[House Report 113-427]
[From the U.S. Government Publishing Office]
113th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 113-427
======================================================================
PERMANENT ACTIVE FINANCING EXCEPTION ACT
OF 2014
_______
May 2, 2014.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Camp, from the Committee on Ways and Means, submitted the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 4429]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 4429) to amend the Internal Revenue Code of 1986 to
permanently extend the subpart F exemption for active financing
income, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................2
A. Purpose and Summary................................. 2
B. Background and Need for Legislation................. 2
C. Legislative History................................. 2
II. EXPLANATION OF THE BILL..........................................3
A. Exceptions for Active Financing Income (secs. 953
and 954 of the Code)............................... 3
III. VOTES OF THE COMMITTEE...........................................6
IV. BUDGET EFFECTS OF THE BILL.......................................7
A. Committee Estimate of Budgetary Effects............. 7
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 7
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 7
D. Macroeconomic Impact Analysis....................... 8
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......8
A. Committee Oversight Findings and Recommendations.... 8
B. Statement of General Performance Goals and
Objectives......................................... 8
C. Information Relating to Unfunded Mandates........... 9
D. Applicability of House Rule XXI 5(b)................ 9
E. Tax Complexity Analysis............................. 9
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 9
G. Duplication of Federal Programs..................... 9
H. Disclosure of Directed Rule Makings................. 10
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........10
VII. DISSENTING VIEWS................................................12
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Permanent Active Financing Exception
Act of 2014''.
SEC. 2. PERMANENT SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.
(a) Banking, Financing, or Similar Businesses.--Subsection (h) of
section 954 of the Internal Revenue Code of 1986 (relating to special
rule for income derived in the active conduct of banking, financing, or
similar businesses) is amended by striking paragraph (9).
(b) Insurance Businesses.--Subsection (e) of section 953 of such Code
(relating to exempt insurance income) is amended by striking paragraph
(10) and by redesignating paragraph (11) as paragraph (10).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of a foreign corporation beginning after December 31,
2013, and to taxable years of United States shareholders with or within
which such taxable years of such foreign corporation end.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
Similar to a provision contained in the discussion draft of
the ``Tax Reform Act of 2014'' released on February 26, 2014,
the bill, H.R. 4429, reported by the Committee on Ways and
Means, provides a permanent exemption from subpart F for active
financing income. Under current law, that exemption expired for
taxable years beginning after December 31, 2013.
B. Background and Need for Legislation
While the Committee continues actively to pursue
comprehensive tax reform as a critical means of promoting
economic growth and job creation, the Committee also believes
that it is important to provide permanent, immediate tax relief
to worldwide American employers in the manufacturing, financial
services, and insurance sectors to help encourage economic
growth and job creation here in the United States. By providing
deferral of U.S. tax on their foreign business income, H.R.
4429 would deliver certainty and stability to these employers,
allowing U.S. companies to price their products competitively
against foreign multinationals.
C. Legislative History
BACKGROUND
H.R. 4429 was introduced on April 8, 2014, and was referred
to the Committee on Ways and Means.
COMMITTEE ACTION
The Committee on Ways and Means marked up H.R. 4429, the
Permanent Active Financing Exception Act of 2014, on April 29,
2014, and ordered the bill, as amended, favorably reported
(with a quorum being present).
COMMITTEE HEARINGS
The need for a permanent extension of the active financing
exception was discussed at no fewer than five hearings during
the 112th and 113th Congresses:
Full Committee hearing on Fundamental Tax Reform
(January 20, 2011);
Full Committee hearing on the Need for
Comprehensive Tax Reform to Help American Companies Compete in
the Global Market and Create Jobs for American Workers (May 12,
2011);
Select Revenue Measures Subcommittee hearing on
Ways and Means International Tax Reform Discussion Draft
(November 17, 2011);
Full Committee hearing on Tax Havens, Base
Erosion and Profit-Shifting (June 13, 2013); and
Full Committee hearing on the Benefits of
Permanent Tax Policy for America's Job Creators (April 8,
2014).
II. EXPLANATION OF THE BILL
A. Exceptions for Active Financing Income
(secs. 953 and 954 of the Code)
PRESENT LAW
Under the subpart F rules,\1\ 10-percent-or-greater U.S.
shareholders of a controlled foreign corporation (``CFC'') are
subject to U.S. tax currently on certain income earned by the
CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, insurance income
and foreign base company income. Foreign base company income
includes, among other things, foreign personal holding company
income and foreign base company services income (i.e., income
derived from services performed for or on behalf of a related
person outside the country in which the CFC is organized).
---------------------------------------------------------------------------
\1\Secs. 951-965.
---------------------------------------------------------------------------
Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and real estate mortgage investment
conduits (``REMICs''); (3) net gains from commodities
transactions; (4) net gains from certain foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; (7) payments in lieu
of dividends; and (8) amounts received under personal service
contracts.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income.\2\
---------------------------------------------------------------------------
\2\Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, as a securities dealer, or in the conduct of
an insurance business (so-called ``active financing income'').
With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the active financing exceptions. In addition,
certain nexus requirements apply, which provide that income
derived by a CFC or a qualified business unit (``QBU'') of a
CFC from transactions with customers is eligible for the
exceptions if, among other things, substantially all of the
activities in connection with such transactions are conducted
directly by the CFC or QBU in its home country, and such income
is treated as earned by the CFC or QBU in its home country for
purposes of such country's tax laws. Moreover, the exceptions
apply to income derived from certain cross border transactions,
provided that certain requirements are met. Additional
exceptions from foreign personal holding company income apply
for certain income derived by a securities dealer within the
meaning of section 475 and for gain from the sale of active
financing assets.
In the case of a securities dealer, the temporary exception
from foreign personal holding company income applies to certain
income. The income covered by the exception is any interest or
dividend (or certain equivalent amounts) from any transaction,
including a hedging transaction or a transaction consisting of
a deposit of collateral or margin, entered into in the ordinary
course of the dealer's trade or business as a dealer in
securities within the meaning of section 475. In the case of a
QBU of the dealer, the income is required to be attributable to
activities of the QBU in the country of incorporation, or to a
QBU in the country in which the QBU both maintains its
principal office and conducts substantial business activity. A
coordination rule provides that this exception generally takes
precedence over the exception for income of a banking,
financing or similar business, in the case of a securities
dealer.
In the case of insurance, a temporary exception from
foreign personal holding company income applies for certain
income of a qualifying insurance company with respect to risks
located within the CFC's country of creation or organization.
In the case of insurance, temporary exceptions from insurance
income and from foreign personal holding company income also
apply for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met. In the case of a life insurance or
annuity contract, reserves for such contracts are determined
under rules specific to the temporary exceptions. Present law
also permits a taxpayer in certain circumstances, subject to
approval by the IRS through the ruling process or in published
guidance, to establish that the reserve of a life insurance
company for life insurance and annuity contracts is the amount
taken into account in determining the foreign statement reserve
for the contract (reduced by catastrophe, equalization, or
deficiency reserve or any similar reserve). IRS approval is to
be based on whether the method, the interest rate, the
mortality and morbidity assumptions, and any other factors
taken into account in determining foreign statement reserves
(taken together or separately) provide an appropriate means of
measuring income for Federal income tax purposes.
The temporary exemptions for active financing income expire
for taxable years of foreign corporations beginning after
December 31, 2013 (and taxable years of U.S. shareholders
ending with or within those taxable years).
REASONS FOR CHANGE
The Committee believes that it is appropriate to make
permanent the temporary provisions to provide certainty, to
facilitate business planning, and to help U.S. employers with
overseas operations compete more effectively with foreign firms
and increase employment in the United States.
EXPLANATION OF PROVISION
The proposal makes permanent the temporary exceptions from
subpart F foreign personal holding company income, foreign base
company services income, and insurance income for certain
income that is derived in the active conduct of a banking,
financing, or similar business, as a securities dealer, or in
the conduct of an insurance business.
EFFECTIVE DATE
The proposal is effective for taxable years of foreign
corporations beginning after December 31, 2013, and for taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 4429, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2014-2024:
----------------------------------------------------------------------------------------------------------------
By fiscal years in billions of dollars--
-----------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-19 2014-24
----------------------------------------------------------------------------------------------------------------
-2.0 -5.2 -5.5 -5.6 -5.1 -5.4 -5.8 -5.9 -6.0 -6.1 -6.3 -28.8 -58.8
----------------------------------------------------------------------------------------------------------------
Note: Details do not add to totals due to rounding.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing tax
provisions involve increased tax expenditures. (See amounts in
table in Part IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 1, 2014.
Hon. Dave Camp,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4429, the
Permanent Active Financing Exception Act of 2014.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Logan
Timmerhoff.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure.
H.R. 4429--Permanent Active Financing Exception Act of 2014
H.R. 4429 would amend the Internal Revenue Code to allow
the deferral of tax on certain income earned in foreign
companies when calculating taxable income. Under Subpart F
rules in the Internal Revenue Code, U.S. shareholders that hold
10 percent or more of a controlled foreign corporation are
subject to U.S. tax annually on certain income earned by that
corporation, whether or not that income is distributed to
shareholders. H.R. 4429 would make permanent the temporary
exceptions from Subpart F tax treatment for income from active
banking, financing, insurance, or similar business that
generally expired after December 31, 2013.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 4429 would reduce revenues, thus
increasing federal budget deficits, by about $59 billion over
the 2014-2024 period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
direct spending and revenues. Enacting H.R. 4429 would result
in revenue losses in each year beginning in 2014. The estimated
increases in the deficit are shown in the following table.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Logan
Timmerhoff. The estimate was approved by David Weiner,
Assistant Director for Tax Analysis.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4429, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON APRIL 29, 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-2019 2014-2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects........... 2,033 5,166 5,536 5,563 5.092 5,401 5,778 5,854 5,983 6,092 6,306 28,790 58,803
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not sum to totals because of rounding.
D. Macroeconomic Impact Analysis
In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986: the effects of the bill on economic activity are so small
as to be incalculable within the context of a model of the
aggregate economy.
V. OTHER MATTERS TO BE DISCUSSED UNDER THERULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 4429 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code and has widespread applicability to
individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Code and that
have ``widespread applicability'' to individuals or small
businesses, within the meaning of the rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill, and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(j)(2) of H. Res. 5 (113th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(k) of H. Res. 5 (113th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter N--Tax Based on Income From Sources Within or Without the
United States
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
* * * * * * *
Subpart F--Controlled Foreign Corporations
* * * * * * *
SEC. 953. INSURANCE INCOME.
(a) * * *
* * * * * * *
(e) Exempt Insurance Income.--For purposes of this section--
(1) * * *
* * * * * * *
[(10) Application.--This subsection and section
954(i) shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2014, and to taxable years of United
States shareholders with or within which any such
taxable year of such foreign corporation ends. If this
subsection does not apply to a taxable year of a
foreign corporation beginning after December 31, 2013
(and taxable years of United States shareholders ending
with or within such taxable year), then,
notwithstanding the preceding sentence, subsection (a)
shall be applied to such taxable years in the same
manner as it would if the taxable year of the foreign
corporation began in 1998.]
[(11)] (10) Cross reference.--For income exempt from
foreign personal holding company income, see section
954(i).
SEC. 954. FOREIGN BASE COMPANY INCOME.
(a) * * *
* * * * * * *
(h) Special Rule for Income Derived in the Active Conduct of
Banking, Financing, or Similar Businesses.--
(1) * * *
* * * * * * *
[(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection
(e)(2) shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before January 1, 2014, and to taxable years of United
States shareholders with or within which any such
taxable year of such foreign corporation ends.]
* * * * * * *
VII. DISSENTING VIEWS
These bills would add a combined $310 billion to the
deficit. Even though these bills were introduced individually
with some bipartisan support, the opposition to these bills was
based on the position that these tax provisions should not be
made permanent by adding to the deficit without any revenue
offset.
To put the combined cost ($310 billion) into context, this
total represents more than one-half of the entire federal
deficit this year--the lowest it has been since President Obama
took office. It represents nearly two-thirds of all non-defense
domestic discretionary spending in 2014. It is more than three
times what we spend annually on education, job training, and
social services. It is five times more than we spend on
veterans. And, it is five times more than we spend on medical
research and public health.
We also opposed the manner in which Republicans were
proceeding--selecting six to make permanent without any offset
from the approximately 60 tax provisions that expired last
year. This approach was both fiscally irresponsible and
fundamentally hypocritical.
We found it hypocritical that, four months ago, Republicans
let emergency unemployment insurance expire for more than 1.3
million Americans by arguing that an adequate offset had yet to
be proposed. In early April, the Senate came to a bipartisan
agreement on an offset after months of painstaking
negotiations. Yet House Republicans still refuse to act.
Further, we found it also hypocritical that the Republicans
were in favor of passing these six tax bills at a cost of $310
billion without an offset at the same time that they were
requiring an offset for a provision stripped from another bill
under consideration at the markup that helped foster children
at a cost of $12 million.
The consideration of these six tax bills should have been
part of the consideration of all the expired tax provisions
commonly referred to as ``tax extenders.'' The Republicans did
not take up other tax extenders that also are important to
Democratic Committee Members. Left to an uncertain fate are
provisions like the Work Opportunity Tax Credit, the New
Markets Tax Credit, and the renewable energy tax credits, as
well as the long-term status of the Earned Income Tax Credit,
the Child Tax Credit, and the American Opportunity Tax Credit.
Sander M. Levin,
Ranking Member.