[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1475 Introduced in Senate (IS)]
108th CONGRESS
1st Session
S. 1475
To amend the Internal Revenue Code of 1986 to promote the
competitiveness of American businesses, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 28 (legislative day, July 21), 2003
Mr. Hatch introduced the following bill; which was read twice and
referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to promote the
competitiveness of American businesses, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Promote Growth and
Jobs in the USA Act of 2003'' (the PRO GROW USA Act of 2003).
(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.
(c) Table of Contents.--
Sec. 1. Short title; references; table of contents.
TITLE I--REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME
Sec. 101. Repeal of exclusion for extraterritorial income.
TITLE II--SIMPLIFICATION OF RULES RELATING TO TAXATION OF UNITED STATES
BUSINESSES OPERATING ABROAD
Subtitle A--Treatment of Controlled Foreign Corporations
Sec. 201. Exceptions from foreign base company sales and services
income rules.
Sec. 202. Look-thru treatment of payments between related controlled
foreign corporations under foreign personal
holding company income rules.
Sec. 203. Look-thru treatment for sales of partnership interests.
Sec. 204. Repeal of foreign personal holding company rules and foreign
investment company rules.
Sec. 205. Clarification of treatment of pipeline transportation income.
Sec. 206. Permanent extension and modification of subpart F exemption
for active financing.
Sec. 207. Expansion of de minimis rule under subpart F.
Sec. 208. Modification of interaction between subpart F and passive
foreign investment company rules.
Sec. 209. Determination of foreign personal holding company income with
respect to transactions in commodities.
Sec. 210. Repeal of foreign base company shipping income rules.
Sec. 211. Reduced tax on repatriated earnings previously exempt from
tax under subpart F.
Sec. 212. Effective date.
Subtitle B--Provisions Relating to Foreign Tax Credit
Sec. 221. Interest expense allocation rules.
Sec. 222. Extension of period to which excess foreign taxes may be
carried.
Sec. 223. Ordering rules for foreign tax credit carryforwards.
Sec. 224. Repeal of limitation of foreign tax credit under alternative
minimum tax.
Sec. 225. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
Sec. 226. Reduction to 2 foreign tax credit baskets.
Sec. 227. Recharacterization of overall domestic loss.
Sec. 228. Repeal of special rules for applying foreign tax credit in
case of foreign oil and gas income.
Sec. 229. Increase in individual exemption from foreign tax credit
limitation.
Sec. 230. United States property not to include certain assets of
controlled foreign corporation.
Sec. 231. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
Sec. 232. Provide equal treatment for interest paid by foreign
partnerships and foreign corporations.
Sec. 233. Application of look-thru rules to interest, rents, and
royalties.
Sec. 234. Clarification of treatment of certain transfers of intangible
property.
Subtitle C--Other Provisions
Sec. 251. Application of uniform capitalization rules to foreign
persons.
Sec. 252. Treatment of certain dividends of regulated investment
companies.
Sec. 253. Repeal of withholding tax on dividends from certain foreign
corporations.
Sec. 254. Airline mileage awards to certain foreign persons.
Sec. 255. Interest payments deductible where disqualified guarantee has
no economic effect.
Sec. 256. Modifications of reporting requirements for certain foreign-
owned corporations.
Sec. 257. Repeal of tax on certain United States source capital gains
of nonresident aliens.
Sec. 258. Election not to use average exchange rate for foreign tax
paid other than in functional currency.
Sec. 259. Study of impact of international tax laws on taxpayers other
than large corporations.
TITLE III--CREDIT FOR INCREASING RESEARCH ACTIVITIES
Sec. 301. Permanent extension of research credit.
Sec. 302. Increase in rates of alternative incremental credit.
Sec. 303. Alternative simplified credit for qualified research
expenses.
TITLE IV--REFORM OF DEPRECIATION OF BUSINESS PROPERTY
Sec. 401. 100-percent expensing for certain property through 2006.
Sec. 402. Extension of expensing for small business.
Sec. 403. Election to increase minimum tax credit limitation in lieu of
bonus depreciation.
TITLE I--REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME
SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.
(a) Repeal.--Section 114 (relating to extraterritorial income) is
repealed.
(b) Conforming Amendments.--
(1)(A) Subpart E of part III of subchapter N of chapter 1
(relating to qualifying foreign trade income) is repealed.
(B) The table of subparts for such part III is amended by
striking the item relating to subpart E.
(2) The table of sections for part III of subchapter B of
chapter 1 is amended by striking the item relating to section
114.
(3) The second sentence of section 56(g)(4)(B)(i) is
amended by striking ``or under section 114''.
(4) Section 275(a) is amended--
(A) by inserting ``or'' at the end of paragraph
(4)(A), by striking ``or'' at the end of paragraph
(4)(B) and inserting a period, and by striking
subparagraph (C), and
(B) by striking the last sentence.
(5) Paragraph (3) of section 864(e) is amended--
(A) by striking:
``(3) Tax-exempt assets not taken into account.--
``(A) In general.--For purposes of''; and
inserting:
``(3) Tax-exempt assets not taken into account.--For
purposes of'', and
(B) by striking subparagraph (B).
(6) Section 903 is amended by striking ``114, 164(a),'' and
inserting ``164(a)''.
(7) Section 999(c)(1) is amended by striking
``941(a)(5),''.
(c) Effective Date.--Except as provided in subsections (d) and (f),
the amendments made by this section shall apply to transactions after
December 31, 2003.
(d) Transitional Rules for 2004, 2005, and 2006.--
(1) In general.--In the case of transactions during 2004,
2005, and 2006, the amount includible in gross income by reason
of the amendments made by this section shall not exceed the
applicable percentage of the amount which would have been so
included but for this subsection.
(2) Applicable percentage.--For purposes of paragraph (1),
the applicable percentage is--
(A) 25 percent for 2004,
(B) 50 percent for 2005, and
(C) 75 percent for 2006.
(e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of
this Act, a corporation for which an election is in effect under
section 943(e) of the Internal Revenue Code of 1986 revokes such
election, no gain or loss shall be recognized with respect to property
treated as transferred under clause (ii) of section 943(e)(4)(B) of
such Code to the extent such property--
(1) was treated as transferred under clause (i) thereof, or
(2) was acquired during a taxable year to which such
election applies and before May 1, 2003, in the ordinary course
of its trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may
prescribe such regulations as may be necessary to prevent the abuse of
the purposes of this subsection.
(f) Clarification of Transition Rule to Repeal of Provisions
Relating to Foreign Sales Corporations.--
(1) In general.--The last sentence of section 5(c)(1) of
the FSC Repeal and Extraterritorial Income Exclusion Act of
2000 (Public Law 106-519) is amended by inserting ``, once
exercised by the purchaser or lessee (and, if required by the
contract, accepted by the seller or lessor),'' before ``is
enforceable''.
(2) Effective date.--The amendment made by this section
shall take effect as if included in the provisions of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000.
TITLE II--SIMPLIFICATION OF RULES RELATING TO TAXATION OF UNITED STATES
BUSINESSES OPERATING ABROAD
Subtitle A--Treatment of Controlled Foreign Corporations
SEC. 201. EXCEPTIONS FROM FOREIGN BASE COMPANY SALES AND SERVICES
INCOME RULES.
(a) In General.--Section 954(b) (relating to exclusions and special
rules regarding foreign base company income) is amended by adding at
the end the following new paragraph:
``(9) Exceptions from foreign sales and services income.--
For purposes of subsection (a), foreign base company income of
a controlled foreign corporation for a taxable year shall not
include foreign base company sales income or foreign base
company services income for the taxable year--
``(A) if the controlled foreign corporation is
eligible for benefits of a comprehensive income tax
treaty with the United States (other than the treaty
with Barbados in force on July 28, 2003) which the
Secretary determines is satisfactory for purposes of
this paragraph and which includes an exchange of
information program, or
``(B) to the extent that the foreign base company
sales income or foreign base company services income is
derived in connection with an exempt transaction (as
defined in subsection (j)).''
(b) Exempt Transactions Defined.--Section 954 (defining foreign
base company income) is amended by adding at the end the following new
subsection:
``(j) Exempt Transactions.--For purposes of subsection (b)(9)--
``(1) In general.--The term `exempt transaction' means any
transaction--
``(A) which is subject to an advance pricing
agreement under section 482 or is treated as subject to
such an agreement under paragraph (2)(C),
``(B) with respect to which the corresponding
related person transaction described in subsection
(d)(1) or (e)(1), whichever is applicable, is subject
to an advance pricing agreement under section 482 or is
treated as subject to such an agreement under paragraph
(2)(C), or
``(C) with respect to which the related person
described in subsection (d)(1) or (e)(1), whichever is
applicable, with respect to the transaction is, at the
time of the transaction--
``(i) a controlled foreign corporation, or
``(ii) to the extent provided in
regulations, a foreign person or a foreign
branch.
``(2) Advance pricing agreement approval process.--
``(A) In general.--A United States shareholder of a
controlled foreign corporation may file an application
for an advance pricing agreement under section 482
which would be applicable to transactions of the
controlled foreign corporation or any related person
during any 3-taxable year period of the controlled
foreign corporation specified in the application. Such
application shall be filed at such time and manner, and
shall contain such information, as the Secretary shall
prescribe.
``(B) Secretarial action.--Within 180 days of
receipt of an application under subparagraph (A) (or
such longer period as the Secretary and the applicant
may agree upon), the Secretary shall--
``(i) enter into an advance pricing
agreement under section 482 for the taxable
years covered by the application (or such
greater number of taxable years specified in
the agreement),
``(ii) notify the applicant that the
Secretary has determined that the application
was filed in good faith and substantially
complies with the requirements for the
application under subparagraph (A), or
``(iii) notify the applicant that the
Secretary has determined that the application
was not filed in good faith or does not
substantially comply with such requirements.
If the Secretary fails to act within the time
prescribed under the preceding sentence, the applicant
shall be treated for purposes of this paragraph as
having received notice under clause (ii).
``(C) Effect of approval notice.--For purposes of
paragraph (1)(B)(ii), an advance pricing agreement
under section 482 shall be treated as in effect with
respect to transactions of the controlled foreign
corporation or related person which would otherwise be
covered by the agreement during the period--
``(i) beginning on the date notice under
subparagraph (B)(ii) is received or treated as
received (or, if later, the first day of the
first taxable year to which the agreement was
to apply), and
``(ii) ending on the effective date of an
advance pricing agreement entered into pursuant
to the application or the date the Secretary
determines the parties will not be able to
enter into such an agreement.
``(3) Multiple shareholders.--An application may be filed
under paragraph (1) only with the consent of United States
shareholders who own (or are treated as owning) under section
958 more than 50 percent (by vote or value) of stock of the
controlled foreign corporation.''
(c) Certain Sales.--Paragraph (1) of section 954(c) is amended by
adding at the end the following new subparagraph:
``(H) Certain sales.--Income (whether in the form
of profits, commissions, fees, or otherwise) derived in
connection with the purchase of personal property from
a related person and its sale to any person, the sale
of personal property to any person on behalf of a
related person, the purchase of personal property from
any person and its sale to a related person, or the
purchase of personal property from any person on behalf
of a related person if--
``(i) the property which is purchased (or
in the case of property sold on behalf of a
related person, the property which is sold) is
manufactured, produced, grown, or extracted in
the United States, and
``(ii) the property is sold for use,
consumption, or disposition in the United
States, or, in the case of property purchased
on behalf of a related person, is purchased for
use, consumption, or disposition in the United
States.
This subparagraph shall not apply to income otherwise
treated as foreign base company income for the taxable
year.''
(d) Effective Date.--The amendments made by this section shall
apply to taxable years of foreign corporations beginning after December
31, 2005, and to taxable years of United States shareholders with or
within which such taxable years of foreign corporations end.
SEC. 202. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED
FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING
COMPANY INCOME RULES.
Subsection (c) of section 954 is amended by adding at the end the
following new paragraph:
``(4) Look-thru in the case of related controlled foreign
corporations.--For purposes of this subsection, dividends,
interest, rents, and royalties received or accrued from a
controlled foreign corporation which is a related person (as
defined in subsection (d)(3)) shall not be treated as foreign
personal holding company income to the extent properly
allocable or attributable (determined under rules similar to
the rules of subparagraphs (C) and (D) of section 904(d)(3)) to
income of the related person which is not subpart F income. The
Secretary shall prescribe such regulations as may be
appropriate to prevent the abuse of the purposes of this
paragraph.''
SEC. 203. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.
Section 954(c) (defining foreign personal holding company income),
as amended by section 202, is amended by adding at the end the
following new paragraph:
``(5) Look-through rule for certain partnership sales.--
``(A) In general.--In the case of any sale by a
controlled foreign corporation of an interest in a
partnership with respect to which such corporation is a
25-percent owner, such corporation shall be treated for
purposes of this subsection as selling the
proportionate share of the assets of the partnership
attributable to such interest.
``(B) 25-percent owner.--For purposes of this
paragraph, the term `25-percent owner' means a
controlled foreign corporation which owns (within the
meaning of section 958(a)) 25 percent or more of the
capital or profits interest in the partnership.''
SEC. 204. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN
INVESTMENT COMPANY RULES.
(a) General Rule.--The following provisions are hereby repealed:
(1) Part III of subchapter G of chapter 1 (relating to
foreign personal holding companies).
(2) Section 1246 (relating to gain on foreign investment
company stock).
(3) Section 1247 (relating to election by foreign
investment companies to distribute income currently).
(b) Exemption of Foreign Corporations From Personal Holding Company
Rules.--
(1) In general.--Subsection (c) of section 542 (relating to
exceptions) is amended--
(A) by striking paragraph (5) and inserting the
following:
``(5) a foreign corporation,'',
(B) by striking paragraphs (7) and (10) and by
redesignating paragraphs (8) and (9) as paragraphs (7)
and (8), respectively,
(C) by inserting ``and'' at the end of paragraph
(7) (as so redesignated), and
(D) by striking ``; and'' at the end of paragraph
(8) (as so redesignated) and inserting a period.
(2) Treatment of income from personal service contracts.--
Paragraph (1) of section 954(c), as amended by section 201(c),
is amended by adding at the end the following new subparagraph:
``(I) Personal service contracts.--
``(i) Amounts received under a contract
under which the corporation is to furnish
personal services if--
``(I) some person other than the
corporation has the right to designate
(by name or by description) the
individual who is to perform the
services, or
``(II) the individual who is to
perform the services is designated (by
name or by description) in the
contract, and
``(ii) amounts received from the sale or
other disposition of such a contract.
This subparagraph shall apply with respect to amounts
received for services under a particular contract only
if at some time during the taxable year 25 percent or
more in value of the outstanding stock of the
corporation is owned, directly or indirectly, by or for
the individual who has performed, is to perform, or may
be designated (by name or by description) as the one to
perform, such services.''
(c) Conforming Amendments.--
(1) Clause (iii) of section 1(h)(11)(C) is amended by
striking ``a foreign personal holding company (as defined in
section 552), a foreign investment company (as defined in
section 1246(b)), or''.
(2) Paragraph (2) of section 171(c) is amended--
(A) by striking ``, or by a foreign personal
holding company, as defined in section 552'', and
(B) by striking ``, or foreign personal holding
company''.
(3) Paragraph (2) of section 245(a) is amended by striking
``foreign personal holding company or''.
(4) Section 312 is amended by striking subsection (j).
(5) Subsection (m) of section 312 is amended by striking
``, a foreign investment company (within the meaning of section
1246(b)), or a foreign personal holding company (within the
meaning of section 552)''.
(6) Subsection (e) of section 443 is amended by striking
paragraph (3) and by redesignating paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
(7) Subparagraph (B) of section 465(c)(7) is amended by
adding ``or'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(8) Paragraph (1) of section 543(b) is amended by inserting
``and'' at the end of subparagraph (A), by striking ``, and''
at the end of subparagraph (B) and inserting a period, and by
striking subparagraph (C).
(9) Paragraph (1) of section 562(b) is amended by striking
``or a foreign personal holding company described in section
552''.
(10) Section 563 is amended--
(A) by striking subsection (c),
(B) by redesignating subsection (d) as subsection
(c), and
(C) by striking ``subsection (a), (b), or (c)'' in
subsection (c) (as so redesignated) and inserting
``subsection (a) or (b)''.
(11) Subsection (d) of section 751 is amended by adding
``and'' at the end of paragraph (2), by striking paragraph (3),
by redesignating paragraph (4) as paragraph (3), and by
striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so
redesignated) and inserting ``paragraph (1) or (2)''.
(12) Paragraph (2) of section 864(d) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B) and (C)
as subparagraphs (A) and (B), respectively.
(13)(A) Subparagraph (A) of section 898(b)(1) is amended to
read as follows:
``(A) which is treated as a controlled foreign
corporation for any purpose under subpart F of part III
of this subchapter, and''.
(B) Subparagraph (B) of section 898(b)(2) is amended by
striking ``and sections 551(f) and 554, whichever are
applicable,''.
(C) Paragraph (3) of section 898(b) is amended to read as
follows:
``(3) United states shareholder.--The term `United States
shareholder' has the meaning given to such term by section
951(b), except that, in the case of a foreign corporation having
related person insurance income (as defined in section 953(c)(2)), the
Secretary may treat any person as a United States shareholder for
purposes of this section if such person is treated as a United States
shareholder under section 953(c)(1).''
(D) Subsection (c) of section 898 is amended to read as
follows:
``(c) Determination of Required Year.--
``(1) In general.--The required year is--
``(A) the majority U.S. shareholder year, or
``(B) if there is no majority U.S. shareholder
year, the taxable year prescribed under regulations.
``(2) 1-month deferral allowed.--A specified foreign
corporation may elect, in lieu of the taxable year under
paragraph (1)(A), a taxable year beginning 1 month earlier than
the majority U.S. shareholder year.
``(3) Majority u.s. shareholder year.--
``(A) In general.--For purposes of this subsection,
the term `majority U.S. shareholder year' means the
taxable year (if any) which, on each testing day,
constituted the taxable year of--
``(i) each United States shareholder
described in subsection (b)(2)(A), and
``(ii) each United States shareholder not
described in clause (i) whose stock was treated
as owned under subsection (b)(2)(B) by any
shareholder described in such clause.
``(B) Testing day.--The testing days shall be--
``(i) the first day of the corporation's
taxable year (determined without regard to this
section), or
``(ii) the days during such representative
period as the Secretary may prescribe.''
(14) Clause (ii) of section 904(d)(2)(A) is amended to read
as follows:
``(ii) Certain amounts included.--Except as
provided in clause (iii), the term `passive
income' includes, except as provided in
subparagraph (E)(iii) or paragraph (3)(I), any
amount includible in gross income under section
1293 (relating to certain passive foreign
investment companies).''
(15)(A) Subparagraph (A) of section 904(g)(1) is amended by
adding ``or'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(B) The paragraph heading of paragraph (2) of section
904(g) is amended by striking ``foreign personal holding or''.
(16) Section 951 is amended by striking subsections (c) and
(d) and by redesignating subsections (e) and (f) as subsections
(c) and (d), respectively.
(17) Paragraph (3) of section 989(b) is amended by striking
``, 551(a),''.
(18) Paragraph (5) of section 1014(b) is amended by
inserting ``and before January 1, 2005,'' after ``August 26,
1937,''.
(19) Subsection (a) of section 1016 is amended by striking
paragraph (13).
(20)(A) Paragraph (3) of section 1212(a) is amended to read
as follows:
``(3) Special rules on carrybacks.--A net capital loss of a
corporation shall not be carried back under paragraph (1)(A) to
a taxable year--
``(A) for which it is a regulated investment
company (as defined in section 851), or
``(B) for which it is a real estate investment
trust (as defined in section 856).''
(B) The amendment made by subparagraph (A) shall apply to
taxable years beginning after December 31, 2007.
(21) Section 1223 is amended by striking paragraph (10) and
by redesignating the following paragraphs accordingly.
(22) Subsection (d) of section 1248 is amended by striking
paragraph (5) and by redesignating paragraphs (6) and (7) as
paragraphs (5) and (6), respectively.
(23) Paragraph (2) of section 1260(c) is amended by
striking subparagraphs (H) and (I) and by redesignating
subparagraph (J) as subparagraph (H).
(24)(A) Subparagraph (F) of section 1291(b)(3) is amended
by striking ``551(d), 959(a),'' and inserting ``959(a)''.
(B) Subsection (e) of section 1291 is amended by inserting
``(as in effect on the day before the date of the enactment of
the PRO GROW USA Act of 2003)'' after ``section 1246''.
(25) Paragraph (2) of section 1294(a) is amended to read as
follows:
``(2) Election not permitted where amounts otherwise
includible under section 951.--The taxpayer may not make an
election under paragraph (1) with respect to the undistributed
PFIC earnings tax liability attributable to a qualified
electing fund for the taxable year if any amount is includible
in the gross income of the taxpayer under section 951 with
respect to such fund for such taxable year.''
(26) Section 6035 is hereby repealed.
(27) Subparagraph (D) of section 6103(e)(1) is amended by
striking clause (iv) and redesignating clauses (v) and (vi) as
clauses (iv) and (v), respectively.
(28) Subparagraph (B) of section 6501(e)(1) is amended to
read as follows:
``(B) Constructive dividends.--If the taxpayer
omits from gross income an amount properly includible
therein under section 951(a), the tax may be assessed,
or a proceeding in court for the collection of such tax
may be done without assessing, at any time within 6
years after the return was filed.''
(29) Subsection (a) of section 6679 is amended--
(A) by striking ``6035, 6046, and 6046A'' in
paragraph (1) and inserting ``6046 and 6046A'', and
(B) by striking paragraph (3).
(30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4)
are each amended by striking ``556(b)(2),'' each place it
appears.
(31) The table of parts for subchapter G of chapter 1 is
amended by striking the item relating to part III.
(32) The table of sections for part IV of subchapter P of
chapter 1 is amended by striking the items relating to sections
1246 and 1247.
(33) The table of sections for subpart A of part III of
subchapter A of chapter 61 is amended by striking the item
relating to section 6035.
SEC. 205. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.
Section 954(g)(1) (defining foreign base company oil related
income) is amended by striking ``or'' at the end of subparagraph (A),
by striking the period at the end of subparagraph (B) and inserting ``,
or'', and by inserting after subparagraph (B) the following new
subparagraph:
``(C) the pipeline transportation of oil or gas
within such foreign country.''
SEC. 206. PERMANENT EXTENSION AND MODIFICATION OF SUBPART F EXEMPTION
FOR ACTIVE FINANCING.
(a) Permanent Extension.--
(1) Exempt insurance income.--Section 953(e)(10) is
amended--
(A) by striking ``, and before January 1, 2007,'',
and
(B) by striking the second sentence.
(2) Foreign personal holding company income.--Section
954(h)(9) is amended by striking ``, and before January 1,
2007,''.
(b) Direct Conduct of Activities.--Section 954(h)(3) is amended by
adding at the end the following:
``(E) Direct conduct of activities.--For purposes
of subparagraph (A)(ii)(II), an activity shall be
treated as conducted directly by an eligible controlled
foreign corporation or qualified business unit in its
home country if the activity is performed by employees
of a related person and--
``(i) the related person is an eligible
controlled foreign corporation the home country
of which is the same as the home country of the
corporation or unit to which subparagraph
(A)(ii)(II) is being applied,
``(ii) the activity is performed in the
home country of the related person, and
``(iii) the related person is compensated
on an arm's-length basis for the performance of
the activity by its employees and such
compensation is treated as earned by such
person in its home country for purposes of the
home country's tax laws.''
SEC. 207. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.
(a) In General.--Clause (ii) of section 954(b)(3)(A) (relating to
de minimis, etc., rules) is amended by striking ``$1,000,000'' and
inserting ``$5,000,000''.
(b) Technical Amendments.--
(1) Clause (ii) of section 864(d)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
(2) Clause (i) of section 881(c)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
SEC. 208. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND PASSIVE
FOREIGN INVESTMENT COMPANY RULES.
(a) Limitation on Exception From PFIC Rules for United States
Shareholders of Controlled Foreign Corporations.--Paragraph (2) of
section 1297(e) (relating to passive investment company) is amended by
adding at the end the following flush sentence:
``Such term shall not include any period if the earning
of subpart F income by such corporation during such
period would only result in a remote likelihood of an
inclusion in gross income under section
951(a)(1)(A)(i).''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of controlled foreign corporations beginning after
December 31, 2003, and to taxable years of United States shareholders
in which or with which such taxable years of controlled foreign
corporations end.
SEC. 209. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH
RESPECT TO TRANSACTIONS IN COMMODITIES.
(a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C)
(relating to commodity transactions) are amended to read as follows:
``(i) arise out of commodity hedging
transactions (as defined in paragraph (6)(A)),
``(ii) are active business gains or losses
from the sale of commodities, but only if
substantially all of the controlled foreign
corporation's commodities are property
described in paragraph (1), (2), or (8) of
section 1221(a), or''.
(b) Definition and Special Rules.--Subsection (c) of section 954,
as amended by sections 202 and 203, is amended by adding at the end the
following new paragraph:
``(6) Definition and special rules relating to commodity
transactions.--
``(A) Commodity hedging transactions.--For purposes
of paragraph (1)(C)(i), the term `commodity hedging
transaction' means any transaction with respect to a
commodity if such transaction--
``(i) is a hedging transaction as defined
in section 1221(b)(2), determined--
``(I) without regard to
subparagraph (A)(ii) thereof,
``(II) by applying subparagraph
(A)(i) thereof by substituting
`ordinary property or property
described in section 1231(b)' for
`ordinary property', and
``(III) by substituting `controlled
foreign corporation' for `taxpayer'
each place it appears, and
``(ii) is clearly identified as such in
accordance with section 1221(a)(7).
``(B) Regulations.--The Secretary shall prescribe
such regulations as are appropriate to carry out the
purposes of paragraph (1)(C) in the case of
transactions involving related persons.''
(c) Effective Date.--The amendments made by this section shall
apply to transactions entered into after December 31, 2004.
SEC. 210. REPEAL OF FOREIGN BASE COMPANY SHIPPING INCOME RULES.
(a) Elimination of Foreign Base Company Shipping Income.--Section
954 (relating to foreign base company income) is amended--
(1) in subsection (a), by striking paragraph (4) and by
redesignating paragraph (5) as paragraph (4), and
(2) by striking subsection (f) (relating to foreign base
company shipping income).
(b) Active Leasing Income From Aircraft and Vessels.--
(1) In general.--Section 954(c)(2) is amended by adding at
the end the following new subparagraph:
``(D) Certain rents, etc.--
``(i) In general.--Foreign personal holding
company income shall not include qualified
leasing income derived from or in connection
with the leasing or rental of any aircraft or
vessel.
``(ii) Qualified leasing income.--For
purposes of this subparagraph, the term
`qualified leasing income' means rents and
gains derived in the active conduct of a trade
or business of leasing with respect to which
the controlled foreign corporation conducts
substantial activity, but only if--
``(I) the leased property is used
by the lessee or other end-user in
foreign commerce and predominantly
outside the United States, and
``(II) the lessee or other end-user
is not a related person (as defined in
subsection (d)(3)).
Any amount not treated as foreign personal
holding income under this subparagraph shall
not be treated as foreign base company income
under any other provision of this section.''
(2) Conforming amendment.--Section 954(c)(1)(B) is amended
by inserting ``or (2)(D)'' after ``paragraph (2)(A)''.
(c) Conforming Amendments.--
(1) Section 952(c)(1)(B)(iii) is amended by striking
subclause (I) and redesignating subclauses (II) through (VI) as
subclauses (I) through (V), respectively.
(2) Subsection (b) of section 954 is amended--
(A) by striking ``the foreign base shipping
income,'' in paragraph (5),
(B) by striking paragraphs (6) and (7), and
(C) by redesignating paragraph (8) as paragraph
(6).
(d) Effective Date.--The amendments made by this section shall
apply to taxable years of foreign corporations beginning after December
31, 2005, and to taxable years of United States shareholders with or
within which such taxable years of foreign corporations end.
SEC. 211. REDUCED TAX ON REPATRIATED EARNINGS PREVIOUSLY EXEMPT FROM
TAX UNDER SUBPART F.
(a) In General.--Subpart F of part III of subchapter N of chapter 1
is amended by adding at the end the following new section:
``SEC. 965. REDUCED TAX ON REPATRIATED EARNINGS PREVIOUSLY EXEMPT FROM
TAX.
``(a) In General.--If a corporation which is a United States
shareholder elects the application of this section, a tax shall be
imposed on the taxpayer in an amount equal to the applicable percentage
of--
``(1) the taxpayer's qualified foreign distribution amount,
and
``(2) the amount determined under section 78 which is
attributable to the qualified foreign distribution amount.
Such tax shall be imposed in lieu of the tax imposed under section 11
or 55 on the amounts described in paragraphs (1) and (2) for such
taxable year. For purposes of this subsection, the applicable
percentage for any taxable year is the percentage equal to 15 percent
of the highest rate of tax in effect under section 11(b) for the
taxable year.
``(b) Qualified Foreign Distribution Amount.--For purposes of this
section--
``(1) In general.--The term `qualified foreign distribution
amount' means the lesser of--
``(A) the aggregate dividends received by the
taxpayer during the taxable year which are from 1 or
more corporations which are controlled foreign
corporations in which the taxpayer is a United States
shareholder on the date such dividends are paid, or
``(B) the amount designated by the taxpayer under
subsection (c)(6).
``(2) Limitation based on qualified innovation spending.--
``(A) In general.--The qualified foreign
distribution amount for any taxable year shall not
exceed the excess (if any) of--
``(i) the qualified innovation expenses of
the taxpayer for the taxable year, over
``(ii) the base innovation expense amount.
``(B) Qualified innovation expenses.--For purposes
of this paragraph, the term `qualified innovation
expenses' means the sum of the following amounts for
the taxable year:
``(i) Qualified research expenses taken
into account in determining the credit
determined under section 41 for the taxable
year.
``(ii) The aggregate adjusted bases of all
property placed in service during the taxable
year to which section 168(k) applies.
``(C) Base innovation expense amount.--For purposes
of this paragraph, the base innovation expense amount
is 85 percent of the average of the taxpayer's
qualified innovation expenses during the base period.
``(3) Base period.--
``(A) In general.--The term `base period' means,
with respect to any taxable year, the 3-taxable-year
period ending with the taxable year preceding the
taxable year.
``(B) Shorter period.--If the taxpayer has fewer
than 3 taxable years immediately preceding the taxable
year, then in lieu of applying subparagraph (A), the
base period shall include all preceding taxable years
of the taxpayer.
``(c) Definitions and Special Rules.--For purposes of this
section--
``(1) Dividends.--The term `dividend' has the meaning given
such term by section 316, except that such term shall not
include amounts described in sections 78 and 959.
``(2) Foreign tax credits and deductions.--The amount of
any income, war, profits, or excess profit taxes paid (or
deemed paid under sections 902 and 960) or accrued by the
taxpayer with respect to the qualified foreign distribution
amount for which a credit would be allowable under section 901
without regard to this section shall be reduced by 85 percent.
No deduction shall be allowed under this chapter for the
portion of any tax for which credit is not allowable by reason
of the preceding sentence.
``(3) Foreign tax credit limitation.--For purposes of
section 904, there shall be disregarded 85 percent of--
``(A) the qualified foreign distribution amount,
``(B) the amount determined under section 78 which
is attributable to such qualified foreign distribution
amount, and
``(C) the amounts (including assets, gross income,
and other relevant bases of apportionment) which are
attributable to the qualified foreign distribution
amount which would, determined without regard to this
section, be used to apportion the expenses, losses, and
deductions of the taxpayer under section 861 and 864 in
determining its taxable income from sources without the
United States.
For purposes of applying subparagraph (C), the principles of
section 864(e)(3)(A) shall apply.
``(4) Treatment of acquisitions and dispositions.--Rules
similar to the rules of section 41(f)(3) shall apply in the
case of acquisitions or dispositions of controlled foreign
corporations occurring on or after the first day of the
earliest taxable year taken into account in determining the
base period.
``(5) Treatment of consolidated groups.--Members of an
affiliated group of corporations filing a consolidated return
under section 1501 shall be treated as a single taxpayer for
purposes of this section.
``(6) Designation of dividends.--For purposes of subsection
(b)(1)(B), the taxpayer may designate the particular dividends
received during the taxable year from 1 or more corporations
which are controlled foreign corporations in which the taxpayer
is a United States shareholder on the date the dividends are
paid which are to be treated as the taxpayer's qualified
foreign distribution amount.
``(7) Treatment of expenses, losses, and deductions and
credits.--
``(A) Expenses, losses, and deductions.--Any
expenses, losses, or deductions of the taxpayer
allowable under subchapter B--
``(i) shall not be applied to reduce any
amount described in subsection (a) (1) or (2),
and
``(ii) shall be applied to reduce other
income of the taxpayer (determined without
regard to any amount described in subsection
(a) (1) or (2)).
``(B) Denial of credit.--No credit shall be allowed
under this chapter against the tax imposed by
subsection (a).
``(8) Transition rule for 2004 for look-thru on
dividends.--For purposes of this section, a United States
shareholder shall be treated for purposes of this section as
having received a dividend from a controlled foreign
corporation to the extent of any amount included in gross
income by such shareholder under section 951(a)(1)(A) as a
result of any dividend paid during any taxable year of such
corporation beginning in 2004 to--
``(A) such corporation from another controlled
foreign corporation which is in a chain of ownerships
described in section 958(a), or
``(B) any other controlled foreign corporation in
such chain of ownership, but only to the extent of
distributions described in section 959(b) which are
made during such taxable year to the controlled foreign
corporation from which such shareholder received such
dividend.
``(d) Election.--
``(1) In general.--An election under this section for any
taxable year shall be made no later than the due date for the
taxpayer's income tax return for the taxable year (determined
by taking extensions into account) and shall be included on
such return. Such election, once made, may be revoked only with
the consent of the Secretary.
``(2) All controlled foreign corporations.--An election
under paragraph (1) shall apply to all corporations which are
controlled foreign corporations in which the taxpayer is a
United States shareholder during the taxable year.
``(3) Consolidated groups.--If a taxpayer is a member of an
affiliated group of corporations filing a consolidated return
under section 1501 for the taxable year, an election under this
section shall be made by the common parent of the affiliated
group which includes the taxpayer and shall apply to all
members of the affiliated group.
``(e) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section, including regulations relating to the application of section
55 and regulations addressing corporations which, during the base
period or thereafter, join or leave an affiliated group of corporations
filing a consolidated return.''
(b) Conforming Amendment.--The table of sections for subpart F of
part III of subchapter N of chapter 1 is amended by adding at the end
the following new item:
``Sec. 965. Reduced tax on repatriated
earnings previously exempt from
tax.''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 212. EFFECTIVE DATE.
Except as otherwise provided in this subtitle, the amendments made
by this subtitle shall apply to taxable years of foreign corporations
beginning after December 31, 2004, and to taxable years of United
States shareholders with or within which such taxable years of foreign
corporations end.
Subtitle B--Provisions Relating to Foreign Tax Credit
SEC. 221. INTEREST EXPENSE ALLOCATION RULES.
(a) Election To Allocate on Worldwide Basis.--Section 864 is
amended by redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new subsection:
``(f) Election To Allocate Interest, Etc. on Worldwide Basis.--For
purposes of this subchapter, at the election of the worldwide
affiliated group--
``(1) Allocation and apportionment of interest expense.--
``(A) In general.--The taxable income of each
domestic corporation which is a member of a worldwide
affiliated group shall be determined by allocating and
apportioning interest expense of each member as if all
members of such group were a single corporation.
``(B) Treatment of worldwide affiliated group.--The
taxable income of the domestic members of a worldwide
affiliated group from sources outside the United States
shall be determined by allocating and apportioning the
interest expense of such domestic members to such
income in an amount equal to the excess (if any) of--
``(i) the total interest expense of the
worldwide affiliated group multiplied by the
ratio which the foreign assets of the worldwide
affiliated group bears to all the assets of the
worldwide affiliated group, over
``(ii) the interest expense of all foreign
corporations which are members of the worldwide
affiliated group to the extent such interest
expense of such foreign corporations would have
been allocated and apportioned to foreign
source income if this subsection were applied
to a group consisting of all the foreign
corporations in such worldwide affiliated
group.
``(C) Worldwide affiliated group.--For purposes of
this paragraph, the term `worldwide affiliated group'
means a group consisting of--
``(i) the includible members of an
affiliated group (as defined in section
1504(a), determined without regard to
paragraphs (2) and (4) of section 1504(b)), and
``(ii) all controlled foreign corporations
in which such members in the aggregate meet the
ownership requirements of section 1504(a)(2)
either directly or indirectly through applying
paragraph (2) of section 958(a) or through
applying rules similar to the rules of such
paragraph to stock owned directly or indirectly
by domestic partnerships, trusts, or estates.
``(2) Allocation and apportionment of other expenses.--
Expenses other than interest which are not directly allocable
or apportioned to any specific income producing activity shall
be allocated and apportioned as if all members of the
affiliated group were a single corporation. For purposes of the
preceding sentence, the term `affiliated group' has the meaning
given such term by section 1504 (determined without regard to
paragraph (4) of section 1504(b)).
``(3) Treatment of tax-exempt assets; basis of stock in
nonaffiliated 10-percent owned corporations.--The rules of
paragraphs (3) and (4) of subsection (e) shall apply for
purposes of this subsection, except that paragraph (4) shall be
applied on worldwide affiliated group basis.
``(4) Treatment of certain financial institutions.--
``(A) In general.--For purposes of paragraph (1),
any corporation described in subparagraph (B) shall be
treated as an includible corporation for purposes of
section 1504 only for purposes of applying this
subsection separately to corporations so described.
``(B) Description.--A corporation is described in
this subparagraph if--
``(i) such corporation is a financial
institution described in section 581 or 591,
``(ii) the business of such financial
institution is predominantly with persons other
than related persons (within the meaning of
subsection (d)(4)) or their customers, and
``(iii) such financial institution is
required by State or Federal law to be operated
separately from any other entity which is not
such an institution.
``(C) Treatment of bank holding companies.--To the
extent provided in regulations--
``(i) a bank holding company (within the
meaning of section 2(a) of the Bank Holding
Company Act of 1956), and
``(ii) any subsidiary of a financial
institution described in section 581 or 591 or
of any bank holding company if such subsidiary
is predominantly engaged (directly or
indirectly) in the active conduct of a banking,
financing, or similar business,
shall be treated as a corporation described in
subparagraph (B).
``(5) Election to expand financial institution group of
worldwide group.--
``(A) In general.--If a worldwide affiliated group
elects the application of this subsection, all
financial corporations which--
``(i) are members of such worldwide
affiliated group, but
``(ii) are not corporations described in
paragraph (4)(B),
shall be treated as described in paragraph (4)(B) for
purposes of applying paragraph (4)(A). This subsection
(other than this paragraph) shall apply to any such
group in the same manner as this subsection (other than
this paragraph) applies to the pre-election worldwide
affiliated group of which such group is a part.
``(B) Financial corporation.--For purposes of this
paragraph, the term `financial corporation' means any
corporation if at least 80 percent of its gross income
is income described in section 904(d)(2)(D)(ii) and the
regulations thereunder which is derived from
transactions with persons who are not related (within
the meaning of section 267(b) or 707(b)(1)) to the
corporation. For purposes of the preceding sentence,
there shall be disregarded any item of income or gain
from a transaction or series of transactions a
principal purpose of which is the qualification of any
corporation as a financial corporation.
``(C) Antiabuse rules.--In the case of a
corporation which is a member of an electing financial
institution group, to the extent that such
corporation--
``(i) distributes dividends or makes other
distributions with respect to its stock after
the date of the enactment of this paragraph to
any member of the pre-election worldwide
affiliated group (other than to a member of the
electing financial institution group) in excess
of the greater of--
``(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-
taxable-year period ending with the
taxable year preceding the taxable
year, or
``(II) 25 percent of its average
annual earnings and profits for such 5-
taxable-year period, or
``(ii) deals with any person in any manner
not clearly reflecting the income of the
corporation (as determined under principles
similar to the principles of section 482),
an amount of indebtedness of the electing financial
institution group equal to the excess distribution or
the understatement or overstatement of income, as the
case may be, shall be recharacterized (for the taxable
year and subsequent taxable years) for purposes of this
paragraph as indebtedness of the worldwide affiliated
group (excluding the electing financial institution
group). If a corporation has not been in existence for
5 taxable years, this subparagraph shall be applied
with respect to the period it was in existence.
``(D) Election.--An election under this paragraph
with respect to any financial institution group may be
made only by the common parent of the pre-election
worldwide affiliated group and may be made only for the
first taxable year beginning after December 31, 2005,
in which such affiliated group includes 1 or more
financial corporations. Such an election, once made,
shall apply to all financial corporations which are
members of the electing financial institution group for
such taxable year and all subsequent years unless
revoked with the consent of the Secretary.
``(E) Definitions relating to groups.--For purposes
of this paragraph--
``(i) Pre-election worldwide affiliated
group.--The term `pre-election worldwide
affiliated group' means, with respect to a
corporation, the worldwide affiliated group of
which such corporation would (but for an
election under this paragraph) be a member for
purposes of applying paragraph (1).
``(ii) Electing financial institution
group.--The term `electing financial
institution group' means the group of
corporations to which this subsection applies
separately by reason of the application of
paragraph (4)(A) and which includes financial
corporations by reason of an election under
subparagraph (A).
``(F) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out
this subsection, including regulations--
``(i) providing for the direct allocation
of interest expense in other circumstances
where such allocation would be appropriate to
carry out the purposes of this subsection,
``(ii) preventing assets or interest
expense from being taken into account more than
once, and
``(iii) dealing with changes in members of
any group (through acquisitions or otherwise)
treated under this paragraph as an affiliated
group for purposes of this subsection.
``(6) Election.--An election to have this subsection apply
with respect to any worldwide affiliated group may be made only
by the common parent of the domestic affiliated group referred
to in paragraph (1)(C) and may be made only for the first
taxable year beginning after December 31, 2005, in which a
worldwide affiliated group exists which includes such
affiliated group and at least one foreign corporation. Such an
election, once made, shall apply to such common parent and all
other corporations which are members of such worldwide
affiliated group for such taxable year and all subsequent years
unless revoked with the consent of the Secretary.''.
(b) Expansion of Regulatory Authority.--Paragraph (7) of section
864(e) is amended--
(1) by inserting before the comma at the end of
subparagraph (B) ``and in other circumstances where such
allocation would be appropriate to carry out the purposes of
this subsection'', and
(2) by striking ``and'' at the end of subparagraph (E), by
redesignating subparagraph (F) as subparagraph (G), and by
inserting after subparagraph (E) the following new
subparagraph:
``(F) preventing assets or interest expense from
being taken into account more than once, and''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2005.
SEC. 222. EXTENSION OF PERIOD TO WHICH EXCESS FOREIGN TAXES MAY BE
CARRIED.
(a) General Rule.--Section 904(c) (relating to carryback and
carryover of excess tax paid) is amended by striking ``in the first,
second, third, fourth, or fifth'' and inserting ``in any of the first
20''.
(b) Excess Extraction Taxes.--Paragraph (1) of section 907(f) is
amended by striking ``in the first, second, third, fourth, or fifth''
and inserting ``in any of the first 20''.
(c) Effective Date.--The amendments made by this section shall
apply to excess foreign taxes arising in taxable years beginning after
December 31, 2003.
SEC. 223. ORDERING RULES FOR FOREIGN TAX CREDIT CARRYFORWARDS.
(a) In General.--Section 904(c) (relating to carryback and
carryover of excess tax paid), as amended by section 222, is amended to
read as follows:
``(c) Carryback and Carryforward of Excess Tax Paid.--
``(1) In general.--If, for any taxable year for which the
taxpayer elects to have the benefits of this subpart apply, the
sum of--
``(A) the foreign tax credit carryforwards under
this subsection to a taxable year, plus
``(B) the amount of foreign taxes paid or accrued
for the taxable year,
exceeds the limitation under subsection (a), such excess (to
the extent attributable to the taxes described in subparagraph
(B)) shall be a foreign tax credit carryback to each of the 2
preceding taxable years and a foreign tax credit carryforward
to each of the 20 following taxable years.
``(2) Amounts carried to earliest years.--The excess
described in paragraph (1) for any taxable year shall be
carried to the earliest of the 22 taxable years to which (by
reason of paragraph (1)) such excess may be carried. The amount
of such excess shall be carried to each of the other 21 taxable
years to the extent that such excess may not be taken into
account under subsection (a) for a prior taxable year because
of the limitations of paragraph (4).
``(3) Ordering rules.--For purposes of determining under
this subsection whether foreign taxes are taken into account
for a taxable year or as a carryback or carryforward, such
taxes shall be treated as taken into account in the order of
the taxable years in which such taxes were actually paid or
accrued, beginning with the earliest such year.
``(4) Limitations.--
``(A) Carrybacks used last.--The excess described
in paragraph (1) for any taxable year (in this
paragraph referred to as the `current taxable year')
which is carried to any preceding taxable year shall
not exceed the amount by which the limitation under
subsection (a) for such preceding taxable year exceeds
the sum of--
``(i) the foreign taxes paid or accrued for
such preceding taxable year, and
``(ii) the amount of the foreign taxes paid
or accrued for any taxable year earlier than
the current taxable year which have been
carried to such preceding taxable year.
``(B) Carryforwards used first.--The excess
described in paragraph (1) for a taxable year which is
carried to any succeeding taxable year shall not exceed
the amount by which the limitation under subsection (a)
for such succeeding taxable year exceeds the sum of the
amounts which, by reason of this subsection, are
carried to such succeeding taxable year and are
attributable to taxable years preceding the taxable
year of such excess.
``(C) Credit only.--The excess described in
paragraph (1) may be carried to a taxable year under
this subsection only if the taxpayer elects to have the
benefits of this subpart apply to foreign taxes paid or
accrued for such taxable year. Any amount so carried
may be allowed only as a credit and not a deduction.
``(5) Treatment of amounts carried back or forward.--The
amount of any foreign tax carryback or foreign tax carryforward
to a taxable year under this subsection shall, for purposes of
section 901, be treated as foreign taxes paid or accrued in
such year.
``(6) Foreign taxes.--For purposes of this subsection, the
term `foreign taxes' means taxes paid or accrued to foreign
countries or any possessions of the United States.''
(b) Effective Date.--The amendment made by this section shall apply
to taxes paid or accrued for taxable years beginning after December 31,
2003, and to carryforwards of taxes from taxable years beginning after
December 31, 1997.
SEC. 224. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT UNDER ALTERNATIVE
MINIMUM TAX.
(a) In General.--Section 59(a) (relating to alternative minimum tax
foreign tax credit) is amended by striking paragraph (2) and by
redesignating paragraphs (3) and (4) as paragraphs (2) and (3),
respectively.
(b) Conforming Amendment.--Section 53(d)(1)(B)(i)(II) is amended by
striking ``and if section 59(a)(2) did not apply''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 225. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED
SECTION 902 CORPORATIONS.
(a) In General.--Paragraph (4) of section 904(d) (relating to
separate application of section with respect to certain categories of
income) is amended to read as follows:
``(4) Look-thru applies to dividends from noncontrolled
section 902 corporations.--
``(A) In general.--For purposes of this subsection,
any dividend from a noncontrolled section 902
corporation with respect to the taxpayer shall be
treated as income in a separate category in proportion
to the ratio of--
``(i) the portion of earnings and profits
attributable to income in such category, to
``(ii) the total amount of earnings and
profits.
``(B) Earnings and profits of controlled foreign
corporations.--In the case of any distribution from a
controlled foreign corporation to a United States
shareholder, rules similar to the rules of subparagraph
(A) shall apply in determining the extent to which
earnings and profits of the controlled foreign
corporation which are attributable to a noncontrolled
section 902 corporation may be treated as income in a
separate category.
``(C) Special rules.--For purposes of this
paragraph--
``(i) In general.--Rules similar to the
rules of paragraph (3)(F) shall apply.
``(ii) Earnings and profits.--
``(I) In general.--The rules of
section 316 shall apply.
``(II) Regulations.--The Secretary
may prescribe regulations regarding the
treatment of distributions out of
earnings and profits for periods before
the taxpayer's acquisition of the stock
to which the distributions relate.
``(iii) Dividends not allocable to separate
category.--The portion of any dividend from a
noncontrolled section 902 corporation which is
not treated as income in a separate category
under subparagraph (A) or (B) shall be treated
as a dividend to which subparagraph (A) or (B)
does not apply.
``(iv) Look-thru with respect to
carryforwards of credit.--Rules similar to the
rules of subparagraph (A) shall apply to any
carryforward under subsection (c) from a
taxable year beginning before January 1, 2003,
of tax allocable to a dividend from a
noncontrolled section 902 corporation with
respect to the taxpayer.''.
(b) Conforming Amendments.--
(1) Subparagraph (E) of section 904(d)(1) is hereby
repealed.
(2) Section 904(d)(2)(C)(iii) is amended by striking
subclause (II) and by redesignating subclause (III) as
subclause (II).
(3) The last sentence of section 904(d)(2)(D) is amended to
read as follows: ``Such term does not include any financial
services income.''.
(4) Section 904(d)(2)(E) is amended--
(A) by inserting ``or (4)'' after ``paragraph (3)''
in clause (i), and
(B) by striking clauses (ii) and (iv) and by
redesignating clause (iii) as clause (ii).
(5) Section 904(d)(3)(F) is amended by striking ``(D), or
(E)'' and inserting ``or (D)''.
(6) Section 864(d)(5)(A)(i) is amended by striking
``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 226. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.
(a) In General.--Paragraph (1) of section 904(d) (relating to
separate application of section with respect to certain categories of
income), as amended by section 225, is amended to read as follows:
``(1) In general.--The provisions of subsections (a), (b),
and (c) and sections 902, 907, and 960 shall be applied
separately with respect to--
``(A) typically low-taxed income, and
``(B) general category income.''
(b) Categories.--Paragraph (2) of section 904(d), as amended by
section 204(c)(14), is amended by striking subparagraph (B), by
redesignating subparagraph (A) as subparagraph (B), and by inserting
before subparagraph (B) (as so redesignated) the following new
subparagraph:
``(A) Categories.--
``(i) Typically low-taxed income.--The term
`typically low-taxed income' means passive
income and specified typically low-taxed
income.
``(ii) General category income.--The term
`general category income' means income other
than typically low-taxed income.''
(c) Specified Typically Low-Taxed Income.--Subparagraph (B) of
section 904(d)(2), as redesignated by subsection (b), is amended by
adding at the end the following new clause:
``(v) Specified typically low-taxed
income.--The term `specified typically low-
taxed income' means--
``(I) dividends from a DISC or
former DISC (as defined in section
992(a)) to the extent such dividends
are treated as income from sources
without the United States,
``(II) taxable income attributable
to foreign trade income (within the
meaning of section 923(b)),
``(III) distributions from a FSC
(or a former FSC) out of earnings and
profits attributable to foreign trade
income (within the meaning of section
923(b)) or interest or carrying charges
(as defined in section 927(d)(1))
derived from a transaction which
results in foreign trade income (as
defined in section 923(b)), and
``(IV) shipping income.''
(d) Treatment of Financial Services.--Paragraph (2) of section
904(d) is amended by redesignating subparagraphs (H) and (I) as
subparagraphs (I) and (J) and by inserting after subparagraph (G) the
following new subparagraph:
``(H) Treatment of financial services income and
companies.--
``(i) In general.--Financial services
income shall be treated as general category
income in the case of--
``(I) a member of a financial
services group, and
``(II) any other person if such
person is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business.
``(ii) Financial services group.--The term
`financial services group' means any affiliated
group (as defined in section 1504(a) without
regard to paragraphs (2) and (3) of section
1504(b)) which is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business. In determining
whether such a group is so engaged, there shall
be taken into account only the income of
members of the group that are--
``(I) United States corporations,
or
``(II) controlled foreign
corporations in which United States
corporations own, directly or
indirectly, at least 80 percent of the
total voting power and value of the
stock.
``(iii) Pass-thru entities.--The Secretary
shall by regulation specify for purposes of
this subparagraph the treatment of financial
services income received or accrued by
partnerships and by other pass-thru entities
which are not members of a financial services
group.''
(e) Conforming Amendments.--
(1) Clause (iii) of section 904(d)(2)(B) (relating to
exceptions from passive income), as redesignated by subsection
(b), is amended by striking subclause (I) and by redesignating
subclauses (II) and (III) as subclauses (I) and (II),
respectively.
(2) Clause (i) of section 904(d)(2)(C) (defining financial
services income) is amended by adding ``or'' at the end of
subclause (I) and by striking subclauses (II) and (III) and
inserting the following new subclause:
``(II) passive income (determined
without regard to subparagraph
(B)(iii)(II)).''
(3) Section 904(d)(2)(C) (defining financial services
income), as amended by section 225(b)(2), is amended by
striking clause (iii).
(4) Paragraph (3) of section 904(d), as amended by section
225(b)(5), is amended to read as follows:
``(3) Look-thru in case of controlled foreign
corporations.--
``(A) In general.--Except as otherwise provided in
this paragraph, dividends, interest, rents, and
royalties received or accrued by the taxpayer from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall not be treated as
typically low-taxed income.
``(B) Subpart f inclusions.--Any amount included in
gross income under section 951(a)(1)(A) shall be
treated as typically low-taxed income to the extent the
amount so included is attributable to typically low-
taxed income.
``(C) Interest, rents, and royalties.--Any
interest, rent, or royalty which is received or accrued
from a controlled foreign corporation in which the
taxpayer is a United States shareholder shall be
treated as typically low-taxed income to the extent it
is properly allocable (under regulations prescribed by
the Secretary) to typically low-taxed income of the
controlled foreign corporation.
``(D) Dividends.--Any dividend paid out of the
earnings and profits of any controlled foreign
corporation in which the taxpayer is a United States
shareholder shall be treated as typically low-taxed
income in proportion to the ratio of--
``(i) the portion of the earnings and
profits attributable to typically low-taxed
income, to
``(ii) the total amount of earnings and
profits.
``(E) Look-thru applies only where subpart f
applies.--If a controlled foreign corporation meets the
requirements of section 954(b)(3)(A) (relating to de
minimis rule) for any taxable year, for purposes of
this paragraph, none of its foreign base company income
(as defined in section 954(a) without regard to section
954(b)(5)) and none of its gross insurance income (as
defined in section 954(b)(3)(C)) for such taxable year
shall be treated as typically low-taxed income, except
that this sentence shall not apply to any income which
(without regard to this sentence) would be treated as
financial services income. Solely for purposes of
applying subparagraph (D), passive income of a
controlled foreign corporation shall not be treated as
typically low-taxed income if the requirements of
section 954(b)(4) are met with respect to such income.
``(F) Coordination with high-taxed income
provisions.--
``(i) In determining whether any income of
a controlled foreign corporation is typically
low-taxed income, subclause (II) of paragraph
(2)(B)(iii) shall not apply.
``(ii) Any income of the taxpayer which is
treated as typically low-taxed income under
this paragraph shall be so treated
notwithstanding any provision of paragraph (2);
except that the determination of whether any
amount is high-taxed income shall be made after
the application of this paragraph.''
(5) Treatment of income tax base differences.--Paragraph
(2) of section 904(d), as amended by subsection (d), is amended
by redesignating subparagraphs (I) and (J) as subparagraphs (J)
and (K), respectively, and by inserting after subparagraph (H)
the following new subparagraph:
``(I) Treatment of income tax base differences.--
Tax imposed under the law of a foreign country or
possession of the United States on an amount which does
not constitute income under United States tax
principles shall be treated as imposed on income
described in paragraph (1)(B).''
(6) Paragraph (3) of section 904(d) is amended by striking
subparagraph (H) and by redesignating subparagraph (I) as
subparagraph (H).
(7) Paragraph (2) of section 904(d), as amended by this
subsection, is amended by adding at the end the following new
subparagraph:
``(L) Transitional rules for 2004 changes.--For
purposes of paragraph (1)--
``(i) taxes carried from any taxable year
beginning before January 1, 2005, to any
taxable year beginning on or after such date,
with respect to any item of income, shall be
treated as described in the subparagraph of
paragraph (1) in which such income would be
described were such taxes paid or accrued in a
taxable year beginning on or after such date,
``(ii) the Secretary may by regulations
provide for the allocation of any carryback of
taxes with respect to income to such a taxable
year for purposes of allocating such income
among the separate categories in effect for
such taxable year, and
``(iii) the Secretary may by regulations
provide for the allocation under subsection (f)
of any overall foreign loss for such a taxable
year to income among the separate categories
for taxable years beginning on or after such
date.''
(8) Section 904(j)(3)(A)(i) is amended by striking
``subsection (d)(2)(A)'' and inserting ``subsection
(d)(2)(B)''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
SEC. 227. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.
(a) General Rule.--Section 904, as amended by section 204, is
amended by redesignating subsections (g), (h), (i), (j), and (k) as
subsections (h), (i), (j), (k), and (l) respectively, and by inserting
after subsection (f) the following new subsection:
``(g) Recharacterization of Overall Domestic Loss.--
``(1) General rule.--For purposes of this subpart and
section 936, in the case of any taxpayer who sustains an
overall domestic loss for any taxable year beginning after
December 31, 2004, that portion of the taxpayer's taxable
income from sources within the United States for each
succeeding taxable year which is equal to the lesser of--
``(A) the amount of such loss (to the extent not
used under this paragraph in prior taxable years), or
``(B) 50 percent of the taxpayer's taxable income
from sources within the United States for such
succeeding taxable year,
shall be treated as income from sources without the United
States (and not as income from sources within the United
States).
``(2) Overall domestic loss defined.--For purposes of this
subsection--
``(A) In general.--The term `overall domestic loss'
means any domestic loss to the extent such loss offsets
taxable income from sources without the United States
for the taxable year or for any preceding taxable year
by reason of a carryback. For purposes of the preceding
sentence, the term `domestic loss' means the amount by
which the gross income for the taxable year from
sources within the United States is exceeded by the sum
of the deductions properly apportioned or allocated
thereto (determined without regard to any carryback
from a subsequent taxable year).
``(B) Taxpayer must have elected foreign tax credit
for year of loss.--The term `overall domestic loss'
shall not include any loss for any taxable year unless
the taxpayer elected the benefits of this subpart for
such taxable year.
``(3) Characterization of subsequent income.--
``(A) In general.--Any income from sources within
the United States that is treated as income from
sources without the United States under paragraph (1)
shall be allocated among and increase the income
categories in proportion to the loss from sources
within the United States previously allocated to those
income categories.
``(B) Income category.--For purposes of this
paragraph, the term `income category' has the meaning
given such term by subsection (f)(5)(E)(i).
``(4) Coordination with subsection (f).--The Secretary
shall prescribe such regulations as may be necessary to
coordinate the provisions of this subsection with the
provisions of subsection (f).''
(b) Conforming Amendments.--
(1) Section 535(d)(2) is amended by striking ``section
904(g)(6)'' and inserting ``section 904(h)(6)''.
(2) Subparagraph (A) of section 936(a)(2) is amended by
striking ``section 904(f)'' and inserting ``subsections (f) and
(g) of section 904''.
(c) Effective Date.--The amendments made by this section shall
apply to losses for taxable years beginning after December 31, 2004.
SEC. 228. REPEAL OF SPECIAL RULES FOR APPLYING FOREIGN TAX CREDIT IN
CASE OF FOREIGN OIL AND GAS INCOME.
(a) In General.--Section 907 (relating to special rules in case of
foreign oil and gas income) is repealed.
(b) Conforming Amendments.--
(1) Each of the following provisions are amended by
striking ``907,'':
(A) Section 245(a)(10).
(B) Section 865(h)(1)(B).
(C) Section 904(d)(1).
(D) Section 904(g)(10)(A).
(2) Section 904(f)(5)(E)(iii) is amended by inserting ``,
as in effect before its repeal by the Promote Growth and Jobs
in the USA Act of 2003'' after ``section 907(c)(4)(B)''.
(3) Section 954(g)(1) is amended by inserting ``, as in
effect before its repeal by the Promote Growth and Jobs in the
USA Act of 2003'' after ``907(c)''.
(4) Section 6501(i) is amended--
(A) by striking ``, or under section 907(f)
(relating to carryback and carryover of disallowed oil
and gas extraction taxes)'', and
(B) by striking ``or 907(f)''.
(5) The table of sections for subpart A of part III of
subchapter N of chapter 1 is amended by striking the item
relating to section 907.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2005.
SEC. 229. INCREASE IN INDIVIDUAL EXEMPTION FROM FOREIGN TAX CREDIT
LIMITATION.
(a) In General.--Paragraph (2)(B) of section 904(k) (relating to
certain individuals exempt), as redesignated by section 227, is amended
by striking ``$300 ($600 in the case of a joint return)'' and inserting
``the exemption amount (twice the exemption amount in the case of a
joint return)''.
(b) Exemption Amount.--Section 904(k)(3), as so redesignated, is
amended by adding at the end the following new subparagraph:
``(E) Exemption amount.--
``(i) In general.--The exemption amount is
$500.
``(ii) Cost-of-living adjustment.--In the
case of a taxable year beginning after 2004,
the exemption amount shall be increased by an
amount equal to the product of $500 and the
cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2003' for `1992' in subparagraph
(B) thereof. If the exemption amount after an increase under this
clause is not a multiple of $10, such amount shall be rounded to the
next lowest multiple of $10.''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 230. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS OF
CONTROLLED FOREIGN CORPORATION.
(a) In General.--Section 956(c)(2) (relating to exceptions from
property treated as United States property) is amended by striking
``and'' at the end of subparagraph (J), by striking the period at the
end of subparagraph (K) and inserting a semicolon, and by adding at the
end the following new subparagraphs:
``(L) securities acquired and held by a controlled
foreign corporation in the ordinary course of its
business as a dealer in securities if (i) the dealer
accounts for the securities as securities held
primarily for sale to customers in the ordinary course
of business, and (ii) the dealer disposes of the
securities (or such securities mature while held by the
dealer) within a period consistent with the holding of
securities for sale to customers in the ordinary course
of business; and
``(M) an obligation of a United States person
which--
``(i) is not a domestic corporation, and
``(ii) is not--
``(I) a United States shareholder
(as defined in section 951(b)) of the
controlled foreign corporation, or
``(II) a partnership, estate, or
trust in which the controlled foreign
corporation, or any related person (as
defined in section 954(d)(3)), is a
partner, beneficiary, or trustee
immediately after the acquisition of
any obligation of such partnership,
estate, or trust by the controlled
foreign corporation.''
(b) Conforming Amendment.--Section 956(c)(2) is amended by striking
``and (K)'' in the last sentence and inserting ``, (K), (L), and (M)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years of foreign corporations beginning after December
31, 2004, and to taxable years of United States shareholders or with or
within which such taxable years of foreign corporations end.
SEC. 231. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY
IN DETERMINING SECTION 902 AND 960 CREDITS.
(a) In General.--Subsection (c) of section 902 is amended by
redesignating paragraph (7) as paragraph (8) and by inserting after
paragraph (6) the following new paragraph:
``(7) Constructive ownership through partnerships.--Stock
owned, directly or indirectly, by or for a partnership shall be
considered as being owned proportionately by its partners.
Stock considered to be owned by a person by reason of the
preceding sentence shall, for purposes of applying such
sentence, be treated as actually owned by such person. The
Secretary may prescribe such regulations as may be necessary to
carry out the purposes of this paragraph, including rules to
account for special partnership allocations of dividends,
credits, and other incidents of ownership of stock in
determining proportionate ownership.''
(b) Clarification of Comparable Attribution Under Section
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking
``any individual'' and inserting ``any person''.
(c) Effective Date.--The amendments made by this section shall
apply to taxes of foreign corporations for taxable years of such
corporations beginning after the date of the enactment of this Act.
SEC. 232. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN
PARTNERSHIPS AND FOREIGN CORPORATIONS.
(a) In General.--Paragraph (1) of section 861(a) is amended by
striking ``and'' at the end of subparagraph (A), by striking the period
at the end of subparagraph (B) and inserting ``, and'', and by adding
at the end the following new subparagraph:
``(C) in the case of a foreign partnership, any
interest not paid by a trade or business engaged in by
the partnership in the United States and not allocable
to income which is effectively connected (or treated as
effectively connected) with the conduct of a trade or
business in the United States.''
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2003.
SEC. 233. APPLICATION OF LOOK-THRU RULES TO INTEREST, RENTS, AND
ROYALTIES.
(a) Interest, Rents, and Royalties.--
(1) Noncontrolled section 902 corporation.--Section
904(d)(4)(A), as amended by sections 204 and 225, is amended to
read as follows:
``(A) In general.--For purposes of this
subsection--
``(i) any applicable dividend shall be
treated as income in a separate category in
proportion to the ratio of--
``(I) the portion of the earnings
and profits attributable to income in
such category, to
``(II) the total amount of earnings
and profits, and
``(ii) any interest, rent, or royalty which
is received or accrued from a noncontrolled
section 902 corporation with respect to the
taxpayer shall be treated as income in a
separate category to the extent it is properly
allocable (under regulations prescribed by the
Secretary) to income of such corporation in
such category.''
(2) Partnerships.--Section 904(d)(6)(C) (relating to
regulations) is amended--
(A) by inserting ``or (4)(A)(ii)'' after
``paragraph (3)(C)'', and
(B) by inserting ``or noncontrolled section 902
corporations, whichever is applicable'' after
``controlled foreign corporations''.
(3) Conforming amendment.--The heading for section
904(d)(4), as amended by sections 204 and 225, is amended by
inserting ``, interest, rents, or royalties'' after
``dividends''.
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
SEC. 234. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF INTANGIBLE
PROPERTY.
(a) In General.--Subparagraph (C) of section 367(d)(2) is amended
by adding at the end the following new sentence: ``For purposes of
applying section 904(d), any such amount shall be treated in the same
manner as if such amount were a royalty.''
(b) Effective Date.--The amendment made by this section shall apply
to amounts treated as received pursuant to section 367(d)(2) of the
Internal Revenue Code of 1986 on or after August 5, 1997.
Subtitle C--Other Provisions
SEC. 251. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN
PERSONS.
(a) In General.--Section 263A(c) (relating to exceptions) is
amended by adding at the end the following new paragraph:
``(7) Foreign persons.--Except for purposes of applying
sections 871(b)(1) and 882(a)(1), this section shall not apply
to any taxpayer who is not a United States person if such
taxpayer capitalizes costs of produced property or property
acquired for resale by applying the method used to ascertain
the income, profit, or loss for purposes of reports or
statements to shareholders, partners, other proprietors, or
beneficiaries, or for credit purposes.''
(b) Effective Date.--The amendment made by subsection (a) shall
apply to taxable years beginning after December 31, 2004. Section 481
of the Internal Revenue Code of 1986 shall not apply to any change in a
method of accounting by reason of such amendment.
SEC. 252. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT
COMPANIES.
(a) Treatment of Certain Dividends.--
(1) Nonresident alien individuals.--Section 871 (relating
to tax on nonresident alien individuals) is amended by
redesignating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
``(k) Exemption for Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1)(A) of subsection (a) on any interest-
related dividend received from a regulated investment
company.
``(B) Exceptions.--Subparagraph (A) shall not
apply--
``(i) to any interest-related dividend
received from a regulated investment company by
a person to the extent such dividend is
attributable to interest (other than interest
described in subparagraph (E) (i) or (iii))
received by such company on indebtedness issued
by such person or by any corporation or
partnership with respect to which such person
is a 10-percent shareholder,
``(ii) to any interest-related dividend
with respect to stock of a regulated investment
company unless the person who would otherwise
be required to deduct and withhold tax from
such dividend under chapter 3 receives a
statement (which meets requirements similar to
the requirements of subsection (h)(5)) that the
beneficial owner of such stock is not a United
States person, and
``(iii) to any interest-related dividend
paid to any person within a foreign country (or
any interest-related dividend payment addressed
to, or for the account of, persons within such
foreign country) during any period described in
subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock which was acquired on or before
the date of the publication of the Secretary's
determination under subsection (h)(6).
``(C) Interest-related dividend.--For purposes of
this paragraph, an interest-related dividend is any
dividend (or part thereof) which is designated by the
regulated investment company as an interest-related
dividend in a written notice mailed to its shareholders
not later than 60 days after the close of its taxable
year. If the aggregate amount so designated with
respect to a taxable year of the company (including
amounts so designated with respect to dividends paid
after the close of the taxable year described in
section 855) is greater than the qualified net interest
income of the company for such taxable year, the
portion of each distribution which shall be an
interest-related dividend shall be only that portion of
the amounts so designated which such qualified net
interest income bears to the aggregate amount so
designated.
``(D) Qualified net interest income.--For purposes
of subparagraph (C), the term `qualified net interest
income' means the qualified interest income of the
regulated investment company reduced by the deductions
properly allocable to such income.
``(E) Qualified interest income.--For purposes of
subparagraph (D), the term `qualified interest income'
means the sum of the following amounts derived by the
regulated investment company from sources within the
United States:
``(i) Any amount includible in gross income
as original issue discount (within the meaning
of section 1273) on an obligation payable 183
days or less from the date of original issue
(without regard to the period held by the
company).
``(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original issue
discount or market discount or acquisition
discount under part V of subchapter P and such
other amounts as regulations may provide) on an
obligation which is in registered form; except
that this clause shall not apply to--
``(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company is
a 10-percent shareholder in such
corporation or partnership, and
``(II) any interest which is
treated as not being portfolio interest
under the rules of subsection (h)(4).
``(iii) Any interest referred to in
subsection (i)(2)(A) (without regard to the
trade or business of the regulated investment
company).
``(iv) Any interest-related dividend
includable in gross income with respect to
stock of another regulated investment company.
``(F) 10-percent shareholder.--For purposes of this
paragraph, the term `10-percent shareholder' has the
meaning given such term by subsection (h)(3)(B).
``(2) Short-term capital gain dividends.--
``(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1)(A) of subsection (a) on any short-term
capital gain dividend received from a regulated
investment company.
``(B) Exception for aliens taxable under subsection
(a)(2).--Subparagraph (A) shall not apply in the case
of any nonresident alien individual subject to tax
under subsection (a)(2).
``(C) Short-term capital gain dividend.--For
purposes of this paragraph, a short-term capital gain
dividend is any dividend (or part thereof) which is
designated by the regulated investment company as a
short-term capital gain dividend in a written notice
mailed to its shareholders not later than 60 days after
the close of its taxable year. If the aggregate amount
so designated with respect to a taxable year of the
company (including amounts so designated with respect
to dividends paid after the close of the taxable year
described in section 855) is greater than the qualified
short-term gain of the company for such taxable year,
the portion of each distribution which shall be a
short-term capital gain dividend shall be only that
portion of the amounts so designated which such
qualified short-term gain bears to the aggregate amount
so designated.
``(D) Qualified short-term gain.--For purposes of
subparagraph (C), the term `qualified short-term gain'
means the excess of the net short-term capital gain of
the regulated investment company for the taxable year
over the net long-term capital loss (if any) of such
company for such taxable year. For purposes of this
subparagraph--
``(i) the net short-term capital gain of
the regulated investment company shall be
computed by treating any short-term capital
gain dividend includible in gross income with
respect to stock of another regulated
investment company as a short-term capital
gain, and
``(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4) does
not apply) shall be determined without regard
to any net capital loss or net short-term
capital loss attributable to transactions after
October 31 of such year, and any such net
capital loss or net short-term capital loss
shall be treated as arising on the 1st day of
the next taxable year.
To the extent provided in regulations, clause (ii)
shall apply also for purposes of computing the taxable
income of the regulated investment company.''
(2) Foreign corporations.--Section 881 (relating to tax on
income of foreign corporations not connected with United States
business) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the
following new subsection:
``(e) Tax Not To Apply to Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in
subparagraph (B), no tax shall be imposed under
paragraph (1) of subsection (a) on any interest-related
dividend (as defined in section 871(k)(1)) received
from a regulated investment company.
``(B) Exception.--Subparagraph (A) shall not
apply--
``(i) to any dividend referred to in
section 871(k)(1)(B), and
``(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to the
extent such dividend is attributable to
interest received by the regulated investment
company from a person who is a related person
(within the meaning of section 864(d)(4)) with
respect to such controlled foreign corporation.
``(C) Treatment of dividends received by controlled
foreign corporations.--The rules of subsection
(c)(5)(A) shall apply to any interest-related dividend
received by a controlled foreign corporation (within
the meaning of section 957(a)) to the extent such
dividend is attributable to interest received by the
regulated investment company which is described in
clause (ii) of section 871(k)(1)(E) (and not described
in clause (i) or (iii) of such section).
``(2) Short-term capital gain dividends.--No tax shall be
imposed under paragraph (1) of subsection (a) on any short-term
capital gain dividend (as defined in section 871(k)(2))
received from a regulated investment company.''
(3) Withholding taxes.--
(A) Section 1441(c) (relating to exceptions) is
amended by adding at the end the following new
paragraph:
``(12) Certain dividends received from regulated investment
companies.--
``(A) In general.--No tax shall be required to be
deducted and withheld under subsection (a) from any
amount exempt from the tax imposed by section
871(a)(1)(A) by reason of section 871(k).
``(B) Special rule.--For purposes of subparagraph
(A), clause (i) of section 871(k)(1)(B) shall not apply
to any dividend unless the regulated investment company
knows that such dividend is a dividend referred to in
such clause. A similar rule shall apply with respect to
the exception contained in section 871(k)(2)(B).''
(B) Section 1442(a) (relating to withholding of tax
on foreign corporations) is amended--
(i) by striking ``and the reference in
section 1441(c)(10)'' and inserting ``the
reference in section 1441(c)(10)'', and
(ii) by inserting before the period at the
end the following: ``, and the references in
section 1441(c)(12) to sections 871(a) and
871(k) shall be treated as referring to
sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply to
any dividend unless the regulated investment
company knows that such dividend is a dividend
referred to in such clause)''.
(b) Estate Tax Treatment of Interest in Certain Regulated
Investment Companies.--Section 2105 (relating to property without the
United States for estate tax purposes) is amended by adding at the end
the following new subsection:
``(d) Stock in a RIC.--
``(1) In general.--For purposes of this subchapter, stock
in a regulated investment company (as defined in section 851)
owned by a nonresident not a citizen of the United States shall
not be deemed property within the United States in the
proportion that, at the end of the quarter of such investment
company's taxable year immediately preceding a decedent's date
of death (or at such other time as the Secretary may designate
in regulations), the assets of the investment company that were
qualifying assets with respect to the decedent bore to the
total assets of the investment company.
``(2) Qualifying assets.--For purposes of this subsection,
qualifying assets with respect to a decedent are assets that,
if owned directly by the decedent, would have been--
``(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
``(B) debt obligations described in the last
sentence of section 2104(c), or
``(C) other property not within the United
States.''
(c) Treatment of Regulated Investment Companies Under Section
897.--
(1) Paragraph (1) of section 897(h) is amended by striking
``REIT'' each place it appears and inserting ``qualified
investment entity''.
(2) Paragraphs (2) and (3) of section 897(h) are amended to
read as follows:
``(2) Sale of stock in domestically controlled entity not
taxed.--The term `United States real property interest' does
not include any interest in a domestically controlled qualified
investment entity.
``(3) Distributions by domestically controlled qualified
investment entities.--In the case of a domestically controlled
qualified investment entity, rules similar to the rules of
subsection (d) shall apply to the foreign ownership percentage
of any gain.''
(3) Subparagraphs (A) and (B) of section 897(h)(4) are
amended to read as follows:
``(A) Qualified investment entity.--The term
`qualified investment entity' means any real estate
investment trust and any regulated investment company.
``(B) Domestically controlled.--The term
`domestically controlled qualified investment entity'
means any qualified investment entity in which at all
times during the testing period less than 50 percent in
value of the stock was held directly or indirectly by
foreign persons.''
(4) Subparagraphs (C) and (D) of section 897(h)(4) are each
amended by striking ``REIT'' and inserting ``qualified
investment entity''.
(5) The subsection heading for subsection (h) of section
897 is amended by striking ``REITS'' and inserting ``Certain
Investment Entities''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
dividends with respect to taxable years of regulated investment
companies beginning after the date of the enactment of this
Act.
(2) Estate tax treatment.--The amendment made by subsection
(b) shall apply to estates of decedents dying after the date of
the enactment of this Act.
(3) Certain other provisions.--The amendments made by
subsection (c) (other than paragraph (1) thereof) shall take
effect on the date of the enactment of this Act.
SEC. 253. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN
CORPORATIONS.
(a) In General.--Paragraph (2) of section 871(i) (relating to tax
not to apply to certain interest and dividends) is amended by adding at
the end the following new subparagraph:
``(D) Dividends paid by a foreign corporation which
are treated under section 861(a)(2)(B) as income from
sources within the United States.''.
(b) Effective Date.--The amendment made by this section shall apply
to payments made after December 31, 2004.
SEC. 254. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN PERSONS.
(a) In General.--The last sentence of section 4261(e)(3)(C)
(relating to regulations) is amended by inserting ``and mileage awards
which are issued to individuals whose mailing addresses on record with
the person providing the right to air transportation are outside the
United States'' before the period at the end thereof.
(b) Effective Date.--The amendment made by this section shall apply
to amounts paid, and benefits provided, after December 31, 2003.
SEC. 255. INTEREST PAYMENTS DEDUCTIBLE WHERE DISQUALIFIED GUARANTEE HAS
NO ECONOMIC EFFECT.
(a) In General.--Section 163(j)(6)(D)(ii) (relating to exceptions
to disqualified guarantee) is amended--
(1) by striking ``or'' at the end of subclause (I),
(2) by striking the period at the end of subclause (II) and
inserting ``, or'',
(3) by inserting after subclause (II) the following new
subclause:
``(III) if, in the case of a
guarantee by a foreign person, the
taxpayer establishes to the
satisfaction of the Secretary that the
taxpayer could have borrowed
substantially the same principal amount
from an unrelated person without the
guarantee.'', and
(4) by adding at the end the following new sentence: ``For
purposes of subclause (III), to the extent provided in
regulations, the Secretary may reject a showing that a taxpayer
could have borrowed substantially the same principal amount if
such borrowing is on terms substantially dissimilar to those of
the actual loan.''
(b) Effective Date.--The amendments made by this section shall
apply to guarantees issued on and after the date of the enactment of
this Act.
SEC. 256. MODIFICATIONS OF REPORTING REQUIREMENTS FOR CERTAIN FOREIGN-
OWNED CORPORATIONS.
(a) De Minimis Exception.--Section 6038A(b) (relating to required
information) is amended by adding at the end the following new flush
sentence:
``The Secretary shall not require the reporting corporation to report
any information with respect to any foreign person which is a related
person if the aggregate value of the transactions between the
corporation and the related person (and any person related to such
person) during the taxable year does not exceed $5,000,000.''
(b) Time for Providing Translations of Specific Documents.--
Notwithstanding Internal Revenue Service Regulation Sec. 1.6038A-
3(f)(2), a taxpayer shall have at least 60 days to provide translations
of specific documents it is requested to translate. Nothing in this
subsection shall limit the right of a taxpayer to file a written
request for an extension of time to comply with the request.
(c) Effective Dates.--
(1) Exception.--The amendment made by subsection (a) shall
apply to taxable years beginning after December 31, 2003.
(2) Translations.--Subsection (b) shall apply to requests
made by the Internal Revenue Service after December 31, 2003.
SEC. 257. REPEAL OF TAX ON CERTAIN UNITED STATES SOURCE CAPITAL GAINS
OF NONRESIDENT ALIENS.
(a) In General.--Subsection (a) of section 871 is amended by
striking paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 258. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX
PAID OTHER THAN IN FUNCTIONAL CURRENCY.
(a) In General.--Paragraph (1) of section 986(a) (relating to
determination of foreign taxes and foreign corporation's earnings and
profits) is amended by redesignating subparagraph (D) as subparagraph
(E) and by inserting after subparagraph (C) the following new
subparagraph:
``(D) Elective exception for taxes paid other than
in functional currency.--
``(i) In general.--At the election of the
taxpayer, subparagraph (A) shall not apply to
any foreign income taxes the liability for
which is denominated in any currency other than
in the taxpayer's functional currency.
``(ii) Application to qualified business
units.--An election under this subparagraph may
apply to foreign income taxes attributable to a
qualified business unit in accordance with
regulations prescribed by the Secretary.
``(iii) Election.--Any such election shall
apply to the taxable year for which made and
all subsequent taxable years unless revoked
with the consent of the Secretary.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 259. STUDY OF IMPACT OF INTERNATIONAL TAX LAWS ON TAXPAYERS OTHER
THAN LARGE CORPORATIONS.
(a) Study.--The Secretary of the Treasury or the Secretary's
delegate shall conduct a study of the impact of Federal international
tax rules on taxpayers other than large corporations, including the
burdens placed on such taxpayers in complying with such rules.
(b) Report.--Not later than 180 days after the date of the
enactment of this Act, the Secretary shall report to the Committee on
Finance of the Senate and the Committee on Ways and Means of the House
of Representatives the results of the study conducted under subsection
(a), including any recommendations for legislative or administrative
changes to reduce the compliance burden on taxpayers other than large
corporations and for such other purposes as the Secretary determines
appropriate.
TITLE III--CREDIT FOR INCREASING RESEARCH ACTIVITIES
SEC. 301. PERMANENT EXTENSION OF RESEARCH CREDIT.
(a) In General.--Section 41 (relating to credit for increasing
research activities) is amended by striking subsection (h).
(b) Conforming Amendment.--Paragraph (1) of section 45C(b) is
amended by striking subparagraph (D).
(c) Effective Date.--The amendments made by this section shall
apply to amounts paid or incurred after the date of the enactment of
this Act.
SEC. 302. INCREASE IN RATES OF ALTERNATIVE INCREMENTAL CREDIT.
(a) In General.--Subparagraph (A) of section 41(c)(4) (relating to
election of alternative incremental credit) is amended--
(1) by striking ``2.65 percent'' and inserting ``3
percent'',
(2) by striking ``3.2 percent'' and inserting ``4
percent'', and
(3) by striking ``3.75 percent'' and inserting ``5
percent''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years ending after the date of the enactment of this Act.
SEC. 303. ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH
EXPENSES.
(a) In General.--Subsection (c) of section 41 (relating to base
amount) is amended by redesignating paragraphs (5) and (6) as
paragraphs (6) and (7), respectively, and by inserting after paragraph
(4) the following new paragraph:
``(5) Election of alternative simplified credit.--
``(A) In general.--At the election of the taxpayer,
the credit determined under subsection (a)(1) shall be
equal to 12 percent of so much of the qualified
research expenses for the taxable year as exceeds 50
percent of the average qualified research expenses for
the 3 taxable years preceding the taxable year for
which the credit is being determined.
``(B) Special rule in case of no qualified research
expenses in any of 3 preceding taxable years.--
``(i) Taxpayers to which subparagraph
applies.--The credit under this paragraph shall
be determined under this subparagraph if the
taxpayer has no qualified research expenses in
any 1 of the 3 taxable years preceding the
taxable year for which the credit is being
determined.
``(ii) Credit rate.--The credit determined
under this subparagraph shall be equal to 6
percent of the qualified research expenses for
the taxable year.
``(C) Election.--An election under this paragraph
shall apply to the taxable year for which made and all
succeeding taxable years unless revoked with the
consent of the Secretary. An election under this
paragraph may not be made for any taxable year to which
an election under paragraph (4) applies.''
(b) Coordination With Election of Alternative Incremental Credit.--
(1) In general.--Section 41(c)(4)(B) (relating to election)
is amended by adding at the end the following: ``An election
under this paragraph may not be made for any taxable year to
which an election under paragraph (5) applies.''
(2) Transition rule.--In the case of an election under
section 41(c)(4) of the Internal Revenue Code of 1986 which
applies to the taxable year which includes the date of the
enactment of this Act, such election shall be treated as
revoked with the consent of the Secretary of the Treasury if
the taxpayer makes an election under section 41(c)(5) of such
Code (as added by subsection (a)) for such year.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment of this
Act.
TITLE IV--REFORM OF DEPRECIATION OF BUSINESS PROPERTY
SEC. 401. 100-PERCENT EXPENSING FOR CERTAIN PROPERTY THROUGH 2006.
(a) In General.--
(1) Increase.--Paragraph (4) of section 168(k) is amended
by striking ``50-percent'' each place it appears and inserting
``100-percent''.
(2) Extension.--
(A) Section 168(k)(4) is amended by striking
``January 1, 2005'' each place it appears and inserting
``January 1, 2007''.
(B) Clause (iii) of section 168(k)(4)(B) is amended
by striking ``January 1, 2006'' and inserting ``January
1, 2008''.
(b) Extension of Certain Dates for 30-Percent Bonus Depreciation
Property.--Section 168(k)(2) is amended--
(1) by striking ``January 1, 2005'' each place it appears
in the text and inserting ``January 1, 2007'',
(2) in subparagraph (A)(iv), by striking ``January 1,
2006'' and inserting ``January 1, 2008'', and
(3) in subparagraph (B)(ii), by striking ``pre-january 1,
2005'' in the heading and inserting ``pre-january 1, 2007''.
(c) Conforming Amendments.--
(1) Section 168(k)(4) is amended by striking ``50-percent''
in the heading and inserting ``100-percent''.
(2) The subsection heading for section 168(k) is amended by
striking ``January 1, 2005'' and inserting ``January 1, 2007''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years ending after May 5, 2003.
SEC. 402. EXTENSION OF EXPENSING FOR SMALL BUSINESS.
Section 179 is amended by striking ``2006'' each place it appears
in the text and inserting ``2007''.
SEC. 403. ELECTION TO INCREASE MINIMUM TAX CREDIT LIMITATION IN LIEU OF
BONUS DEPRECIATION.
(a) In General.--Section 53 (relating to credit for prior year
minimum tax liability) is amended by adding at the end the following
new subsection:
``(e) Additional Credit in Lieu of Bonus Depreciation.--
``(1) In general.--In the case of a corporation making an
election under this subsection for a taxable year, the
limitation under subsection (c) shall be increased by an amount
equal to the bonus depreciation amount.
``(2) Bonus depreciation amount.--For purposes of paragraph
(1), the bonus depreciation amount for any taxable year is an
amount equal to the product of--
``(A) 35 percent, and
``(B) the excess (if any) of--
``(i) the aggregate amount of depreciation
which would be determined under section 168 for
property placed in service during such taxable
year if no election under this subsection were
made, over
``(ii) the aggregate allowance for
depreciation allowable with respect to such
property placed in service for such taxable
year.
``(3) Election.--Sections 168(k) (other than paragraph
(2)(F) thereof) shall not apply to any property placed in
service during a taxable year by a corporation making an
election under this subsection for such taxable year. An
election under this subsection may only be revoked with the
consent of the Secretary.
``(4) Credit refundable.--The aggregate increase in the
credit allowed by this section for any taxable year by reason
of this subsection shall for purposes of this title (other than
subsection (b)(2) of this section) be treated as a credit
allowed to the taxpayer under subpart C.''.
(b) Conforming Amendments.--Subsection (k) of section 168, as
amended by section 401, is amended by adding at the end the following
new paragraph:
``(5) Cross reference.--For an election to claim certain
minimum tax credits in lieu of the allowance determined under
this subsection,