[Senate Report 118-107]
[From the U.S. Government Publishing Office]


                                                      Calendar No. 230
118th Congress     }                                     {      Report
                                 SENATE
 1st Session       }                                     {     118-107

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



 
          UNITED STATES-TAIWAN EXPEDITED DOUBLE-TAX RELIEF ACT

                                _______
                                

                October 19, 2023.--Ordered to be printed

                                _______
                                

               Mr. Wyden, from the Committee on Finance, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 3084]

    The Committee on Finance, having considered an original 
bill (S. 3084), to amend the Internal Revenue Code of 1986 to 
provide special rules for the taxation of certain residents of 
Taiwan with income from sources within the United States, 
reports favorably thereon without amendment and recommends that 
the bill do pass.

                                CONTENTS

                                                                     Page
 I. LEGISLATIVE BACKGROUND............................................  1
II. EXPLANATION OF THE BILL...........................................  3
III.BUDGET EFFECTS OF THE BILL.......................................  22

        A. Committee Estimates...................................      22
        B. Budget Authority and Tax Expenditures.................      22
        C. Consultation with Congressional Budget Office.........      22
IV. VOTES OF THE COMMITTEE...........................................  22
 V. REGULATORY IMPACT AND OTHER MATTERS..............................  23
        A. Regulatory Impact.....................................      23
        B. Unfunded Mandates Statement...........................      23
        C. Tax Complexity Analysis...............................      23
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............  24

                       I. LEGISLATIVE BACKGROUND

    The Committee on Finance, having considered the United 
States-Taiwan Expedited Double-Tax Relief Act, a bill to amend 
the Internal Revenue Code of 1986 to relieve double taxation on 
income from U.S. sources earned or received by qualified 
residents of Taiwan, and for other purposes, reports favorably 
thereon and recommends that the bill do pass.

Background and need for legislative action

    Background--Based on the discussion draft released by Chair 
Wyden and Ranking Member Crapo, along with Ways and Means 
Committee Chair Smith and Ranking Member Neal, the Committee on 
Finance marked up original legislation, the ``United States-
Taiwan Expedited Double-Tax Relief Act'' on September 14, 2023, 
and, with a majority present, unanimously ordered the bill 
favorably reported.
    Need for legislative action--Throughout the United States 
Senate, there is broad bipartisan support for strengthening our 
economic partnership with Taiwan. Taiwan is one of the largest 
trading partners of the U.S., and an especially critical 
trading partner in the semiconductor industry. The Senate 
recently demonstrated its strong support for growing our 
economic partnership with Taiwan when it unanimously passed the 
first trade agreement signed under the U.S.-Taiwan Initiative 
on 21st-Century Trade.
    To further strengthen that economic partnership, there has 
been a strong bipartisan interest in addressing double taxation 
to encourage cross-border investment between the U.S. and 
Taiwan. Taiwan is our largest trading partner with whom we do 
not have an income tax treaty, but Taiwan's very unique status 
precludes the conclusion of a tax treaty. In order to address 
double taxation between the U.S. and Taiwan, a unique solution 
is necessary.
    In addition, immediate relief is necessary to unlock 
additional cross-border investment between the U.S. and Taiwan. 
Taiwan is a critical partner in enhancing our onshoring 
capabilities for advanced manufacturing. However, according to 
a survey of Taiwanese companies with a presence in the U.S., 
almost 80 percent of those companies considered the current 30 
percent withholding tax to be a considerable factor preventing 
additional U.S. investment. Those additional investments would 
build upon the $45 billion invested in the U.S. from Taiwan 
over the last five years in the semiconductor sector alone. 
Alleviating this double tax burden, in conjunction with the 
advanced manufacturing investment credit which incentivizes 
domestic semiconductor manufacturing, is expected to unleash 
tens of billions of dollars in new investment, supporting 
thousands of good paying jobs across this country.
    Not only has foreign direct investment from Taiwan into the 
U.S. surged over the last few years, but also Taiwan is a key 
destination for U.S. exports. In 2022, U.S. goods exports to 
Taiwan were $44.2 billion, up 20 percent from 2021. 
Strengthening our economic relationship with Taiwan is as 
important as ever.
    In addition to boosting our economy, a stronger partnership 
with Taiwan serves U.S. national security interests. Taiwan is 
a vibrant democracy that shares our values, but faces a growing 
threat from China, which has ratcheted up its military 
capabilities along Taiwan's coastline. These aggressive 
activities affect the United States. As a global leader in 
manufacturing semiconductors--the chips used in digital devices 
and data centers, but also in advanced weapons and military 
equipment--Taiwan plays a key role in the security of 
democratic nations. Strengthening our economic partnership will 
help bring greater stability to the region, and provide both 
economic and national security benefits to the U.S. and to 
Taiwan.

Tax-writers' discussion draft

    On July 12, Committee Chair Wyden and Ranking Member Crapo, 
along with House of Representatives Ways and Means Committee 
Chair Smith and Ranking Member Neal, released a discussion 
draft of legislation to address double-tax relief on income 
from activity between the U.S. and Taiwan. Comments were 
received from multiple stakeholders, with many of the comments 
incorporated into the Chairman's mark.

Committee mark-up

    On September 14, 2023, the Committee met to mark up the 
United States-Taiwan Expedited Double-Tax Relief Act. The 
Committee favorably reported the legislation by a vote of 27-0.

                      II. EXPLANATION OF THE BILL


        The United States-Taiwan Expedited Double-Tax Relief Act


                              PRESENT LAW

    The following discussion summarizes U.S. taxation of income 
from cross-border business activity, with emphasis on how the 
rules determine whether the income is subject to tax by the 
United States or another jurisdiction in either the Internal 
Revenue Code\1\ or in bilateral agreements in which the United 
States agrees to relieve double taxation when its jurisdiction 
to tax overlaps or is in conflict with that of another 
jurisdiction.
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    \1\Unless otherwise stated, section references are to the Internal 
Revenue Code of 1986, as amended (the ``Code'').
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    International law generally recognizes the right of each 
sovereign nation to prescribe rules to regulate conduct and 
persons (whether natural or juridical) with a sufficient nexus 
to the sovereign nation. The nexus may be based on nationality 
(i.e., a nexus based on a connection between the relevant 
person and the sovereign nation) or may be territorial (i.e., a 
nexus based on a connection between the relevant conduct and 
the sovereign nation). These concepts have been refined and 
adapted to form the principles for determining whether 
sufficient nexus with a jurisdiction exists to conclude that 
the jurisdiction may enforce its right to tax.

     1. U.S. Tax Principles Common to Inbound and Outbound Taxation

    Taxes based on where activities occur, or where property is 
located, are source-based taxes. The United States generally 
taxes the U.S. trades or businesses of foreign persons and 
sales or other dispositions of interests in U.S. real property 
by foreign persons. In addition, the United States generally 
taxes items of income that are paid by U.S. persons to foreign 
persons. Most jurisdictions, including the United States, have 
rules for determining the source of items of income and expense 
in a broad range of categories, such as compensation for 
services, dividends, interest, royalties, and gains.
    Income taxes based on a person's citizenship, nationality, 
or residence are residence-based taxes. The United States 
generally imposes residence-based taxation on U.S. persons in 
the year in which income is earned. For individuals and 
domestic entities, this results in taxing them on their 
worldwide income, whether derived in the United States or 
abroad, with limited opportunity for deferral of taxation of 
income earned by foreign corporations owned by U.S. 
shareholders. As explained below, income earned by a resident 
of the United States from foreign activities conducted through 
a foreign entity generally is subject to U.S. tax in the year 
earned or not at all. The United States generally taxes foreign 
persons on only U.S.-source income.
    The United States imposes source-based taxation on U.S.-
source income of nonresident alien individuals and other 
foreign persons. Under this system, the application of the Code 
differs depending on whether income arises from outbound 
investment (i.e., foreign investments by U.S. persons) or 
inbound investment (i.e., U.S. investment by foreign persons). 
While the United States taxes inbound and outbound investments 
differently, certain rules are common to the taxation of both, 
including rules relating to residency, entity classification, 
source determination, and transfer pricing.

Residence

    The Code defines a U.S. person to include all U.S. citizens 
and residents as well as domestic entities such as 
partnerships, corporations, trusts and estates.\2\ Partnerships 
and corporations are domestic if organized or created under the 
laws of the United States, any State, or the District of 
Columbia, unless, in the case of a partnership, the Secretary 
prescribes otherwise by regulation.\3\ All other partnerships 
and corporations (i.e., those organized under the laws of 
foreign countries) are foreign.\4\ Other jurisdictions may use 
factors such as situs or management and control to determine 
residence. As a result, legal entities may have more than one 
tax residence, or, in some cases, no residence. In such cases, 
bilateral treaties may resolve conflicting claims of residence.
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    \2\Sec. 7701(a)(30).
    \3\Sec. 7701(a)(4) and (10).
    \4\Sec. 7701(a)(5) and (9). Entities organized in a possession or 
territory of the United States are not considered to have been 
organized under the laws of the United States.
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            Exception for corporate inversions
    In certain cases, a foreign corporation that acquires a 
domestic corporation or partnership may be treated as a 
domestic corporation for Federal tax purposes.\5\ This result 
generally applies following a transaction in which, pursuant to 
a plan or a series of related transactions:
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    \5\Sec. 7874. The Treasury Department and the IRS have promulgated 
detailed guidance, through both regulations and several notices, 
addressing these requirements under section 7874 since its enactment in 
2004, and have sought to expand the reach of the section or reduce the 
tax benefits of inversion transactions.
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          1. A domestic corporation becomes a subsidiary of a 
        foreign-incorporated entity or otherwise transfers 
        substantially all of its properties to such an entity;
          2. The former shareholders of the domestic 
        corporation hold (by reason of the stock they had held 
        in the domestic corporation) at least 80 percent (by 
        vote or value) of the stock of the foreign-incorporated 
        entity after the transaction (often referred to as 
        ``stock held by reason of''); and
          3. The foreign-incorporated entity, considered 
        together with all companies connected to it by a chain 
        of greater than 50-percent ownership (the ``expanded 
        affiliated group''), does not have substantial business 
        activities in the entity's country of organization, 
        compared to the total worldwide business activities of 
        the expanded affiliated group.
    If the ``stock held by reason of'' the acquisition is less 
than 80 percent, but at least 60 percent of the stock of the 
foreign corporation, and the other requirements above are 
satisfied, then the foreign corporation is not treated as a 
domestic corporation. Instead, the foreign corporation is 
considered a surrogate foreign corporation for the acquired 
domestic company, which is an expatriated entity that must 
recognize certain ``inversion gain'' post-acquisition 
restructuring\6\ and may be subject to other consequences under 
the provisions enacted in 2017.\7\
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    \6\An excise tax may be imposed on certain stock compensation of 
executives of companies that undertake inversion transactions. Sec. 
4985. In addition, dividends from certain surrogate foreign 
corporations are excluded from qualified dividend income within the 
meaning of section 1(h)(11)(B) and are ineligible to be taxed as net 
capital gains. Sec. 1(h)(11)(C)(iii). As a result, individual 
shareholders in such corporations cannot claim the reduced rate on 
dividends otherwise available under section 1(h)(11).
    \7\See secs. 59A(d)(4) (providing that payments made to expatriated 
entities that reduce gross receipts are base erosion payments) and 
965(l) (disallowing the partial participation exemption deduction for 
computing the transition tax and assessing the additional transition 
tax in the year of inversion if an entity inverts within the 10-year 
period beginning on December 22, 2017)).
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Source of income rules

    Various factors determine the source of income for U.S. tax 
purposes, including the status or nationality of the payor or 
recipient and the location of the activities or assets that 
generate the income. Extensive rules determine whether income 
is considered to be from U.S. sources or foreign sources.\8\ 
Special rules are provided for certain industries, (e.g., 
transportation, shipping, and certain space and ocean 
activities) as well as for income partly from within and partly 
from without the United States.\9\
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    \8\Sections 861 through 865, generally.
    \9\Sec. 863.
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    Gains, profits, and income from the sale or exchange of 
inventory property that is either (1) produced (in whole or in 
part) inside the United States and then sold or exchanged 
outside the United States or (2) produced (in whole or part) 
outside the United States and then sold or exchanged inside the 
United States is allocated and apportioned solely on the basis 
of the location of the production activities.\10\ For example, 
income derived from the sale of inventory produced entirely in 
the United States is wholly from U.S. sources, even if title 
passage occurs elsewhere. Likewise, income derived from the 
sale of inventory produced entirely in another country is 
wholly from foreign sources, even if title passage occurs in 
the United States. If inventory is produced only partly in the 
United States, the income derived from its sale is sourced 
partly in the United States regardless of where title to the 
property passes.
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    \10\Sec. 863(b). Prior to Public Law 115-97, enacted on December 
22, 2017, the source of income from sale of inventory was determined by 
passage of title.
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   2. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons

    In general, income earned directly by a U.S. person from 
the conduct of a foreign trade or business is taxed 
currently,\11\ while income earned indirectly through certain 
related foreign entities (i.e., controlled foreign corporations 
(``CFCs''))\12\ is taxed in the year earned or not at all. 
Earnings and profits of CFCs are generally taxable in one of 
two ways. First, the earnings may constitute income to U.S. 
shareholders under the traditional anti-deferral regime of 
subpart F, which applies to certain passive income and income 
that is readily movable from one jurisdiction to another.\13\ 
Subpart F was designed as an anti-abuse regime to prevent U.S. 
taxpayers from shifting passive and mobile income to low-tax 
jurisdictions.\14\ Second, the earnings may be subject to 
section 951A, which applies to some foreign-source income of a 
CFC that is not subpart F income (referred to as global 
intangible low-taxed income (``GILTI'')). GILTI was enacted as 
a base protection measure to counter the participation 
exemption system, established by the dividends-received-
deduction, under which the income could potentially be 
distributed back to the U.S. corporation with no U.S. tax 
imposed.\15\ Subpart F income is taxed at full rates with 
related foreign taxes generally eligible for the foreign tax 
credit; GILTI is taxed at reduced rates with additional 
limitations on the use of related foreign tax credits. Both 
subpart F income and GILTI are included by the U.S. shareholder 
without regard to whether the earnings are distributed by the 
CFC.
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    \11\Such income is called foreign branch income.
    \12\A CFC generally is defined as any foreign corporation in which 
U.S. persons own (directly, indirectly, or constructively) more than 50 
percent of the corporation's stock (measured by vote or value), taking 
into account only ``U.S. shareholders,'' that is, U.S. persons who own 
at least 10 percent of the stock (measured by vote or value). See secs. 
951(b), 957, and 958. Special rules apply with respect to U.S. persons 
that are shareholders (regardless of their percentage ownership) in any 
foreign corporation that is not a CFC but is a passive foreign 
investment company (``PFIC''). See secs. 1291 through 1298. The PFIC 
rules generally seek to prevent the deferral of passive income through 
the use of foreign corporations.
    \13\Subpart F comprises sections 951 through 965.
    \14\See JCS-5-61, ``Tax Effects of Conducting Foreign Business 
through Foreign Corporations'' (July 21, 1961), Part V. See also Rev. 
Act. of 1962, Pub. L. No. 87-834.
    \15\See Reconciliation Recommendations Pursuant to H. Con. Res. 71 
(December 2017).
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    In addition to the taxation of GILTI at reduced rates, U.S. 
corporations generally are taxed at reduced rates on their 
foreign-derived intangible income (``FDII'').\16\ Foreign 
earnings not subject to tax as subpart F income or GILTI 
generally are exempt from U.S. tax. To exempt those earnings, 
dividends received by corporate U.S. shareholders from 
specified 10-percent owned foreign corporations (including 
CFCs) generally are eligible for a 100-percent dividends-
received deduction (``DRD'').\17\ Special rules apply in 
situations in which a U.S. person transfers property to a 
foreign corporation or certain partnerships in certain 
nonrecognition transactions.\18\
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    \16\Sec. 250(a)(1)(A).
    \17\Sec. 245A. The DRD is not limited to dividends from CFCs, but 
rather may be available with respect to any dividend received from a 
specified 10-percent owned foreign corporation by a domestic 
corporation which is a U.S. shareholder with respect to such foreign 
corporation.
    \18\Secs. 367 and 721(c); Treas. Reg. sec. 1.721(c)-1.
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            3. U.S. Tax Rules Applicable to Foreign Persons

    Nonresident aliens and foreign corporations generally are 
subject to U.S. tax only on their U.S.-source income. There are 
two broad types of taxation of U.S.-source income of foreign 
taxpayers: (1) gross-basis tax on income that is ``fixed or 
determinable annual or periodical gains, profits, and income'' 
(i.e., FDAP income), and (2) net-basis tax on income that is 
``effectively connected with the conduct of a trade or business 
within the United States'' (i.e., ECI). FDAP income, although 
nominally subject to a statutory 30-percent gross-basis tax 
withheld at its source, in many cases is subject to a reduced 
rate of, or entirely exempt from, U.S. tax under the Code or a 
bilateral income tax treaty. ECI generally is subject to the 
same U.S. tax rules and rates that apply to business income 
earned by U.S. persons.
    Finally, certain corporations are subject to a base erosion 
and anti-abuse tax (``BEAT'') that is in the nature of a 
minimum tax and payable in addition to all other tax 
liabilities.\19\
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    \19\Sec. 59A.
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Gross-basis taxation of U.S.-source income

    FDAP income received by foreign persons from U.S. sources 
is subject to a 30-percent gross-basis tax (i.e., a tax on 
gross income without reduction for related expenses), which is 
collected by withholding at the source of the payment. FDAP 
income includes interest, dividends, rents, salaries, wages, 
premiums, annuities, compensations, remunerations, and 
emoluments.\20\ The items enumerated in defining FDAP income 
are illustrative, and the words ``annual or periodical'' are 
``merely generally descriptive'' of the payments within the 
purview of the statute.\21\ The categories of income subject to 
the 30-percent tax and the categories for which withholding is 
required generally are coextensive.\22\
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    \20\Secs. 871(a) and 881. FDAP income that is ECI is taxed as ECI.
    \21\Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).
    \22\See secs. 1441 and 1442.
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            Exclusions from FDAP income
    FDAP income encompasses a broad range of gross income but 
has important exceptions. Capital gains of nonresident aliens 
generally are foreign source; however, capital gains of 
nonresident aliens present in the United States for 183 days or 
more\23\ during the year are income from U.S. sources subject 
to gross-basis taxation.\24\ In addition, U.S-source gains from 
the sale or exchange of intangibles are subject to tax and 
withholding if they are contingent on the productivity, use, or 
disposition of the property sold.\25\
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    \23\For purposes of this rule, whether a person is considered a 
resident in the United States is determined by application of the rules 
under section 7701(b).
    \24\Sec. 871(a)(2). In addition, certain capital gains from sales 
of U.S. real property interests are subject to tax as ECI under the 
Foreign Investment in Real Property Tax Act of 1980 (``FIRPTA''). See 
sec. 897(a)(1).
    \25\Secs. 871(a)(1)(D) and 881(a)(4).
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    Interest on bank deposits may qualify for exemption from 
treatment as FDAP income on two grounds. First, interest on 
deposits with domestic banks and savings and loan associations, 
and certain amounts held by insurance companies, is U.S.-source 
income but is exempt from the 30-percent tax when paid to a 
foreign person.\26\ Second, interest on deposits with foreign 
branches of domestic banks and domestic savings and loan 
associations is not U.S.-source income and, thus, is not 
subject to U.S. tax.\27\ Interest and original issue discount 
on certain short-term obligations also is exempt from U.S. tax 
when paid to a foreign person.\28\ In addition, an exception to 
information reporting requirements may apply with respect to 
payments of such exempt amounts.\29\
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    \26\Secs. 871(i)(2)(A) and 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii).
    \27\Sec. 861(a)(1); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
    \28\Secs. 871(g)(1)(B) and 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
    \29\Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A) and (B). A bank must 
report interest if the recipient is a nonresident alien who resides in 
a country with which the United States has a satisfactory exchange of 
information program under a bilateral agreement and the deposit is 
maintained at an office in the United States. Treas. Reg. secs. 1.6049-
4(b)(5) and -8. The IRS publishes lists of the countries whose 
residents are subject to the reporting requirements, and those 
countries with respect to which the reported information is 
automatically exchanged. See Rev. Proc. 2022-35, 2022-40 I.R.B. 270.
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    Although FDAP income includes U.S.-source portfolio 
interest, such interest is specifically exempt from the 30-
percent gross-basis tax. Portfolio interest is any interest 
(including original issue discount) that is paid on an 
obligation that is in registered form and for which the 
beneficial owner has provided to the U.S. withholding agent a 
statement certifying that the beneficial owner is not a U.S. 
person.\30\ Portfolio interest, however, does not include 
interest received by a 10-percent shareholder,\31\ certain 
contingent interest,\32\ interest received by a CFC from a 
related person,\33\ or interest received by a bank on an 
extension of credit made pursuant to a loan agreement entered 
into in the ordinary course of its trade or business.\34\
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    \30\Sec. 871(h)(2).
    \31\Sec. 871(h)(3). The exemption does not apply to interest 
payments made to a foreign lender that owns 10 percent or more of the 
voting power (but not value) of the stock of the borrower.
    \32\Sec. 871(h)(4).
    \33\Sec. 881(c)(3)(C).
    \34\Sec. 881(c)(3)(A).
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            Withholding of 30-percent gross-basis tax
    The 30-percent tax on FDAP income is generally collected by 
means of withholding.\35\ Withholding on FDAP payments to 
foreign payees is required unless the withholding agent (i.e., 
the person making the payment to the foreign person) can 
establish that the beneficial owner of the amount is eligible 
for an exemption from withholding or a reduced rate of 
withholding under an income tax treaty.\36\
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    \35\Secs. 1441 and 1442.
    \36\A withholding agent includes any U.S. or foreign person that 
has the control, receipt, custody, disposal, or payment of an item of 
income of a foreign person subject to withholding. Treas. Reg. 
sec.1.1441-7(a). See also Treas. Reg. sec. 1.1441-6 (providing, in 
part, the requirements (including documentary evidence) that must be 
satisfied for purposes of claiming the benefits of an exemption from or 
reduced rate of withholding under a treaty).
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    Often, the income subject to withholding is the only income 
of the foreign person subject to any U.S. tax. If the foreign 
person has no ECI and the withholding is sufficient to satisfy 
the tax liability with respect to FDAP income, the foreign 
person generally is not required to file a U.S. Federal income 
tax return. Accordingly, the withholding of the 30-percent 
gross-basis tax generally represents the collection of the 
foreign person's final U.S. tax liability.
    To the extent that a withholding agent withholds an amount, 
the withheld tax is credited to the foreign recipient of the 
income.\37\ If the agent withholds more than is required, and 
that results in an overpayment of tax, the foreign recipient 
may file a claim for refund.
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    \37\Sec. 1462.
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Net-basis taxation of income from conduct of a trade or business within 
        the United States

    Income that is effectively connected with the conduct of a 
trade or business within the United States (``ECI'') generally 
is subject to tax on a net basis under the same U.S. tax rules 
and rates that apply to business income earned by U.S. 
persons.\38\
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    \38\Secs. 871(b) and 882.
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            U.S. trade or business
    A foreign person is subject to U.S. tax on a net basis if 
the person is engaged in a U.S.trade or business. Partners in a 
partnership and beneficiaries of an estate or trust are treated 
as engaged in a U.S.trade or business if the partnership, 
estate, or trust is so engaged.\39\
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    \39\Sec. 875.
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    Whether a foreign person is engaged in a U.S. trade or 
business is a factual question that has generated a significant 
amount of case law. Basic issues include whether the activity 
rises to the level of a trade or business, whether a trade or 
business has sufficient connections to the United States, and 
whether the relationship between the foreign person and persons 
performing activities in the United States for the foreign 
person is sufficient to attribute those activities to the 
foreign person.
    The trade or business rules differ from one activity to 
another. The term ``trade or business within the United 
States''' expressly includes the performance of personal 
services within the United States.\40\ Detailed rules govern 
whether trading in stock or securities, or in commodities, 
constitutes the conduct of a U.S. trade or business.\41\ A 
foreign person who trades in stock or securities, or in 
commodities, in the United States through an independent agent 
generally is not treated as engaged in a U.S. trade or business 
if the foreign person does not have an office or other fixed 
place of business in the United States through which trades are 
carried out. A foreign person who trades stock or securities, 
or commodities, for the person's own account also generally is 
not considered to be engaged in a U.S. trade or business so 
long as the foreign person is not a dealer in stock or 
securities, or in commodities. This may be the case even in the 
presence of an office or fixed place of business in the United 
States through which trades for the person's own account are 
carried out.
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    \40\Sec. 864(b).
    \41\Sec. 864(b)(2) and Treas. Reg. sec. 1.864-2(c) and (d).
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    For eligible foreign persons, U.S. bilateral income tax 
treaties restrict the application of net-basis U.S. taxation. 
Under each treaty, the United States is permitted to tax 
business profits only to the extent those profits are 
attributable to a U.S. permanent establishment of the foreign 
person. The threshold level of activities that constitute a 
permanent establishment is generally higher than the threshold 
level of activities that constitute a U.S. trade or business. 
For example, a permanent establishment typically requires the 
maintenance of a fixed place of business over a significant 
period of time.
            Effectively connected income
    A foreign person that is engaged in the conduct of a trade 
or business within the United States is subject to U.S. net-
basis taxation on ECI from that trade or business. Specific 
statutory rules govern whether income is ECI.\42\
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    \42\Sec. 864(c).
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    In general, for a foreign person engaged in the conduct of 
a U.S. trade or business, all income, gain, or loss from 
sources within the United States is treated as ECI.\43\
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    \43\Sec. 864(c)(3).
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    In the case of U.S.-source capital gain and U.S.-source 
income of a type that would be subject to gross-basis U.S. 
taxation, the factors taken into account in determining whether 
the income is ECI include whether the income is derived from 
assets used in or held for use in the conduct of the U.S. trade 
or business, and whether the activities of the U.S.trade or 
business were a material factor in the realization of the 
amount (the ``asset use'' and ``business activities''' 
tests).\44\ Under the asset use and business activities tests, 
due regard is given to whether such asset or such income, gain, 
deduction, or loss was accounted for through the trade or 
business.
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    \44\Sec. 864(c)(2).
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    A foreign person that is engaged in a U.S. trade or 
business may have limited categories of foreign-source income 
that are considered to be ECI.\45\ A foreign tax credit may be 
allowed with respect to foreign income tax imposed on such 
income.\46\ Foreign-source income not included in one of those 
categories generally is exempt from U.S. tax.
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    \45\A foreign person's income from foreign sources generally is 
considered to be ECI only if the person has an office or other fixed 
place of business within the United States to which the income is 
attributable and the income is in one of the following categories: (1) 
rents or royalties for the use of patents, copyrights, secret processes 
or formulas, goodwill, trademarks, trade brands, franchises, or other 
like intangible properties derived in the active conduct of the trade 
or business; (2) interest or dividends derived in the active conduct of 
a banking, financing, or similar business within the United States or 
received by a corporation the principal business of which is trading in 
stocks or securities for its own account; or (3) income derived from 
the sale or exchange (outside the United States), through the U.S. 
office or fixed place of business, of inventory or property held by the 
foreign person primarily for sale to customers in the ordinary course 
of the trade or business, unless the sale or exchange is for use, 
consumption, or disposition outside the United States and an office or 
other fixed place of business of the foreign person in a foreign 
country participated materially in the sale or exchange. Foreign-source 
dividends, interest, and royalties are not treated as ECI if the items 
are paid by a foreign corporation more than 50percent (by vote) of 
which is owned directly, indirectly, or constructively by the recipient 
of the income. Sec.864(c)(4)(B) and (D)(i).
    \46\See sec. 906.
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    In determining whether a foreign person has a U.S. office 
or other fixed place of business, the office or other fixed 
place of business of an independent agent generally is 
disregarded. The place of business of an agent other than an 
independent agent acting in the ordinary course of business is 
not disregarded, however, if the agent either has the authority 
(regularly exercised) to negotiate and conclude contracts in 
the name of the foreign person or has a stock of merchandise 
from which the agent regularly fills orders on behalf of the 
foreign person.\47\ If a foreign person has a U.S. office or 
fixed place of business, income, gain, deduction, or loss is 
not considered attributable to the office unless the office is 
a material factor in the production of the income, gain, 
deduction, or loss and the office regularly carries on 
activities of the type from which the income, gain, deduction, 
or loss is derived.\48\
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    \47\Sec. 864(c)(5)(A).
    \48\Sec. 864(c)(5)(B).
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            Certain sales and other dispositions
    Income, gain, deduction, or loss for a particular year 
generally is not treated as ECI if the foreign person is not 
engaged in a U.S. trade or business in that year.\49\ If, 
however, income or gain taken into account for a taxable year 
is attributable to activity in a prior taxable year (i.e., such 
as the sale or exchange of property, the performance of 
services, or any other transaction), the income or gain is ECI 
if the income or gain would have been ECI in the prior 
year.\50\ If any property ceases to be used or held for use in 
connection with the conduct of a U.S. trade or business and the 
property is disposed of within 10 years after the cessation, 
the income or gain attributable to the disposition of the 
property is ECI if the income or gain would have been ECI had 
the disposition occurred immediately before the property ceased 
to be used or held for use in connection with the conduct of a 
U.S. trade or business.\51\
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    \49\Sec. 864(c)(1)(B).
    \50\Sec. 864(c)(6).
    \51\Sec. 864(c)(7).
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            Allowance of deductions
    Taxable ECI is computed by taking into account deductions 
associated with gross ECI. Regulations address the allocation 
and apportionment of deductions between ECI and other income. 
Certain deductions may be allocated and apportioned on the 
basis of units sold, gross sales or receipts, costs of goods 
sold, profits contributed, expenses incurred, assets used, 
salaries paid, space used, time spent, or gross income 
received. Specific rules provide for the allocation and 
apportionment of research and experimental expenditures, legal 
and accounting fees, income taxes, losses on dispositions of 
property, and net operating losses. In general, interest is 
allocated and apportioned based on assets rather than income.
            Sales of partnership interests
    Gain or loss from the sale or exchange of a partnership 
interest is treated as effectively connected with a U.S. trade 
or business to the extent that the transferor would have had 
effectively connected gain or loss had the partnership sold all 
of its assets at fair market value as of the date of the sale 
or exchange.\52\ Any gain or loss from such hypothetical asset 
sale by the partnership must be allocated to interests in the 
partnership in the same manner as non-separately stated income 
and loss.
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    \52\Sec. 864(c)(8)(B).
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    The transferee of a partnership interest must withhold 10 
percent of the amount realized on the sale or exchange of a 
partnership interest unless the transferor certifies that the 
sale qualifies for an exception from withholding, e.g., that 
the transferor is not a nonresident alien individual or foreign 
corporation or that there is no realized gain from the 
sale.\53\ If the transferee fails to withhold the correct 
amount, the partnership is required to deduct and withhold from 
distributions to the transferee partner an amount equal to the 
amount the transferee failed to withhold.\54\
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    \53\Sec. 1446(f)(1).
    \54\Sec. 1446(f)(4); Treas. Reg. sec. 1.1446(f)-2(b).
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            Foreign Investment in Real Property Act (``FIRPTA'')
    A foreign person's gain or loss from the disposition of a 
U.S. real property interest (``USRPI'') is treated as ECI.\55\ 
Thus, a foreign person subject to tax on such a disposition is 
required to file a U.S. tax return. In the case of a foreign 
corporation, the gain from the disposition of a USRPI may also 
be subject to the branch profits tax at a 30-percent rate (or 
lower treaty rate). Certain sales of USRPI are exempt from this 
tax. For example, qualified foreign pension funds (``QFPF'') 
are not treated as a nonresident alien individual or foreign 
corporation subject to tax under FIRPTA,\56\ foreign 
governments are exempt from FIRPTA tax on gain from certain 
sales of stock of U.S. real property holding corporations,\57\ 
and equity interests in ``domestically controlled'' REITs are 
not USRPIs.\58\
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    \55\Sec. 897(a).
    \56\Sec. 897(l)(1).
    \57\Treas. Reg. sec. 1.892-3T(a).
    \58\Sec. 897(h)(2).
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    The payor of income that FIRPTA treats as ECI is generally 
required to withhold U.S. tax from the payment.\59\ The foreign 
person can request a refund with its U.S. tax return, if 
appropriate, based on that person's overall tax liability for 
the taxable year.
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    \59\Sec. 1445 and regulations thereunder.
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Special measures to address potential tax avoidance

            Base erosion and anti-abuse tax
    The base erosion and anti-abuse tax (the ``BEAT'') is an 
additional tax imposed on certain multinational corporations 
with respect to payments to foreign affiliates.\60\
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    \60\Sec. 59A.
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    The BEAT applies only to corporate taxpayers with average 
annual gross receipts for the three-taxable-year period ending 
with the preceding taxable year in excess of $500 million, and 
is determined, in part, by the extent to which a taxpayer has 
made payments to foreign related parties.\61\ The BEAT 
generally does not apply to taxpayers for which reductions to 
taxable income (``base erosion tax benefits'') arising from 
payments to foreign related parties (``base erosion payments'') 
are less than three percent of total deductions (i.e.,a ``base 
erosion percentage'' of less than three percent).\62\
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    \61\For this purpose, a related party is, with respect to the 
taxpayer, any 25-percent owner of the taxpayer; any person who is 
related (within the meaning of section 267(b) or 707(b)(1)) to the 
taxpayer or any 25-percent owner of the taxpayer; and any other person 
who is related (within the meaning of section 482) to the taxpayer. 
Sec. 59A(g). The 25-percent ownership threshold is determined by vote 
or value.
    \62\Sec. 59A.
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    For a taxpayer subject to the BEAT (an ``applicable 
taxpayer''), the additional tax (the ``base erosion minimum tax 
amount'' or ``BEAT liability'') for the year generally equals 
the excess, if any, of 10 percent of its modified taxable 
income over an amount equal to its regular tax liability 
reduced (but not below zero) by the sum of a certain tax 
credits.\63\
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    \63\Sec. 59A(e). For taxable years beginning after December 31, 
2025, the 10-percent rate on modified taxable income is increased to 
12.5 percent, and regular tax liability is reduced (and the base 
erosion minimum tax amount is therefore increased) by the sum of all 
the taxpayer's income tax credits for the taxable year. Sec. 59A(b)(2). 
In addition, special rules with respect to banks and securities dealers 
provide that for purposes of determining whether they are subject to 
the BEAT, banks and securities dealers are subject to a base erosion 
percentage threshold of two percent (rather than three percent), and if 
that threshold is met, such persons are subject to a tax rate on its 
modified taxable income that is one-percentage point higher than the 
generally applicable tax rate. Secs. 59A(b)(3) and 59A(e)(1)(C).
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            Branch profits taxes
    The branch profits tax generally seeks to equalize the tax 
treatment of a dividend to a foreign person paid from a 
domestic branch with that paid from a domestic corporation. A 
domestic corporation is subject to U.S. income tax on its net 
income. The earnings of the domestic corporation may be subject 
to a second tax, this time at the shareholder level, when 
dividends are paid. When the shareholders are foreign, the 
second-level tax may be collected by withholding. Unless the 
portfolio interest exemption or another exemption applies, 
interest payments made by a domestic corporation to foreign 
creditors are likewise subject to withholding tax. To 
approximate those second-level withholding taxes imposed on 
payments made by domestic subsidiaries to their foreign 
shareholders, the United States taxes a foreign corporation 
that is engaged in a U.S. trade or business through a U.S. 
branch on amounts of U.S. earnings and profits that are shifted 
(to the head office) out of, or amounts of interest that are 
deducted by, the U.S. branch of the foreign corporation.\64\ 
Those branch taxes may be reduced or eliminated under an 
applicable income tax treaty.\65\
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    \64\Under the branch profits tax, the United States imposes a tax 
of 30 percent on a foreign corporation's ``dividend equivalent 
amount.'' Sec. 884(a). The dividend equivalent amount generally is the 
earnings and profits of a U.S. branch of a foreign corporation 
attributable to its ECI. Sec. 884(b).
    Interest paid by a U.S. trade or business of a foreign corporation 
generally is treated as if paid by a domestic corporation and therefore 
generally is subject to 30-percent withholding tax if paid to a foreign 
person. Sec. 884(f)(1)(A). Certain ``excess interest'' of a U.S. trade 
or business of a foreign corporation is treated as if paid by a U.S. 
corporation to a foreign parent and, therefore, also may be subject to 
30-percent withholding tax. Sec.884(f)(1)(B). For this purpose, excess 
interest is the excess of the interest expense of the foreign 
corporation apportioned to the U.S. trade or business over the amount 
of interest paid by the trade or business.
    \65\See Treas. Reg. secs. 1.884-1(g) and -4(b)(8).
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            Hybrid arrangements
    Hybrid arrangements exploit differences in the tax 
treatment of a transaction or entity under the laws of two or 
more tax jurisdictions to achieve tax benefits, including 
double nontaxation and deferral. Special rules seek to combat 
the use of such arrangements. These rules include denying 
deductions relating to certain interest and royalty 
payments.\66\ Specifically, no deduction is allowed for any 
``disqualified related party amount''\67\ that is paid or 
accrued pursuant to a hybrid transaction\68\ or that is paid or 
accrued by, or to, a hybrid entity.\69\
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    \66\ Sec. 267A; see also sec. 245A(e) (addressing hybrid 
dividends).
    \67\ A disqualified related party amount is any interest or royalty 
paid or accrued to a related party to the extent that: (1) there is no 
corresponding inclusion to the related party under the tax law of the 
country of which such related party is a resident for tax purposes or 
in which such related party is subject to tax, or (2) such related 
party is allowed a deduction with respect to such amount under the tax 
law of such country. Sec. 267A(b)(1). A disqualified related party 
amount does not include any payment to the extent such payment is 
included in the gross income of a U.S. shareholder under subpart F. In 
general, a related party is any person that controls, or is controlled 
by, the taxpayer, with control being direct or indirect ownership of 
more than 50 percent of the vote, value, or beneficial interests of the 
relevant person. Sec. 267A(b)(2).
    \68\A hybrid transaction is any transaction, series of 
transactions, agreement, or instrument one or more payments with 
respect to which are treated as interest or royalties for Federal 
income tax purposes and which are not so treated for purposes of the 
tax law of the foreign country of which the recipient of such payment 
is resident for tax purposes or in which the recipient is subject to 
tax. Sec. 267A(c).
    \69\ A hybrid entity is any entity which is either: (1) treated as 
fiscally transparent for Federal income tax purposes but not so treated 
for purposes of the tax law of the foreign country of which the entity 
is resident for tax purposes or in which the entity is subject to tax 
or (2) treated as fiscally transparent for purposes of the tax law of 
the foreign country of which the entity is resident for tax purposes or 
in which the entity is subject to tax but not so treated for Federal 
income tax purposes. Sec. 267A(d).
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      4. Resolving Overlapping or Conflicting Jurisdiction to Tax

    Multinational enterprises operating in multiple countries 
may find that the same item of income is subject to tax under 
the rules of two or more jurisdictions. Such double taxation 
may be mitigated by domestic laws permitting credit or 
deduction for income taxes paid to another jurisdiction or by 
bilateral tax treaties. Another related objective of such 
treaties is the removal of barriers to trade, capital flows, 
and commercial travel that may be caused by overlapping tax 
jurisdictions and by the burdens of complying with the tax laws 
of a jurisdiction when a person's contacts with, and income 
derived from, that jurisdiction are minimal.

Relief from double taxation by statute

    Subject to certain limitations, U.S. citizens, resident 
individuals, and domestic corporations are allowed a credit for 
foreign income taxes they pay. In addition, a domestic 
corporation is allowed a credit for foreign income taxes paid 
by a CFC with respect to income included by the corporation as 
subpart F income and GILTI; such taxes are deemed to have been 
paid by the domestic corporation for purposes of calculating 
the foreign tax credit.
    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income. The 
limit is intended to ensure that the credit mitigates double 
taxation of foreign-source income without offsetting U.S. tax 
on U.S.-source income. The limit is computed by multiplying a 
taxpayer's total pre-credit U.S. tax liability for the year by 
the ratio of the taxpayer's foreign-source taxable income for 
the year to the taxpayer's total taxable income for the year. 
If the total amount of foreign income taxes paid and deemed 
paid for the year exceeds the taxpayer's foreign tax credit 
limitation for the year, the taxpayer may (in certain cases) 
carry back the excess foreign taxes to the previous year and 
then carry forward any remaining excess to one of the 10 
succeeding taxable years. No carryback or carryover of excess 
foreign tax credits are allowed in the GILTI foreign tax credit 
limitation category.

Bilateral treaties to relieve double taxation

    The United States is a partner in numerous bilateral 
treaties that aim to avoid international double taxation and to 
prevent tax avoidance and evasion. The United States Model 
Income Tax Convention of 2016 (``Model Treaty'') was published 
in 2016 and reflects the most recent comprehensive statement of 
U.S. policy with respect to tax treaties.\70\ As explained in 
the Preamble published contemporaneously with the Model Treaty, 
the provisions therein included both refinements of provisions 
that have been included in U.S. tax treaties, as well as new 
provisions, not yet incorporated in a bilateral treaty, that 
deny treaty benefits on deductible payments of highly mobile 
income that are made to related persons that enjoy low or no 
taxation with respect to that income under a special tax 
regime.\71\ To a large extent, the treaty provisions designed 
to carry out these objectives supplement U.S. tax law 
provisions having the same objectives; treaty provisions may 
modify the generally applicable statutory rules with provisions 
that take into account the particular tax system of the treaty 
partner.
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    \70\The Model Treaty has been updated periodically. The Model 
Treaty and its Preamble, as well as text of earlier Model Treaties, are 
available at https://home.treasury.gov/policy-issues/tax-policy/
treaties.
    \71\For example, the Model Treaty denies treaty benefits when U.S. 
source payments are made to a beneficial owner that benefits from a 
special tax regime, as defined in Article 3 (General Definitions), 
subparagraph (l) of paragraph 1; the benefits that may be denied 
include the reduced withholding rates on dividends, interest and 
royalties that are paid to persons that fail to satisfy the limitation 
on benefits requirements in Article 22 (Limitation on Benefits).
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    The objective of limiting double taxation generally is 
accomplished in treaties through the agreement of each country 
to allocate taxing authority by limiting, in specified 
situations, its right to tax income earned within its territory 
by residents of the other country. For the most part, the 
various rate reductions and exemptions agreed to by the country 
in which income is derived (the ``source country'') in treaties 
are premised on the assumption that the country of residence of 
the taxpayer deriving the income (the ``residence country'') 
may tax the income at levels comparable to those imposed by the 
source country on its residents. Treaties also provide for the 
elimination of double taxation by requiring the residence 
country to allow a credit for taxes that the source country 
retains the right to impose under the treaty. In addition, in 
the case of certain types of income, treaties may provide for 
exemption by the residence country of income taxed by the 
source country.
    Treaties define the term ``resident'' so that an individual 
or corporation generally will not be subject to tax as a 
resident by both countries. A ``limitation on benefits'' 
provision in treaties further determines whether a treaty 
resident is a qualified person permitted to receive treaty 
benefits. This provision limits the ability of third country 
residents to engage in treaty shopping by establishing conduit 
legal entities in either the United States or the treaty 
partner jurisdiction. The provision sets forth objective tests 
that commonly include a publicly traded company test, an 
ownership and base erosion test, and an active trade or 
business test.
    Treaties generally provide that neither country may tax 
business income derived by residents of the other country 
unless the business activities in the taxing jurisdiction are 
substantial enough to constitute a permanent establishment or 
fixed base in that jurisdiction, and the business income is 
attributable to that permanent establishment. As explained 
above, U.S. bilateral income tax treaties restrict the 
application of net-basis U.S. taxation by requiring a threshold 
for permanent establishment status that is higher than that 
required to constitute a U.S. trade or business under the Code. 
As a result, a foreign corporation engaged in a U.S. trade or 
business but not through a permanent establishment generally 
would not be taxable in the United States under an applicable 
treaty. The term ``attributable to'' is generally analogous to 
the ``effectively connected'' concept in section 864(c). 
Treaties also contain commercial visitation exemptions under 
which individual residents of one country performing personal 
services in the other are not required to pay tax in that other 
country unless their contacts exceed certain specified minimums 
(for example, presence for a set number of days or earnings in 
excess of a specified amount).
    Treaties address the taxation of passive income such as 
dividends, interest, and royalties from sources within one 
country derived by residents of the other country either by 
providing that the income is taxed only in the recipient's 
country of residence or by reducing the rate of the source 
country's withholding tax imposed on the income. In this 
regard, the United States agrees in its tax treaties to reduce 
its 30-percent withholding tax (or, in the case of some income, 
to eliminate it entirely)\72\ in return for reciprocal 
treatment by its treaty partner. In particular, under the Model 
Treaty and many U.S. tax treaties, source-country taxation of 
most payments of interest and royalties is eliminated, and some 
recent U.S. treaties forbid the source country from imposing 
withholding tax on dividends paid by an 80-percent owned 
subsidiary to a parent corporation organized in the other 
treaty country.
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    \72\The rates agreed upon in U.S. bilateral tax treaties for income 
other than personal services income are found in ``Table1. Tax Rates on 
Income Other Than Personal Service Income Under Chapter 3, Internal 
Revenue Code, and Income Tax Treaties (Rev. May 2023)'' at https://
www.irs.gov/individuals/international-taxpayers/tax-treaty-tables.
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    In its treaties, the United States, as a matter of policy, 
generally retains the right to tax its citizens and residents 
on their worldwide income as if the treaty had not come into 
effect. The United States also provides in its treaties that it 
allows a credit against U.S. tax for income taxes paid to the 
treaty partners, subject to the various limitations of U.S. 
law.

                        EXPLANATION OF PROVISION

    Under the provision, income from U.S. sources earned or 
received by qualified residents of Taiwan is entitled to 
certain benefits. These benefits include reduced tax rates for 
income otherwise subject to the 30-percent gross-basis tax; 
with respect to income effectively connected with a U.S. trade 
or business, taxation of only that income effectively connected 
with a U.S. permanent establishment; and preferential treatment 
of wages and related income earned by such qualified residents. 
The new rules are analogous to provisions typical in bilateral 
treaties to which the United States is a party and are based on 
relevant language found in the Model Treaty. The provision 
requires general anti-abuse standards similar to those in 
section 894(c) to deny benefits when payments are made through 
hybrid entities. The proposed rules are applicable only if 
reciprocal provisions apply to U.S. persons with respect to 
income sourced in Taiwan.

Treatment of certain income from U.S. sources

            Income generally subject to U.S. taxation on a gross basis
    Special rules address the treatment of several forms of 
income received by qualified residents of Taiwan from U.S. 
sources that would otherwise be subject to a 30-percent gross-
basis tax (i.e., a tax on gross income without reduction for 
related expenses). Such taxes are collected by withholding at 
the source of the payment.
            Interest, royalties and gains
    Tax on U.S.-source interest (other than original issue 
discount), royalties, amounts described in section 
871(a)(1)(C), and gains described in section 871(a)(1)(D) that 
are paid to or received by a qualified resident of Taiwan is 
reduced to 10 percent. The treatment of these types of income 
is consistent with that provided under Model Treaty Articles 11 
(Interest), 12 (Royalties), and 13 (Gains).
            Dividends
    Tax on U.S.-source dividends that are paid to or received 
by a qualified resident of Taiwan is reduced to 15 percent. The 
reduction in rates follows the treaty benefits provided under 
Model Treaty Article 10 (Dividends).
    The reduced rates do not apply to amounts subject to 
FIRPTA; payments between an expatriated entity and a related 
party; any amount which is included in income under section 
860C to the extent that such amount does not exceed an excess 
inclusion with respect to a REMIC; and dividends paid by a REIT 
other than qualified REIT dividends. A dividend paid by a REIT 
is a qualified REIT dividend if the dividend is paid with 
respect to a class of shares that is publicly traded and the 
owner of the dividend holds not more than five percent of any 
class of shares in the REIT.
    Certain qualified residents of Taiwan that are taxable as 
corporations in Taiwan may be eligible for a further reduction 
in the tax rate (i.e., from 15 percent to 10 percent) with 
respect to dividends, provided that certain holding period and 
ownership thresholds are met. To qualify for the 10-percent tax 
rate on dividends, at all times during the 12-month period 
ending on the date on which the stock in a corporation becomes 
ex-dividend with respect to such dividend, the dividend 
recipient must be a qualified resident of Taiwan and directly 
own at least 10 percent of the vote and value of the total 
outstanding shares of stock in such corporation. For purposes 
of the 12-month period, a dividend recipient shall be permitted 
to tack the holding period of an entity taxed as a corporation 
in Taiwan from whom the dividend recipient acquired such stock, 
if that entity was a qualified resident of Taiwan and a 
``connected person'' with respect to the dividend recipient at 
the time the share was acquired. Persons are ``connected 
persons'' if one person owns, directly or indirectly, at least 
50 percent of the beneficial interest in the other (or, if a 
corporation, at least 50 percent of the vote and value of its 
shares); a third person owns, directly or indirectly, at least 
50 percent of the beneficial interest in each person (or, if a 
corporation, at least 50 percent of the vote and value of its 
shares). In addition, a person may be a connected person if, 
based on all the relevant facts and circumstances, one has 
control of the other, or both are under the control of the same 
persons. In no event is a dividend paid by a RIC or a REIT 
eligible for this further reduction in tax rate.
            Income from employment
    Qualified wages for personal services within the United 
States generally are not subject to U.S. income tax if paid by 
an employer to a qualified resident of Taiwan who is either not 
a U.S. resident or is employed as a member of the regular 
component of a ship or aircraft operated in international 
traffic. The definition of qualified wages follows the 
definition in Model Treaty Article 14 (Income from Employment) 
to include amounts paid by or on behalf of a non-U.S. person 
(and not borne by a U.S. permanent establishment) in the form 
of wages, salaries, or similar remunerations with respect to 
personal services performed in the United States. Directors' 
fees, income derived as a student or trainee, pensions, or 
amounts paid with respect to employment with the United States, 
any State, or any U.S. possession, or other amounts specified 
in regulations or guidance are not included within the scope of 
qualified wages.
            Income from services as an entertainer or athlete
    Income derived by a qualified resident of Taiwan for 
services performed as an entertainer or athlete in the United 
States generally is subject to income tax in the United States 
but may avoid U.S. taxation if gross receipts from such 
services do not exceed in total (including amounts received as 
reimbursement of expenses) $30,000. If total receipts from the 
performance of services as an entertainer or athlete exceeds 
$30,000, then the entire amount is subject to taxation in the 
United States. Income from such services accruing to a person 
other than the entertainer or athlete performing such services 
also may qualify for the exemption from U.S. taxation, but only 
if the person receiving the income is contractually authorized 
to designate another person or persons to provide the services.
    This provision is intended to be consistent with the rules 
in Model Treaty Article 16 (Entertainers and Sportsmen), which 
generally provides that income derived from services performed 
by entertainers and athletes resident in one treaty partner 
jurisdiction may be subject to tax based on the source of 
income rather than the residence of the performer or athlete, 
notwithstanding provisions of Model Treaty Article 14 (Income 
from Employment).

Income effectively connected with a U.S. permanent establishment

    Income of a qualified resident of Taiwan that is 
effectively connected with a U.S. permanent establishment is 
subject to tax on a net basis (under section 1 for noncorporate 
persons and section 11 for corporations). In addition, such ECI 
continues to be subject to the alternative minimum tax and 
BEAT, if applicable. In determining taxable income for these 
purposes, gross income includes only gross income which is 
effectively connected with the permanent establishment.
    Various rules of special application are provided for 
determining whether rules regarding ECI are modified. First, 
under FIRPTA, to ensure that the ultimate substantive tax 
treatment of FIRPTA income is unchanged, references to ``trade 
or business within the United States''' are changed to refer to 
carrying on a trade or business through a U.S. permanent 
establishment. The branch profits tax applicable to ECI 
(including the branch profits tax on interest) is reduced to 10 
percent, thus matching the reduced rate for dividends and 
interest that would otherwise apply. The provision adopts the 
anti-abuse standards of section 894(c) to deny benefits when 
payments are made through hybrid entities.
    In addition, wages, salaries, or similar remunerations with 
respect to employment as well as directors' fees, income from 
services as an entertainer or athlete, income derived as a 
student or trainee, pensions, and amounts paid with respect to 
employment within the United States are outside the scope of 
income considered to be effectively connected with a permanent 
establishment. This limitation is in accordance with language 
in Model Treaty Article 7 (Business Profits), paragraph 4, 
which provides that ``[w]here profits include items of income 
that are dealt with separately in other Articles of this 
Convention, then the provisions of those Articles shall not be 
affected by the provisions of this Article.''
            Definition of U.S. permanent establishment
    A U.S. permanent establishment is a fixed place of business 
through which a qualified resident of Taiwan conducts an active 
trade or business within the United States. A U.S. permanent 
establishment need not be subject to corporate tax in Taiwan to 
qualify. The fixed place may include a place from which a trade 
or business is managed, as well as an office, factory, 
workshop, branch, site in which minerals are extracted, or 
other sites. Such a fixed place generally does not include 
sites maintained for a limited purpose such as storage, 
display, or auxiliary or preparatory work; further, such a 
fixed place generally does not include a fixed place of 
business of an independent agent even if such agent habitually 
contracts on behalf of the foreign entity. Following Model 
Treaty Article 5 (Permanent Establishment), special rules on 
the extent to which a temporary project may constitute a fixed 
place of business are provided.

Qualified resident of Taiwan

    Following Model Treaty Article 4 (Resident), the provision 
defines residence for both individuals and entities. In 
general, a ``qualified resident of Taiwan'' is entitled to the 
benefits of the new provision. The term generally includes any 
person that is not a U.S. person who is liable for tax in 
Taiwan and establishes domicile, residence, management or 
control, or place of incorporation in Taiwan. Rules specific to 
individuals, as well as specific limitations on eligibility of 
corporations, are provided.
            Individuals
    In general, the Code provides that the residence of an 
individual other than a U.S. citizen be determined by 
application of section 7701(b). If such a person also has met 
the foregoing criteria for status as a qualified resident of 
Taiwan, such individual may be a dual resident, whose residence 
must be resolved after further inquiry.

                 RESOLVING RESIDENCE OF A DUAL RESIDENT

    The residence of a dual resident is resolved by applying a 
hierarchy of three tests based on the individual's permanent 
home, center of vital interests, or habitual abode. The first 
inquiry is where the individual has a permanent home. If the 
individual has a permanent home in Taiwan but not the United 
States, the permanent home is determinative of residence. If a 
person has permanent homes in both jurisdictions, the second 
inquiry is whether the individual has a center of vital 
interests in Taiwan. If the person has a permanent home in both 
jurisdictions and the center of vital interests cannot be 
determined, or has no permanent home in either jurisdiction, 
then the individual's residence is based on the individual's 
habitual abode. If an individual's residence cannot be 
determined by habitual abode, that person is not a qualified 
resident of Taiwan for purposes of claiming benefits under this 
provision.
            Rules for determining residence of an entity
    Entities taxed as corporations in Taiwan are treated as 
qualified residents of Taiwan if they meet an ownership and 
income test, a publicly traded in Taiwan test, or a qualified 
subsidiary test. In addition, qualified items of income are 
treated as income of a qualified resident of Taiwan.
            Ownership and income thresholds for non-publicly traded 
                    entities
    The ownership and income tests require that at least 50 
percent by vote and value of the entity is owned (directly or 
indirectly) by qualified residents of Taiwan and that less than 
50 percent of gross income of the entity (and, in the case of 
an entity that is a member of a tested group, less than 50 
percent of the tested group's gross income) is in the form of 
payments deductible for purposes of income taxes imposed by 
Taiwan to persons who are neither qualified residents of Taiwan 
nor certain U.S. persons whose connection to the United States 
meets comparable tests, as determined by the Secretary. 
Indirect ownership for purposes of the ownership threshold 
requires that all intermediate owners are qualifying 
intermediate owners; that is, a qualified resident of Taiwan or 
resident of a foreign country with which the United States has 
a comprehensive tax treaty for the relief of double taxation, 
provided that the foreign country is not a country of concern 
within the meaning of that term as included in the CHIPS Act of 
2022.\73\
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    \73\Section 103(a)(4) of the CHIPS Act of 2022.
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    Certain deductible payments are not included in gross 
income for purposes of the income test. Such deductible 
payments do not include arm's-length payments by an entity in 
the ordinary course of an active trade or business for services 
or tangible property and do not include certain intragroup 
transactions within a tested group. A tested group is defined 
as a group of two or more corporations that participate in a 
group for tax consolidation, fiscal unity or other plan that 
requires the corporations to share profits and losses, or that 
share losses through group relief or other loss sharing 
regimes.
            Publicly traded test
    Alternatively, an entity may establish itself as a 
qualified resident of Taiwan under the publicly traded test. An 
entity is considered to be publicly traded in Taiwan if its 
principal class of shares (and any disproportionate class of 
shares) is primarily and regularly traded on an established 
securities market in Taiwan. If such shares of an entity are 
not primarily traded in Taiwan but the entity has its primary 
place of management and control in Taiwan and its principal 
class of shares (and any disproportionate class of shares) is 
regularly traded there on an established securities market, the 
entity meets the publicly traded test.
            Qualified subsidiary test
    An entity that does not meet the above ownership and income 
test or publicly traded test may nonetheless be eligible for 
the benefits described herein if that entity meets the 
qualified subsidiary test. Entities that meet the income 
requirements of the ownership and income tests may qualify if 
they are owned at least 50 percent by five or fewer 
corporations that themselves satisfy the publicly traded test 
or are U.S. persons, the shares of which are primarily and 
regularly traded in the United States on an established 
securities market. For this purpose, the indirect ownership of 
the qualified subsidiary is met only if all intermediate owners 
are themselves qualifying intermediate owners, which, for 
purposes of the qualified subsidiary test only, may include 
U.S. persons that satisfy tests comparable to the test for a 
qualified resident of Taiwan, as determined by the Secretary. 
In addition, qualifying intermediate owners also include a 
qualified resident of Taiwan or a resident of a foreign country 
with which the United States has a comprehensive tax treaty for 
the relief of double taxation and is not a country of concern.
            Active trade or business test
    Even if an entity is not otherwise a qualified resident of 
Taiwan, a qualified item of income from the United States that 
is derived by a person subject to income tax under Taiwan law 
(and that is not a U.S. person) shall be treated as income of a 
qualified resident of Taiwan. A qualified item of income 
includes any item of income which emanates from, or is 
incidental to, the conduct of an active trade or business in 
Taiwan and, if such person derives an item of income from a 
trade or business activity conducted in the United States, or 
derives an item of income arising in the United States from a 
connected person, the trade or business activity in Taiwan to 
which the item relates is required to be substantial in 
relation to the same or complementary trade or business 
activity in the United States. The trade or business activity 
in the United States may be carried on by such person or any 
connected person. The active trade or business test is not 
available for any item of income derived by an entity if at 
least 50 percent (by vote or value) of such entity is owned 
(directly or indirectly) or controlled by residents of a 
foreign country of concern.

Reciprocity requirements

    Before any of the foregoing rules are applicable in any 
taxable period, the Secretary must determine that certain 
reciprocity requirements are met, ensuring that U.S. persons 
subject to income tax in Taiwan are afforded reciprocal 
benefits. Reciprocity may be determined in any appropriate 
manner.

Regulations

    The provision grants the Secretary authority to promulgate 
regulations on a variety of enumerated issues. These issues 
include regulations or guidance for determining what 
constitutes a U.S. permanent establishment of a qualified 
resident of Taiwan and income that is effectively connected to 
such a permanent establishment; preventing the abuse of the 
provisions of this section by persons who are not (or who 
should not be treated as) qualified residents of Taiwan; 
requirements for record keeping and reporting; rules to assist 
withholding agents or employers in determining whether a 
foreign person is a qualified resident of Taiwan or whether 
reporting is required for a payment; the application of the 
provision to ownership thresholds attributable to stock held by 
predecessor owners; determining what amounts are to be treated 
as qualified wages; defining established securities markets for 
the limitation on benefits provisions; the application of the 
legislation to qualified residents of Taiwan that are partners 
of a partnership or beneficiaries of an estate or trust; 
determining ownership interests held by foreign countries of 
concern; determining what items are to be treated as qualified 
items of income under the active trade or business provisions 
of the limitation of benefits to prevent abuse of the purposes 
of this section; and determining the starting and ending dates 
for periods with respect to the reciprocity requirements. To 
the extent practical, the regulations shall be consistent with 
the relevant Model Treaty provisions.

                             EFFECTIVE DATE

    The provision is effective on date of enactment, subject to 
satisfaction of the contingent reciprocity standards being met.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 308(a)(1) of the 
Congressional Budget and Impoundment Control Act of 1974, as 
amended (the ``Budget Act''), the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the ``United States-Taiwan Expedited Double-Tax 
Relief Act,'' as reported:
    Consistent with estimating conventions regarding contingent 
legislation, the staff of the Joint Committee on Taxation 
estimates the bill to have no effect on Federal fiscal year 
budget receipts for the period 2024 through 2033.

                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The statement from the 
Congressional Budget Office will be provided separately.

Tax expenditures

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that there are no provisions that affect the 
levels of tax expenditures.

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The statement from the 
Congressional Budget Office will be provided separately.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee states that, with a 
majority present, the United States-Taiwan Expedited Double-Tax 
Relief Act, was ordered favorably reported on September 14, 
2023, by a roll call vote of 27 ayes and 0 nays. The vote was 
as follows:
    Ayes: Wyden, Stabenow, Cantwell, Menendez (proxy), Carper, 
Cardin, Brown, Bennet (proxy), Casey, Warner, Whitehouse, 
Hassan, Cortez Masto, Warren (proxy), Crapo, Grassley, Cornyn 
(proxy), Thune (proxy), Scott (proxy), Cassidy (proxy), 
Lankford (proxy), Daines, Young (proxy), Barrasso, Johnson, 
Tillis, and Blackburn (proxy).
    Nays: None.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill.

Impact on individuals and businesses, personal privacy and paperwork

    The bill includes various provisions relating to cross-
border transactions between residents of Taiwan and the United 
States, including provisions that reduce rates of withholding 
taxes on certain income, designed to encourage investment in 
the United States by qualified residents of Taiwan. The 
provisions of the bill are dependent upon confirmation that 
Taiwan has provided reciprocal benefits to U.S. residents. The 
bill is not expected to impose additional administrative 
requirements or regulatory burdens on individuals or businesses 
beyond those normally necessary to access double-tax relief. 
The provisions of the bill do not impact personal privacy.

                     B. Unfunded Mandates Statement

    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 tax provisions of the 
reported bill contain no unfunded Federal mandates on the 
private sector, nor does it contain a Federal intergovernmental 
mandate that is imposed on State, local, or tribal governments 
within the meaning of Public Law 104-4, the Unfunded Mandates 
Reform Act of 1995.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (``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. The staff of the Joint Committee on Taxation has 
determined that there are no provisions that are of widespread 
applicability to individuals or small businesses.

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

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  [all]