Chairman Brady’s amendment to the Chairman’s mark modifies in three ways the application of the 20% excise tax on certain payments to foreign affiliates.
Exclusion of Payments to Acquire Securities or Commodities. First, amounts paid to acquire any security or commodity, each as defined in Section 475, are not subject to the excise tax. In the Chairman’s mark and the original draft bill, amounts paid to acquire securities were included in the definition of “specified amount,” and amounts paid to acquire only certain commodities were excluded.
Calculation of Permitted Deductions. Second, the amendment changes how to calculate permitted deductions in respect of deemed expenses. Deemed expenses are still defined as the amount of expenses such that the net income ratio of the electing foreign corporation with respect to such amount is equal to the net income ratio of the international financial reporting group with respect to the product line to which the specified amount relates.
However, in calculating the net income ratio, there is taken into account only the revenues and expenses of the members of such group (other than the members of such group which are treated as domestic for purposes of the ECI election provision) derived from, or incurred with respect to, persons who are not members of such group and members of such group which are treated as domestic corporations for purposes of the ECI election provision. The resulting amount of deemed expenses is now multiplied by the sum of (i) 104 percent and (ii) the annual federal short-term rate for the last month ending before the beginning of the taxable year, to determine the allowed deduction to the foreign electing corporation.
Foreign Tax Credits. Lastly, provision has been made for the allowance of foreign tax credits in the amount equal to the excess of the aggregate specified amounts received over the aggregate amount of deductions allowed with respect to deemed expenses, in each case by the foreign corporation for such taxable year, multiplied by the lesser of 50 percent of the IFRG’s effective foreign tax rate for the reporting year and 20 percent. Previously, the bill had disallowed any foreign tax credits and any deduction for such disallowed credit in respect of any specified amount.
You can view the text of the amendment here.