Sec. 4004. Treatment of deferred foreign income upon transition to participation exemption system of taxation
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Section 965 is amended to read as follows: In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of— the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.
In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at least one E&P deficit foreign corporation, the amount which would (but for this subsection) be taken into account under section 951(a)(1) by reason of subsection
(a)as such United States shareholder’s pro rata share of the subpart F income of each deferred foreign income corporation shall be reduced (but not below zero) by the amount of such United States shareholder’s aggregate foreign E&P deficit which is allocated under paragraph
(2)to such deferred foreign income corporation. The aggregate foreign E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an amount which bears the same proportion to such aggregate as— such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of each such deferred foreign income corporation, bears to the aggregate of such United States shareholder’s pro rata share of the accumulated post-1986 deferred foreign income of all deferred foreign income corporations of such United States shareholder. For purposes of this subsection— The term aggregate foreign E&P deficit means, with respect to any United States shareholder, the aggregate of such shareholder’s pro rata shares of the specified E&P deficits of the E&P deficit foreign corporations of such shareholder. The term E&P deficit foreign corporation means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if— such specified foreign corporation has a deficit in post-1986 earnings and profits, and as of November 2, 2017— such corporation was a specified foreign corporation, and such taxpayer was a United States shareholder of such corporation. The term specified E&P deficit means, with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B). In the case of any affiliated group which includes at least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection
(a)by each such E&P net surplus shareholder shall be reduced (but not below zero) by such shareholder’s applicable share of the affiliated group’s aggregate unused E&P deficit. For purposes of this paragraph, the term E&P net surplus shareholder means any United States shareholder which would (determined without regard to this paragraph) take into account an amount greater than zero under section 951(a)(1) by reason of subsection (a). For purposes of this paragraph, the term E&P net deficit shareholder means any United States shareholder if— the aggregate foreign E&P deficit with respect to such shareholder (as defined in paragraph (3)(A)), exceeds the amount which would (but for this subsection) be taken into account by such shareholder under section 951(a)(1) by reason of subsection (a). For purposes of this paragraph— The term aggregate unused E&P deficit means, with respect to any affiliated group, the lesser of— the sum of the excesses described in subparagraph (C), determined with respect to each E&P net deficit shareholder in such group, or the amount determined under subparagraph (E)(ii). If the group ownership percentage of any E&P net deficit shareholder is less than 100 percent, the amount of the excess described in subparagraph
(C)which is taken into account under clause (i)(I) with respect to such E&P net deficit shareholder shall be such group ownership percentage of such amount. For purposes of this paragraph, the term applicable share means, with respect to any E&P net surplus shareholder in any affiliated group, the amount which bears the same proportion to such group’s aggregate unused E&P deficit as— the product of— such shareholder’s group ownership percentage, multiplied by the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection
(a)by such shareholder, bears to the aggregate amount determined under clause
(i)with respect to all E&P net surplus shareholders in such group. For purposes of this paragraph, the term group ownership percentage means, with respect to any United States shareholder in any affiliated group, the percentage of the value of the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Notwithstanding the preceding sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which is also used in section 1504 shall have the same meaning as when used in such section. In the case of a United States shareholder of a deferred foreign income corporation, there shall be allowed as a deduction for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section an amount equal to the sum of— the United States shareholder’s 7 percent rate equivalent percentage of the excess (if any) of— the amount so included as gross income, over the amount of such United States shareholder’s aggregate foreign cash position, plus the United States shareholder’s 14 percent rate equivalent percentage of so much of the amount described in subparagraph (A)(ii) as does not exceed the amount described in subparagraph (A)(i). For purposes of this subsection— The term 7 percent rate equivalent percentage means, with respect to any United States shareholder for any taxable year, the percentage which would result in the amount to which such percentage applies being subject to a 7 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in section 11 for such taxable year. In the case of any taxable year of a United States shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate of tax under section 11 after the effective date of such change shall each be taken into account under the preceding sentence in the same proportions as the portion of such taxable year which is before and after such effective date, respectively. The term 14 percent rate equivalent percentage means, with respect to any United States shareholder for any taxable year, the percentage determined under subparagraph
(A)applied by substituting 14 percent rate of tax for 7 percent rate of tax . For purposes of this subsection— The term aggregate foreign cash position means, with respect to any United States shareholder, one-third of the sum of— the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of November 2, 2017, the aggregate described in clause
(i)determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017, and the aggregate described in clause
(i)determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in clause (ii). In the case of any foreign corporation which did not exist as of the determination date described in clause
(ii)or (iii), this subparagraph shall be applied separately to such foreign corporation by not taking into account such clause and by substituting one-half (100 percent in the case that both clauses
(ii)and
(iii)are disregarded) for one-third . For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of— cash held by such foreign corporation, the net accounts receivable of such foreign corporation, plus the fair market value of the following assets held by such corporation: Actively traded personal property for which there is an established financial market. Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government. Any foreign currency. Any obligation with a term of less than one year. Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph. For purposes of this paragraph, the term net accounts receivable means, with respect to any specified foreign corporation, the excess (if any) of— such corporation’s accounts receivable, over such corporation’s accounts payable (determined consistent with the rules of section 461). The applicable percentage of each specified cash position of a specified foreign corporation shall not be taken into account by— the United States shareholder referred to in clause
(ii)with respect to such position, or any United States shareholder which is an includible corporation in the same affiliated group as such United States shareholder referred to in clause (ii). For purposes of this subparagraph, the term specified cash position means— amounts described in subparagraph (B)(ii) to the extent such amounts are receivable from another specified foreign corporation with respect to any United States shareholder, amounts described in subparagraph (B)(iii)(I) to the extent such amounts consist of an equity interest in another specified foreign corporation with respect to any United States shareholder, and amounts described in subparagraph (B)(iii)(IV) to the extent that another specified foreign corporation with respect to any United States shareholder is obligated to repay such amount. For purposes of this subparagraph, the term applicable percentage means— with respect to each specified cash position described in subclause
(I)or
(III)of clause (ii), the pro rata share of the United States shareholder referred to in clause
(ii)with respect to the specified foreign corporation referred to in such clause, and with respect to each specified cash position described in clause (ii)(II), the ratio (expressed as a percentage and not in excess of 100 percent) of the United States shareholder’s pro rata share of the cash position of the specified foreign corporation referred to in such clause divided by the amount of such specified cash position. For purposes of this subparagraph, a separate applicable percentage shall be determined under each of subclauses
(I)and
(II)with respect to each specified foreign corporation referred to in clause
(ii)with respect to which a specified cash position is determined for the specified foreign corporation referred to in clause (i). For purposes of clause (i)(II), in the case of an includible corporation the group ownership percentage of which is less than 100 percent (as determined under subsection (b)(4)(F)), the amount not take into account by reason of such clause shall be the group ownership percentage of such amount (determined without regard to this clause). A cash position of a specified foreign corporation shall not be taken into account under subparagraph
(A)if such position could not (as of the date that it would otherwise have been taken into account under clause (i), (ii), or
(iii)of subparagraph (A)) have been distributed by such specified foreign corporation to United States shareholders of such specified foreign corporation because of currency or other restrictions or limitations imposed under the laws of any foreign country (within the meaning of section 964(b)). An entity (other than a domestic corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder’s aggregate foreign cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such entity were a foreign corporation. For purposes of this paragraph, the determination of whether a person is a United States shareholder, whether a person is a specified foreign corporation, and the pro rata share of a United States shareholder with respect to a specified foreign corporation, shall be determined as of the end of the taxable year described in subsection (a). If the Secretary determines that the principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection. For purposes of this section— The term deferred foreign income corporation means, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the date referred to in paragraph
(1)or
(2)of subsection (a), whichever is applicable with respect to such foreign corporation) greater than zero. The term accumulated post-1986 deferred foreign income means the post-1986 earnings and profits except to the extent such earnings— are attributable to income of the specified foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or if distributed, would be excluded from the gross income of a United States shareholder under section 959. To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders which are not United States shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph
(B)if such shareholders were United States shareholders. The term post-1986 earnings and profits means the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986, and determined— as of the date referred to in paragraph
(1)or
(2)of subsection (a), whichever is applicable with respect to such foreign corporation, without diminution by reason of dividends distributed during the taxable year ending with or including such date, and increased by the amount of any qualified deficit (within the meaning of section 952(c)(1)(B)(ii)) arising before January 1, 2018, which is treated as a qualified deficit (within the meaning of such section as amended by the Tax Cuts and Jobs Act ) for purposes of such foreign corporation’s first taxable year beginning after December 31, 2017. For purposes of this section, the term specified foreign corporation means— any controlled foreign corporation, and any foreign corporation with respect to which one or more domestic corporations is a United States shareholder (determined without regard to section 958(b)(4)). For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection
(a)(and for purposes of applying subsection (f)). The term specified foreign corporation shall not include any passive foreign investment company (within the meaning of subpart D of part VI of subchapter P) that is not a controlled foreign corporation. For purposes of this section, the determination of any United States shareholder’s pro rata share of any amount with respect to any specified foreign corporation shall be determined under rules similar to the rules of section 951(a)(2) by treating such amount in the same manner as subpart F income (and by treating such specified foreign corporation as a controlled foreign corporation). No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section. For purposes of this subsection, the term applicable percentage means the amount (expressed as a percentage) equal to the sum of— 80 percent of the ratio of— the excess to which subsection (c)(1)(A) applies, divided by the sum of such excess plus the amount to which subsection (c)(1)(B) applies, plus 60 percent of the ratio of— the amount to which subsection (c)(1)(B) applies, divided by the sum described in subparagraph (A)(ii). No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph
(1)(determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). With respect to the taxes treated as paid or accrued by a domestic corporation with respect to amounts which are includible in gross income of such domestic corporation by reason of this section, section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as— the excess of— the amounts which are includible in gross income of such domestic corporation by reason of this section, over the deduction allowable under subsection
(c)with respect to such amounts, bears to such amounts. With respect to any taxes paid or accrued (or treated as paid or accrued) with respect to any amount for which a deduction is allowed under this section, section 904(c) shall be applied by substituting first 20 succeeding taxable years for first 10 succeeding taxable years . In the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder may elect to pay the net tax liability under this section in 8 equal installments. If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year described in subsection
(a)and each succeeding installment shall be paid on the due date (as so determined) for the return of tax for the taxable year following the taxable year with respect to which the preceding installment was made. If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially all the assets of a taxpayer to a buyer if such buyer enters into an agreement with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the taxpayer. If an election is made under paragraph
(1)to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, the deficiency shall be prorated to the installments payable under paragraph (1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and demand from the Secretary. This subsection shall not apply if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax. Any election under paragraph
(1)shall be made not later than the due date for the return of tax for the taxable year described in subsection
(a)and shall be made in such manner as the Secretary may provide. For purposes of this subsection— The net tax liability under this section with respect to any United States shareholder is the excess (if any) of— such taxpayer’s net income tax for the taxable year in which an amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over such taxpayer’s net income tax for such taxable year determined— without regard to this section, and without regard to any income, deduction, or credit, properly attributable to a dividend received by such United States shareholder from any deferred foreign income corporation. The term net income tax means the regular tax liability reduced by the credits allowed under subparts A, B, and D of part IV of subchapter A. In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return as an addition to tax in the shareholder’s taxable year which includes such triggering event. In the case of any shareholder’s net tax liability under this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first: Such corporation ceases to be an S corporation (determined as of the first day of the first taxable year that such corporation is not an S corporation). A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business by such S corporation, such S corporation ceases to exist, or any similar circumstance. A transfer of any share of stock in such S corporation by the taxpayer (including by reason of death, or otherwise). In the case of a transfer of less than all of the taxpayer’s shares of stock in the S corporation, such transfer shall only be a triggering event with respect to so much of the taxpayer’s net tax liability under this section with respect to such S corporation as is properly allocable to such stock. A transfer described in clause
(iii)shall not be treated as a triggering event if the transferee enters into an agreement with the Secretary under which such transferee is liable for net tax liability with respect to such stock in the same manner as if such transferee were the taxpayer. A shareholder’s net tax liability under this section with respect to any S corporation is the net tax liability under this section which would be determined under subsection (h)(6) if the only subpart F income taken into account by such shareholder by reason of this section were allocations from such S corporation. In the case of a taxpayer which elects to defer payment under paragraph (1)— subsection
(h)shall be applied separately with respect to the liability to which such election applies, an election under subsection
(h)with respect to such liability shall be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect to such liability occurs, the first installment under subsection
(h)with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection
(h)with respect to such liability may be made only with the consent of the Secretary. If any shareholder of an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto. Notwithstanding any other provision of law, any limitation on the time period for the collection of a liability deferred under this subsection shall not be treated as beginning before the date of the triggering event with respect to such liability. Any shareholder of an S corporation which makes an election under paragraph
(1)shall report the amount of such shareholder’s deferred net tax liability on such shareholder’s return of tax for the taxable year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns. For purposes of this paragraph, the term deferred net tax liability means, with respect to any taxable year, the amount of net tax liability payment of which has been deferred under paragraph
(1)and which has not been assessed on a return of tax for any prior taxable year. In the case of any failure to report any amount required to be reported under subparagraph
(A)with respect to any taxable year before the due date for the return of tax for such taxable year, there shall be assessed on such return as an addition to tax 5 percent of such amount. Any election under paragraph (1)— shall be made by the shareholder of the S corporation not later than the due date for such shareholder’s return of tax for the taxable year which includes the close of the taxable year of such S corporation in which the amount described in subsection
(a)is taken into account, and shall be made in such manner as the Secretary may provide. Each S corporation which is a United States shareholder of a deferred foreign income corporation shall report in its return of tax under section 6037(a) the amount includible in its gross income for such taxable year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a shareholder under section 6037(b) shall include a statement of such shareholder’s pro rata share of such amounts. For purposes of sections 904(f)(1) and 907(c)(4), in the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder’s taxable income from sources without the United States and combined foreign oil and gas income shall be determined without regard to this section. The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section. . The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 965 and inserting the following: Sec. 965. Treatment of deferred foreign income upon transition to participation exemption system of taxation. .