To amend the Internal Revenue Code of 1986 to comply with the World Trade Organization rulings on the FSC/ETI benefit in a manner that preserves jobs and production activities in the United States.

April 11, 2003

Mr. CRANE (for himself, Mr. RANGEL, Mr. MANZULLO, Mr. LEVIN, Mr. COLLINS, Mr. MCDERMOTT, Mr. LAHOOD, Mr. NEAL of Massachusetts, Mr. SHIMKUS, and Mr. MATSUI) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to comply with the World Trade Organization rulings on the FSC/ETI benefit in a manner that preserves jobs and production activities in the United States.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Job Protection Act of 2003'.

SEC. 2. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

(a) IN GENERAL- Section 114 of the Internal Revenue Code of 1986 is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Subpart E of part III of subchapter N of chapter 1 of such Code (relating to qualifying foreign trade income) is hereby repealed.

(2) The table of subparts for such part III is amended by striking the item relating to subpart E.

(3) The table of sections for part III of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 114.

(c) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to transactions occurring after the date of the enactment of this Act.

(2) BINDING CONTRACTS- The amendments made by this section shall not apply to any transaction in the ordinary course of a trade or business which occurs pursuant to a binding contract--

(A) which is between the taxpayer and a person who is not a related person (as defined in section 943(b)(3) of such Code, as in effect on the day before the date of the enactment of this Act), and

(B) which is in effect on April 11, 2003, and at all times thereafter.

For purposes of this paragraph, a binding contract shall include a purchase option, renewal option, or replacement option which is included in such contract.

(d) REVOCATION OF SECTION 943(e) ELECTIONS-

(1) IN GENERAL- In the case of a corporation that elected to be treated as a domestic corporation under section 943(e) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act)--

(A) the corporation may revoke such election, effective as of the date of the enactment of this Act, and

(B) if the corporation does revoke such election--

(i) such corporation shall be treated as a domestic corporation transferring (as of the date of the enactment of this Act) all of its property to a foreign corporation in connection with an exchange described in section 354 of the Internal Revenue Code of 1986, and

(ii) no gain or loss shall be recognized on such transfer.

(2) EXCEPTION- Subparagraph (B)(ii) of paragraph (1) shall not apply to gain on any asset held by the revoking corporation if--

(A) the basis of such asset is determined in whole or in part by reference to the basis of such asset in the hands of the person from whom the revoking corporation acquired such asset,

(B) the asset was acquired by transfer (not as a result of the election under section 943(e) of such Code) occurring on or after the 1st day on which its election under section 943(e) of such Code was effective, and

(C) a principal purpose of the acquisition was the reduction or avoidance of tax.

(e) GENERAL TRANSITION-

(1) IN GENERAL- In the case of a taxable year ending after the date of the enactment of this Act and beginning before January 1, 2009, for purposes of chapter 1 of such Code, each current FSC/ETI beneficiary shall be allowed a deduction equal to the transition amount determined under this subsection with respect to such beneficiary for such year.

(2) CURRENT FSC/ETI BENEFICIARY- The term `current FSC/ETI beneficiary' means any corporation which entered into one or more transactions during its taxable year beginning in calendar year 2001 with respect to which FSC/ETI benefits were allowable.

(3) TRANSITION AMOUNT- For purposes of this subsection--

(A) IN GENERAL- The transition amount applicable to any current FSC/ETI beneficiary for any taxable year is the phaseout percentage of the adjusted base period amount.

(B) PHASEOUT PERCENTAGE-

(i) IN GENERAL- In the case of a taxpayer using the calendar year as its taxable year, the phaseout percentage shall be determined under the following table:

The phaseout

percentage is:

2004 and 2005

100

2006

75

2007

75

2008

50

2009 and thereafter

0

(ii) SPECIAL RULE FOR 2003- The phaseout percentage for 2003 shall be the amount that bears the same ratio to 100

percent as the number of days after the date of the enactment of this Act bears to 365.

(iii) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS- In the case of a taxpayer not using the calendar year as its taxable year, the phaseout percentage is the weighted average of the phaseout percentages determined under the preceding provisions of this paragraph with respect to calendar years any portion of which is included in the taxpayer's taxable year. The weighted average shall be determined on the basis of the respective portions of the taxable year in each calendar year.

(4) ADJUSTED BASE PERIOD AMOUNT- For purposes of this subsection--

(A) IN GENERAL- In the case of a taxpayer using the calendar year as its taxable year, the adjusted base period amount for any taxable year is the base period amount multiplied by the applicable percentage, as determined in the following table:

The applicable

percentage is:

2003

100

2004

100

2005

105

2006

110

2007

115

2008

120

2009 and thereafter

0

(B) BASE PERIOD AMOUNT- The base period amount is the aggregate FSC/ETI benefits for the taxpayer's taxable year beginning in calendar year 2001.

(C) SPECIAL RULES FOR FISCAL YEAR TAXPAYERS, ETC- Rules similar to rules of clauses (ii) and (iii) of paragraph (3)(B) shall apply for purposes of this paragraph.

(5) FSC/ETI BENEFIT- For purposes of this subsection, the term `FSC/ETI benefit' means--

(A) amounts excludable from gross income under section 114 of such Code, and

(B) the exempt foreign trade income of related foreign sales corporations from property acquired from the taxpayer (determined without regard to section 923(a)(5) of such Code (relating to special rule for military property), as in effect on the day before the date of the enactment of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000).

In determining the FSC/ETI benefit there shall be excluded any amount attributable to a transaction with respect to which the taxpayer is the lessor unless the leased property was manufactured or produced in whole or in part by the taxpayer.

(6) SPECIAL RULE FOR FARM COOPERATIVES- Under regulations prescribed by the Secretary, determinations under this subsection with respect to an organization described in section 943(g)(1) of such Code, as in effect on the day before the date of the enactment of this Act, shall be made at the cooperative level and the purposes of this subsection shall be carried out by excluding amounts from the gross income of its patrons.

(7) CERTAIN RULES TO APPLY- Rules similar to the rules of section 41(f) of such Code shall apply for purposes of this subsection.

(8) COORDINATION WITH BINDING CONTRACT RULE- The deduction determined under paragraph (1) for any taxable year shall be reduced by the phaseout percentage of any FSC/ETI benefit realized for the taxable year by reason of subsection (c)(2). The preceding sentence shall not apply to any FSC/ETI benefit attributable to a transaction described in the last sentence of paragraph (5).

(9) SPECIAL RULE FOR TAXABLE YEAR WHICH INCLUDES DATE OF ENACTMENT- In the case of a taxable year which includes the date of the enactment of this Act, the deduction allowed under this subsection to any current FSC/ETI beneficiary shall in no event exceed--

(A) 100 percent of such beneficiary's adjusted base period amount for calendar year 2003, reduced by

(B) the aggregate FSC/ETI benefits of such beneficiary with respect to transactions occurring during the portion of the taxable year ending on the date of the enactment of this Act.

SEC. 3. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED STATES PRODUCTION ACTIVITIES.

(a) IN GENERAL- Part VIII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to special deductions for corporations) is amended by adding at the end the following new section:

`SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

`(a) IN GENERAL- In the case of a corporation, there shall be allowed as a deduction an amount equal to 10 percent of the qualified production activities income of the corporation for the taxable year.

`(b) PHASEIN- In the case of taxable years beginning in 2006, 2007, 2008 or 2009, subsection (a) shall be applied by substituting for the percentage contained therein the transition percentage determined under the following table:

The transition

percentage is:

2006

1

2007

2

2008

4

2009

9

`(c) QUALIFIED PRODUCTION ACTIVITIES INCOME- For purposes of this section, the term `qualified production activities income' means the product of--

`(1) the portion of the modified taxable income of the taxpayer which is attributable to domestic production activities, and

`(2) the domestic/foreign fraction.

`(d) DETERMINATION OF INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES- For purposes of this section--

`(1) IN GENERAL- The portion of the modified taxable income which is attributable to domestic production activities is so much of the modified taxable income for the taxable year as does not exceed--

`(A) the taxpayer's domestic production gross receipts for such taxable year, reduced by

`(B) the sum of--

`(i) the costs of goods sold that are allocable to such receipts,

`(ii) other deductions, expenses, or losses directly allocable to such receipts, and

`(iii) a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income.

`(2) ALLOCATION METHOD- Except as provided in regulations, allocations under clauses (ii) and (iii) of paragraph (1)(B) shall be made under the principles used in determining the portion of taxable income from sources within and without the United States.

`(3) SPECIAL RULE-

`(A) For purposes of determining costs under clause (i) of paragraph (1)(B), any item or service brought into the United States without a transfer price meeting the requirements of section 482 shall be treated as acquired by purchase, and its cost shall be treated as not less than its value when it entered the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts.

`(B) In the case of any property described in subparagraph (A) that had been exported by the taxpayer for further manufacture, the increase in cost (or adjusted basis) under subparagraph (A) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture.

`(4) MODIFIED TAXABLE INCOME- The term `modified taxable income' means taxable income computed without regard to the deduction allowable under this section.

`(e) DOMESTIC PRODUCTION GROSS RECEIPTS- For purposes of this section--

`(1) IN GENERAL- The term `domestic production gross receipts' means the gross receipts of the taxpayer which are derived from--

`(A) any sale, exchange, or other disposition of, or

`(B) any lease, rental or license of,

qualifying production property which was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the United States.

`(2) SPECIAL RULE- The term `domestic production gross receipts' includes gross receipts of the taxpayer from the sale, exchange, or other disposition of replacement parts if--

`(A) such parts are sold by the taxpayer as replacement parts for qualified production property produced or manufactured in whole or significant part by the taxpayer in the United States, and

`(B) the taxpayer (or a related party) owns the designs for such parts.

`(3) RELATED PARTY- The term `related party' means any corporation which is a member of the taxpayer's expanded afiliated group.

`(f) QUALIFYING PRODUCTION PROPERTY- For purposes of this section--

`(1) IN GENERAL- Except as otherwise provided in this paragraph, the term `qualifying production property' means--

`(A) any tangible personal property,

`(B) any computer software, and

`(C) any films, tapes, records, or similar reproductions.

`(2) EXCLUSIONS FROM QUALIFYING PRODUCTION PROPERTY- The term `qualifying production property' shall not include--

`(A) consumable property that is sold, leased, or licensed by the taxpayer as an integral part of the provision of services,

`(B) oil or gas (or any primary product thereof),

`(C) electricity,

`(D) water supplied by pipeline to the consumer,

`(E) any unprocessed timber which is softwood,

`(F) utility services, or

`(G) any property (not described in paragraph (1)(B)) which is a film, tape, recording, book, magazine, newspaper, or similar property the market for which is primarily topical or otherwise essentially transitory in nature.

For purposes of subparagraph (E), the term `unprocessed timber' means any log, cant, or similar form of timber.

`(g) DOMESTIC/FOREIGN FRACTION- For purposes of this section--

`(1) IN GENERAL- The term `domestic/foreign fraction' means a fraction--

`(A) the numerator of which is the value of the domestic production of the taxpayer, and

`(B) the denominator of which is the value of the worldwide production of the taxpayer.

`(2) VALUE OF DOMESTIC PRODUCTION- The value of domestic production is the excess of--

`(A) the domestic production gross receipts, over

`(B) the cost of purchased inputs allocable to such receipts that are deductible under this chapter for the taxable year.

`(3) PURCHASED INPUTS-

`(A) IN GENERAL- Purchased inputs are any of the following items acquired by purchase:

`(i) Services (other than services of employees) used in manufacture, production, growth, or extraction activities.

`(ii) Items consumed in connection with such activities.

`(iii) Items incorporated as part of the property being manufactured, produced, grown, or extracted.

`(B) SPECIAL RULE- Rules similar to the rules of subsection (d)(3) shall apply for purposes of this subsection.

`(4) VALUE OF WORLDWIDE PRODUCTION-

`(A) IN GENERAL- The value of worldwide production shall be determined under the principles of paragraph (2), except that--

`(i) worldwide production gross receipts shall be taken into account, and

`(ii) paragraph (3)(B) shall not apply.

`(B) WORLDWIDE PRODUCTION GROSS RECEIPTS- The worldwide production gross receipts is the amount that would be determined under subsection (e) if such subsection were applied without any reference to the United States.

`(5) SPECIAL RULE FOR AFFILIATED GROUPS-

`(A) IN GENERAL- In the case of a taxpayer that is a member of an expanded affiliated group, the domestic/foreign fraction shall be the amount determined under the preceding provisions of this subsection by treating all members of such group as a single corporation.

`(B) EXPANDED AFFILIATED GROUP- The term `expanded affiliated group' means an affiliated group as defined in section 1504(a), determined--

`(i) by substituting `50 percent' for `80 percent' each place it appears, and

`(ii) without regard to paragraphs (2), (3), and (4) of section 1504(b).

`(h) DEFINITIONS AND SPECIAL RULES-

`(1) UNITED STATES- For purposes of this section, the term `United States' includes the Commonwealth of Puerto Rico and any other possession of the United States.

`(2) SPECIAL RULE FOR PARTNERSHIPS- For purposes of this section, a corporation's distributive share of any partnership item shall be taken into account as if directly realized by the corporation.

`(3) COORDINATION WITH MINIMUM TAX- The deduction under this section shall be allowed for purposes of the tax imposed by section 55; except that for purposes of section 55, alternative minimum taxable income shall be taken into account in determining the deduction under this section.

`(4) ORDERING RULE- The amount of any other deduction allowable under this chapter shall be determined as if this section had not been enacted.

`(5) COORDINATION WITH TRANSITION RULES- For purposes of this section--

`(A) domestic production gross receipts shall not include gross receipts from any transaction if the binding contract transition relief of section 2(c)(2) of the Job Protection Act of 2003 applies to such transaction, and

`(B) any deduction allowed under section 2(e) of such Act shall be disregarded in determining the portion of the taxable income which is attributable to domestic production gross receipts.'.

(b) CLERICAL AMENDMENT- The table of sections for part VIII of subchapter B of chapter 1 of such Code is amended by adding at the end the following new item:

`Sec. 250. Income attributable to domestic production activities.'.

(c) EFFECTIVE DATE-

`(1) IN GENERAL- The amendments made by this section shall apply to taxable years beginning after 2005.

`(2) APPLICATION OF SECTION 15- Section 15 of the Internal Revenue Code of 1986 shall apply to the amendments made by this section as if they were changes in a rate of tax.

END