11. Identification of Return Preparers
(Sec. 3711 of the Bill and Sec. 6109(a) of the Code)
Present Law
Any return or claim for refund prepared by an income tax return preparer must bear the
social security number of the return preparer, if such preparer is an individual (Sec. 6109(a)).
Reasons for Change
The Committee is concerned that inappropriate use might be made of a preparer's social
security number.
Explanation of Provision
The provision authorizes the IRS to approve alternatives to Social Security numbers to
identify tax return preparers.
Effective Date
The provision is effective on the date of enactment.
12. Offset of past-due, legally enforceable State income tax obligations against
overpayments (Sec. 3712 of the Bill and new Sec. 6402(e) of the Code)
Present Law
Overpayments of Federal tax may be used to pay past-due child support and debts owed to
Federal agencies (Sec. 6402), without the consent of the taxpayer. Such amount for past-due child
support may be paid directly to a State. Present law provides that offsets are made in the following
priority: (1) child support; and (2) other Federal debts, in the order in which such debts accrued.
Reasons for Change
The Committee believes that it is appropriate to permit States to collect past-due, legally
enforceable income tax debts that have been reduced to judgment from Federal tax overpayments.
Explanation of Provision
The provision permits States to participate in the IRS refund offset program for past-due,
legally enforceable State income tax debts that have been reduced to judgment, providing the
person making the income tax refunds payable after December 31, 1998.
13. Moratorium regarding regulations under Notice 98-11 (Sec. 3713(a)(1) of the Bill)
Present Law
Overview
U. S. citizens and residents and U.S. corporations are taxed currently by the United States
on their worldwide income, subject to a credit against U.S. tax on foreign-source income for
foreign income taxes paid with respect to such income. A foreign corporation generally is not
subject to U.S. tax on its income from operations outside the United States.
Income of a foreign corporation generally is taxed by the United States when it is
repatriated to the United States through payment to the corporation's U.S. shareholders, subject to
a foreign tax credit. However, various regimes imposing current U.S. tax on income earned
through a foreign corporation are reflected in the Code. One anti-deferral regime set forth in the
Code is the controlled foreign corporation rules of subpart F (Secs. 951-964).
A controlled foreign corporation ("CFC") is defined generally as any foreign corporation if
U.S. persons own more than 50 percent of the corporation's stock (measured by vote or value),
taking into account only those U.S. persons that own at least 10 percent of the stock (measured by
vote only) (Sec. 957). Stock ownership includes not only stock owned directly, but also stock
owned indirectly or constructively (Sec. 958).
The United States generally taxes the U.S. 10-percent shareholders of a CFC currently on
their pro rata shares of certain income of the CFC (so-called "subpart F income") (Sec. 951). In
effect, the Code treats those shareholders as having received a current distribution out of the CFC's
subpart F income. Such shareholders also are subject to current U.S. tax on their pro rata shares of
the CFC's earnings invested in U.S. property (Sec. 951). The foreign tax credit may reduce the
U.S. tax on these amounts.
Subpart F income includes, among other items, foreign base company income (Sec. 952).
Foreign base company income, in turn, includes foreign personal holding company income,
foreign base company sales income, foreign base company services income, foreign base company
shipping income and foreign base company oil related income (Sec. 954). Foreign personal holding
company income includes, among other items, dividends, interest, rents and royalties. An
exception from foreign personal holding company income applies to certain dividends and interest
received from a related person which is created or organized in the same country as the CFC and
which has a substantial part of its assets in that country, and to certain rents and royalties received
from a related person for the use of property in the same country in which the CFC was created or
organized (the so-called "same-country exception").
Foreign base company sales income includes income derived by a CFC from certain
related-party transactions, including the purchase of personal property from a related person and its
sale to any person, the purchase of personal property from any person and its sale to a related
person, and the purchase or sale of personal property on behalf of a related person, where the
property which is purchased or sold is manufactured outside the country in which the CFC was
created or organized and the property is purchased or sold for use or consumption outside such
foreign country. A special branch rule applies for purposes of determining a CFC's foreign base
company sales income. Under this rule, a branch of a CFC is treated as a separate corporation
(only for purposes of determining the CFC's foreign base company sales income) where the
activities of the CFC through the branch outside the CFC's country of incorporation have
substantially the same effect as if such branch were a subsidiary.
Because of differences in U.S. and foreign laws, it is possible for a taxpayer to enter into
transactions that are treated in one manner for U.S. tax purposes and in another manner for foreign
tax purposes. These transactions are referred to as hybrid transactions. For example, a hybrid
transaction may involve the use of an entity that is treated as a corporation for purposes of the tax
law of one jurisdiction but is treated as a branch or partnership for purposes of the tax law of
another jurisdiction.
Notice 98-11 and the regulations issued thereunder
Notice 98-11, issued on January 16, 1998, addresses the treatment of hybrid branches
under the subpart F provisions of the Code. The Notice states that the Treasury Department and the
Internal Revenue Service have concluded that the use of certain arrangements involving hybrid
branches is contrary to the policy and rules of subpart F. The hybrid branch arrangements
identified in Notice 98-11 involve structures that are characterized for U.S. tax purposes as part of
a CFC but are characterized for purposes of the tax law of the country in which the CFC is
incorporated as a separate entity. The Notice states that regulations will be issued to prevent the use
of hybrid branch arrangements to reduce foreign tax while avoiding the corresponding creation of
subpart F income. The Notice states that such regulations will provide that the branch and the CFC
will be treated as separate corporations for purposes of subpart F. The Notice also states that
similar issues raised under subpart F by certain partnership or trust arrangements will be addressed
in separate regulation projects.
On March 23, 1998, temporary and proposed regulations were issued to address the issues
raised in Notice 98-11 and to address certain partnership and other issues raised under subpart F.
Under the regulations, certain payments between a CFC and its hybrid branch or between hybrid
branches of the CFC (so-called "hybrid branch payments") are treated as giving rise to subpart F
income. The regulations generally provide that non-subpart F income of the CFC, in the amount of
the hybrid branch payment, is recharacterized as subpart F income of the CFC if: (1) the hybrid
branch payment reduces the foreign tax of the payor, (2) the hybrid branch payment would have
been foreign personal holding company income if made between separate CFCs, and (3) there is a
disparity between the effective tax rate on the payment in the hands of the payee and the effective
tax rate that would have applied if the income had been taxed in the hands of the payor. The
regulations also apply to other hybrid branch arrangements involving a partnership, including a
CFC's proportionate share of any hybrid branch payment made between a partnership in which the
CFC is a partner and a hybrid branch of the partnership or between hybrid branches of such a
partnership. Under the regulations, if a partnership is treated as fiscally transparent by the CFC's
taxing jurisdiction, the recharacterization rules are applied by treating the hybrid branch payment as
if it had been made directly between the CFC and the hybrid branch, or as if the hybrid branches of
the partnership were hybrid branches of the CFC, as applicable. If the partnership is treated as a
separate entity by the CFC's taxing jurisdiction, the recharacterization rules are applied to treat the
partnership as if it were a CFC.
The regulations also address the application of the same-country exception to the foreign
personal holding company income rules under subpart F in the case of certain hybrid branch
arrangements. Under the regulations, the same-country exception applies to payments by a CFC to
a hybrid branch of a related CFC only if the payment would have qualified for the exception if the
hybrid branch had been a separate CFC incorporated in the jurisdiction in which the payment is
subject to tax (other than a withholding tax). The regulations provide additional rules regarding the
application of the same-country exception in the case of certain hybrid arrangements involving a
partnership.
The regulations generally apply to amounts paid or accrued pursuant to hybrid branch
arrangements entered into or substantially modified on or after January 16, 1998. As a result, the
regulations generally do not apply to amounts paid or accrued pursuant to hybrid branch
arrangements entered into before January 16, 1998 and not substantially modified on or after that
date.
In the case of certain hybrid arrangements involving partnerships, the regulations generally
apply to amounts paid or accrued pursuant to such arrangements entered into or substantially
modified on or after March 23, 1998. As a result, the regulations generally do not apply to
amounts paid or accrued pursuant to such arrangements entered into before March 23, 1998 and
not substantially modified on or after that date.
Reasons for Change
Notice 98-11 and the regulations issued thereunder address complex international tax issues
relating to the treatment of hybrid transactions under the subpart F provisions of the Code. The
impact of such administrative guidance on U.S. businesses operating abroad may be substantial.
The Committee believes that it is appropriate to place a moratorium on the implementation of the
regulations with respect to Notice 98-11 so that these important issues can be considered by the
Congress.
Explanation of Provision
The bill provides that no temporary or final regulations with respect to Notice 98-11 may be
implemented prior to six months after the date of enactment of this provision. This moratorium
applies to the regulations with respect to hybrid branches and to the regulations with respect to
hybrid arrangements involving partnerships. It is intended that the moratorium delaying
implementation of the regulations would not require a modification to the effective dates of the
regulations. No inference is intended regarding the authority of the Department of the Treasury or
the Internal Revenue Service to issue the Notice or the regulations.
Effective Date
The provision is effective on the date of enactment.
14. Sense of the Senate regarding Notices 98-5 and 98-11 (Secs. 3713(a)(2) and
(b) of the Bill)
Present Law
Overview
U. S. citizens and residents and U.S. corporations are taxed currently by the United States
on their worldwide income. U.S. persons may credit foreign taxes against U.S. tax on foreign
source income. The amount of foreign tax credits that can be claimed in a year is subject to a
limitation that prevents taxpayers from using foreign tax credits to offset U.S. tax on U.S.-source
income. Separate limitations are applied to specific categories of income.
A foreign corporation generally is not subject to U.S. tax on its income from operations
outside the United States. Income of a foreign corporation generally is taxed by the United States
when it is repatriated to the United States through payment to the corporation's U.S. shareholders,
subject to a foreign tax credit. However, various regimes imposing current U.S. tax on income
earned through a foreign corporation are reflected in the Code. One anti-deferral regime set forth in
the Code is the controlled foreign corporation rules of subpart F (Secs. 951-964).
A controlled foreign corporation ("CFC") is defined generally as any foreign corporation if
U.S. persons own more than 50 percent of the corporation's stock (measured by vote or value),
taking into account only those U.S. persons that own at least 10 percent of the stock (measured by
vote only) (Sec. 957). Stock ownership includes not only stock owned directly, but also stock
owned indirectly or constructively (Sec. 958).
The United States generally taxes the U.S. 10-percent shareholders of a CFC currently on
their pro rata shares of certain income of the CFC (so-called "subpart F income") (Sec. 951). In
effect, the Code treats those shareholders as having received a current distribution out of the CFC's
subpart F income. Such shareholders also are subject to current U.S. tax on their pro rata shares of
the CFC's earnings invested in U.S. property (Sec. 951). The foreign tax credit may reduce the
U.S. tax on these amounts.
Subpart F income includes, among other items, foreign base company income (Sec. 952).
Foreign base company income, in turn, includes foreign personal holding company income,
foreign base company sales income, foreign base company services income, foreign base company
shipping income and foreign base company oil related income (Sec. 954). Foreign personal holding
company income includes, among other items, dividends, interest, rents and royalties. An
exception from foreign personal holding company income applies to certain dividends and interest
received from a related person which is created or organized in the same country as the CFC and
which has a substantial part of its assets in that country, and to certain rents and royalties received
from a related person for the use of property in the same country in which the CFC was created or
organized (the so-called "same-country exception").
Foreign base company sales income includes income derived by a CFC from certain
related-party transactions, including the purchase of personal property from a related person and its
sale to any person, the purchase of personal property from any person and its sale to a related
person, and the purchase or sale of personal property on behalf of a related person, where the
property which is purchased or sold is manufactured outside the country in which the CFC was
created or organized and the property is purchased or sold for use or consumption outside such
foreign country. A special branch rule applies for purposes of determining a CFC's foreign base
company sales income. Under this rule, a branch of a CFC is treated as a separate corporation
(only for purposes of determining the CFC's foreign base company sales income) where the
activities of the CFC through the branch outside the CFC's country of incorporation have
substantially the same effect as if such branch were a subsidiary.
Because of differences in U.S. and foreign laws, it is possible for a taxpayer to enter into
transactions that are treated in one manner for U.S. tax purposes and in another manner for foreign
tax purposes. These transactions are referred to as hybrid transactions. For example, a hybrid
transaction may involve the use of an entity that is treated as a corporation for purposes of the tax
law of one jurisdiction but is treated as a branch or partnership for purposes of the tax law of
another jurisdiction.
Notices 98-5 and 98-11
Notice 98-5, issued on December 23, 1997, addresses the treatment of certain types of
transactions under the foreign tax credit provisions of the Code. The Notice states that the Treasury
Department and the Internal Revenue Service have concluded that the use of certain transactions
creates the potential for foreign tax credit abuse. The Notice states that such transactions typically
involve either: (1) the acquisition of an asset that generates an income stream (e.g., royalties or
interest) subject to a foreign withholding tax, or (2) the effective duplication of tax benefits through
the use of certain structures designed to exploit inconsistencies between U.S. and foreign tax laws.
The Notice includes five specific transactions as illustrations of arrangements creating the potential
for foreign tax credit abuse. The Notice states that it is intended that regulations will be issued to
disallow foreign tax credits for abusive transactions in cases where the reasonably expected
economic profit from the transaction is insubstantial compared to the value of the foreign tax credits
expected to be obtained as a result of the arrangement. The Notice further states that it is intended
that regulations generally will apply with respect to such transactions for taxes paid or accrued on
or after December 23, 1997. Regulations have not yet been issued under Notice 98-5.
Notice 98-11, issued on January 16, 1998, addresses the treatment of hybrid branches
under the subpart F provisions of the Code. The Notice states that the Treasury Department and the
Internal Revenue Service have concluded that the use of certain arrangements involving hybrid
branches is contrary to the policy and rules of subpart F. The hybrid branch arrangements
identified in Notice 98-11 involve structures that are characterized for U.S. tax purposes as part of
a CFC but are characterized for purposes of the tax law of the country in which the CFC is
incorporated as a separate entity. The Notice states that regulations will be issued to prevent the use
of hybrid branch arrangements to reduce foreign tax while avoiding the corresponding creation of
subpart F income. The Notice states that such regulations will provide that the branch and the CFC
will be treated as separate corporations for purposes of subpart F. The Notice also states that
similar issues raised under subpart F by certain partnership or trust arrangements will be addressed
in separate regulation projects.
On March 23, 1998, temporary and proposed regulations were issued to address the issues
raised in Notice 98-11 and to address certain partnership and other issues raised under subpart F.
Under the regulations, certain payments between a CFC and its hybrid branch or between hybrid
branches of the CFC (so-called "hybrid branch payments") are treated as giving rise to subpart F
income. The regulations generally provide that non-subpart F income of the CFC, in the amount of
the hybrid branch payment, is recharacterized as subpart F income of the CFC if: (1) the hybrid
branch payment reduces the foreign tax of the payor, (2) the hybrid branch payment would have
been foreign personal holding company income if made between separate CFCs, and (3) there is a
disparity between the effective tax rate on the payment in the hands of the payee and the effective
tax rate that would have applied if the income had been taxed in the hands of the payor. The
regulations also apply to other hybrid branch arrangements involving a partnership, including a
CFC's proportionate share of any hybrid branch payment made between a partnership in which the
CFC is a partner and a hybrid branch of the partnership or between hybrid branches of such a
partnership. Under the regulations, if a partnership is treated as fiscally transparent by the CFC's
taxing jurisdiction, the recharacterization rules are applied by treating the hybrid branch payment as
if it had been made directly between the CFC and the hybrid branch, or as if the hybrid branches of
the partnership were hybrid branches of the CFC, as applicable. If the partnership is treated as a
separate entity by the CFC's taxing jurisdiction, the recharacterization rules are applied to treat the
partnership as if it were a CFC.
The regulations also address the application of the same-country exception to the foreign
personal holding company income rules under subpart F in the case of certain hybrid branch
arrangements. Under the regulations, the same-country exception applies to payments by a CFC to
a hybrid branch of a related CFC only if the payment would have qualified for the exception if the
hybrid branch had been a separate CFC incorporated in the jurisdiction in which the payment is
subject to tax (other than a withholding tax). The regulations provide additional rules regarding the
application of the same-country exception in the case of certain hybrid arrangements involving a
partnership.
The regulations generally apply to amounts paid or accrued pursuant to hybrid branch
arrangements entered into or substantially modified on or after January 16, 1998. As a result, the
regulations generally do not apply to amounts paid or accrued pursuant to hybrid branch
arrangements entered into before January 16, 1998 and not substantially modified on or after that
date.
In the case of certain hybrid arrangements involving partnerships, the regulations generally
apply to amounts paid or accrued pursuant to such arrangements entered into or substantially
modified on or after March 23, 1998. As a result, the regulations generally do not apply to
amounts paid or accrued pursuant to such arrangements entered into before March 23, 1998 and
not substantially modified on or after that date.
Reasons for Change
The subpart F provisions of the Code reflect a balancing of various policy objectives. Any
modification or refinement to that balance should be the subject of serious and thoughtful debate. It
is the Committee's view that any significant policy developments with respect to the subpart F
provisions, such as those addressed by Notice 98-11 and the regulations issued thereunder, should
be considered by the Congress as part of the normal legislative process. The Committee also
believes that any regulations issued under Notice 98-5 should be limited to the specific transactions
described therein. Moreover, the Committee is concerned about the potential disruptive effect of the
issuance of an administrative notice that describes general principles to be reflected in regulations
that will be issued in the future, but provides that such future regulations will be effective as of the
date of issuance of the notice.
Explanation of Provision
The bill provides that it is the sense of the Senate that the Department of the Treasury and
the Internal Revenue Service should withdraw Notice 98-11 and the regulations issued thereunder,
and that the Congress, and not the Department of the Treasury nor the Internal Revenue Service,
should determine the international tax policy issues relating to the treatment of hybrid transactions
under the subpart F provisions of the Code.
The bill further provides that it is the sense of the Senate that the Department of the
Treasury and the Internal Revenue Service should limit any regulations issued under Notice 98-5 to
the specific transactions described therein. In addition, such regulations should: (a) not affect
transactions undertaken in the ordinary course of business, (b) not have an effective date any
earlier than the date of issuance of proposed regulations, and (c) be issued in accordance with
normal regulatory procedures which include an opportunity for comment. Nothing in this sense of
the Senate should be construed to limit the ability of the Department of the Treasury or the Internal
Revenue Service to address abusive transactions.
Effective Date
The provision is effective on the date of enactment.
