SEC. 451. LIMITATION ON TREATY BENEFITS FOR CERTAIN DEDUCTIBLE PAYMENTS.

[a] In General- Section- 894 of the Internal Revenue Code of 1986 [relating to income affected by treaty] is amended by adding at the end the following new subsection:

'[d] Limitation on Treaty Benefits for Certain Deductible Payments-

'[1] IN GENERAL- In the case of any deductible related-party payment, any withholding tax imposed under chapter 3 [and any tax imposed under subpart A or B of this part] with respect to such payment may not be reduced under any treaty of the United States unless any such withholding tax would be reduced under a treaty of the United States if such payment were made directly to the foreign parent corporation.

'[2] DEDUCTIBLE RELATED-PARTY PAYMENT- For purposes of this subsection, the term 'deductible related-party payment' means any payment made, directly or indirectly, by any person to any other person if the payment is allowable as a deduction under this chapter and both persons are members of the same foreign controlled group of entities.

'[3] FOREIGN CONTROLLED GROUP OF ENTITIES- For purposes of this subsection--

'[A] IN GENERAL- The term 'foreign controlled group of entities' means a controlled group of entities the common parent of which is a foreign corporation.

'[B] CONTROLLED GROUP OF ENTITIES- The term 'controlled group of entities' means a controlled group of corporations as defined in section 1563[a][1], except that--

'[i] 'more than 50 percent' shall be substituted for 'at least 80 percent' each place it appears therein, and

'[ii] the determination shall be made without regard to subsections [a][4] and [b][2] of section 1563. A partnership or any other entity [other than a corporation] shall be treated as a member of a controlled group of entities if such entity is controlled [within the meaning of section 954[d][3]] by members of such group [including any entity treated as a member of such group by reason of this sentence].

'[4] FOREIGN PARENT CORPORATION- For purposes of this subsection, the term 'foreign parent corporation' means, with respect to any deductible related-party payment, the common parent of the foreign controlled group of entities referred to in paragraph [3][A].

'[5] REGULATIONS- The Secretary may prescribe such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provide for--

'[A] the treatment of two or more persons as members of a foreign controlled group of entities if such persons would be the common parent of such group if treated as one corporation, and

'[B] the treatment of any member of a foreign controlled group of entities as the common parent of such group if such treatment is appropriate taking into account the economic relationships among such entities.'.

[b] Effective Date- The amendment made by this section shall apply to payments made after the date of the enactment of this Act.