Home > 106th Congressional Bills > H.R. 4986 (rh) To amend the Internal Revenue Code of 1986 to repeal the provisions relating to foreign sales corporations (FSCs) and to exclude extraterritorial income from gross income. [Reported in House] ...

H.R. 4986 (rh) To amend the Internal Revenue Code of 1986 to repeal the provisions relating to foreign sales corporations (FSCs) and to exclude extraterritorial income from gross income. [Reported in House] ...


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106th CONGRESS
  2d Session
                                H. R. 4986


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           September 14, 2000

     Received; read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 AN ACT


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

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

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

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taxation of foreign sales corporations) is hereby repealed.

SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

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

``SEC. 114. EXTRATERRITORIAL INCOME.

    ``(a) Exclusion.--Gross income does not include extraterritorial 
income.
    ``(b) Exception.--Subsection (a) shall not apply to 
extraterritorial income which is not qualifying foreign trade income as 
determined under subpart E of part III of subchapter N.
    ``(c) Disallowance of Deductions.--
            ``(1) In general.--Any deduction of a taxpayer allocated 
        under paragraph (2) to extraterritorial income of the taxpayer 
        excluded from gross income under subsection (a) shall not be 
        allowed.
            ``(2) Allocation.--Any deduction of the taxpayer properly 
        apportioned and allocated to the extraterritorial income 
        derived by the taxpayer from any transaction shall be allocated 
        on a proportionate basis between--
                    ``(A) the extraterritorial income derived from such 
                transaction which is excluded from gross income under 
                subsection (a), and
                    ``(B) the extraterritorial income derived from such 
                transaction which is not so excluded.
    ``(d) Denial of Credits for Certain Foreign Taxes.--Notwithstanding 
any other provision of this chapter, no credit shall be allowed under 
this chapter for any income, war profits, and excess profits taxes paid 
or accrued to any foreign country or possession of the United States 
with respect to extraterritorial income which is excluded from gross 
income under subsection (a).
    ``(e) Extraterritorial Income.--For purposes of this section, the 
term `extraterritorial income' means the gross income of the taxpayer 
attributable to foreign trading gross receipts (as defined in section 
942) of the taxpayer.''
    (b) Qualifying Foreign Trade Income.--Part III of subchapter N of 
chapter 1 is amended by inserting after subpart D the following new 
subpart:

              ``Subpart E--Qualifying Foreign Trade Income

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

``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

    ``(a) Qualifying Foreign Trade Income.--For purposes of this 
subpart and section 114--
            ``(1) In general.--The term `qualifying foreign trade 
        income' means, with respect to any transaction, the amount of 
        gross income which, if excluded, will result in a reduction of 
        the taxable income of the taxpayer from such transaction equal 
        to the greatest of--
                    ``(A) 30 percent of the foreign sale and leasing 
                income derived by the taxpayer from such transaction,
                    ``(B) 1.2 percent of the foreign trading gross 
                receipts derived by the taxpayer from the transaction, 
                or
                    ``(C) 15 percent of the foreign trade income 
                derived by the taxpayer from the transaction.
        In no event shall the amount determined under subparagraph (B) 
        exceed 200 percent of the amount determined under subparagraph 
        (C).
            ``(2) Alternative computation.--A taxpayer may compute its 
        qualifying foreign trade income under a subparagraph of 
        paragraph (1) other than the subparagraph which results in the 
        greatest amount of such income.
            ``(3) Limitation on use of foreign trading gross receipts 
        method.--If any person computes its qualifying foreign trade 
        income from any transaction with respect to any property under 
        paragraph (1)(B), the qualifying foreign trade income of such 
        person (or any related person) with respect to any other 
        transaction involving such property shall be zero.
            ``(4) Rules for marginal costing.--The Secretary shall 
        prescribe regulations setting forth rules for the allocation of 
        expenditures in computing foreign trade income under paragraph 
        (1)(C) in those cases where a taxpayer is seeking to establish 
        or maintain a market for qualifying foreign trade property.
            ``(5) Participation in international boycotts, etc.--Under 
        regulations prescribed by the Secretary, the qualifying foreign 
        trade income of a taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                    ``(A) an amount equal to such income multiplied by 
                the international boycott factor determined under 
                section 999, and
                    ``(B) any illegal bribe, kickback, or other payment 
                (within the meaning of section 162(c)) paid by or on 
                behalf of the taxpayer directly or indirectly to an 
                official, employee, or agent in fact of a government.
    ``(b) Foreign Trade Income.--For purposes of this subpart--
            ``(1) In general.--The term `foreign trade income' means 
        the taxable income of the taxpayer attributable to foreign 
        trading gross receipts of the taxpayer.
            ``(2) Special rule for cooperatives.--In any case in which 
        an organization to which part I of subchapter T applies which 
        is engaged in the marketing of agricultural or horticultural 
        products sells qualifying foreign trade property, in computing 
        the taxable income of such cooperative, there shall not be 
        taken into account any deduction allowable under subsection (b) 
        or (c) of section 1382 (relating to patronage dividends, per-
        unit retain allocations, and nonpatronage distributions).
    ``(c) Foreign Sale and Leasing Income.--For purposes of this 
section--
            ``(1) In general.--The term `foreign sale and leasing 
        income' means, with respect to any transaction--
                    ``(A) foreign trade income properly allocable to 
                activities which--
                            ``(i) are described in paragraph (2)(A)(i) 
                        or (3) of section 942(b), and
                            ``(ii) are performed by the taxpayer (or 
                        any person acting under a contract with such 
                        taxpayer) outside the United States, or
                    ``(B) foreign trade income derived by the taxpayer 
                in connection with the lease or rental of qualifying 
                foreign trade property for use by the lessee outside 
                the United States.
            ``(2) Special rules for leased property.--
                    ``(A) Sales income.--The term `foreign sale and 
                leasing income' includes any foreign trade income 
                derived by the taxpayer from the sale of property 
                described in paragraph (1)(B).
                    ``(B) Limitation in certain cases.--Except as 
                provided in regulations, in the case of property 
                which--
                            ``(i) was manufactured, produced, grown, or 
                        extracted by the taxpayer, or
                            ``(ii) was acquired by the taxpayer from a 
                        related person for a price which was not 
                        determined in accordance with the rules of 
                        section 482,
        the amount of foreign trade income which may be treated as 
        foreign sale and leasing income under paragraph (1)(B) or 
        subparagraph (A) of this paragraph with respect to any 
        transaction involving such property shall not exceed the amount 
        which would have been determined if the taxpayer had acquired 
        such property for the price determined in accordance with the 
        rules of section 482.
            ``(3) Special rules.--
                    ``(A) Excluded property.--Foreign sale and leasing 
                income shall not include any income properly allocable 
                to excluded property described in subparagraph (B) of 
                section 943(a)(3) (relating to intangibles).
                    ``(B) Only direct expenses taken into account.--For 
                purposes of this subsection, any expense other than a 
                directly allocable expense shall not be taken into 
                account in computing foreign trade income.

``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

    ``(a) Foreign Trading Gross Receipts.--
            ``(1) In general.--Except as otherwise provided in this 
        section, for purposes of this subpart, the term `foreign 
        trading gross receipts' means the gross receipts of the 
        taxpayer which are--
                    ``(A) from the sale, exchange, or other disposition 
                of qualifying foreign trade property,
                    ``(B) from the lease or rental of qualifying 
                foreign trade property for use by the lessee outside 
                the United States,
                    ``(C) for services which are related and subsidiary 
                to--
                            ``(i) any sale, exchange, or other 
                        disposition of qualifying foreign trade 
                        property by such taxpayer, or
                            ``(ii) any lease or rental of qualifying 
                        foreign trade property described in 
                        subparagraph (B) by such taxpayer,
                    ``(D) for engineering or architectural services for 
                construction projects located (or proposed for 
                location) outside the United States, or
                    ``(E) for the performance of managerial services 
                for a person other than a related person in furtherance 
                of the production of foreign trading gross receipts 
                described in subparagraph (A), (B), or (C).
        Subparagraph (E) shall not apply to a taxpayer for any taxable 
        year unless at least 50 percent of its foreign trading gross 
        receipts (determined without regard to this sentence) for such 
        taxable year is derived from activities described in 
        subparagraph (A), (B), or (C).
            ``(2) Certain receipts excluded on basis of use; subsidized 
        receipts excluded.--The term `foreign trading gross receipts' 
        shall not include receipts of a taxpayer from a transaction 
        if--
                    ``(A) the qualifying foreign trade property or 
                services--
                            ``(i) are for ultimate use in the United 
                        States, or
                            ``(ii) are for use by the United States or 
                        any instrumentality thereof and such use of 
                        qualifying foreign trade property or services 
                        is required by law or regulation, or
                    ``(B) such transaction is accomplished by a subsidy 
                granted by the government (or any instrumentality 
                thereof) of the country or possession in which the 
                property is manufactured, produced, grown, or 
                extracted.
            ``(3) Election to exclude certain receipts.--The term 
        `foreign trading gross receipts' shall not include gross 
        receipts of a taxpayer from a transaction if the taxpayer 
        elects not to have such receipts taken into account for 
        purposes of this subpart.
    ``(b) Foreign Economic Process Requirements.--
            ``(1) In general.--Except as provided in subsection (c), a 
        taxpayer shall be treated as having foreign trading gross 
        receipts from any transaction only if economic processes with 
        respect to such transaction take place outside the United 
        States as required by paragraph (2).
            ``(2) Requirement.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to the gross receipts of 
                a taxpayer derived from any transaction if--
                            ``(i) such taxpayer (or any person acting 
                        under a contract with such taxpayer) has 
                        participated outside the United States in the 
                        solicitation (other than advertising), the 
                        negotiation, or the making of the contract 
                        relating to such transaction, and
                            ``(ii) the foreign direct costs incurred by 
                        the taxpayer attributable to the transaction 
                        equal or exceed 50 percent of the total direct 
                        costs attributable to the transaction.
                    ``(B) Alternative 85-percent test.--A taxpayer 
                shall be treated as satisfying the requirements of 
                subparagraph (A)(ii) with respect to any transaction 
                if, with respect to each of at least 2 subparagraphs of 
                paragraph (3), the foreign direct costs incurred by 
                such taxpayer attributable to activities described in 
                such subparagraph equal or exceed 85 percent of the 
                total direct costs attributable to activities described 
                in such subparagraph.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Total direct costs.--The term `total 
                        direct costs' means, with respect to any 
                        transaction, the total direct costs incurred by 
                        the taxpayer attributable to activities 
                        described in paragraph (3) performed at any 
                        location by the taxpayer or any person acting 
                        under a contract with such taxpayer.
                            ``(ii) Foreign direct costs.--The term 
                        `foreign direct costs' means, with respect to 
                        any transaction, the portion of the total 
                        direct costs which are attributable to 
                        activities performed outside the United States.
            ``(3) Activities relating to qualifying foreign trade 
        property.--The activities described in this paragraph are any 
        of the following with respect to qualifying foreign trade 
        property--
                    ``(A) advertising and sales promotion,
                    ``(B) the processing of customer orders and the 
                arranging for delivery,

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