply to taxable years of foreign corporations
beginning after December 31, 2005, and before
January 1, 2014, and to taxable years of United
States shareholders with or within which such
taxable years of foreign corporations end.]

* * * * * * *

VII. DISSENTING VIEWS

These bills would add a combined $310 billion to the
deficit. Even though these bills were introduced individually
with some bipartisan support, the opposition to these bills was
based on the position that these tax provisions should not be
made permanent by adding to the deficit without any revenue
offset.
To put the combined cost ($310 billion) into context, this
total represents more than one-half of the entire federal
deficit this year--the lowest it has been since President Obama
took office. It represents nearly two-thirds of all non-defense
domestic discretionary spending in 2014. It is more than three
times what we spend annually on education, job training, and
social services. It is five times more than we spend on
veterans. And, it is five times more than we spend on medical
research and public health.
We also opposed the manner in which Republicans were
proceeding--selecting six to make permanent without any offset
from the approximately 60 tax provisions that expired last
year. This approach was both fiscally irresponsible and
fundamentally hypocritical.
We found it hypocritical that, four months ago, Republicans
let emergency unemployment insurance expire for more than 1.3
million Americans by arguing that an adequate offset had yet to
be proposed. In early April, the Senate came to a bipartisan
agreement on an offset after months of painstaking
negotiations. Yet House Republicans still refuse to act.
Further, we found it also hypocritical that the Republicans
were in favor of passing these six tax bills at a cost of $310
billion without an offset at the same time that they were
requiring an offset for a provision stripped from another bill
under consideration at the markup that helped foster children
at a cost of $12 million.
The consideration of these six tax bills should have been
part of the consideration of all the expired tax provisions
commonly referred to as ``tax extenders.'' The Republicans did
not take up other tax extenders that also are important to
Democratic Committee Members. Left to an uncertain fate are
provisions like the Work Opportunity Tax Credit, the New
Markets Tax Credit, and the renewable energy tax credits, as
well as the long-term status of the Earned Income Tax Credit,
the Child Tax Credit, and the American Opportunity Tax Credit.
Sincerely,
Sander M. Levin,
Ranking Member.