International Tax Provisions of the American Competitiveness and Corporate Accountability Act (H.R. 5095)

Report for Congress
International Tax Provisions of the
American Competitiveness and
Corporate Accountability Act (H.R. 5095)
September 20, 2002
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

International Tax Provisions of the American
Competitiveness and Corporate Accountability Act
(H.R. 5095)
Summary
On July 11, 2002, House Ways and Means Committee Chairman William
Thomas introduced H.R. 5095, the American Competitiveness and Corporate
Accountability Act. The focus of this report is the bill’s proposed changes in U.S.
taxation of income from international transactions. The bill also contains provisions
designed to restrict corporate tax shelters; the report does not discuss these.
The bill’s international proposals are in three general areas. First, the bill would
repeal the extraterritorial income (ETI) tax benefit for exporting, thereby attempting
to end a long-running dispute between the United States and the European Union
(EU) over whether the U.S. tax benefit is an export subsidy prohibited by the World
Trade Organization agreements. Second, the bill contains proposals aimed at
offshore corporations with subsidiaries in the United States. In part, these proposals
are aimed at corporate “inversions” where some U.S.-owned firms have reorganized
to include paper parent corporations chartered in “tax haven” countries. In part, these
proposals also address “earnings stripping,” or the shifting of U.S. profits abroad by
means of intra-firm transactions. Third, H.R. 5095 contains proposals altering the
tax treatment of U.S. firms with foreign operations and investment. The bill terms
these changes international tax “simplification;” the bulk of the provisions would
have the effect of reducing U.S. tax on foreign-source income. The chief areas that
would be affected are rules related to the foreign tax credit and provisions affecting
the “deferral” tax benefit for overseas business operations.
This report does not attempt a comprehensive economic analysis of H.R. 5095.
Several likely broad effects, however, can be identified. First, taken alone, repeal of
the ETI export benefit would likely not increase the U.S. trade deficit, but would
reduce the overall level of U.S. trade – exports and imports alike – by a small
amount. Because export subsidies generally reduce the aggregate economic welfare
of the subsidizing country, repeal of the ETI provisions would likely increase U.S.
economic welfare, while leading to a small contraction of the export sector and a
small expansion of import competing sectors. Second, tax-motivated inversions are
apparently events that chiefly occur on paper, involving little alteration of the
location of economic activity. Their chief economic impact is probably a reduction
in U.S. tax revenues. Thus, the chief impact of H.R. 5095’s inversion provisions
would probably be to reduce the extent to which inversions erode U.S. corporate tax
collections. The bill’s earnings stripping provisions may likewise reduce erosions
in U.S. tax collections but an assessment of whether these provisions would reduce
foreign investment in the United States is not attempted here. Third, the bill’s
foreign source income provisions would likely reduce the tax burden on foreign-
source income. As a result, their impact would probably be to increase the level of
U.S. investment abroad beyond what would otherwise occur. Preliminary estimates
by the Joint Committee on Taxation indicate the bill would increase tax revenue by
a net of $6.4 billion over five years and a net of $1.1 billion over 10 years.
This report will be updated as legislative developments occur.

Contents
Basic Features of the U.S. International Tax System.......................2
Overseas Investment: Foreign Tax Credit Proposals......................3
Interest Allocation Rules .......................................4
Consolidation of Tax Credit Limitations (“Baskets”)..................6
“Look Through” Treatment for Dividends from Section 902
Corporations ..............................................8
Recharacterization of Overall Domestic Losses .....................8
Extension of Foreign Tax Credit Carryforward Period.................9
Repeal of Foreign Tax Credit Restrictions under the Alternative
Minimum Tax...........................................10
Overseas Investment: Deferral and Subpart F..........................10
Sales and Services Income Subject to Subpart F ....................11
“Look through” Treatment for Dividends Flowing Between
Related Foreign Subsidiaries................................12
Other Provisions for U.S. Investment in Foreign Corporations..........12
Provisions Directed at “Earnings Stripping” and Corporate
“Inversions” or “Expatriation”...................................13
Repeal of the Extraterritorial Income Tax Benefit for Exports..............15
Other Provisions..................................................16
Economic Effects.................................................17
Impact on Investment and Economic Welfare ......................17
Impact on U.S. Tax Revenue ...................................19
Affected Industries............................................22
List of Tables
Table 1. Estimated Revenue Effects of H.R. 5095.......................20
Table 2. Foreign Sales Corporations, 1996: Gross Receipts,
by Major Product.............................................22
Table 3. Foreign Sales Corporations, 1996: Net Exempt Income,
by Major Product.............................................24
Table 4. 1997 Foreign Tax Credits Claimed, by Industry..................26
Table 5. 1996 Subpart F Income of Controlled Foreign Corporations,
by Industry..................................................28

International Tax Provisions of the American
Competitiveness and Corporate
Accountability Act (H.R. 5095)
The American Competitiveness and Corporate Accountability Act (ACCAA;
H.R. 5095) was introduced on July 11, 2002, by Chairman William Thomas of the
House Committee on Ways and Means. The first title of the bill contains several
provisions designed to restrict corporate tax shelters – provisions beyond the scope
of this report. The balance of the bill, however, contains a broad range of proposals
for taxation of income from international transactions and is the report’s focus. The
international proposals are in three general areas: taxation of income from foreign
business operations and investment; export tax benefits; and the tax treatment of
offshore corporations that have U.S. subsidiaries, including foreign “inversions” or
“expatriation.” Compared to changes enacted in international taxation in recent
years, the bill’s changes are important and broad in scope. At the same time,
however, the proposals are incremental rather than a broad structural revision of the
U.S. international tax system.
The likely impacts of the proposals on business tax burdens vary: its foreign-
source income provisions would likely reduce the tax burden on the overseas
operations of U.S.-owned firms while the export provisions probably will increase
the tax burden on U.S. export firms. The inversions provisions may restrict the
viability of the restructuring transactions as tax-saving devices and thus reduce U.S.
revenue losses from the transactions, although the proposed provisions are
temporary. The bill’s earnings stripping provisions would probably reduce revenue
losses from the shifting of otherwise-taxable profits abroad and may increase the tax
burden on foreign business investment in the United States. According to
preliminary estimates by the Joint Committee on Taxation, H.R. 5095’s proposals –
including both its international and tax shelter provisions – would increase U.S. tax¹
revenue on a net basis by $6.4 billion over five years and $1.1 billion over 10 years.
The scope of H.R. 5095 is broad, touching almost every area of U.S.
international taxation, from export profits to overseas subsidiary firms, to the foreign
tax credit, to foreign parent corporations chartered in tax havens. Accordingly, this
report begins by describing the basic structural features of the U.S. international tax
system.

¹U.S. Congress, Joint Committee on Taxation, “Estimated Revenue Effects of H.R. 5095,”
reprinted in BNA Daily Tax Report, July 17, 2002, pp. L-1 - L-3. The estimates are
reproduced below, on pages 20-21.

Basic Features of the U.S. International Tax System
In the international setting, countries base their tax jurisdiction on either the
source of income or the residence of the taxpayer. That is, in determining whether
it has jurisdiction to tax income, a tax system can look either to the geographic or
territorial source of the income or to the residence of the entity or person earning the
income. Under a “territorial” system, a country taxes only income earned within its
borders. However, under a “residence system” a country taxes the worldwide income
of its resident individuals or firms.
In applying its tax jurisdiction to the overseas income of its own citizens and
firms, the United States generally – with some exceptions – operates a residence-
based system. It looks to the nationality of the taxpayer, taxing U.S. citizens and
residence on their worldwide income and, in the case of businesses, taxing
corporations chartered or organized in the United States on their worldwide income.
Thus, if a U.S. corporation earns dividends whose source is, say, Ireland or Germany,
the U.S. firm will generally be subject to U.S. tax on the dividends – at least in
principle. In applying its tax system to foreign investors in the United States, the
United States operates a source-based system, taxing the U.S. branches of foreign
corporations only on their U.S.-source income.
But there are exceptions to this general structure. First, the United States grants
foreign tax credits. While the United States taxes its residents’ worldwide income,
it concedes that the country of source has the primary right to tax that income and
permits its corporate and non-corporate taxpayers to credit foreign income taxes they
pay against U.S. taxes they would otherwise owe. In so doing, the United States –
in effect – accepts the responsibility for alleviating the double-taxation that would
result when the U.S. worldwide tax jurisdiction overlaps the normal practice of host
countries in taxing income earned within their borders.
Importantly, however, to protect the U.S. tax base, the U.S. foreign tax credit
is limited to offsetting U.S. tax on foreign income; foreign taxes cannot be credited
against U.S. tax on U.S. income. The tax credit’s limitation and associated rules give
rise to some of the most complex parts of the tax code, as described further in the
section below on H.R. 5095’s foreign tax credit provisions. In general terms, H.R.
5095 would ease restrictions on the foreign tax credit embedded in a number of
foreign tax credit rules.
Along with the foreign tax credit, another exception to U.S. worldwide taxation
is the so-called “deferral” principle. While the United States taxes foreign income
earned directly by branches of U.S. corporations – branches that are not separately
incorporated abroad – the United States does not tax foreign-chartered corporations
on their foreign-source income. Thus, if a U.S. firm conducts foreign operations
through a subsidiary firm chartered abroad, the foreign income is not subject to U.S.
tax until the income is remitted to the U.S. parent as dividends or other income (at
which point it enters the U.S. tax jurisdiction as income of a U.S.-resident
corporation). U.S. tax on the subsidiary’s income is thus tax-deferred as long as the
income is reinvested abroad.

Deferral poses a tax incentive for U.S. firms to invest abroad in countries with
relatively low tax rates and reduces U.S. tax revenues, but since 1962 the tax code’s
Subpart F provisions have denied deferral’s benefit to certain types of income –
generally income from passive investment and other income whose source is thought
to be easy to manipulate in order to reduce taxes. Subpart F and deferral are
described in more detail below in the section on H.R. 5095’s proposals for U.S.-
controlled foreign corporations. In broad terms, H.R. 5095 reduces the scope of
Subpart F and expands potential areas where deferral can apply.
U.S. tax treatment of foreign corporations has also been a focus of attention in
the recent controversy over corporate “inversions” or “expatriation.” Since foreign
corporations are not taxed on foreign-source income, a number of U.S. firms with
U.S.-incorporated parent segments have reorganized so that the parent segment or
holding company is a foreign corporation chartered in low-tax country or “tax
haven.” The tax savings on foreign-source income is apparently supplemented in
many cases by “earnings stripping” – the use of related-company debt – to shift U.S.
income from U.S. subsidiaries into the hands of a foreign-chartered parent. H.R.
5095 contains a number of provisions designed to limit inversions and earnings
stripping.
Under the United States residence-based tax system, U.S. taxes would normally
apply to export income in full. If a U.S. corporation were to sell exports directly,
U.S. worldwide taxation would ordinarily ensure full U.S. taxation; if a U.S. firm
were to sell exports through a related foreign subsidiary outside the U.S. tax
jurisdiction, U.S. “transfer pricing” rules – rules governing the allocation of income
among related firms – would restrict the extent to which export income could be
allocated abroad to a foreign subsidiary outside the U.S. tax jurisdiction. To the
extent flexibility in the application of transfer pricing permits the allocation of
income to foreign subsidiaries, Subpart F apparently rules out much of the potential
for deferral to apply. Notwithstanding these rules, however, several provisions of the
U.S. tax code provide tax benefits for U.S. exports. One of these – the extraterritorial
income (ETI) benefit – has been the focus of a controversy between the United States
and the European Union (EU), with the EU complaining to the World Trade
Organization (WTO) that ETI constitutes an illegal export subsidy. Several WTO
rulings have supported the EU, and unless the United States brings its tax code into
compliance, the WTO may permit the EU to levy tariffs on EU imports of U.S.
products. The controversy is described more fully below; H.R. 5095 would repeal
the ETI provisions. At the same time, however, the bill would relax the Subpart F
rules applicable to sales to related subsidiaries.
We turn now to the specific provisions of H.R. 5095.
Overseas Investment:
Foreign Tax Credit Proposals
While the foreign tax credit generally concedes to foreign host countries the
primary right to tax foreign income, the limitation of the credit to offsetting U.S. tax
on foreign and not U.S. income is designed to protect the part of the U.S. tax base

consisting of U.S. income. If not for the limitation, foreign governments could
conceivably impose extremely high tax rates on the U.S. investors they host without
fear of discouraging inbound investment. With an unlimited credit, investors would
be impervious to the high foreign taxes; they could simply credit their foreign taxes
against U.S. taxes on their U.S. earnings.
While the foreign tax credit’s limitation protects the U.S. tax base, it is also
responsible for some of the most complex and difficult-to-administer rules in the tax
code. H.R. 5095’s foreign tax credit proposals generally simplify and ease
restrictions on the tax credit rules in a number of areas related to the limitation. In
addition, it increases the extent to which the credit can reduce a firm’s alternative
minimum tax.
Interest Allocation Rules
In calculating its foreign tax credit limitation, whether a firm can assign an item
of income or deductible expense to foreign or domestic sources can have a
substantial impact on the company’s maximum creditable foreign taxes and thus on
its U.S. tax liability, after credits. Among H.R. 5095’s foreign tax credit proposals,
that which is likely to have the largest impact may well be a proposed change in rules
governing the allocation of interest expense between foreign and U.S. sources. To
illustrate, the provision is estimated to reduce tax revenue by $23.4 billion over 10
years – approximately half the revenue loss from all the bill’s foreign tax credit
proposals and about one quarter of the revenue loss of all the bill’s revenue-losing
items.
Firms with foreign earnings have long argued that current law’s rules for interest
allocation work improperly and are unfair, and in 1999 Congress included a revision
of the rules as part of the more general tax cut it passed with the Taxpayer Refund
and Relief Act (H.R. 2488, 106^th Congress).² However, President Clinton vetoed the
Act. H.R. 5095 would essentially implement the changes passed in 1999.
How income and expenses are allocated matters to a firm only if the foreign tax
credit limitation is a binding constraint and the firm has excess foreign tax credits.
To see why, note that under the foreign tax limitation, maximum creditable foreign
taxes are limited to the share of U.S. pre-credit tax falling on foreign source rather
than domestic income. It follows that if, for example, an item of revenue is
determined to have a foreign rather than U.S. source, the share of U.S. pre-credit tax
falling on foreign income is increased and maximum creditable foreign taxes are
therefore increased.
The reverse is true with deductions. A deduction allocated to foreign rather than
U.S. sources reduces foreign income and U.S. pre-credit tax on foreign income,
thereby reducing creditable foreign taxes and increasing after-credit U.S. tax. For
interest expense specifically, the important point is this: interest deductions allocated

²For a more comprehensive explanation of the interest allocation rules, see: CRS Report
RL30321, The Taxpayer Refund and Relief Act of 1999 and the Foreign Tax Credit’s
Interest Allocation Rules, by David L. Brumbaugh and Jane G. Gravelle.

to foreign rather than U.S. sources reduce foreign tax credits and increase U.S. taxes.
Or, looking at it another way, a firm in an excess credit position has no remaining
U.S. tax liability on foreign-source income; it has all been eliminated by foreign tax
credits. Thus, a deductible cost allocated to foreign rather than U.S. sources can
produce no further tax savings and the deduction is, in effect, lost.
Given the importance of allocating income and expenses, the tax code contains
detailed rules for making the allocations, including the rules governing interest
expense. Current law provides for the allocation of interest expense by combining
the parent firm and its domestic subsidiaries; a portion of the interest is then allocated
to foreign source income (and affects the foreign tax credit limit) based on the
proportion of the group’s assets that are located abroad. Thus, even if all of a
domestic firm’s borrowing is done in the United States, part of its interest expense
may be allocated abroad. This is based on the notion that debt is fungible – that
regardless of where borrowing occurs, it funds the totality of a firm’s investment.
The controversy over the rules is based on the particular way in which this
allocation is applied under current law – a method of allocation sometimes referred
to as a “water’s edge” allocation. Under this method, the borrowing of foreign
subsidiaries is not explicitly included in the allocation. Specifically, debt-financed
assets of subsidiaries are not included in the calculation; subsidiary assets are
included only to the extent of parent ownership of subsidiary stock. In isolation, this
omission has the effect of reducing the amount of interest allocated to foreign sources
and increases creditable foreign taxes. Second, while some parent interest expense
is allocated to foreign sources, no subsidiary interest is allocated to domestic sources.
In isolation, this second omission reduces foreign income and creditable foreign
taxes. Mathematically, the impact of omitting foreign interest is larger than omitting
foreign assets so that, on balance, omitting foreign debt from the formula reduces
creditable foreign taxes.
In a manner similar to the vetoed 1999 Act, section 311 of H.R. 5095 would
substitute a “worldwide” allocation regime for current law’s water’s edge rule.³
Under this method, the interest costs of foreign subsidiaries would be included in the
allocation formula and subsidiary assets would be included in the allocation formula
on a gross basis rather than a net-of-debt basis. In isolation, the first of these changes
would increase firms’ foreign tax credits and reduce taxes while the second would
have the reverse effect. On balance, switching to H.R. 5095’s worldwide allocation
regime would increase firms’ foreign tax credits and reduce their after-credit U.S.
taxes.

³H.R. 5095 leaves out part of a set of “subgroup election” rules included in the 1999
legislation. Under current law, firms can elect to apply the interest allocation rules
separately for those parts of a corporate group that are financial institutions. The 1999 bill
would have expanded this election to include finance companies and insurance firms; it also
would have permitted a second election to allocate interest separately for any group of
subsidiaries, subject to certain anti-abuse rules. H.R. 5095 includes the expansion for
financial firms but not the second, broader election. For a more detailed discussion, see
Ibid., pp. 9-11.

Consolidation of Tax Credit Limitations (“Baskets”)
One feature of the foreign tax credit’s limit that has occupied the attention of
policymakers on a number of occasions is the ability of investors to “cross credit”
high foreign taxes on one stream of income or high foreign taxes paid to one country
against residual U.S. taxes that might be due on other, more lightly taxed foreign
income. Cross crediting works like this: if a U.S. firm’s only foreign-source income
is subject to low foreign taxes, the firm will not have sufficient foreign tax credits to
offset all U.S. taxes on the income and will owe some residual U.S. tax. Or, if a
corporation’s only foreign income is subject to rates that are high compared to the
U.S. tax rate, it will be able to eliminate its entire U.S. tax on foreign income but will
have excess credits left over. But if a firm has both heavily-taxed and lightly-taxed
foreign income, it can “cross credit” the excess credits from the heavily-taxed income
against U.S. tax due on the lightly-taxed income.
In effect, cross crediting shields investment in low-tax countries from U.S. tax,
leaving the low foreign taxes as the only tax burden the investment faces and posing
an incentive to invest abroad in low tax countries while reducing U.S. tax revenue.
At the same time, cross-crediting reduces the effective tax burden where foreign
taxes are high, thereby reducing what would otherwise be a tax disincentive to invest
abroad in high-tax countries. Because of these incentive and revenue effects,
legislation has been enacted on a number of occasions that is intended to limit the
ability of firms to cross credit by requiring the foreign tax credit limit to be calculated
separately for different types or “baskets” of income, in effect segregating different
streams of foreign income and prohibiting cross-crediting between different baskets.
In some periods in the past, separate limits have applied on a country-by-country
basis, thereby prohibiting taxes paid in “high tax” countries from being cross credited
against income earned in “low tax” countries. Under current law, however, separate
limits apply to several different categories of income rather than to separate
countries; much of their structure was implemented by the Tax Reform Act of 1986
(Public Law 99-514).
Under current law, there are nine separate foreign tax credit baskets, as follows:

1. dividends from Domestic International Sales Corporations (DISCs);

2. income attributable to “foreign trade income;”

3. distributions from Foreign Sales Corporations (FSCs);

4. financial services income;

5. shipping income;

6. dividends from each “section 902” corporation;

7. high withholding tax interest;

8. passive income;

9. all other income.

In addition, section 907 of the tax code limits the amount of taxes on foreign oil and
gas extraction income that can be credited, albeit under a somewhat different
mechanism.
The first three of the baskets in the above list are of limited importance,
applying to export income that is typically not subject to high foreign taxes and to

income related to export tax benefits – FSCs and DISCs – that have been repealed.⁴
The next two baskets are relatively narrow, applying to specific industries: income
from financial services and shipping income. (Note, however, that IRS data show
that the financial services basket is the second largest in terms of the amount of
taxable income it contains.⁵ ) The geographic source of this income is thought to be
relatively flexible, and thus relatively easy to locate in low-tax foreign countries,
making cross-crediting with heavily-taxed income particularly useful to the taxpayer.
The next three baskets apply to different types of income from passive
investment. One is dividends a taxpayer receives from each foreign subsidiary
corporation that is not controlled by U.S. stockholders but in which the dividend’s
recipient owns at least 10% of the stock. (These are known as “section 902”
corporations. As described more fully below, however, this basket is scheduled for
elimination in 2003.) Under this basket’s rules, a separate limitation must be
calculated for dividends from each subsidiary, thus restricting cross-crediting among
income from different foreign corporations. The remaining passive income baskets
are a basket for passive income in general – for example, interest, rents, and royalties
– and interest income that is subject to a high foreign withholding tax.⁶ As with the
transportation and banking limitations, the separate basket for general passive income
was implemented because passive income is thought to be geographically flexible.⁷
The high-withholding-tax basket was created because even low foreign withholding
taxes on a U.S. lender’s gross interest received from abroad could amount to a high
effective tax rate on the investor’s net interest from a loan, thereby generating large
amounts of excess credits.⁸
The last remaining basket is a residual category into which any remaining type
of income is placed. It is thus a general, “overall” basket into which income from
most active business operations is placed.
Section 313 of H.R. 5095 would consolidate current law’s nine baskets into
three: a general passive income basket; a basket for financial services income; and
a general, “overall” basket. In doing so, the bill eliminates the separate baskets
related to export income, the basket for shipping income, the basket for high-
withholding-tax interest, and the basket for section 902 corporations. The general
effect of the proposal would be to increase cross crediting. What data are available

⁴Pointed out by Richard Doernberg in his International Taxation in a Nutshell, 5^th ed. (St.
Paul, MN: West Group, 2001), p. 215. Our explanation of baskets relies heavily on
Professor Doernberg’s book.
⁵See Kathryn A. Green and Scott Luttrell, “Corporate Foreign Tax Credit, 1977,” Statistics
of Income Bulletin, vol. 21, Winter 2001-2002, p. 143.
⁶A high withholding tax is defined for purposes of the limitation as a withholding tax with
a rate of at least 5%.
⁷U.S. Congress, Joint Committee on Taxation, General Explanation of the Tax Reform Act
of 1986, joint committee print, 100^th Cong., 1^st sess. (Washington: GPO, 1987), p. 863.
⁸Ibid., p. 864. See also the explanation in Doernberg, International Taxation in a Nutshell,
p. 220.

suggest that the most important consolidations would be eliminating the high-
withholding-tax basket (whose contents would most likely be placed in the passive-
income basket) and eliminating the basket for section 902 corporations.
“Look Through” Treatment for Dividends from Section 902
Corporations
As noted above, the tax code currently requires a separate foreign tax credit
limitation to be calculated for dividends received from each section 902 corporation
– noncontrolled corporations where the recipient owns at least 10% of the stock. The
purpose of the separate limitations is to prevent cross-crediting between dividends
from a 902 corporation and other streams of income; the provision was first enacted
with the Tax Reform Act of 1986.
In 1997, Congress concluded that the separate limitations for section 902
dividends were overly complex and discouraged participation by U.S. firms in joint
ventures overseas.⁹ The Taxpayer Relief Act of 1997 scheduled the limitation for a
manner of phaseout by applying “look through” rules for section 902 dividends paid
out of earnings generated after 2002. Under the look through rules, the dividend is
apportioned among the tax credit baskets in proportion to the types of income
comprising the section 902 corporation’s earnings and profits. The 1997 Act also
changed the treatment of section 902 dividends paid out of earnings and profits
generated prior to 2003; effective beginning in 2003, the Act places dividends from
all section 902 corporations in a single basket.
As described in the preceding section, H.R. 5095 would remove the separate
limitation for section 902 dividends. H.R. 5095 would also apply a look through rule
to all section 902 dividends, allocating the dividend among the bill’s three baskets
in proportion to the amount of passive, financial services, and general active-business
income comprising the firm’s earnings and profits.
Recharacterization of Overall Domestic Losses
An additional foreign tax credit proposal in H.R. 5095 changes the way the tax
code’s loss rules and foreign tax credit rules interact. Under current law, if a
taxpayer incurs a loss for tax purposes – that is, if it has negative taxable income –
the loss (termed a “net operating loss,” or NOL, in tax parlance) can be “carried
back” up to two years and used to offset taxable income in those years, potentially¹⁰
generating a tax refund. If some or all of the NOL remains after applying it to
carryback years, the loss can be saved and carried forward up to 20 years in the
future.

⁹U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation
Enacted in 1997, joint committee print, 105^th Cong., 1^st sess. (Washington: GPO, 1997), p.

302.

¹⁰In March, 2002, Congress enacted as part of P.L. 107-147 a provision that extended the
carryback period to five years in the case of NOLs incurred in 2001 and 2002.

In calculating the foreign tax credit limitation, a taxpayer who incurs a loss with
respect to domestic operations can use the loss to reduce foreign income. If a firm
has some residual U.S. tax liability on foreign income – that is, if it does not have
excess credits – the loss can generate tax savings by reducing U.S. tax on foreign-
source income. However, H.R. 5095’s loss provision is aimed at taxpayers in a
different situation: firms that have a domestic loss and excess foreign tax credits.
Here, while the loss does reduce foreign-source income, it produces no tax saving in
the loss year because there is no U.S. tax liability on foreign-source income. Further,
the potential NOL carryforward embodied by the loss – and the resulting future tax
savings – is reduced to the extent the loss is deducted from foreign income. Excess
foreign tax credits can be carried forward up to five years, and deducting the NOL
from foreign income in this case generally increases foreign tax credit carryforwards
in a manner that potentially offsets the loss in tax savings from the reduced NOL
carryforward. However, if a firm expects to be in an excess credit position
indefinitely, this offsetting mechanism does not work and the taxpayer will, in effect,
have lost some or all of its NOL carryforward – an important loss if the firm
anticipates returning to having positive taxable income in the near future.
H.R. 5095 would give firms with domestic losses the option of recharacterizing
a certain amount of U.S.-source income as foreign-source income in a subsequent
year. For firms in an excess credit position in the year the recharacterization occurs,
the recharacterization would increase the amount of foreign tax credits that can be
claimed, thereby compensating for the reduced NOL. The amount of income that can
be recharacterized would be equal to the firm’s previously-incurred domestic loss,
subject to a cap equal to 50% of the firm’s U.S.-source taxable income.
H.R. 5095’s recharacterization proposal has been proposed previously – first in
1983 and again in 1992 – but was not adopted. In part, this was because of concern
over whether firms without excess credits in a loss year, but with excess credits in a
subsequent year, could obtain both the benefit of deducting the loss in the loss year
and recharacterizing income in the later, excess credit year. Treasury Department
testimony in 1992 indicated that “certain objections” to the proposal had been
rendered moot, but did not elaborate. Thus, it is not certain whether the double-
benefit exists with the current proposal.¹¹
Extension of Foreign Tax Credit Carryforward Period
Excess foreign tax credits that accrue in one year can be carried back to the two
preceding years and any credits that remain after the carryback can be carried forward
up to five years. The carryback and carryforward provisions were instituted as a
means of compensating for the possibility that income and deductions may be

¹¹For a description of the double benefit, see U.S. Congress, Senate, Committee on Finance,

1983-84 Miscellaneous Tax Bills– VII: S. 120, S. 1397, S. 1584, S. 1814, S. 1815, and S.^th^st

1826, hearings, 98 Cong., 1 sess., Sept. 26, 1983 (Washington: GPO, 1984), pp. 79-80.

For subsequent testimony, see U.S. Congress, House, Committee on Ways and Means,^nd
Foreign Income Tax Rationalization and Simplification Act of 1992, hearings, 102 Cong.,^nd

2 sess., July 21 and 22, 1992 (Washington: GPO, 1992), p. 235.

recognized at different times under foreign tax systems than under the U.S. system.
H.R. 5095 would extend the carryforward period to 10 years.
Repeal of Foreign Tax Credit Restrictions under the
Alternative Minimum Tax
Under current law, taxpayers pay either their regular tax or their alternative
minimum tax (AMT), whichever is larger. The two amounts ordinarily differ
because taxable income is defined more strictly under the AMT while tax rates under
the AMT are lower than under the regular tax. The purpose of the AMT is to ensure
that every firm or individual who registers positive economic income pays at least
some tax and is not able to use various tax benefits to eliminate their tax completely.
The foreign tax credit is generally not considered a tax “benefit,” but is instead a
mechanism for alleviating double taxation of foreign-source income; the credit is
therefore generally allowed to offset a taxpayer’s AMT. Nonetheless, as part of a
broad revision of the AMT in 1986, Congress concluded that every taxpayer with
positive income should make at least a “nominal” contribution to the U.S. tax base,¹²
even when it is foreign tax credits that eliminate U.S. taxes. Accordingly, foreign
tax credits are permitted to offset only 90% of a taxpayer’s AMT.
H.R. 5095 would repeal the 90% limitation.
Overseas Investment: Deferral and Subpart F
As described above, the tax deferral available to income earned through foreign
subsidiary corporations is restricted in some cases by the tax code’s Subpart F
provisions – provisions that were first enacted in 1962 and that were designed to
restrict firms’ ability to augment the deferral tax benefit by concentrating income in
tax havens or other countries with low tax rates. Subpart F denies the deferral benefit
to certain types of income whose geographic source is thought to be easily
manipulated. The tax code contains several other “anti-deferral” regimes in addition
to Subpart F. Most prominent of the other anti-deferral regimes is the passive foreign
investment company (PFIC) rules.
The tax code applies Subpart F to those U.S. stockholders who own at least 10%
of a “controlled foreign corporation (CFC),” as defined by the tax code. A CFC, in
turn, is a foreign corporation that is more 50% owned by those U.S. stockholders
owning at least 10% of the corporation’s stock. One component of income covered
by Subpart F is income the tax code terms “foreign personal holding company
income,” which is generally income from passive investment (e.g., interest,
dividends, and royalties). Subpart F income also includes income from international
air or sea transportation, certain oil-related income, certain insurance income, and
certain sales and services income from transactions with related firms. H.R. 5095

¹²U.S. Congress, Joint Committee on Taxation, General Explanation of the Tax Reform Act
of 1986, joint committee print, 100^th Cong., 1^st sess. (Washington: GPO, 1987), p. 436.

would generally reduce the scope of Subpart F, thus expanding the applicability of
deferral.
Sales and Services Income Subject to Subpart F
H.R. 5095’s most important change to Subpart F is likely its proposal to remove
sales and services income from the provision’s coverage. As defined under current
law these categories of income – termed “foreign base company sales income” and
“foreign base company services income”– consist (respectively) of income from sales
to a related corporation where the property is both produced and used outside the
related corporation’s country of incorporation, and income from the provision of
services to a related corporation, outside the CFC’s country of incorporation. H.R.
5095 would retain Subpart F coverage for sales of U.S. products back to the United
States, thus apparently restricting the ability of firms to apply the deferral benefit to
what might be U.S.-source income.
Given the elimination of the extraterritorial income (ETI) tax benefit for
exporting by other parts of H.R. 5095, the question of whether or not the bill’s repeal
of foreign base company sales and services income could pose a replacement export
benefit is relevant.¹³ Suppose, for example, a U.S. exporting corporation sells its
exports to a subsidiary foreign corporation chartered in a low-tax country, and the
foreign subsidiary, in turn, sells the exports in various foreign markets. To the extent
export income is allocated for tax purposes to the foreign subsidiary rather than the
U.S. parent, an export tax benefit results. Further, it is not clear whether continuing
to apply Subpart F coverage to sales of products back to the United States while
exempting exports would run afoul of the WTO agreements.
Absent stringent regulations governing the allocation of income, a firm might
be able to achieve such an export benefit by, for example, charging an unrealistically
low price for exports sold to its foreign subsidiary; such a technique would make the
foreign subsidiary’s income unrealistically high and the U.S. parent’s income
unrealistically low. However, the internationally-accepted norm for allocating
income between related entities for tax purposes is a method known as “arm’s length
pricing” – a method that approximates the division that would occur if the different
parts of the firm were, in fact, unrelated. And where “arm’s length pricing” rules are
followed in allocating income between a U.S. parent and its foreign sales subsidiary,
little or no export income can be allocated to a foreign sales subsidiary. IRS
regulations issued under section 482 of the Internal Revenue Code generally require
arm’s length pricing to be used in allocating income.¹⁴ Some observers, however,

¹³The possibility of solving the dispute in this manner was raised as early as 1988. See:
Robert E. Hudec, “Reforming GATT Adjudication Procedures: The Lessons of the DISC
Case,” Minnesota Law Review, vol. 72, June 1988, p. 1449. However, the writer ignores the
obstacle to this solution posed by application of arm’s length pricing.
¹⁴Doernberg, International Taxation in a Nutshell, p. 237.

have expressed concern over potential manipulation of transfer prices so as to shift
export income abroad.¹⁵
“Look through” Treatment for Dividends Flowing Between
Related Foreign Subsidiaries
As noted above, one broad type of income subject to Subpart F is income from
passive investment, which is defined to include dividends. Current law makes an
exception, however, for dividends and interest a CFC receives from a related
corporation that is incorporated in the same foreign country as the CFC itself, and
that conducts business in that country. Subpart F income also does not include rents
and royalties received for the use of property in the CFC’s own country. H.R. 5095
would add to these exceptions dividend, interest, and other passive income a CFC
receives from a related CFC to the extent the payments are not attributable to what
would be Subpart F income in the hands of the related corporation. The proposed
look through rule contrasts with current law’s exceptions in that the country where
the excepted income originates would be immaterial, but would not include all
dividend or other income received from the related CFC.
Other Provisions for U.S. Investment in Foreign Corporations
As described above, one type of Subpart F income is “foreign personal holding
company (FPHC) income,” which is generally income from passive investment,
generally including dividends, interest, rents, royalties, and annuities. FPHC income
also includes gains from the sale of assets that produce the identified types of passive
income, gains from the sale of interests in partnerships or trusts, and gains from
certain commodities transactions. H.R. 5095 would repeal Subpart F’s inclusion of
gain from the sale of partnership interests and would ease its applicability to gains
from commodities transactions. It would also provide more generous treatment
under Subpart F’s oil-income rules to income from transportation of oil.
As noted above, Subpart F is not the only anti-deferral regime contained in the
U.S. tax code, although it likely is the most broadly applicable. Next to Subpart F,
the most widely applicable set of rules limiting deferral are the passive foreign
investment company (PFIC) rules, enacted with the Tax Reform Act of 1986. In
contrast to Subpart F, the PFIC rules deny the deferral benefit to all income of
defined corporations (PFICs) and to all stockholders, not just 10% stockholders. A
PFIC is defined differently than a CFC, however. Rather than criteria based on
control by U.S. stockholders, a PFIC is a foreign corporation that is intensively
engaged in passive investment, according to several tests set forth in the PFIC rules.
Beyond the Subpart F and PFIC rules, deferral of tax on foreign income can
potentially be restricted under four additional sets of rules: the foreign personal
holding company provisions; the foreign investment company rules; the
personal holding company provisions; and the accumulated earnings tax rules.
(The last two of these can apply to domestic as well as foreign corporations.) The

¹⁵Samuel C. Thompson, Jr. “A Critical Perspective on the Thomas Bill,” Tax Notes, Jul. 22,

2002, pp. 581-584.

scope and applicability of the regimes differ and can overlap in some cases. The tax
code contains rules coordinating the various regimes.
H.R. 5095 would repeal the foreign personal holding company rules and the
foreign investment company rules. It would exclude foreign-chartered corporations
from coverage under the personal holding company provisions.
Provisions Directed at “Earnings Stripping” and
Corporate “Inversions” or “Expatriation”
Recent news reports and articles in professional tax journals have drawn the
attention of policymakers and the public to a phenomenon sometimes called
corporate “inversions” or “expatriation” – instances where firms that consist of
multiple corporations reorganize their structure so that the “parent” element of the
group is a foreign corporation rather than a corporation chartered in the United
States. Firms engaged in the inversions cite a number of reasons for undertaking
them, including creating greater “operational flexibility,” improved cash
management, and an enhanced ability to access international capital markets.¹⁶
Prominent, if not primary, however, is the role of taxes: firms that undertake
inversion have indicated they expect significant tax savings from the
reorganiz ations.
A prototypical inversion begins with a firm with operations in both the United
States and abroad, but whose parent corporation – the component of the firm whose
stock is traded on the stock exchange – is chartered in the United States. Thus, the
firm may use the deferral tax benefit for its foreign operations, but its foreign income
is ultimately subject to U.S. tax when it is repatriated to the United States. The firm
in question inverts by creating a foreign corporation chartered in a low tax country
– Bermuda and the Cayman Islands have been cited as popular destinations. The
firm reorganizes so the new foreign corporation becomes the parent of the U.S.
corporation that was formerly the parent firm; the former U.S. parent transfers its
foreign subsidiary corporations to the new foreign parent. The stockholders of the
erstwhile U.S. parent firm automatically become stockholders of the new foreign
parent.
Inversions need not involve the shift of economic activity from the United States
abroad, and those that have been prominently featured in the recent controversy have
apparently been accomplished entirely on paper. The transaction does, however,
produce tax savings from two general sources. First, as described above, although
the United States does not tax the foreign-source income of foreign subsidiaries
immediately, it does tax their income when it is ultimately remitted to the United

¹⁶These reasons were cited by Stanley Works in a Feb. 8, 2002 press release. The release
is available at the firm’s website at [http://www.stanleyworks.com/index.htm]. See also the
Nov. 2, 2001 proxy statement by Ingersoll-Rand, which cited “a variety of potential
business, financial and strategic benefits.” The statement is available on the IR website at:
[http://www.ingersoll-rand.com/proxy.pdf]. Note that on Aug. 1, Stanley Works announced
that it was cancelling its planned reorganization.

States. An inversion eliminates this deferred tax liability by placing the ownership
of foreign subsidiaries in the hands of the new foreign parent.¹⁷
A second source of tax saving from an inversion – known as “earnings
stripping” – actually applies to U.S. rather than foreign-source income. The practice
of earnings stripping involves a U.S. subsidiary corporation essentially shifting U.S.-
source income out of the U.S. tax jurisdiction, from the hands of a taxable U.S.
corporation into the hands of a foreign corporation. In general, the U.S. subsidiary
of a foreign corporation makes tax-deductible payments (e.g., interest or royalties)
to its foreign parent firm in compensation for intrafirm loans or the use of patents or
copyrights. The tax deduction reduces the taxable income of the U.S. subsidiary,
while increasing the income of the foreign subsidiary. Given that foreign
corporations are subject only to U.S. corporate income tax on the active conduct of
a U.S. trade or business, the interest or royalty income is removed from the U.S. tax
base.¹⁸ Note that earnings stripping is not unique to inverted U.S.-owned firms, but
can be practiced by foreign-owned firms that invest in the United States through
U.S.-chartered subsidiaries. Indeed, in 1989 provisions designed to curtail earnings
stripping were enacted with section 163(j) of the Internal Revenue Code.
H.R. 5095 contains provisions that would curtail each of these sources of tax
savings. First, it would revamp existing restrictions on earnings stripping contained
in section 163(j). Under current law, deductions are denied for interest paid to
related entities if the payor’s debt-to-equity ratio exceeds 1.5 to 1; the deduction is
generally denied for interest exceeding 50% of its taxable income, after certain
adjustments. Denied deductions are permitted to be carried forward indefinitely, and
used to reduce taxable income in the future. H.R. 5095 would redesign the
restrictions by removing the debt-to-equity test and reducing the percentage threshold
to 35% from 50%. The bill would also limit the carryforward of interest to five
years.
In addition to these changes, H.R. 5095 would disallow a portion of interest
deductions if a domestic subsidiary’s indebtedness is out of proportion to the entire
corporate group’s indebtedness, and the indebtedness consists of debt to related
entities. More specifically, the deductibility of interest on related party debt would
be disallowed to the extent the subsidiary’s total debt (to both related and unrelated
entities) exceeds a share of the entire group’s external debt equal to the subsidiary’s
share of the group’s assets.

¹⁷At the same time, however, an inversion may trigger U.S. capital gains tax for U.S.
individual stockholders of inverting firms. Some have suggested this provides a clue as to
the reason for the recent apparent upsurge in inversions – the declines in the stock market
have made the individual-level capital gains tax consequences of inversions less onerous.
For further information, see CRS Report RL31444, Firms That Incorporate Abroad for Tax
Purposes: Corporate “Inversions” and “Expatriation,” by David L. Brumbaugh.
¹⁸Note that aside from the corporate income tax, the United States in some cases applies a
withholding tax on interest or royalty payments to non-residents. However, the withholding
tax is frequently reduced or eliminated by treaty provisions.

H.R. 5095 addresses inversions’ savings on foreign-source income with a
temporary measure that would treat the new foreign parent firms created in an
inversion transaction as U.S. firms. The foreign parents’ foreign-source income
would thus be subject to U.S. taxation upon its receipt. The provision would apply
to transactions where the shareholders of the former U.S. parent corporation own
80% or more of the new foreign-chartered parent, and the foreign parent does not
have substantial business activity in its country of incorporation. The provision
would apply for inversions occurring during the three-year period spanning March

20, 2002 to March 20, 2005.¹⁹

An additional inversion provision under the bill would apply to transfers of
foreign stock by a U.S. corporation (e.g., a former parent corporation) to a new
foreign parent firm. Under current law, such transfers are in principle subject to U.S.
tax, but U.S. tax can be offset by foreign tax credits or net operating losses. H.R.
5095 would prohibit such “toll taxes” from being offset by tax credits and other tax
attributes. This provision would apply to transactions where 60% or more of the
foreign parent company is owned by stockholders of the former U.S. parent. The
provision would be permanent rather than limited to three years.
In contrast to the tax savings inversions can generate at the corporate level,
individual stockholders of an inverting firm are generally required to recognize any
gain embedded in their stock at the time of inversion. In contrast, current law
provides that persons holding stock options are not subject to U.S. tax until the
option is exercised. Accordingly, persons holding stock options in inverting firms
– for example, corporate officers – could avoid the capital gains tax that would
ordinarily apply when an inversion occurs. H.R. 5095 would impose a 20% excise
tax on certain holders of an inverting firm’s stock options, including officers,
directors, and persons owning 10% or more of the firm’s stock. The tax would be
imposed on gain determined by reference to an option-pricing model specified by the
Treasury Department.
Repeal of the Extraterritorial Income Tax
Benefit for Exports
Under the U.S. residence-based tax system, the United States would ordinarily
tax income its exporters earn from sales of U.S. goods abroad. However, prior to
2001, the U.S. tax code’s Foreign Sales Corporation (FSC) rules provided an explicit
tax benefit for exporting.²⁰ The FSC provisions were the statutory descendant of the

¹⁹This provision is similar to anti-inversion provisions of several other bills introduced in
the 107^th Congress, although those proposals would generally not be temporary. For a
discussion of those bills, see: CRS Report RL31444, Firms that Incorporate Abroad for Tax
Purposes: Corporate “Inversions” and “Expatriation”, by David L. Brumbaugh.
²⁰An alternative, implicit tax benefit for exporting is provided by the so-called “export
source rule,” under whose terms an exporter can allocate as much as 50% of export income
to foreign sources for purposes of calculating its foreign tax credit limitation. This has the
effect of providing a 50% tax exemption for firms in an excess credit position. The EU has
(continued...)

an earlier tax benefit – the Domestic International Sales Corporation (DISC)
provisions, first enacted in 1971. However, European countries charged that DISC
was an export subsidy, and so violated the General Agreement on Tariffs and Trade
(GATT). Although a GATT panel supported the European charge, the United States
never conceded that DISC violated GATT. The FSC provisions were enacted in

1984 in an attempt to defuse the controversy.

In 1997, the countries of the European Union (EU) complained to the World
Trade Organization (WTO; successor to GATT) that FSC also was an export subsidy
and contravened the WTO. A WTO panel ruling upheld the EU complaint, and to
avoid WTO-sanctioned retaliatory tariffs, the United States in November 2000
replaced FSC with the ETI provisions, which deliver a tax benefit of similar size but
that was redesigned in an attempt to achieve WTO-compliance. The United States
maintained that the ETI provisions were WTO-compliant, but the EU disagreed and
asked the WTO to rule against them and approve $4 billion in tariffs. A WTO panel
ruled against the ETI provisions in August, 2001, and in January, 2002, a WTO
appellate body denied an appeal by the United States. On August 30, 2002, a WTO
arbitration panel issued a report approving the level of tariffs requested by the EU.
Some EU officials have suggested that the EU is not anxious to impose
sanctions and will delay their implementation as long as it believes the United States
is making progress in becoming WTO-compliant. Unlike the previous legislative
responses to GATT and WTO rulings, H.R. 5095 does not attempt to construct a
WTO-compliant export tax benefit. Rather, it would simply repeal the provision.²¹
Other Provisions
As noted at the outset of the report, H.R. 5095 contains a set of provisions
designed to restrict the use of tax shelters by corporations; these provisions are not
discussed in this report. In addition, the bill contains several other proposals not
related to taxation of income from international transactions.
One of these provisions is indexation and expansion of the “expensing”
allowance contained in section 179 of the tax code. Under current law, firms are
permitted to deduct immediately (expense) rather than deduct gradually (depreciate)
up to $24,000 of equipment investment each year. The allowance is scheduled to
increased to $25,000 in 2003 and thereafter. The amount that can be expensed is
reduced and gradually eliminated for a firm’s investment above $200,000. The effect
of the expensing allowance is to confer a tax benefit in the form of a tax deferral
because the expensed investment is deducted more rapidly than the asset in question
actually declines in value.

²⁰(...continued)
not lodged a complaint against the export source rules.
²¹For further information on the ETI/FSC/WTO controversy, see CRS Report RS20746,
Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial
Replacement Provisions, by David L. Brumbaugh.

H.R. 5095 would index for inflation both the basic allowance and the $200,000
threshold above which the allowance is phased out. Indexing would begin in 2005.
In addition, the bill would increase the base allowance to $40,000 and the phase-out
threshold to $325,000 beginning in 2013.
H.R. 5095 also contains a set of relatively narrow revenue-raising items apart
from its tax shelter, ETI, and inversion proposals. The largest item is extension of
a set of user fees applied by the U.S. Customs Service that are scheduled to expire
at the end of FY2003.
Economic Effects
Impact on Investment and Economic Welfare
The range of provisions contained in H.R. 5095 is broad, and a comprehensive
analysis of its likely economic effects is not undertaken here. Nonetheless, several
general preliminary assessments are possible. First, the bill’s proposals relating to
the foreign tax credit, controlled foreign corporations, and repeal of the ETI
provisions will each probably increase the share of U.S.-owned capital that is
employed abroad rather than in the United States beyond what would otherwise
occur. Second, in isolation, repeal of the ETI provisions is likely to reduce the level
of U.S. trade, reducing both exports and imports. At the same time, however, the
increased flow of U.S. capital abroad that would occur in the near term is likely to
reduce the U.S. trade deficit in the near term below what would otherwise occur. The
bill’s net impact on U.S. economic welfare is uncertain, with repeal of the ETI
benefit probably increasing U.S. welfare (in isolation) and the foreign tax credit and
CFC provisions reducing it. According to “very preliminary” estimates by the Joint
Committee on Taxation, the bill would increase revenues by a net $6.4 billion over
five years and by $1.1 billion over 10 years.
Business taxes apply to corporate profits – the return from capital investment.
Accordingly, the most direct impact of changes in international business taxes is on
the level, location, and type of investment firms undertake, and it is here H.R. 5095
would likely have its most immediate impact. As we have seen, the bill proposes
changes in two broad areas affecting the income from overseas operations – changes
to the foreign tax credit and related source-of-income rules and changes for the
deferral principle and Subpart F. In applying to income from overseas operations,
the proposals affect the aftertax rate of return on overseas investment; the changes
would generally reduce the tax burden on investment abroad and thus increase its
attractiveness for U.S. firms. Accordingly, one broad impact of the bill’s foreign tax
credit and CFC proposals would be to increase the share of U.S.-owned capital
consisting of foreign rather than domestic U.S. investment compared to what would
otherwise occur.
In contrast, two other broad areas of the bill – its earnings stripping and ETI
exporting provisions – would both likely affect the rate of return on investment in the
United States. Export production, by definition, involves investment and production
in the United States and sales abroad. Repeal of the ETI provisions would therefore

probably reduce the aftertax rate of return on investment in the United States export
sector and in isolation may increase the flow of U.S. investment abroad by a small
amount. At the same time, a portion of investment released from the U.S. export
sector would likely stay in the United States, flowing to the import-competing sector
and other parts of the economy. For their part, the earnings stripping rules would
likely increase the tax burden on foreign investment in the United States by making
it harder to shift U.S.-source income abroad for tax purposes. Accordingly, the
earnings-stripping provisions would probably reduce the stock of foreign investment
to the United States below what would otherwise occur.
Each of these effects works in the same direction, working to increase the share
of U.S.-owned capital employed abroad. The lone exception of the bill’s proposals
appears to be the increase in the expensing allowance for domestic U.S. investment.
This provision, in isolation, would probably reduce the level of investment abroad
compared to what would otherwise occur. Nonetheless, because the great bulk of the
bill’s proposals would increase the flow of U.S. investment abroad, the bill’s net
impact would probably be in that direction.
The bill’s likely impact on U.S. exports is harder to discern. In isolation, repeal
of the ETI provisions would probably reduce the level of U.S. exports, although
exchange rate adjustments that would reduce the price of the U.S. dollar would
probably also reduce U.S. imports. In isolation, repeal of the ETI provisions would
probably not alter the U.S. balance of trade. But the provisions of the bill that would
alter the level of U.S. capital employed abroad – the foreign tax credit and CFC
provisions – would likely alter the balance of trade at least in the near term, triggering
exchange rate adjustments that would also reduce the price of U.S. currency in world
markets. In isolation, U.S. exports would increase and imports would fall, reducing
the U.S. trade deficit. It is likely that the net impact of the bill would be to reduce
U.S. imports, but whether the bill would increase exports, on balance, is uncertain.
These effects may actually reverse in the long run, as capital stocks abroad adjust to
the new levels induced by the bill’s foreign investment provisions.
Economic theory suggests, however, that a country’s ultimate economic welfare
– in this case, that of the United States – does not depend, for example, on exporting
as much as it possibly can or even on maximizing the competitiveness of its firms’
operations abroad. Rather, it depends heavily on whether investment locations are
distorted in inefficient ways or on whether the benefit of subsidies accrues to U.S.
individuals or firms or flows out of the United States. In the case of an export
subsidy such as the ETI provisions, economic theory suggests that its repeal would,
in isolation, increase the economic welfare of the United States on both counts. An
export subsidy distorts the allocation of investment, drawing an inefficient amount
of capital to the export sector and encouraging the subsidizing country (here, the
United States) to export more than is economically efficient. At the same time, a part
of the export benefit flows to foreign consumers, as U.S. producers pass on part of
their tax reduction in the form of lower prices for U.S. goods.
The net impact of the remaining parts of the bill on U.S. economic welfare are
harder to discern, and a definite conclusion is not possible at this point. For
example, the deferral tax benefit poses an incentive for U.S. firms to invest in low-
tax countries more than they otherwise would, and traditional economic theory

suggests that such a distortion of investment reduces U.S. economic welfare.
Accordingly, the parts of the bill that relax Subpart F and expand deferral – for
example, the provisions relating to section 902 firms and the repeal of foreign base
company sales income – probably, in isolation, reduce U.S. economic welfare.
In contrast, the bill’s interest allocation rules may reduce distortions in
investment. As noted above, the rules are designed to correct an imperfection in the
design of existing rules that affect the operation of the foreign tax credit limitation,
and, in any case, one general impact of the foreign tax credit limitation is to distort
investment by posing a tax disincentive to invest abroad. Accordingly, the revised
interest allocation rules, by providing more generous foreign tax credit limitation
rules, may ease the limitation’s distortion and increase economic welfare.
The impact of other foreign tax credit proposals is more ambiguous. The
practice of “cross-crediting” foreign tax credits between different streams of foreign
income probably poses an incentive to invest in low-tax countries by shielding such
investment from U.S. tax. Expansion of cross-crediting would likely result from
H.R. 5095’s consolidation of the foreign tax credit’s separate baskets. On the other
hand, however, cross-crediting probably also reduces a disincentive to invest in high-
tax countries, thereby reducing a distortion posed by the U.S. foreign tax credit.
But even if both the interest allocation rules and reduction of foreign tax credit
baskets were to reduce investment distortions on balance, we could not automatically
conclude that the provisions enhance U.S. economic welfare. The reason is tax
revenue: to the extent the provisions reduce U.S. tax revenue collected from foreign
sources, the provisions may reduce U.S. welfare, and whether that reduction would
be sufficient to offset efficiency gains from allocation of investment is not clear.
Impact on U.S. Tax Revenue
As noted above, the Joint Committee on Taxation’s preliminary estimates are
that H.R. 5095 would, on balance, increase tax revenue over $6.4 billion over its first
five years and by $1.1 billion over its first 10 years. These figures are modest
compared to other tax bills enacted in recent years. For example, the Economic
Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) was
estimated to reduce tax revenue by $552.5 billion over five years and by $1,348.5
billion over 10 years. The estimates we cite for H.R. 5095, however, are net amounts
equal to the revenue gain from the bill’s revenue-raising items minus the revenue loss
from its revenue-losing provisions, and the net amounts mask larger swings in
revenue that are estimated to occur. Taken alone, the revenue-raising items would
increase revenue by an estimated $43.1 billion over five years and $94.7 billion over
10 years; the revenue -losing items would reduce revenue by an estimated $36.6
billion over five years and by $93.6 billion over 10 years. These revenue changes are
still small, however, compared to those projected to result from the 2001 tax cut.
Table 1 shows the Joint Committee’s estimates for the bill.

Table 1. Estimated Revenue Effects of H.R. 5095
⁽^P^r^e^p^a^r^e^d^b^y^th^{e J}^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ⁾
⁽^M^illioⁿ^s^o^f^Do^llar^s⁾
Fiscal YearsFiscal Years
2002-2007 2002-2012
Tax Shelter Provisions3,7668,510
Economic substance doctrine2,9126,404
Reportable transactions5511,270
Partnership loss transfers196547
Substantial understatement penalty38188
Certain conduct related to tax shelters and00
reportable transactions
Civil penalty on failure to report interest in foreign13
accounts
Frivolous tax submissions1530
Regulation of individuals practicing before the00
Treasury
Stripped interest4040
Minimum holding period on foreign tax credit1328
Consolidated return regulation 00
Tax Avoidance Through Earnings Stripping and2,5976,305
Expatriation
Earnings stripping2,1155,568
Expatriated entities (inversions)405595
Compensation of insiders in expatriated65115
corporations
Reporting of taxable mergers and acquisitions1227
U.S. Business Operations Abroad-35,069-88,516
Repeal of CFC rules on foreign base company-13,727-37,381
sales and service income
Look through treatment of payments between-854-2,216
related CFCs
Look through treatment for sales of partnership-392-948
interests
Repeal of foreign personal holding company rules-269-785
and foreign investment company rules
Treatment of pipeline transportation income-26-126
Foreign personal holding company income related-42-95

to commodities

Fiscal YearsFiscal Years
2002-2007 2002-2012
Interest expense allocation rules-9,882-23,417
Recharacterization of overall domestic loss-2,383-6,041
Consolidation of foreign tax credit baskets-2,785-6,151
10-year foreign tax credit carryforward-2,087-6,725
Repeal of foreign tax credit limit under the-1,873-3,860
minimum tax
Look through rules for section 902 corporations -736-743
Stock ownership rules in apply section 902 and 960-13-28
credits
Repeal of export tax benefits22,12451,401
Repeal of ETI tax benefit for exporters21,95751,233
Repeal of FSC transitional rules167168
Other Provisions10,04016,450
Application of uniform capitalization rules to-488-548
foreign persons
Assets acquired by dealers-47-113
Dividends of regulated investment companies-445-988
Average exchange rate rule00
Withholding tax on dividends-14-29
Increase in section 179 expensing-568-3,422
Extension of IRS user fees138341
Extension of customs user fees5,76714,883
Nonqualified deferred compensation plans4,2265,214
Transfers of excess defined benefits pension plan59287
assets
Estimated taxes for deemed asset sales120145
Interest on tax overpayments1,108527
Interest on potential underpayments130104
Installment agreements6163
Excise tax on bows and arrows-7-14
Interaction among provisions2,9686,906
^Source:^{U.S. Co}ⁿ^g^r^{ess, J}^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^,^r^e^p^rⁱⁿ^tedⁱⁿ^B^N^A^Da^{ily Ta}^{x Rep}^o^r^t^{, Ju}^l^y^17,
^{2002, pp. L}¹^-^L^4.

Affected Industries
A general idea of the industries that would be primarily affected by H.R. 5095
can be gained by perusing Internal Revenue Service Statistics of Income data on
Foreign Sales Corporations, foreign tax credits, and controlled foreign corporations.
Tables 2 and 3 present FSC data, by type of product, and provide a glimpse of
the industries that would likely be most affected by repeal of FSC’s successor, the
ETI provisions. The tables show that manufactured products, by far, were the leading
exports of FSC-utilizing firms. Further, use of FSC was concentrated in just a few
manufacturing industries: together, nonelectrical machinery, motor vehicles and
aircraft, electrical machinery, and chemicals and drugs accounted for 63% – nearly
two-thirds – of FSC receipts and for 56% of exempt income of FSCs.
Table 2. Foreign Sales Corporations, 1996:
Gross Receipts, by Major Product
(money amounts in thousands)
^{Percent of T}^o^tal
^G^r^os^s^Receipts^G^r^os^s^Receipts
^A^l^l^Prod^u^c^ts^$285,902,491^100.0%
^N^oⁿ^m^an^u^f^actu^red^Prod^u^c^ts^{: A}^g^ri^cu^l^t^u^r^al^$17,545,571^6.1%
^G^r^aiⁿ^s^an^{d S}^o^y^b^ean^s⁹^,138,533.00^3.2%
^Lⁱ^v^e^s^t^ock³^,742,374.00^1.3%
^C^r^ops^{, ex}^cept^cot^t^oⁿ^,^g^r^aiⁿ^s^an^{d s}^o^y^b^ean^s²^,935,908.00^1.0%
^C^o^t^t^oⁿ¹^,100,600.00^0.4%
^Fⁱ^s^h^ery^produ^ct^s^583,222.00^0.2%
^A^g^ri^cu^l^t^u^ral^s^e^rvⁱ^ces^44,934.00^0.0%
^N^oⁿ^m^an^u^f^actu^red^Prod^u^c^ts^{: N}^oⁿ^agri^c^u^l^tu^ral^$16,965,476^5.9%
^C^o^m^p^u^t^{er s}^o^f^t^w^a^re^8,985,985.00^3.1%
^Motⁱ^oⁿ^pi^ct^u^r^{e di}^s^t^ri^bu^tⁱ^oⁿ⁴^,312,768.00^1.5%
^En^gⁱⁿ^eeriⁿ^g^an^{d A}^r^chⁱ^t^ect^u^r^al^S^e^rvⁱ^ces^1,558,867.00^0.5%
^Met^a^l^mⁱⁿⁱⁿ^g^,^ex^ceptⁱ^r^on^917,219.00^0.3%
^C^o^al^mⁱⁿⁱⁿ^g^877,641.00^0.3%
^L^easⁱⁿ^g^s^e^rvⁱ^ces^{, ot}^h^e^{r t}^h^an^ai^rcraf^t^312,996.00^0.1%
^Mi^s^cel^l^aⁿ^e^ou^s^N^oⁿ^m^an^u^f^act^u^r^{ed Produ}^ct^s²^,740,361.00^1.0%
^M^aⁿ^u^f^actu^red^Prod^u^c^ts^$246,480,712^86.2%
^N^oⁿ^e^l^ect^ri^cal^m^achⁱⁿ^ery^{52,290,199.00}^18.3%
^Mot^o^{r v}^e^hⁱ^cl^es^{, ai}^rcraf^t^{, an}^{d ot}^h^e^{r t}^r^an^s^p^{. equ}ⁱ^pm^en^t^{51,932,407.00}^18.2%
^El^ect^ri^cal^m^achⁱⁿ^ery^{43,665,146.00}^15.3%
^C^h^em^icals^,^dru^g^s^{, an}^{d a}^{llied produ}^cts^{31,952,356.00}^11.2%
^Prof^es^sⁱ^on^alⁱⁿ^s^t^ru^m^eⁿ^t^s^{13,205,941.00}^4.6%

^{Percent of T}^o^tal
^G^r^os^s^Receipts^G^r^os^s^Receipts
^T^{obacco produ}^cts⁶^,919,745.00^2.4%
^P^a^{per an}^{d allied produ}^cts⁶^,574,620.00^2.3%
^F^a^bri^cat^{ed m}^e^t^a^l^produ^ct^s⁵^,082,249.00^1.8%
^Pri^m^ary^m^e^t^a^l^produ^ct^s³^,901,103.00^1.4%
^Mi^s^cel^l^aⁿ^e^ou^s^m^aⁿ^u^f^act^u^r^{ed produ}^ct^s²^,773,969.00^1.0%
^R^u^{bber an}^{d m}ⁱ^s^cel^l^aⁿ^e^ou^s^pl^as^tⁱ^c^s²^,192,314.00^0.8%
^L^u^m^b^{er an}^{d w}^{ood produ}^ct^s²^,119,700.00^0.7%
^T^e^x^{tile m}^{ill produ}^cts¹^,271,260.00^0.4%
^S^t^on^{e, cl}^ay^{, g}^l^as^s^,^an^{d con}^c^ret^e^930,767.00^0.3%
^A^pparel^an^{d ot}^h^e^{r f}ⁱⁿ^s^h^e^{d g}^oods^907,968.00^0.3%
^L^eat^h^e^{r an}^{d l}^eat^h^e^{r produ}^ct^s^884,299.00^0.3%
^P^rⁱⁿ^tin^g^,^pu^blis^hⁱⁿ^g^,^an^{d allied produ}^cts^770,966.00^0.3%
^F^u^rnⁱ^t^u^{re an}^{d f}ⁱ^x^t^u^r^es^479,266.00^0.2%
^Pet^r^ol^eu^m^refⁱⁿ^e^ry^produ^ct^s^392,570.00^0.1%
^F^{ood an}^{d k}ⁱⁿ^d^{red produ}^ct^s^17,505.00^0.0%
^Source:^C^A^R^S^cal^cul^a^tⁱ^o^{ns bas}^e^{d on}^dat^aⁱⁿ^U^.^S^.^In^t^e^rn^al^R^e^v^eⁿ^u^e^S^e^rvⁱ^ce^S^t^a^{tistics o}^f^Iⁿ^co^me
^Bu^lletin^,^S^p^riⁿ^g^,^{2000, pp. 99-}^102.

Table 3. Foreign Sales Corporations, 1996:
Net Exempt Income, by Major Product
⁽^m^oⁿ^e^y^a^m^o^{unts in tho}^u^sa^nd^s)
^{% o}^f
^To^t^a^{l N}^e^t
^{Net E}^x^em^pt^Exe^m^pt
^Inc^o^m^e^Inc^o^m^e
^A^l^l^Prod^u^c^ts^$8,496,280^100.0%
^N^oⁿ^m^an^u^f^actu^red^Prod^u^c^ts^{: A}^g^ri^cu^l^t^u^r^al^$220,350^2.6%
^G^r^aiⁿ^s^an^{d s}^o^y^b^ean^s^110,594.00^1.3%
^C^r^ops^{, ex}^cept^cot^t^oⁿ^,^g^r^aiⁿ^s^{, an}^{d s}^o^y^b^ean^s^40,327.00^0.5%
^Lⁱ^v^e^s^t^ock^31,965.00^0.4%
^Fⁱ^s^h^ery^produ^ct^s^an^{d s}^e^rvⁱ^ces^19,311.00^0.2%
^C^o^t^t^oⁿ^12,450.00^0.1%
^A^g^ri^cu^l^t^u^ral^s^e^rvⁱ^ces^5,703.00^0.1%
^N^oⁿ^m^an^u^f^actu^red^Prod^u^c^ts^{: N}^oⁿ^agri^c^u^l^tu^ral^763,309.00^9.0%
^C^o^m^p^u^t^{er s}^o^f^t^w^a^re^482,913.00^5.7%
^Motⁱ^oⁿ^pi^ct^u^r^{e di}^s^t^ri^bu^tⁱ^oⁿ^167,425.00^2.0%
^En^gⁱⁿ^eeriⁿ^g^an^{d arch}ⁱ^t^ect^u^r^al^s^e^rvⁱ^ces^48,680.00^0.6%
^Met^a^l^mⁱⁿⁱⁿ^g^,^ex^ceptⁱ^r^on^35,502.00^0.4%
^L^easⁱⁿ^g^s^e^rvⁱ^ces^{, ot}^h^e^{r t}^h^an^ai^rcraf^t^16,788.00^0.2%
^C^o^al^mⁱⁿⁱⁿ^g^12,001.00^0.1%
^Mi^s^cel^l^aⁿ^e^ou^sⁿ^oⁿ^m^an^u^f^act^u^r^{ed produ}^ct^s^94,380.00^1.1%
^M^aⁿ^u^f^actu^red^p^r^od^u^c^ts^$7,367,733^86.7%
^El^ect^ri^cal^m^achⁱⁿ^ery¹^,693,099.00^19.9%
^Machⁱⁿ^ery^,^ot^h^e^{r t}^h^an^el^ect^ri^cal^1,377,157.00^16.2%
^C^h^em^icals^,^dru^g^s^{, an}^{d a}^{llied produ}^cts¹^,354,662.00^15.9%
^Prof^es^sⁱ^on^alⁱⁿ^s^t^ru^m^eⁿ^t^s^472,533.00^5.6%
^T^r^an^s^port^a^tⁱ^oⁿ^equⁱ^pm^en^t^319,477.00^3.8%
^T^{obacco P}^r^odu^cts^285,205.00^3.4%
^F^{ood an}^{d k}ⁱⁿ^d^{red produ}^ct^s^284,647.00^3.4%
^P^a^{per an}^{d allied produ}^cts^138,272.00^1.6%
^F^a^bri^cat^{ed m}^e^t^a^l^produ^ct^s^111,174.00^1.3%
^Mi^s^cel^l^aⁿ^e^ou^sⁿ^oⁿ^m^an^u^f^act^u^r^{ed produ}^ct^s^98,775.00^1.2%
^Pri^m^ary^m^e^t^a^l^produ^ct^s^80,828.00^1.0%
^L^u^m^b^{er an}^{d w}^{ood produ}^ct^s^55,403.00^0.7%
^R^u^{bber an}^{d m}ⁱ^s^cel^l^aⁿ^e^ou^s^pl^as^tⁱ^c^s^45,313.00^0.5%
^Priⁿ^tⁱⁿ^g^an^{d pu}^blⁱ^s^hⁱⁿ^g^36,618.00^0.4%
^T^e^x^{tile m}^{ill produ}^cts^35,826.00^0.4%

^{% o}^f
^To^t^a^{l N}^e^t
^{Net E}^x^em^pt^Exe^m^pt
^Inc^o^m^e^Inc^o^m^e
^S^t^on^{e, cl}^ay^{, g}^l^as^s^,^an^{d con}^c^ret^e^27,527.00^0.3%
^A^pparel^an^{d ot}^h^e^{r f}ⁱⁿⁱ^s^h^{ed produ}^ct^s^18,389.00^0.2%
^L^eat^h^e^{r an}^{d l}^eat^h^e^{r produ}^ct^s^15,405.00^0.2%
^F^u^rnⁱ^t^u^{re an}^{d f}ⁱ^x^t^u^r^es^12,956.00^0.2%
^Pet^r^ol^eu^m^refⁱⁿⁱⁿ^g^7,647.00^0.1%
^Source:^CA^{RS calcu}^latioⁿ^s^b^a^sed^oⁿ^d^a^{ta in}^U^.^S^.^Iⁿ^terⁿ^{al Rev}^eⁿ^u^e^Ser^v^ice^S^t^a^{tistics o}^f^Iⁿ^co^me
^Bu^lletin^,^S^p^riⁿ^g^,^{2000, pp. 99-}^102.
Table 4, below, presents data on foreign tax credits. In assessing the principal
industries that would be affected by the foreign tax credit provisions of the bill, we
note first that the bill’s main foreign tax credit proposals – its provisions for interest
allocation rules, recharacterization of domestic loss, consolidation of separate
baskets, and extended carryforward period – would only directly affect firms having
excess foreign tax credits. Unfortunately, excess credit data on an industry-by-
industry basis have not been published, and we are therefore left with indirect
indicators of foreign tax credit position for the various industries. Table 4 offers one
such indirect measure, contained in the right-most column of the table: the percentage
of all un-credited foreign taxes accounted for by each industry, which can be viewed
as an approximation of the percentage of total excess credits in each industry. The
table shows that petroleum manufacturing by far accounts for the largest share of
“uncredited” foreign taxes, at 30.4%.²² Primary metal products is a distant second,
at 7.9%, motor vehicles is third at 6.1%, banking is fourth at 4.3%, and wholesale
trade is fifth, at 3.8%.
Table 5 presents data on Subpart F income. The right-hand column lists
Subpart F income by industry, as a percentage of total Subpart F income, and thus
gives an idea of which industries may be most affected by H.R. 5095’s relaxation of
Subpart F rules. According to the table, Subpart F income is concentrated in the
finance, insurance, and real estate industry (FIREA) – a phenomenon that likely
reflects the importance of passive income in the Subpart F rules. FIREA accounts
for 51.7% of all Subpart F income. Within FIREA, holding companies have the
largest portion of Subpart F income, followed by credit agencies, banks, and
insurance firms. Manufacturing accounts for only 28.39% of Subpart F income, with
drugs and electrical equipment manufacturers the leaders.

²²This high percentage may result from the exclusion of foreign taxes on oil extraction,
because oil firms tend to be vertically integrated and taxes on oil extraction tend to be high.

Table 4. 1997 Foreign Tax Credits Claimed, by Industry
(money amounts in thousands of dollars)
^{Foreign T}^a^x^e^s^{Foreign T}^a^x^Av^a^ila^ble^{Percentage of}
^Av^a^ila^{ble f}^o^r^Credit^{Foreign T}^a^x^e^s^A^ggregate
^Credit^Claⁱ^m^e^d^{less Credit}^s^{Foreign T}^a^x^e^s
^Claⁱ^m^e^d^{Not Credited}
^{All Indust}^r^ies^$49,979,466^$42,222,743^$7,756,723^100.0%
^{Agriculture, fores}^{try, and}^38,313.00^34,696.00^3,617.00^0.0%
^fi^s^hⁱⁿ^g
^Mⁱ^ning^1,416,118.00^906,954.00^509,164.00^6.6%
^Met^a^l^mⁱⁿⁱⁿ^g^417,581.00^166,282.00^251,299.00^3.2%
^Oⁱ^l^an^{d g}^a^s^ex^t^r^actⁱ^oⁿ^854,837.00^637,691.00^217,146.00^2.8%
^C^o^al^mⁱⁿⁱⁿ^g^134,825.00^94,155.00^40,670.00^0.5%
^Noⁿ^m^{etallic m}ⁱⁿ^e^r^a^{ls, ex}^cep^t^8,875.00^8,826.00^49.00^0.0%
^fue^l^s
^Co^nst^r^uctⁱ^oⁿ^63,431.00^44,412.00^19,019.00^0.2%
^M^a^nuf^a^c^t^u^ring^{35,792,177.00}^30,299,210.⁰⁰^5,492,967.00^70.8%
^Pet^r^ol^eu^m⁹^,102,941.00^6,^748,403.00^2,354,538.00^30.4%
^D^r^u^g^s^2,815,266.00^2,202,^041.00^613,225.00^7.9%
^{Electrical an}^{d electron}ⁱ^c^3,437,298.00^2,962,524.⁰⁰^474,774.00^6.1%
^equⁱ^pm^en^t
^Pri^m^ary^m^e^t^a^l^produ^ct^s^701,061.00^421,868.00^279,193.00^3.6%
^Mot^o^{r v}^e^hⁱ^cl^es^an^{d equ}ⁱ^pm^en^t²^,624,433.00^2,380,504.00^243,929.00^3.1%
^F^{ood an}^{d k}ⁱⁿ^d^{red produ}^ct^s³^,^042,404.00^2,801,304.00^241,100.00^3.1%
^Of^fⁱ^{ce, com}^p^u^tin^g^,^an^d^3,376,725.00^3,150,955.⁰⁰^225,770.00^2.9%
^accouⁿ^tin^g
^In^du^s^t^ri^al^pl^as^tⁱ^c^s¹^,861,492.00^1,647,569.00^213,923.00^2.8%
^O^t^h^e^{r ch}^emⁱ^cal^s¹^,471,640.00^1,321,594.00^150,046.00^1.9%
^F^a^bri^cat^{ed m}^e^t^a^l^produ^ct^s^844,557.00^694,974.00^149,583.00^1.9%
^Oth^e^{r m}^achⁱⁿ^ery^,^ex^cept^985,714.00^854,506.00^131,208.00^1.7%
^electrical
^T^{obacco m}^aⁿ^u^f^actu^r^es^1,379,627.00^1,302,880.00^76,747.00^1.0%
^In^s^t^ru^m^eⁿ^t^s¹^,344,804.00^1,292,349.00^52,455.00^0.7%
^P^a^{per an}^{d allied produ}^cts^716,140.00^664,059.00^52,081.00^0.7%
^S^t^on^{e, cl}^ay^{, an}^{d g}^l^as^s^144,642.00^101,193.00^43,449.00^0.6%
^Priⁿ^tⁱⁿ^g^an^{d pu}^blⁱ^s^hⁱⁿ^g^331,423.00^288,130.00^43,293.00^0.6%
^Mi^s^cel^l^aⁿ^e^ou^s^m^aⁿ^u^f^act^u^rⁱⁿ^g^217,384.00^177,199.00^40,185.00^0.5%
^R^u^{bber an}^{d m}ⁱ^s^c^{. pl}^as^tⁱ^c^s^440,363.00^402,316.00^38,047.00^0.5%
^A^p^p^a^r^e^{l an}^d^o^t^h^e^r^tex^tile^291,790.00^266,279.00^25,511.00^0.3%
^produ^ct^s
^F^u^rnⁱ^t^u^{re an}^{d f}ⁱ^x^t^u^r^es^41,940.00^22,761.00^19,179.00^0.2%

^{Foreign T}^a^x^e^s^{Foreign T}^a^x^Av^a^ila^ble^{Percentage of}
^Av^a^ila^{ble f}^o^r^Credit^{Foreign T}^a^x^e^s^A^ggregate
^Credit^Claⁱ^m^e^d^{less Credit}^s^{Foreign T}^a^x^e^s
^Claⁱ^m^e^d^{Not Credited}
^L^u^m^b^{er an}^{d w}^{ood produ}^ct^s^52,370.00^40,342.00^12,028.00^0.2%
^T^r^an^sp^o^r^tatioⁿ^eq^uⁱ^p^m^en^t,^527,783.00^517,204.00^10,579.00^0.1%
^ex^{cept m}^o^{tor v}^e^hⁱ^cles
^T^e^x^{tile m}^{ill produ}^cts^28,485.00^26,532.00^1,953.00^0.0%
^L^eat^h^e^{r an}^{d l}^eat^h^e^{r produ}^ct^s^11,896.00^11,724.00^172.00^0.0%
^T^r^an^s^p^ortati^on^an^d^Pu^b^lⁱ^c^969,683.00^802,644.00^167,039.00^2.2%
^Ut^ilit^ies
^C^o^m^m^uⁿⁱ^catⁱ^oⁿ^539,130.00^451,925.00^87,205.00^1.1%
^{Electric, g}^a^s^,^an^{d s}^aⁿ^itary^216,693.00^163,078.00^53,615.00^0.7%
^s^e^rv^ices
^T^r^an^s^port^a^tⁱ^oⁿ^213,860.00^187,641.00^26,219.00^0.3%
^W^h^ol^es^al^{e trad}^e^980,300.00^686,471.00^293,829.00^3.8%
^Retai^l^trad^e^913,847.00^696,776.00^217,071.00^2.8%

^{Finance, ins}^u^ra^{nce, and real}^7,370,111.00^6,654,591.⁰⁰^715,520.00^9.2%
^es^tate
^Ban^kⁱⁿ^g^3,672,822.00^3,^337,311.00^335,511.00^4.3%
^In^s^u^ran^c^e¹^,703,013.00^1,552,984.00^150,029.00^1.9%
^H^o^l^dⁱⁿ^g^com^p^anⁱ^e^s^620,007.00^481,423.00^138,584.00^1.8%
^C^r^edi^t^ag^en^ci^es^505,543.00^457,527.00^48,016.00^0.6%
^Secu^rity^{, com}^m^odity^brok^ers^,^801,877.00^765,424.00^36,453.00^0.5%
^an^{d s}^e^rv^ices
^R^eal^es^t^a^t^e^16,188.00^9,759.00^6,429.00^0.1%
^In^s^u^ran^{ce ag}^en^t^s^50,660.00^50,162.00^498.00^0.0%
^Services^2,435,487.00^2,096,990.⁰⁰^338,497.00^4.4%
^S^o^u^rce:^{U.S. In}^tern^{al Rev}^eⁿ^u^e^Serv^ice,^Statistic^{s of Inc}^o^me^Bulle^tin^{, W}ⁱ^nte^r^2001-^{2002, pp.}^121-¹³⁵^;^C^R^S
^cal^cu^l^a^tⁱ^oⁿ^s^.

Table 5. 1996 Subpart F Income of Controlled Foreign
Corporations, by Industry
(dollar amounts in thousands)
Percent of
Subpart FTotal Subpart
IncomeF Income
All Industries22,943,983.00100.00%
Agriculture, forestry, and fishing18,099.000.08%
Mining 357,072.00 1.56%
Oil and gas extraction323,957.001.41%
Nonmetallic minerals, except fuels25,051.000.11%
Metal Mining8,065.000.04%
Construction 119,762.00 0.52%
Special trade contractors109,199.000.48%
Heavy construction contractors10,551.000.05%
General bldg. contractors and12.000.00%
operative builders
Manuf acturing 6,512,757.00 28.39%
Drugs 1,386,119.00 6.04%
Electrical and electronic equipment872,370.003.80%
Industrial, plastics, and synthetic562,158.002.45%
materials
Office, computing, and accounting534,811.002.33%
machinery
Petroleum and coal products521,951.002.27%
Motor vehicles and equipment486,697.002.12%
Food and kindred products452,812.001.97%
Tobacco manufacturers436,613.001.90%
Other chemicals279,546.001.22%
Instruments and related products269,941.001.18%
Miscellaneous manufacturing products208,228.000.91%
Primary metals industries141,864.000.62%
Other machinery, except electrical126,859.000.55%
Fabricated metal products110,018.000.48%
Paper and allied products46,856.000.20%
Rubber and misc. plastic products29,719.000.13%

Percent of
Subpart FTotal Subpart
IncomeF Income
Transportation equipment, except11,631.000.05%
motor vehicles
Textile mill products10,394.000.05%
Printing and publishing9,394.000.04%
Stone, clay, and glass products5,661.000.02%
Furniture and fixtures4,662.000.02%
Apparel and other textile products2,607.000.01%
Lumber and wood products1,846.000.01%
Transportation and public utilities388,157.001.69%
Water transportation 130,536.000.57%
Other transportation119,321.000.52%
Communication 70,381.00 0.31%
Electric, gas, and sanitary services67,919.000.30%
Wholesale trade2,148,213.009.36%
Retail trade241,478.001.05%
Finance, insurance, and real estate11,862,803.0051.70%
Holding and other investment4,859,873.0021.18%
companies
Credit agencies, other than banks2,911,319.0012.69%
Banking 1,653,523.00 7.21%
Insurance 1,597,589.00 6.96%
Security, commodity brokers, and677,939.002.95%
services
Real estate119,665.000.52%
Insurance agents, brokers, and services42,896.000.19%
Services 1,295,642.00 5.65%
Business services791,333.003.45%
Other services421,221.001.84%
Hotels and other lodging places39,983.000.17%
Amusement and rec. services15,559.000.07%
^Source:^U^.^S.^Iⁿ^t^e^rⁿ^a^l^Re^ve^nue^Se^r^vⁱ^c^e^,^S^t^a^{tistics o}^f^Iⁿ^co^{me Bu}^lletin^{, S}^p^riⁿ^g^,^{2001, pp.}
^146-^7;^C^R^S^cal^cu^l^a^tⁱ^oⁿ^s^.