1Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An
2act relating to tax reform and State taxation by codifying
3and enumerating certain subjects of taxation and imposing
4taxes thereon; providing procedures for the payment,
5collection, administration and enforcement thereof; providing
6for tax credits in certain cases; conferring powers and
7imposing duties upon the Department of Revenue, certain
8employers, fiduciaries, individuals, persons, corporations
9and other entities; prescribing crimes, offenses and
10penalties," in corporate net income, further providing for
11definitions and for imposition of tax.

12The General Assembly of the Commonwealth of Pennsylvania
13hereby enacts as follows:

14Section 1. Section 401(3)1 of the act of March 4, 1971
15(P.L.6, No.2), known as the Tax Reform Code of 1971, is amended
16by adding paragraphs and the section is amended by adding
17clauses to read:

18Section 401. Definitions.--The following words, terms, and
19phrases, when used in this article, shall have the meaning
20ascribed to them in this section, except where the context
21clearly indicates a different meaning:

1* * *

2(3) "Taxable income." 1. * * *

3(t) For purposes of computing its net income under this
4chapter, a taxpayer shall add back all of the following:

5(1) Otherwise deductible intangible expenses directly or
6indirectly paid, accrued or incurred in connection with one or
7more direct or indirect transactions with one or more related
8members.

9(2) Otherwise deductible interest paid, accrued or incurred
10to a related member during the taxable year.

11(u) (1) If the related member was subject to tax in this
12Commonwealth, another state or possession of the United States
13or a foreign nation or a combination of those governmental
14entities on a tax base that included the interest expense or
15intangible expense paid, accrued or incurred by the taxpayer,
16the taxpayer shall receive a credit against tax due in this
17Commonwealth in an amount equal to the higher of the tax paid by
18the related member with respect to the portion of its income
19representing the interest expense or the intangible expense
20paid, accrued or incurred by the taxpayer, or the tax that would
21have been paid by the related member with respect to that
22portion of its income if:

23(A) that portion of its income had not been offset by
24expenses or losses; or

25(B) the tax liability had not been offset by a credit or
26credits.

27(2) The credit determined under subparagraph (1) shall be
28multiplied by the apportionment factor of the taxpayer in this
29Commonwealth, but may not exceed the taxpayer's liability in
30this Commonwealth attributable to the net income taxed as a

1result of the adjustment required by paragraph (t).

2(v) (1) The adjustment required under paragraph (t) and the
3credit allowed under paragraph (u) shall not apply:

4(A) To the portion of the intangible expense that the
5taxpayer establishes by clear and convincing evidence meets both
6of the following requirements:

7(i) the related member during the same taxable year directly
8or indirectly paid, accrued or incurred the portion to a person
9that is not a related member; and

10(ii) the transaction giving rise to the intangible expense
11between the taxpayer and the related member was undertaken for a
12valid business purpose.

13(B) If the taxpayer establishes by clear and convincing
14evidence that:

15(i) the transaction giving rise to interest expense between
16the taxpayer and the related member was undertaken for a valid
17business purpose; and

18(ii) the interest expense was paid, accrued or incurred
19using terms that reflect an arm's length relationship.

20(C) If the taxpayer establishes by clear and convincing
21evidence that:

22(i) the related member was subject to tax on its net income
23in this Commonwealth, another state or possession of the United
24States or a combination of those governmental entities;

25(ii) the tax base for the tax included the interest expense
26or the intangible expense paid, accrued or incurred by the
27taxpayer; and

28(iii) the aggregate effective rate of tax applied to the
29related member is no less than four per cent.

30(D) If the taxpayer establishes by clear and convincing

1evidence that:

2(i) the interest expense or the intangible expense was paid,
3accrued or incurred to a related member organized under the laws
4of a country other than the United States;

5(ii) the related member's income from the transaction was
6subject to a comprehensive income tax treaty between the country
7and the United States;

8(iii) the related member's income from the transaction was
9taxed in the country at a tax rate at least equal to that
10imposed by the Commonwealth; and

11(iv) the interest expense or intangible expense was paid,
12accrued or incurred pursuant to a transaction that was
13undertaken for a valid business purpose and using terms that
14reflect an arm's length relationship.

15(E) If the taxpayer and the department agree in writing to
16the application or use of alternative adjustments or
17computations. The department may, in its discretion, agree to
18the application or use of alternative adjustments or
19computations when it concludes that in the absence of the
20agreement the income of the taxpayer would not be properly
21reflected.

22(2) (Reserved).

23(w) Nothing under paragraph (t), (u) or (v) shall be
24construed to limit or negate the department's authority to enter
25into agreements and compromises allowed by law.

26* * *

27(8) "Aggregate effective rate of tax." The sum of the
28effective rates of tax imposed by the Commonwealth, another
29state or a possession of the United States or any combination of
30those governmental entities on a related member.

1(9) "Effective rate of tax." The maximum statutory rate of
2tax imposed by the Commonwealth, another state or a possession
3of the United States on a related member's net income multiplied
4by the apportionment percentage, if any, applicable to the
5related member under the laws of that jurisdiction. For purposes
6of this definition, the following shall apply:

7(A) The effective rate of tax shall be zero if the related
8member's net income tax liability in the jurisdiction is
9reported on a combined or consolidated return including both the
10taxpayer and the related member where the reported transactions
11between the taxpayer and the related member are eliminated or
12offset.

13(B) When computing the effective rate of tax for a
14jurisdiction in which a related member's net income is
15eliminated or offset by a credit or similar adjustment that is
16dependent upon the related member either maintaining or managing
17intangible property or collecting interest income in that
18jurisdiction, the maximum statutory rate of tax imposed by the
19jurisdiction shall be decreased to reflect the statutory rate of
20tax that applies to the related member as effectively reduced by
21the credit or similar adjustment.

22(10) "Interest expense." Amounts directly or indirectly
23allowed as deductions under section 163 of the Internal Revenue
24Code of 1986 (26 U.S.C. § 163) for purposes of determining
25taxable income under the Internal Revenue Code of 1986.

26(11) "Intangible expense." The term includes:

271. Expenses, losses and costs for, related to, or in
28connection directly or indirectly with, the direct or indirect
29acquisition, use, maintenance or management, ownership, sale,
30exchange, or any other disposition of intangible property to the

1extent the amounts are allowed as deductions or costs in
2determining taxable income before operating loss deductions and
3special deductions for the taxable year under the Internal
4Revenue Code of 1986.

52. Losses related to, or incurred in connection directly or
6indirectly with, factoring transactions or discounting
7transactions.

83. Royalty, patent, technical and copyright fees.

94. Licensing fees.

105. Other similar expenses and costs.

11(12) "Intangible property." The term includes patents,
12patent applications, trade names, trademarks, service marks,
13copyrights, mask works, trade secrets and similar types of
14intangible assets.

15(13) "Related entity." Any of the following:

161. A stockholder who is an individual or a member of the
17stockholder's family under section 318 of the Internal Revenue
18Code of 1986 (26 U.S.C. § 318) if the stockholder and the
19members of the stockholder's family own, directly, indirectly,
20beneficially or constructively, in the aggregate, at least fifty
21per cent of the value of the taxpayer's outstanding stock.

222. A stockholder or a stockholder's partnership, limited
23liability company, estate, trust or corporation, if the
24stockholder and the stockholder's partnerships, limited
25liability companies, estates, trusts and corporations own
26directly, indirectly, beneficially or constructively, in the
27aggregate, at least fifty per cent of the value of the
28taxpayer's outstanding stock.

293. A corporation or a party related to the corporation in a
30manner that would require an attribution of stock from the

1corporation to the party or from the party to the corporation
2under the attribution rules of the Internal Revenue Code of 1986
3if the taxpayer owns, directly, indirectly, beneficially or
4constructively, at least fifty per cent of the value of the
5corporation's outstanding stock. The attribution rules of the
6Internal Revenue Code of 1986 shall apply for purposes of
7determining whether the ownership requirements of this
8definition have been met.

9(14) "Related member." A person that, with respect to the
10taxpayer during all or any portion of the taxable year, is any
11of the following:

121. A related entity.

132. A component member as defined in section 1563(b) of the
14Internal Revenue Code of 1986 (26 U.S.C. § 1563(b)).

153. A person to or from whom there is attribution of stock
16ownership in accordance with section 1563(e) of the Internal
17Revenue Code of 1986 (26 U.S.C. § 1563(e)).

184. A person that, notwithstanding its form of organization,
19bears the same relationship to the taxpayer as a person
20described in subclauses 1, 2 and 3.

21(15) "Valid business purpose." As follows:

221. One or more business purposes which alone or in
23combination constitute the primary motivation for a business
24activity or transaction and the activity or transaction changes
25in a meaningful way, apart from tax effects, the economic
26position of the taxpayer.

272. For the purpose of subclause 1, the following shall
28apply:

29(A) A business purpose shall not include the avoidance or
30reduction of taxation.

1(B) The economic position of the taxpayer shall include an
2increase in the market share of the taxpayer or the entry by the
3taxpayer into new business markets.

4Section 2. Section 402(b) of the act, amended June 29, 2002 
5(P.L.559, No.89), is amended to read:

6Section 402. Imposition of Tax.--* * *

7(b) The annual rate of tax on corporate net income imposed
8by subsection (a) for taxable years beginning for the calendar
9year or fiscal year on or after the dates set forth shall be as
10follows:

11Taxable Year	Tax Rate
12[January 1, 1995, and each 13taxable year thereafter	9.99%]
14January 1, 1995, and each 15taxable year through December 1631, 2014	9.99%
17January 1, 2015, through 18December 31, 2015	9.49%
19January 1, 2016, through 20December 31, 2016	8.99%
21January 1, 2017, through 22December 31, 2017	8.49%
23January 1, 2018, through 24December 31, 2018	7.99%
25January 1, 2019, through 26December 31, 2019	7.49%
27January 1, 2020, and each 28taxable year thereafter	6.99%

29* * *

30Section 3. The addition of section 401(3)1(t), (u), (v) and

1(w) and (8), (9), (10), (11), (12), (13), (14) and (15) of the
2act shall apply to taxable years beginning after December 31,
32013.

4Section 4. This act shall take effect immediately.