1Amend Bill, page 26, lines 2 through 30; page 27, lines 1
2through 21, by striking out all of said lines on said pages and
3inserting

4(3) "Taxable income." 1. * * *

5(t) For purposes of computing its net income under this
6chapter, a taxpayer shall add back all of the following:

7(1) Otherwise deductible intangible expenses directly or
8indirectly paid, accrued or incurred in connection with one or
9more direct or indirect transactions with one or more related
10members.

11(2) Otherwise deductible interest paid, accrued or incurred
12to a related member during the taxable year.

13(u) (1) If the related member was subject to tax in this
14Commonwealth, another state or possession of the United States
15or a foreign nation or a combination of those governmental
16entities on a tax base that included the interest expense or
17intangible expense paid, accrued or incurred by the taxpayer,
18the taxpayer shall receive a credit against tax due in this
19Commonwealth in an amount equal to the higher of the tax paid by
20the related member with respect to the portion of its income
21representing the interest expense or the intangible expense
22paid, accrued or incurred by the taxpayer, or the tax that would
23have been paid by the related member with respect to that
24portion of its income if:

25(A) that portion of its income had not been offset by
26expenses or losses; or

27(B) the tax liability had not been offset by a credit or
28credits.

29(2) The credit determined under subparagraph (1) shall be
30multiplied by the apportionment factor of the taxpayer in this
31Commonwealth, but may not exceed the taxpayer's liability in
32this Commonwealth attributable to the net income taxed as a
33result of the adjustment required by paragraph (t).

34(v) (1) The adjustment required under paragraph (t) and the
35credit allowed under paragraph (u) shall not apply:

36(A) To the portion of the intangible expense that the
37taxpayer establishes by clear and convincing evidence meets both

1of the following requirements:

2(i) the related member during the same taxable year directly
3or indirectly paid, accrued or incurred the portion to a person
4that is not a related member; and

5(ii) the transaction giving rise to the intangible expense
6between the taxpayer and the related member was undertaken for a
7valid business purpose.

8(B) If the taxpayer establishes by clear and convincing
9evidence that:

10(i) the transaction giving rise to interest expense between
11the taxpayer and the related member was undertaken for a valid
12business purpose; and

13(ii) the interest expense was paid, accrued or incurred
14using terms that reflect an arm's length relationship.

15(C) If the taxpayer establishes by clear and convincing
16evidence that:

17(i) the related member was subject to tax on its net income
18in this Commonwealth, another state or possession of the United
19States or a combination of those governmental entities;

20(ii) the tax base for the tax included the interest expense
21or the intangible expense paid, accrued or incurred by the
22taxpayer; and

23(iii) the aggregate effective rate of tax applied to the
24related member is no less than four per cent.

25(D) If the taxpayer establishes by clear and convincing
26evidence that:

27(i) the interest expense or the intangible expense was paid,
28accrued or incurred to a related member organized under the laws
29of a country other than the United States;

30(ii) the related member's income from the transaction was
31subject to a comprehensive income tax treaty between the country
32and the United States;

33(iii) the related member's income from the transaction was
34taxed in the country at a tax rate at least equal to that
35imposed by the Commonwealth; and

36(iv) the interest expense or intangible expense was paid,
37accrued or incurred pursuant to a transaction that was
38undertaken for a valid business purpose and using terms that
39reflect an arm's length relationship.

40(E) If the taxpayer and the department agree in writing to
41the application or use of alternative adjustments or
42computations. The department may, in its discretion, agree to
43the application or use of alternative adjustments or
44computations when it concludes that in the absence of the
45agreement the income of the taxpayer would not be properly
46reflected.

47(2) (Reserved).

48(w) Nothing under paragraph (t), (u) or (v) shall be
49construed to limit or negate the department's authority to enter
50into agreements and compromises allowed by law.

1Amend Bill, page 30, lines 9 through 30; page 31, lines 1
2through 25, by striking out all of said lines on said pages and
3inserting

4(8) "Aggregate effective rate of tax." The sum of the
5effective rates of tax imposed by the Commonwealth, another
6state or a possession of the United States or any combination of
7those governmental entities on a related member.

8(9) "Effective rate of tax." The maximum statutory rate of
9tax imposed by the Commonwealth, another state or a possession
10of the United States on a related member's net income multiplied
11by the apportionment percentage, if any, applicable to the
12related member under the laws of that jurisdiction. For purposes
13of this definition, the following shall apply:

14(A) The effective rate of tax shall be zero if the related
15member's net income tax liability in the jurisdiction is
16reported on a combined or consolidated return including both the
17taxpayer and the related member where the reported transactions
18between the taxpayer and the related member are eliminated or
19offset.

20(B) When computing the effective rate of tax for a
21jurisdiction in which a related member's net income is
22eliminated or offset by a credit or similar adjustment that is
23dependent upon the related member either maintaining or managing
24intangible property or collecting interest income in that
25jurisdiction, the maximum statutory rate of tax imposed by the
26jurisdiction shall be decreased to reflect the statutory rate of
27tax that applies to the related member as effectively reduced by
28the credit or similar adjustment.

29(10) "Interest expense." Amounts directly or indirectly
30allowed as deductions under section 163 of the Internal Revenue
31Code of 1986 (26 U.S.C. § 163) for purposes of determining
32taxable income under the Internal Revenue Code of 1986.

33(11) "Intangible expense." The term includes:

341. Expenses, losses and costs for, related to, or in
35connection directly or indirectly with, the direct or indirect
36acquisition, use, maintenance or management, ownership, sale,
37exchange, or any other disposition of intangible property to the
38extent the amounts are allowed as deductions or costs in
39determining taxable income before operating loss deductions and
40special deductions for the taxable year under the Internal
41Revenue Code of 1986.

422. Losses related to, or incurred in connection directly or
43indirectly with, factoring transactions or discounting
44transactions.

453. Royalty, patent, technical and copyright fees.

464. Licensing fees.

475. Other similar expenses and costs.

48(12) "Intangible property." The term includes patents,

1patent applications, trade names, trademarks, service marks,
2copyrights, mask works, trade secrets and similar types of
3intangible assets.

4(13) "Related entity." Any of the following:

51. A stockholder who is an individual or a member of the
6stockholder's family under section 318 of the Internal Revenue
7Code of 1986 (26 U.S.C. § 318) if the stockholder and the
8members of the stockholder's family own, directly, indirectly,
9beneficially or constructively, in the aggregate, at least fifty
10per cent of the value of the taxpayer's outstanding stock.

112. A stockholder or a stockholder's partnership, limited
12liability company, estate, trust or corporation, if the
13stockholder and the stockholder's partnerships, limited
14liability companies, estates, trusts and corporations own
15directly, indirectly, beneficially or constructively, in the
16aggregate, at least fifty per cent of the value of the
17taxpayer's outstanding stock.

183. A corporation or a party related to the corporation in a
19manner that would require an attribution of stock from the
20corporation to the party or from the party to the corporation
21under the attribution rules of the Internal Revenue Code of 1986
22if the taxpayer owns, directly, indirectly, beneficially or
23constructively, at least fifty per cent of the value of the
24corporation's outstanding stock. The attribution rules of the
25Internal Revenue Code of 1986 shall apply for purposes of
26determining whether the ownership requirements of this
27definition have been met.

28(14) "Related member." A person that, with respect to the
29taxpayer during all or any portion of the taxable year, is any
30of the following:

311. A related entity.

322. A component member as defined in section 1563(b) of the
33Internal Revenue Code of 1986 (26 U.S.C. § 1563(b)).

343. A person to or from whom there is attribution of stock
35ownership in accordance with section 1563(e) of the Internal
36Revenue Code of 1986 (26 U.S.C. § 1563(e)).

374. A person that, notwithstanding its form of organization,
38bears the same relationship to the taxpayer as a person
39described in subclauses 1, 2 and 3.

40(15) "Valid business purpose." As follows:

411. One or more business purposes which alone or in
42combination constitute the primary motivation for a business
43activity or transaction and the activity or transaction changes
44in a meaningful way, apart from tax effects, the economic
45position of the taxpayer.

462. For the purpose of subclause 1, the following shall
47apply:

48(A) A business purpose shall not include the avoidance or
49reduction of taxation.

50(B) The economic position of the taxpayer shall include an
51increase in the market share of the taxpayer or the entry by the

1taxpayer into new business markets.

2Amend Bill, page 45, line 8, by inserting after "401(3)1(t),"

3 (u), (v) and (w),

4Amend Bill, page 45, line 9, by striking out "and (11)" and 
5inserting

6, (11), (12), (13), (14) and (15)