Title V — Ending International Tax Abuses

“H Special Rules for Allocation of Foreign-Related Deductions and Foreign Tax Credits

“975. Deductions allocated to deferred foreign income may not offset United States source income

“(a) Current year deductions—For purposes of this chapter, foreign-related deductions for any taxable year—

“(1) shall be taken into account for such taxable year only to the extent that such deductions are allocable to currently-taxed foreign income, and

“(2) to the extent not so allowed, shall be taken into account in subsequent taxable years as provided in subsection (b).

“(b) Deductions related to repatriated deferred foreign income

“(1) In general—If there is repatriated foreign income for a taxable year, the portion of the previously deferred deductions allocated to the repatriated foreign income shall be taken into account for the taxable year as a deduction allocated to income from sources outside the United States. Any such amount shall not be included in foreign-related deductions for purposes of applying subsection (a) to such taxable year.

“(2) Portion of previously deferred deductions—For purposes of paragraph (1), the portion of the previously deferred deductions allocated to repatriated foreign income is—

“(A) the amount which bears the same proportion to such deductions, as

“(B) the repatriated income bears to the previously deferred foreign income.

“(c) Definitions and special rule—For purposes of this section—

“(1) Foreign-related deductions—The term foreign-related deductions means the total amount of deductions and expenses which would be allocated or apportioned to gross income from sources without the United States for the taxable year if both the currently-taxed foreign income and deferred foreign income were taken into account.

“(2) Currently-taxed foreign income—The term currently-taxed foreign income means the amount of gross income from sources without the United States for the taxable year (determined without regard to repatriated foreign income for such year).

“(3) Deferred foreign income—The term deferred foreign income means the excess of—

“(A) the amount that would be includible in gross income under subpart F of this part for the taxable year if—

“(i) all controlled foreign corporations were treated as one controlled foreign corporation, and

“(ii) all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952), over

“(B) the sum of—

“(i) all dividends received during the taxable year from controlled foreign corporations, plus

“(ii) amounts includible in gross income under section 951(a).

“(4) Previously deferred foreign income—The term previously deferred foreign income means the aggregate amount of deferred foreign income for all prior taxable years to which this part applies, determined as of the beginning of the taxable year, reduced by the repatriated foreign income for all such prior taxable years.

“(5) Repatriated foreign income—The term repatriated foreign income means the amount included in gross income on account of distributions out of previously deferred foreign income.

“(6) Previously deferred deductions—The term previously deferred deductions means the aggregate amount of foreign-related deductions not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

“(7) Treatment of certain foreign taxes

“(A) Paid by controlled foreign corporation—Section 78 shall not apply for purposes of determining currently-taxed foreign income and deferred foreign income.

“(B) Paid by taxpayer—For purposes of determining currently-taxed foreign income, gross income from sources without the United States shall be reduced by the aggregate amount of taxes described in the applicable paragraph of section 901(b) which are paid by the taxpayer (without regard to sections 902 and 960) during the taxable year.

“(8) Coordination with section 976—In determining currently-taxed foreign income and deferred foreign income, the amount of deemed foreign tax credits shall be determined with regard to section 976.

“976. Amount of foreign taxes computed on overall basis

“(a) Current year allowance—For purposes of this chapter, the amount taken into account as foreign income taxes for any taxable year shall be an amount which bears the same ratio to the total foreign income taxes for that taxable year as—

“(1) the currently-taxed foreign income for such taxable year, bears to

“(2) the sum of the currently-taxed foreign income and deferred foreign income for such year.

“(b) Allowance related to repatriated deferred foreign income

“(1) In general—If there is repatriated foreign income for any taxable year, the portion of the previously deferred foreign income taxes paid or accrued during such taxable year shall be taken into account for the taxable year as foreign taxes paid or accrued. Any such taxes so taken into account shall not be included in foreign income taxes for purposes of applying subsection (a) to such taxable year.

“(2) Portion of previously deferred foreign income taxes—For purposes of paragraph (1), the portion of the previously deferred foreign income taxes allocated to repatriated deferred foreign income is—

“(A) the amount which bears the same proportion to such taxes, as

“(B) the repatriated deferred income bears to the previously deferred foreign income.

“(c) Definitions and special rule—For purposes of this section—

“(1) Previously deferred foreign income taxes—The term previously deferred foreign income taxes means the aggregate amount of total foreign income taxes not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

“(2) Total foreign income taxes—The term total foreign income taxes means the sum of foreign income taxes paid or accrued during the taxable year (determined without regard to section 904(c)) plus the increase in foreign income taxes that would be paid or accrued during the taxable year under sections 902 and 960 if—

“(A) all controlled foreign corporations were treated as one controlled foreign corporation, and

“(B) all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952).

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

“(4) Currently-taxed foreign income and deferred foreign income—The terms currently-taxed foreign income and deferred foreign income have the meanings given such terms by section 975(c).

“977. Application of subpart

“This subpart—

“(1) shall be applied before subpart A, and

“(2) shall be applied separately with respect to the categories of income specified in section 904(d)(1).”

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

“(f) Foreign base company excess intangible income—For purposes of subsection (a)(4) and this subsection:

“(1) Foreign base company excess intangible income defined

“(A) In general—The term “foreign base company excess intangible income” means, with respect to any covered intangible, the excess of—

“(i) the sum of—

“(I) gross income from the sale, lease, license, or other disposition of property in which such covered intangible is used directly or indirectly, and

“(II) gross income from the provision of services related to such covered intangible or in connection with property in which such covered intangible is used directly or indirectly, over

“(ii) 150 percent of the costs properly allocated and apportioned to the gross income taken into account under clause (i) other than expenses for interest and taxes and any expenses which are not directly allocable to such gross income.

“(B) Same country income not taken into account—If—

“(i) the sale, lease, license, or other disposition of the property referred to in subparagraph (A)(i)(I) is for use, consumption, or disposition in the country under the laws of which the controlled foreign corporation is created or organized, or

“(ii) the services referred to in subparagraph (A)(i)(II) are performed in such country,

“(2) Exception based on effective foreign income tax rate

“(A) In general—Foreign base company excess intangible income shall not include the applicable percentage of any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country in excess of 5 percent.

“(B) Applicable percentage—For purposes of subparagraph (A), the term “applicable percentage” means the ratio (expressed as a percentage), not greater than 100 percent, of—

“(i) the number of percentage points by which the effective rate of income tax referred to in subparagraph (A) exceeds 5 percentage points, over

“(ii) 10 percentage points.

“(C) Treatment of losses in determining effective rate of foreign income tax—For purposes of determining the effective rate of income tax imposed by any foreign country—

“(i) such effective rate shall be determined without regard to any losses carried to the relevant taxable year, and

“(ii) to the extent the income with respect to such intangible reduces losses in the relevant taxable year, such effective rate shall be treated as being the effective rate which would have been imposed on such income without regard to such losses.

“(3) Covered intangible—The term “covered intangible” means, with respect to any controlled foreign corporation, any intangible property (as defined in section 936(h)(3)(B))—

“(A) which is sold, leased, licensed, or otherwise transferred (directly or indirectly) to such controlled foreign corporation from a related person, or

“(B) with respect to which such controlled foreign corporation and one or more related persons has (directly or indirectly) entered into any shared risk or development agreement (including any cost sharing agreement).

“(4) Related person—The term “related person” has the meaning given such term in subsection (d)(3).”

“(6) Separate application to foreign base company excess intangible income

“(A) In general—Subsections (a), (b), and (c) of this section and sections 902, 907, and 960 shall be applied separately with respect to each item of income which is taken into account under section 954(a)(4) as foreign base company excess intangible income.

“(B) Regulations—The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provides that related items of income may be aggregated for purposes of this paragraph.”

“(n) Special Rules Relating to Dual Capacity Taxpayers

“(1) General rule—Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer or any member of the worldwide affiliated group of which such dual capacity taxpayer is also a member to any foreign country or to any possession of the United States for any period shall not be considered a tax to the extent such amount exceeds the amount (determined in accordance with regulations) which would have been required to be paid if the taxpayer were not a dual capacity taxpayer.

“(2) Dual capacity taxpayer—For purposes of this subsection, the term ‘dual capacity taxpayer’ means, with respect to any foreign country or possession of the United States, a person who—

“(A) is subject to a levy of such country or possession, and

“(B) receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession.

“(3) Regulations—The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection.”

“(C) combined foreign oil and gas income (as defined in section 907(b)(1)).”

“(J) Coordination with combined foreign oil and gas income—For purposes of this section, passive category income and general category income shall not include combined foreign oil and gas income (as defined in section 907(b)(1)).”