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Title IV — Participation exemption system for the taxation of foreign income

H.R. 1 · 113th Congress · Dec 10, 2014 · Lineage

IV Participation exemption system for the taxation of foreign income

A Establishment of exemption system

Sec. 4001 Deduction for dividends received by domestic corporations from certain foreign corporations

(a)
In general— Part VIII of subchapter B of chapter 1 is amended by inserting after section 245 the following new section:

“245A. Dividends received by domestic corporations from certain foreign corporations

“(a) In general—In the case of any dividend received from a specified 10-percent owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to 95 percent of the foreign-source portion of such dividend.

“(b) Specified 10-Percent owned foreign corporation—For purposes of this section, the term “specified 10-percent owned foreign corporation” means any foreign corporation if any domestic corporation owns directly, or indirectly through a chain of ownership described under section 958(a), 10 percent or more of the voting stock of such foreign corporation.

“(c) Foreign-Source portion—For purposes of this section—

“(1) In general—The foreign-source portion of any dividend is an amount which bears the same ratio to such dividends as—

“(A) the post-1986 undistributed foreign earnings, bears to

“(B) the total post-1986 undistributed earnings.

“(2) Post-1986 undistributed earnings—The term “post-1986 undistributed earnings” means the amount of the earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986—

“(A) as of the close of the taxable year of the specified 10-percent owned foreign corporation in which the dividend is distributed, and

“(B) without diminution by reason of dividends distributed during such taxable year.

“(3) Post-1986 undistributed foreign earnings—The term “post-1986 undistributed foreign earnings” means the portion of the post-1986 undistributed earnings which is attributable to neither—

“(A) income described in subparagraph (A) of section 245(a)(5), nor

“(B) dividends described in subparagraph (B) of such section (determined without regard to section 245(a)(12)).

“(4) Treatment of distributions from earnings before 1987

“(A) In general—In the case of any dividend paid out of earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning before January 1, 1987—

“(i) paragraphs (1), (2), and (3) shall be applied without regard to the phrase “post-1986” each place it appears, and

“(ii) paragraph (2) shall be applied without regard to the phrase “in taxable years beginning after December 31, 1986”.

“(B) Dividends paid first out of post-1986 earnings—Dividends shall be treated as paid out of post-1986 undistributed earnings to the extent thereof.

“(d) Disallowance of foreign tax credit, etc

“(1) In general—No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which a deduction is allowed under this section.

“(2) Denial of deduction—No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).

“(e) Regulations—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.”

(b)
Application of holding period requirement— Subsection (c) of section 246 is amended—
(1)
by striking “or 245” in paragraph (1) and inserting “245, or 245A”, and
(2)
by adding at the end the following new paragraph:

“(5) Special rules for foreign source portion of dividends received from specified 10-percent owned foreign corporations

“(A) 6-month holding period requirement—For purposes of section 245A—

“(i) paragraph (1)(A) shall be applied—

“(I) by substituting “180 days” for “45 days”each place it appears, and

“(II) by substituting “361-day period” for “91-day period”, and

“(ii) paragraph (2) shall not apply.

“(B) Status must be maintained during holding period—For purposes of section 245A, the holding period requirement of this subsection shall be treated as met only if—

“(i) the specified 10-percent owned corporation referred to in section 245A(a) is a specified 10-percent owned corporation at all times during such period, and

“(ii) the taxpayer is a United States shareholder with respect to such specified 10-percent owned corporation at all times during such period.”

(c)
Application of rules generally applicable to deductions for dividends received—
(1)
Treatment of dividends from certain corporations— Paragraph (1) of section 246(a) is amended by striking “and 245” and inserting “245, and 245A”.
(2)
Assets generating tax-exempt portion of dividend not taken into account in allocating and apportioning deductible expenses— Paragraph (3) of section 864(e) is amended by striking “or 245(a)” and inserting “, 245(a), or 245A”.
(3)
Coordination with section 1059— Subparagraph (B) of section 1059(b)(2) is amended by striking “or 245” and inserting “245, or 245A”.
(d)
Coordination with foreign tax credit limitation— Subsection (b) of section 904, as amended by the preceding provisions of this Act, is amended by redesignating paragraph (2) as paragraph (1) and by adding at the end the following new paragraph:

“(2) Treatment of dividends for which deduction is allowed under section 245A—For purposes of subsection (a), in the case of a domestic corporation which is a United States shareholder with respect to a specified 10-percent owned foreign corporation, such domestic corporation’s taxable income from sources without the United States shall be determined without regard to—

“(A) the foreign-source portion of any dividend received from such foreign corporation, and

“(B) any deductions properly allocable to such portion.”

(e)
Conforming amendments—
(1)
Paragraph (4) of section 245(a) is amended by striking “section 902(c)(1)” and inserting “section 245A(c)(2)”.
(2)
Subsection (b) of section 951 is amended by striking “subpart” and inserting “title”.
(3)
Subsection (a) of section 957 is amended by striking “subpart” in the matter preceding paragraph (1) and inserting “title”.
(4)
The table of sections for part VIII of subchapter B of chapter 1 is amended by inserting after the item relating to section 245 the following new item:
(f)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4002 Limitation on losses with respect to specified 10-percent owned foreign corporations

(a)
Basis in specified 10-Percent owned foreign corporation reduced by nontaxed portion of dividend for purposes of determining loss—
(1)
In general— Section 961 is amended by adding at the end the following new subsection:

“(d) Basis in specified 10-Percent owned foreign corporation reduced by nontaxed portion of dividend for purposes of determining loss—If a domestic corporation received a dividend from a specified 10-percent owned foreign corporation (as defined in section 245A) in any taxable year, solely for purposes of determining loss on any disposition in such taxable year or any subsequent taxable year, the basis of such domestic corporation in the stock of such foreign corporation shall be reduced by the amount of any deduction allowable to such domestic corporation under section 245A with respect to such stock.”

(2)
Effective date— The amendments made by this subsection shall apply to dividends received in taxable years beginning after December 31, 2014.
(b)
Treatment of foreign branch losses transferred to specified 10-Percent owned foreign corporations—
(1)
In general— Part II of subchapter B of chapter 1, as amended by the preceding provisions of this Act, is amended by adding at the end the following new section:

“92. Certain foreign branch losses transferred to specified 10-percent owned foreign corporations

“(a) In general—If a domestic corporation transfers substantially all of the assets of a foreign branch (within the meaning of section 367(a)(3)(C)) to a specified 10-percent owned foreign corporation (as defined in section 245A) with respect to which it is a United States shareholder after such transfer, such domestic corporation shall include in gross income for the taxable year which includes such transfer an amount equal to the transferred loss amount with respect to such transfer.

“(b) Limitation and carryforward based on foreign-Source dividends received

“(1) In general—The amount included in the gross income of the taxpayer under subsection (a) for any taxable year shall not exceed the amount allowed as a deduction under section 245A for such taxable year (taking into account dividends received from all specified 10-percent owned foreign corporations with respect to which the taxpayer is a United States shareholder).

“(2) Amounts not included carried forward—Any amount not included in gross income for any taxable year by reason of paragraph (1) shall, subject to the application of paragraph (1) to the succeeding taxable year, be included in gross income for the succeeding taxable year.

“(c) Transferred loss amount—For purposes of this section, the term “transferred loss amount” means, with respect to any transfer of substantially all of the assets of a foreign branch, the excess (if any) of—

“(1) the sum of losses—

“(A) which were incurred by the foreign branch after December 31, 2014, and before the transfer, and

“(B) with respect to which a deduction was allowed to the taxpayer, over

“(2) the sum of—

“(A) any taxable income of such branch for a taxable year after the taxable year in which the loss was incurred and through the close of the taxable year of the transfer, and

“(B) any amount which is recognized under section 904(f)(3) on account of the transfer.

“(d) Reduction for recognized gains

“(1) In general—In the case of a transfer not described in section 367(a)(3)(C), the transferred loss amount shall be reduced (but not below zero) by the amount of gain recognized by the taxpayer on account of the transfer (other than amounts taken into account under subsection (c)(2)(B)).

“(2) Coordination with recognition under section 367—In the case of a transfer described in section 367(a)(3)(C), the transferred loss amount shall not exceed the excess (if any) of—

“(A) the excess of the amount described in section 367(a)(3)(C)(i) over the amount described in section 367(a)(3)(C)(ii) with respect to such transfer, over

“(B) the amount of gain recognized under section 367(a)(3)(C) with respect to such transfer.

“(e) Source of income—Amounts included in gross income under this section shall be treated as derived from sources within the United States.

“(f) Basis adjustments—Consistent with such regulations or other guidance as the Secretary may prescribe, proper adjustments shall be made in the adjusted basis of the taxpayer’s stock in the specified 10-percent owned foreign corporation to which the transfer is made, and in the transferee’s adjusted basis in the property transferred, to reflect amounts included in gross income under this section.”

(2)
Amounts recognized under section 367 on transfer of foreign branch with previously deducted losses treated as United States source— Subparagraph (C) of section 367(a)(3) is amended by striking “outside” in the last sentence and inserting “within”.
(3)
Clerical amendment— The table of subparts for such part, as amended by the preceding provisions of this Act, is amended by adding at the end the following new item:
(4)
Effective date— The amendments made by this subsection shall apply to transfers after December 31, 2014.

Sec. 4003 Treatment of deferred foreign income upon transition to participation exemption system of taxation

(a)
In general— Section 965 is amended to read as follows:

“965. Treatment of deferred foreign income upon transition to participation exemption system of taxation

“(a) Treatment of deferred foreign income as subpart F income—In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2015, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the accumulated post-1986 deferred foreign income of such corporation determined as of the close of such taxable year.

“(b) Reduction in amounts included in gross income of United States shareholders of specified foreign corporations with deficits in earnings and profits

“(1) In general—In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder’s pro rata share of the subpart F income of each deferred foreign income corporation shall be reduced (but not below zero) by the amount of such United States shareholder’s aggregate foreign E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation.

“(2) Allocation of aggregate foreign E&P deficit—The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an amount which bears the same proportion to such aggregate as—

“(A) such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to

“(B) the aggregate of such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder.

“(3) Definitions related to E&P deficits—For purposes of this subsection—

“(A) Aggregate foreign E&P deficit—The term “aggregate foreign E&P deficit” means, with respect to any United States shareholder, the aggregate of such shareholder’s pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder.

“(B) E&P deficit foreign corporation—The term “E&P deficit foreign corporation” means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if—

“(i) such specified foreign corporation has a deficit in post-1986 earnings and profits, and

“(ii) as of February 26, 2014—

“(I) such corporation was a specified foreign corporation, and

“(II) such taxpayer was a United States shareholder of such corporation.

“(C) Specified E&P deficit—The term “specified E&P deficit” means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B).

“(c) Application of participation exemption to included income

“(1) In general—In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section an amount equal to the sum of—

“(A) 90 percent of the excess (if any) of—

“(i) the amount so included as gross income, over

“(ii) the amount of such United States shareholder’s aggregate foreign cash position, plus

“(B) 75 percent of so much of the amount described in subparagraph (A)(ii) as does not exceed the amount described in subparagraph (A)(i).

“(2) Aggregate foreign cash position—For purposes of this subsection—

“(A) In general—The term “aggregate foreign cash position” means, with respect to any United States shareholder, the greater of—

“(i) the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of the close of the last taxable year of such specified foreign corporation which begins before January 1, 2015, or

“(ii) one half of the sum of—

“(I) the aggregate described in clause (i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before February 26, 2014, plus

“(II) the aggregate described in clause (i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in subclause (I).

“(B) Cash position—For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of—

“(i) cash and foreign currency held by such foreign corporation,

“(ii) the net accounts receivable of such foreign corporation, plus

“(iii) the fair market value of the following assets held by such corporation:

“(I) Actively traded personal property for which there is an established financial market.

“(II) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government

“(III) Any obligation with a term of less than one year.

“(IV) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.

“(C) Net accounts receivable—For purposes of this paragraph, the term “net accounts receivable” means, with respect to any specified foreign corporation, the excess (if any) of—

“(i) such corporation’s accounts receivable, over

“(ii) such corporation’s accounts payable (determined consistent with the rules of section 461).

“(D) Prevention of double counting—Cash positions of a specified foreign corporation described in clause (ii) or (iii)(III) of subparagraph (B) shall not be taken into account by a United States shareholder under subparagraph (A) to the extent that such United States shareholder demonstrates to the satisfaction of the Secretary that such amount is so taken into account by such United States shareholder with respect to another specified foreign corporation.

“(E) Cash positions of foreign pass-thru entities taken into account—Any foreign entity which would be a specified foreign corporation of a United States shareholder if such entity were a corporation shall be treated as a specified foreign corporation of such United States shareholder for purposes of determining such United States shareholder’s aggregate foreign cash position.

“(F) Anti-abuse—If the Secretary determines that the principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.

“(d) Deferred foreign income corporation; accumulated post-1986 deferred foreign income—For purposes of this section—

“(1) Deferred foreign income corporation—The term “deferred foreign income corporation” means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the close of the taxable year referred to in subsection (a)) greater than zero.

“(2) Accumulated post-1986 deferred foreign income—The term “accumulated post-1986 deferred foreign income” means the post-1986 earnings and profits except to the extent such earnings—

“(A) are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter,

“(B) if distributed, would—

“(i) in the case of a controlled foreign corporation, be excluded from the gross income of a United States shareholder under section 959, or

“(ii) in the case of any passive foreign investment company (as defined in section 1297) other than a controlled foreign corporation, be treated as a distribution which is not a dividend, or

“(C) in the case of any passive foreign investment company (as so defined), is properly attributable to an unreversed inclusion of a United States person under section 1296.

“(3) Post-1986 earnings and profits—The term “post-1986 earnings and profits” means the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986, and determined—

“(A) as of the close the taxable year referred to in subsection (a), and

“(B) without diminution by reason of dividends distributed during such taxable year.

“(e) Specified foreign corporation

“(1) In general—For purposes of this section, the term “specified foreign corporation” means—

“(A) any controlled foreign corporation, and

“(B) any section 902 corporation (as defined in section 909(d)(5) as in effect before the date of the enactment of the Tax Reform Act of 2014).

“(2) Application to section 902 corporations—For purposes of section 951, a section 902 corporation (as so defined) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for purposes of applying subsection (f)).

“(f) Determinations of pro rata share—For purposes of this section, the determination of any United States shareholder’s pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation).

“(g) Disallowance of foreign tax credit, etc

“(1) In general—No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section.

“(2) Applicable percentage—For purposes of this subsection, the term “applicable percentage” means the amount (expressed as a percentage) equal to the sum of—

“(A) 0.9 multiplied by the ratio of—

“(i) the excess to which subsection (c)(1)(A) applies, divided by

“(ii) the sum of such excess plus the amount to which subsection (c)(1)(B) applies, plus

“(B) 0.75 multiplied by the ratio of—

“(i) the amount to which subsection (c)(1)(B) applies, divided by

“(ii) the sum described in subparagraph (A)(ii).

“(3) Denial of deduction—No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).

“(4) Coordination with section 78—Section 78 shall not apply to any tax for which credit is not allowable under section 901 by reason of paragraph (1).

“(h) Election To pay liability in installments

“(1) In general—In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 installments of the following amounts:

“(A) 8 percent of the net tax liability in the case of each of the first 5 of such installments,

“(B) 15 percent of the net tax liability in the case of the 6th such installment,

“(C) 20 percent of the net tax liability in the case of the 7th such installment, and

“(D) 25 percent of the net tax liability in the case of the 8th such installment.

“(2) Date for payment of installments—If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in subsection (b) and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made.

“(3) Acceleration of payment—If there is an addition to tax for failure to pay timely assessed with respect to any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer.

“(4) Proration of deficiency to installments—If an election is made under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.

“(5) Election—Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary may provide.

“(6) Net tax liability under this section—For purposes of this subsection—

“(A) In general—The net tax liability under this section with respect to any United States shareholder is the excess (if any) of—

“(i) such taxpayer’s net income tax for the taxable year described in subsection (a), over

“(ii) such taxpayer’s net income tax for such taxable year determined without regard to this section.

“(B) Net income tax—The term “net income tax” means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A.

“(i) Special rules for S corporation shareholders

“(1) In general—In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which includes the triggering event with respect to such liability.

“(2) Triggering event

“(A) In general—In the case of any shareholder’s net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first:

“(i) Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation).

“(ii) A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance.

“(iii) A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise).

“(B) Partial transfers of stock—In the case of a transfer of less than all of the taxpayer’s shares of stock in the S corporation, such transfer shall only be a triggering event with respect to so much of the taxpayer’s net tax liability under this section with respect to such S corporation as is properly allocable to such stock.

“(C) Transfer of liability—A transfer described in clause (iii) shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same manner as if such transferee were the taxpayer.

“(3) Net tax liability—A shareholder’s net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation.

“(4) Election to pay deferred liability in installments—In the case of a taxpayer which elects to defer payment under paragraph (1), subsection (h) shall be applied—

“(A) separately with respect to the liability to which such election applies,

“(B) an election under subsection (h) with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect to such liability occurs,

“(C) the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and

“(D) if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection (h) with respect to such liability may be made only with the consent of the Secretary.

“(5) Joint and several liability of S corporation—If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto.

“(6) Extension of limitation on collection—Notwithstanding any other provision of law, any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability.

“(7) Election—Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary may provide.

“(j) Inclusion of deferred foreign income under this section not To trigger recapture of overall foreign loss—For purposes of section 904(f)(1), in the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder’s taxable income from sources without the United States shall be determined without regard to this section.

“(k) Regulations—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.”

(b)
Dedication of revenues to highway trust fund—
(1)
In general— Section 9503(f) is amended by redesignating paragraph (5) as paragraph (6) and by inserting after paragraph (4) the following new paragraph:

“(5) Appropriation to trust fund of net tax liabilities received under section 965

“(A) In general—Out of money in the Treasury not otherwise appropriated, there are hereby appropriated to the Highway Trust Fund amounts equivalent to the aggregate net tax liabilities under section 965 (as defined in such section) received in the Treasury.

“(B) Monthly transfers based on estimates—For rule providing for the monthly transfer of amounts appropriated under subparagraph (A) based on estimates of the Secretary, see section 9601.”

(2)
Transfers to Mass Transit Account— Section 9503(e)(2) is amended by striking “the mass transit portion” and inserting “, 20 percent of the amounts appropriated to the Highway Trust Fund under subsection (f)(5), and the mass transit portion”.
(c)
Clerical amendment— The table of section for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 965 and inserting the following:

Sec. 4004 Look-thru rule for related controlled foreign corporations made permanent

(a)
In general— Paragraph (6) of section 954(c) is amended by striking subparagraph (C).
(b)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2013, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

B Modifications related to foreign tax credit system

Sec. 4101 Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year basis

(a)
Repeal of section 902 indirect foreign tax credits— Subpart A of part III of subchapter N of chapter 1 is amended by striking section 902.
(b)
Determination of section 960 credit on current year basis— Section 960 is amended—
(1)
by striking subsection (c), by redesignating subsection (b) as subsection (c), by striking all that precedes subsection (c) (as so redesignated) and inserting the following:

“960. Deemed paid credit for subpart F inclusions

“(a) In general—For purposes of this subpart, if there is included in the gross income of a domestic corporation any item of income under section 951(a)(1) with respect to any controlled foreign corporation with respect to which such domestic corporation is a United States shareholder, such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as are properly attributable to the item of income so included.

“(b) Special rules for distributions from previously taxed earnings and profits—For purposes of this subpart—

“(1) In general—If any portion of a distribution from a controlled foreign corporation to a domestic corporation which is a United States shareholder with respect to such controlled foreign corporation is excluded from gross income under section 959(a), such domestic corporation shall be deemed to have paid so much of such foreign corporation’s foreign income taxes as—

“(A) are properly attributable to such portion, and

“(B) have not been deemed to have to been paid by such domestic corporation under this section for any prior taxable year.

“(2) Tiered controlled foreign corporations—If section 959(b) applies to any portion of a distribution from a controlled foreign corporation to another controlled foreign corporation, such controlled foreign corporation shall be deemed to have paid so much of such other controlled foreign corporation’s foreign income taxes as—

“(A) are properly attributable to such portion, and

“(B) have not been deemed to have been paid by a domestic corporation under this section for any prior taxable year.”

(2)
and by adding after subsection (c) (as so redesignated) the following new subsections:

“(d) Foreign income taxes—The term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States.

“(e) Regulations—The Secretary shall provide such regulations as may be necessary or appropriate to carry out the provisions of this section.”

(c)
Conforming amendments—
(1)
Section 78 is amended to read as follows:

“78. Gross up for deemed paid foreign tax credit

“If a domestic corporation chooses to have the benefits of subpart A of part III of subchapter N (relating to foreign tax credit) for any taxable year, an amount equal to the taxes deemed to be paid by such corporation under section 960 (relating to deemed paid credit for subpart F inclusions) for such taxable year shall be treated for purposes of this title (other than section 960) as an item of income required to be included in the gross income of such domestic corporation under section 951(a).”

(2)
Section 245(a)(10) is amended by striking “902,”.
(3)
Sections 535(b)(1) and 545(b)(1) are each amended by striking “section 902(a) or 960(a)(1)” and inserting “section 960”.
(4)
Paragraph (1) of section 814(f) is amended—
(A)
by striking subparagraph (B), and
(B)
by striking all that precedes “No income” and inserting the following:

“(1) Treatment of foreign taxes”

(5)
Subparagraph (B) of section 864(h)(1) is amended by striking “902,”.
(6)
Subsection (a) of section 901 is amended by striking “sections 902 and 960” and inserting “section 960”.
(7)
Paragraph (2) of section 901(e) is amended by striking “but is not limited to—” and all that follows through “that portion” and inserting “but is not limited to that portion”.
(8)
Subsection (f) of section 901 is amended by striking “sections 902 and 960” and inserting “section 960”.
(9)
Subparagraph (A) of section 901(j)(1) is amended by striking “902 or”.
(10)
Subparagraph (B) of section 901(j)(1) is amended by striking “sections 902 and 960” and inserting “section 960”.
(11)
Paragraph (2) of section 901(k) is amended by striking “902,”.
(12)
Paragraph (6) of section 901(k) is amended by striking “902 or”.
(13)
Subparagraph (A) of section 904(h)(10) is amended by striking “sections 902, 907, and 960” and inserting “sections 907 and 960”.
(14)
Section 904 is amended by striking subsection (k).
(15)
Paragraph (1) of section 905(c) is amended by striking the last sentence.
(16)
Subclause (I) of section 905(c)(2)(B)(i) is amended by striking “section 902 or”.
(17)
Subsection (a) of section 906 is amended by striking “(or deemed, under section 902, paid or accrued during the taxable year)”.
(18)
Subsection (b) of section 906 is amended by striking paragraphs (4) and (5).
(19)
Subparagraph (B) of section 907(b)(2) is amended by striking “902 or”.
(20)
Paragraph (3) of section 907(c) is amended—
(A)
by striking subparagraph (A) and redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively, and
(B)
by striking “section 960(a)” in subparagraph (A) (as so redesignated) and inserting “section 960”.
(21)
Paragraph (5) of section 907(c) is amended by striking “902 or”.
(22)
Clause (i) of section 907(f)(2)(B) is amended by striking “902 or”.
(23)
Subsection (a) of section 908 is amended by striking “902 or”.
(24)
Subsection (b) of section 909 is amended—
(A)
by striking “section 902 corporation” in the matter preceding paragraph (1) and inserting “specified 10-percent owned foreign corporation”,
(B)
by striking “902 or” in paragraph (1),
(C)
by striking “by such section 902 corporation” and all that follows in the matter following paragraph (2) and inserting “by such specified 10-percent owned foreign corporation or a domestic corporation which is a United States shareholder with respect to such specified 10-percent owned foreign corporation.”, and
(D)
by striking “section 902 corporations” in the heading thereof and inserting “specified 10-percent owned foreign corporations”.
(25)
Subsection (d) of section 909 is amended by striking paragraph (5).
(26)
Paragraph (1) of section 958(a) is amended by striking “960(a)(1)” and inserting “960”.
(27)
Subsection (d) of section 959 is amended by striking “Except as provided in section 960(a)(3), any” and inserting “Any”.
(28)
Subsection (e) of section 959 is amended by striking “and section 960(b)”.
(29)
Subparagraph (A) of section 1291(g)(2) is amended by striking “any distribution—” and all that follows through “but only if” and inserting “any distribution, any withholding tax imposed with respect to such distribution, but only if”.
(30)
Section 1293 is amended by striking subsection (f).
(31)
Subparagraph (B) of section 6038(c)(1) is amended by striking “sections 902 (relating to foreign tax credit for corporate stockholder in foreign corporation) and 960 (relating to special rules for foreign tax credit)” and inserting “section 960”.
(32)
Paragraph (4) of section 6038(c) is amended by striking subparagraph (C).
(33)
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 902.
(34)
The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 960 and inserting the following:
(d)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4102 Foreign tax credit limitation applied by allocating only directly allocable deductions to foreign source income

(a)
In general— Subsection (b) of section 904, as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph:

“(3) Deductions allocable to foreign source income only if directly allocable—For purposes of subsection (a), the taxpayer’s taxable income from sources without the United States shall be determined by allocating deductions to such income only if such deductions are directly allocable to such income.”

(b)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4103 Passive category income expanded to include other mobile income

(a)
Treatment of foreign base company intangible income and foreign base company sales income as mobile category income— Clause (i) of section 904(d)(2)(A) is amended by striking “and specified passive category income” and inserting “specified passive category income, foreign base company sales income (as defined in section 954(d)), and foreign base company intangible income (as defined in section 954(f))”.
(b)
Repeal of special rules treating financial services income as general category income— Paragraph (2) of section 904(d) is amended by striking subparagraphs (C) and (D) and by redesignating subparagraphs (E) through (K) as subparagraphs (C) through (I), respectively.
(c)
Conforming amendments—
(1)
Relating to references to passive income—
(A)
Section 904(d)(1)(A) is amended by striking “passive category income” and inserting “mobile category income”.
(B)
Section 904(d)(2)(A)(i), as amended by subsection (a), is amended—
(i)
by striking “Passive category income” in the heading thereof and inserting “Mobile category income”,
(ii)
by striking “passive category income” and inserting “mobile category income”,
(iii)
by striking “passive income” and inserting “mobile income”, and
(iv)
by striking “specified passive category income” and inserting “specified mobile category income”.
(C)
Section 904(d)(2)(A)(ii) is amended by striking “passive category income” and inserting “mobile category income”.
(D)
Section 904(d)(2)(B) is amended—
(i)
by striking “Passive income” in the heading thereof and inserting “Mobile income”,
(ii)
by striking “passive income” in clauses (i), (ii), and (iii) and inserting “mobile income”,
(iii)
by striking “Specified passive category income” in the heading of clause (iv) and inserting “Specified mobile category income”, and
(iv)
by striking “specified passive category income” in clause (iv) and inserting “specified mobile category income”.
(E)
Section 904(d)(2)(D), as redesignated by subsection (b), is amended by striking “passive income” and inserting “mobile income”.
(F)
Section 904(d)(3)(A) is amended by striking “passive category income” and inserting “mobile category income”.
(G)
Section 904(d)(3)(B) is amended by striking “passive category income” both places it appears and inserting “mobile category income”.
(H)
Section 904(d)(3)(C) is amended by striking “passive category income” both places it appears and inserting “mobile category income”.
(I)
Section 904(d)(3)(D) is amended by striking “passive category income” both places it appears and inserting “mobile category income”.
(J)
Section 904(d)(3)(E) is amended—
(i)
by striking “passive category income” both places it appears and inserting “mobile category income”, and
(ii)
by striking “passive income” and inserting “mobile income”.
(K)
Section 904(d)(3)(F) is amended by striking “passive category income” both places it appears and inserting “mobile category income”.
(2)
Other conforming amendments—
(A)
Subparagraph (B) of section 864(f)(5) is amended by inserting “(as in effect before its repeal)” after “section 904(d)(2)(D)(ii)”.
(B)
Subparagraph (B) of section 954(c)(2) is amended by striking “section 904(d)(2)(G)” and inserting “section 904(d)(2)(E)”.
(d)
Effective date—
(1)
In general— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.
(2)
Treatment of carryforwards and carrybacks— For purposes of section 904 of the Internal Revenue Code of 1986—
(A)
the amendments made by this section shall apply to any taxes carried from any taxable year beginning before January 1, 2015, to any taxable year beginning on or after such date, and
(B)
the Secretary of the Treasury, or his designee, may by regulations provide for the allocation of any carryback of taxes with respect to income from a taxable year beginning on or after January 1, 2015, to a taxable year beginning before such date for purposes of allocating such income among the separate categories in effect under section 904(d) for the taxable year to which carried.

Sec. 4104 Source of income from sales of inventory determined solely on basis of production activities

(a)
In general— Subsection (b) of section 863 is amended by adding at the end the following: “Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.”.
(b)
Effective date— The amendment made by this section shall apply to taxable years beginning after December 31, 2014.

C Rules related to passive and mobile income

1 Modification of subpart F provisions

Sec. 4201 Subpart F income to only include low-taxed foreign income

(a)
In general— Subsection (a) of section 954 is amended—
(1)
by redesignating paragraphs (1), (2), (3), and (5) as subparagraphs (A) through (D), respectively,
(2)
by striking “For purposes of ” and inserting the following:

“(1) In general—For purposes of”

(3)
by adding at the end the following new paragraph:

“(2) Application only to foreign base company income subject to a low foreign effective rate of tax

“(A) In general—Foreign base company income shall only include items of income received by a controlled foreign corporation which are subject to an effective rate of income tax imposed by a foreign country which is less than 100 percent of the maximum rate of tax specified in section 11.

“(B) Application to foreign base company income subject to reduced domestic rate of tax

“(i) Foreign base company sales income—In the case of foreign base company sales income, subparagraph (A) shall be applied by substituting “50 percent” for “100 percent”.

“(ii) Foreign base company intangible income—In the case of foreign base company intangible income, subparagraph (A) shall be applied—

“(I) by substituting “the applicable percentage of the foreign percentage (determined under section 250(c) with respect to the controlled foreign corporation)” for “100 percent”, and

“(II) by treating the foreign base company intangible income as a single item of income.

“(iii) Applicable percentage—For purposes of clause (ii)(I), the term “applicable percentage” means, with respect to any taxable year of a controlled foreign corporation, the percentage determined in accordance with the following table:”

(b)
Insurance income— Subsection (a) of section 953 is amended by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph (1) the following new paragraph:

“(2) Application only to insurance income subject to a low foreign effective rate of tax—Insurance income shall only include items of income received by a controlled foreign corporation which are subject to an effective rate of income tax imposed by a foreign country which is less than the maximum rate of tax specified in section 11.”

(c)
Conforming amendments—
(1)
Section 954(b)(3)(B) is amended by striking “paragraphs (4) and (5)” and inserting “subsection (a)(2), section 953(a)(2), and paragraph (5)”
(2)
Section 954(b) is amended by striking paragraph (4).
(3)
Section 954(c)(1) is amended by striking “subsection (a)(1)” and inserting “this section”.
(4)
Section 954(d)(1) is amended by striking “subsection (a)(2)” and inserting “this section”.
(5)
Section 954(e)(1) is amended by striking “subsection (a)(3)” and inserting “this section”.
(d)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4202 Foreign base company sales income

(a)
50-Percent exclusion for low-Taxed foreign base company sales income—
(1)
In general— Subparagraph (B) of section 954(a)(1), as amended by the preceding provisions of this Act, is amended by inserting “50 percent of” before “the foreign base company sales income”.
(2)
Preservation of deemed paid foreign tax credit on low-taxed foreign base company income— Section 960, as amended by this Act, is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

“(c) Deemed paid credit determined without regard to certain exclusions from subpart F income—Solely for purposes of subsection (a), section 954(a)(1)(B) shall be applied by substituting “100 percent” for “50 percent” in determining amounts included under section 951(a)(1).”

(b)
Exception from foreign base company sales income for foreign corporations eligible for benefits under comprehensive income tax treaties— Section 954(d) is amended by adding at the end the following new paragraph:

“(5) Exception for foreign corporations eligible for benefits under comprehensive income tax treaties—No portion of the gross income of a controlled foreign corporation shall be treated as foreign base company sales income if such controlled foreign corporation is eligible as a qualified resident for all of the benefits provided under a comprehensive income tax treaty with the United States.”

(c)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4203 Inflation adjustment of de minimis exception for foreign base company income

(a)
In general— Paragraph (3) of section 954(b) is amended by adding at the end the following new subparagraph:

“(D) Inflation adjustment—In the case of any taxable year beginning after 2015, the dollar amount in subparagraph (A)(ii) shall be increased by an amount equal to—

“(i) such dollar amount, multiplied by

“(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2014” for “calendar year 2012” in clause (ii) thereof.”

(b)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4204 Active financing exception extended with limitation for low-taxed foreign income

(a)
Extension of active financing exception—
(1)
In general— Paragraph (9) of section 954(h) is amended by striking “January 1, 2014” and inserting “January 1, 2019”.
(2)
Exempt insurance income— Paragraph (10) of section 953(e) is amended—
(A)
by striking “January 1, 2014” and inserting “January 1, 2019”, and
(B)
by striking “December 31, 2013” and inserting “December 31, 2018”.
(b)
Limitation for low-Taxed foreign income—
(1)
In general— Paragraph (1) of section 954(h) is amended to read as follows:

“(1) In general—For purposes of subsection (c)(1), in the case of an eligible controlled foreign corporation, foreign personal holding company income shall not include—

“(A) qualified banking or financing income which is subject to an effective rate of income tax imposed by a foreign country which is at least 50 percent of the maximum rate of tax specified in section 11, and

“(B) 50 percent of any other qualified banking or financing income of such eligible controlled foreign corporation.”

(2)
Insurance business income— Paragraph (1) of section 954(i) is amended to read as follows:

“(1) In general—For purposes of subsection (c)(1), in the case of a qualifying insurance company, foreign personal holding company income shall not include—

“(A) any qualified insurance income which is subject to an effective rate of income tax imposed by a foreign country which is at least 50 percent of the maximum rate of tax specified in section 11, and

“(B) 50 percent of any other qualified insurance income of such qualifying insurance company.”

(3)
Preservation of deemed paid foreign tax credit on high-taxed foreign income— Subsection (c) of section 960, as amended by the preceding provisions of this Act, is amended by striking “Solely for purposes of subsection (a)” and all that following and inserting the following:

“(1) section 954(a)(1)(B) shall be applied by substituting “100 percent” for “50 percent”, and

“(2) the exclusions under subsections (h)(1)(B) and (i)(1)(B) of section 954 shall not apply,”

(c)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2013, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

Sec. 4205 Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment

(a)
In general— Subpart F of part III of subchapter N of chapter 1 is amended by striking section 955.
(b)
Conforming amendments—
(1)
(A)
Subparagraph (A) of section 951(a)(1), as amended by this Act, is amended to read as follows:

“(A) his pro rata share (determined under paragraph (2)) of the corporation’s subpart F income for such year, and”

(B)
Paragraph (3) of section 851(b) is amended by striking “section 951(a)(1)(A)(i)” in the flush language at the end and inserting “section 951(a)(1)(A)”.
(C)
Clause (i) of section 952(c)(1)(B) is amended by striking “section 951(a)(1)(A)(i)” and inserting “section 951(a)(1)(A)”.
(D)
Subparagraph (C) of section 953(c)(1) is amended by striking “section 951(a)(1)(A)(i)” and inserting “section 951(a)(1)(A)”.
(2)
Subsection (a) of section 951 is amended by striking paragraph (3).
(3)
Subclause (II) of section 953(d)(4)(B)(iv) is amended by striking “or amounts referred to in clause (ii) or (iii) of section 951(a)(1)(A)”.
(4)
Subsection (b) of section 964 is amended by striking “, 955,”.
(5)
Section 970 is amended by striking subsection (b).
(6)
The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 955.
(c)
Effective date— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.

2 Prevention of base erosion

Sec. 4211 Foreign intangible income subject to taxation at reduced rate; intangible income treated as subpart F income

(a)
Foreign base company intangible income treated as subpart F income—
(1)
Treatment as subpart F income— Paragraph (1) of section 954(a), as amended by the preceding provisions of this Act, is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

“(D) the foreign base company intangible income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)), and”

(2)
Foreign base company intangible income defined— Section 954 of such Code is amended by inserting after subsection (e) the following new subsection:

“(f) Foreign base company intangible income—For purposes of this section—

“(1) In general—The term “foreign base company intangible income” means, with respect to any corporation for any taxable year, the excess of—

“(A) so much of the adjusted gross income of the corporation as exceeds 10 percent of the corporation’s qualified business asset investment, over

“(B) the applicable percentage of such corporation’s foreign personal holding company income, foreign base company sales income, foreign base company services income, and foreign base company oil related income.

“(2) Applicable percentage—For purposes of paragraph (1), the term “applicable percentage” means, with respect to any corporation for any taxable year, the ratio (expressed as a percentage) of—

“(A) the excess described in paragraph (1)(A), divided by

“(B) the adjusted gross income of the corporation.

“(3) Qualified business asset investment

“(A) In general—The term “qualified business asset investment” means, with respect to any corporation for any taxable year, the aggregate of the corporation’s adjusted bases (determined as of the close of such taxable year and after any adjustments with respect to such taxable year) in specified tangible property—

“(i) used in a trade or business of the corporation, and

“(ii) of a type with respect to which a deduction is allowable under section 168.

“(B) Determination of adjusted basis—For purposes of subparagraph (A), the adjusted basis in any property shall be determined without regard to any provision of this title (or any other provision of law) which is enacted after the date of the enactment of this section.

“(C) Regulations—The Secretary shall issue such regulations or other guidance as the Secretary determines appropriate to prevent the avoidance of the purposes of this paragraph, including regulations or other guidance which provide for the treatment of property if—

“(i) such property is transferred, or held, temporarily, or

“(ii) the avoidance of the purposes of this paragraph is a factor in the transfer or holding of such property.

“(4) Adjusted gross income; specified tangible property—For purposes of this subsection—

“(A) Adjusted gross income

“(i) In general—The term “adjusted gross income” means, with respect to any corporation, the gross income of such corporation reduced by such corporation’s commodities gross income.

“(ii) Commodities gross income—The term “commodities gross income” means, with respect to any corporation, the gross income of such corporation which is derived from commodities which are produced or extracted by such corporation.

“(B) Specified tangible property—The term “specified tangible property” means any tangible property unless such property is used in the production of commodities gross income. In the case of property which is used in the production of commodities gross income and other gross income, such property shall be treated as specified tangible property in the same proportion that the adjusted gross income produced with respect to such property bears to the total gross income produced with respect to such property.

“(C) Commodity—The term “commodity” means any commodity described in section 475(e)(2).”

(3)
Application only to foreign base company intangible income subject to a low foreign effective rate of tax— Paragraph (2) of section 954(a), as amended by preceding provisions of this Act, is amended by inserting “or foreign base company intangible income” after “foreign base company sales income”.
(4)
Conforming amendment— Paragraph (5) of section 954(b) is amended by inserting “the foreign base company intangible income,” before “and the foreign base company oil related income”.
(b)
Deduction for foreign intangible income—
(1)
In general— Part VIII of subchapter B of chapter 1 is amended by adding at the end the following new section:

“250. Foreign intangible income

“(a) In general—In the case of a domestic corporation for any taxable year, there shall be allowed as a deduction an amount equal to the applicable percentage of the lesser of—

“(1) the sum of—

“(A) the foreign percentage multiplied by the net imputed intangible income of such domestic corporation for such taxable year, plus

“(B) in the case of a domestic corporation which is a United States shareholder with respect to any controlled foreign corporation, the foreign percentage (determined with respect to such controlled foreign corporation) multiplied by any foreign base company intangible income (as defined in section 954(f)) of such controlled foreign corporation which is included in the gross income of such domestic corporation under section 951 for such taxable year, or

“(2) taxable income of such domestic corporation (determined without regard to this section) for the taxable year.

“(b) Net imputed intangible income—For purposes of this subsection, the term “net imputed intangible income” means the excess of—

“(1) the excess described in section 954(f)(1)(A), over

“(2) the deductions properly allocable to the amount described in paragraph (1).

“(c) Foreign percentage—For purposes of this section—

“(1) In general—The term “foreign percentage” means, with respect to any corporation for any taxable year, the ratio (expressed as a percentage) of—

“(A) the foreign-derived adjusted gross income of such corporation for such taxable year, over

“(B) the adjusted gross income of such corporation for such taxable year.

“(2) Foreign-derived adjusted gross income

“(A) In general—The term “foreign-derived adjusted gross income” means, with respect to any corporation for any taxable year, any adjusted gross income of such corporation which is derived in connection with—

“(i) property which is sold for use, consumption, or disposition outside the United States, or

“(ii) services provided with respect to persons or property located outside the United States.

“(B) Special rules

“(i) Ultimate disposition—Property shall not be treated as sold for use, consumption, or disposition outside the United States if the taxpayer knew, or had reason to know, that such property would be ultimately sold for use, consumption, or disposition in the United States.

“(ii) Sales to related parties—If property is sold to a related party, such sale shall not be treated as for use, consumption or disposition outside the United States unless—

“(I) such property is ultimately sold for use, consumption or disposition outside the United States, or

“(II) such property is resold to an unrelated party outside the United States and no related party knew or had reason to know that such property would be ultimately sold for use, consumption, or disposition in the United States.

“(iii) Application to services—Rules similar to the rules of clauses (i) and (ii) shall apply with respect to services described in subparagraph (A)(ii).

“(C) Related party—For purposes of this paragraph, the term “related party” means any member of an affiliated group as defined in section 1504(a), determined—

“(i) by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and

“(ii) without regard to paragraphs (2) and (3) of section 1504(b).

“(3) Adjusted gross income—The term “adjusted gross income” has the meaning given such term by section 954(f)(4).

“(d) Applicable percentage—For purposes of this section, the term “applicable percentage” means, with respect to any taxable year of the domestic corporation referred to in subsection (a), the percentage determined in accordance with the following table:

“(e) Regulations—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.”

(2)
Conforming amendments—
(A)
Clause (i) of section 163(j)(6)(A), as amended by the preceding provisions of this Act, is amended by striking “and” at the end of subclause (II) and by adding at the end the following new subclause:

“(IV) any deduction allowable under section 250, and”

(B)
Subparagraph (C) of section 170(b)(2) is amended by striking “and” at the end of clause (iv), by redesignating clause (v) as clause (vi), and by inserting after clause (iv) the following new clause:

“(v) section 250, and”

(C)
Subsection (d) of section 172, as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph:

“(7) Deduction for foreign intangible income—The deduction under section 250 shall not be allowed.”

(D)
Paragraph (1) of section 246(b) is amended by striking “and 247” and inserting “247, and 250”.
(E)
Clause (iii) of section 469(i)(3)(D), as amended by the preceding provisions of this Act, is amended by striking “and 222” and inserting “222, and 250”.
(c)
Effective date—
(1)
Treatment as subpart F income— The amendments made by subsection (a) shall apply to taxable years of foreign corporations beginning after December 31, 2014, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.
(2)
Deduction for foreign intangible income— The amendments made by subsection (b) shall apply to taxable years beginning after December 31, 2014.

Sec. 4212 Denial of deduction for interest expense of United States shareholders which are members of worldwide affiliated groups with excess domestic indebtedness

(a)
In general— Section 163 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

“(n) Disallowance of deduction for interest expense of United States shareholders which are members of worldwide affiliated groups with excess domestic indebtedness

“(1) In general—In the case of any domestic corporation which is a United States shareholder (as defined in section 951(b)) with respect to any foreign corporation both of which are members of the same worldwide affiliated group, the deduction allowed under this chapter for interest paid or accrued by such domestic corporation during the taxable year shall be reduced by the lesser of—

“(A) the product of—

“(i) the net interest expense of such domestic corporation, multiplied by

“(ii) the debt-to-equity differential percentage of such worldwide affiliated group, or

“(B) the excess (if any) of—

“(i) such net interest expense, over

“(ii) 40 percent of the adjusted taxable income (as defined in subsection (j)(6)(A)) of such domestic corporation.

“(2) Carryforward—Any amount disallowed under paragraph (1) for any taxable year shall be treated as interest paid or accrued in the succeeding taxable year (and shall not be treated as disqualified interest for purposes of applying subsection (j)).

“(3) Debt-to-equity differential percentage

“(A) In general—For purposes of this subsection, the term “debt-to-equity differential percentage” means, with respect to any worldwide affiliated group, the percentage which the excess domestic indebtedness of such group bears to the total indebtedness of the domestic corporations which are members of such group.

“(B) Excess domestic indebtedness—For purposes of subparagraph (A), the term “excess domestic indebtedness” means, with respect to any worldwide affiliated group, the excess (if any) of—

“(i) the total indebtedness of the domestic corporations which are members of such group, over

“(ii) 110 percent of the amount which the total indebtedness of such domestic corporations would be if the ratio of such indebtedness to the total equity of such domestic corporations equaled the ratio which—

“(I) the total indebtedness of such group, bears to

“(II) the total equity of such group.

“(C) Total equity—For purposes of subparagraph (B), the term “total equity” means, with respect to one or more corporations, the excess (if any) of—

“(i) the money and all other assets of such corporations, over

“(ii) the total indebtedness of such corporations.

“(D) Special rules for determining debt and equity—For purposes of this paragraph—

“(i) Application of certain general rules—Rules similar to the rules of clauses (i), (ii), and (iii) of subsection (j)(2)(C) shall apply.

“(ii) Intragroup debt and equity interests disregarded—The total indebtedness, and the assets, of any group of corporations shall be determined by treating all members of such group as one corporation.

“(iii) Determination of assets of domestic group—The assets of the domestic corporations which are members of any worldwide affiliated group shall be determined by disregarding any interest held by any such domestic corporation in any foreign corporation which is a member of such group.

“(4) Other definitions—For purposes of this subsection—

“(A) Worldwide affiliated group—The term “worldwide affiliated group” has the meaning which would be given such term by section 864(f)(1)(C) if section 1504(a) were applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.

“(B) Net interest expense—The term “net interest expense” has the meaning given such term by subsection (j)(6)(B).

“(5) Treatment of affiliated group—For purposes of this subsection, all members of the same affiliated group (within the meaning of section 1504(a) applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears) shall be treated as 1 taxpayer.

“(6) Regulations—The Secretary shall prescribe such regulations or other guidance as may be appropriate to carry out the purposes of this subsection, including regulations or other guidance—

“(A) to prevent the avoidance of the purposes of this subsection,

“(B) providing such adjustments in the case of corporations which are members of an affiliated group as may be appropriate to carry out the purposes of this subsection,

“(C) providing for the coordination of this subsection with section 884, and

“(D) providing for the reallocation of shares of partnership indebtedness, or distributive shares of the partnership’s interest income or interest expense.”

(b)
Coordination with limitation on related party indebtedness— Paragraph (1) of section 163(j) is amended by adding at the end the following new subparagraph:

“(C) Coordination with limitation on excess domestic indebtedness—The amount disallowed under subparagraph (A) with respect to any corporation for any taxable year shall be reduced by any amount disallowed under subsection (n)(1) with respect to such corporation for such taxable year.”

(c)
Effective date— The amendments made by this section shall apply to taxable years beginning after December 31, 2014.