FOREIGN OIL AND GAS EXTRACTION INCOME.

SEC. 1035. FOREIGN OIL AND GAS EXTRACTION INCOME. (a) Reduction in Limitation on Foreign Tax Credits Allowable fob Oil and Gas Extraction Income.— Subsection (a) of section 907 (relating to reduction in amounts allowable as foreign tax under section 901) is amended to read as follows: “(a) Reduction tn Amount Allowed as Foreign Tax Under Section 901.— In applying section 901, the amount of any oil and gas extraction taxes paid or accrued (or deemed to have been paid) during the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of— “(1) the amount of the foreign oil and gas extraction income for the taxable year, multiplied by “(2) the percentage which is the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11.” (b) Foreign Oil Related Income Earned by Individuals.— Subsection (b) of section 907 (relating to special rules in case of foreign oil and gas income) is amended to read as follows: “(b) Application of Section 904 Limitation.— “(1) Corporations.— In the ease of a corporation, the provisions of section 904 shall be applied separately with respect to— “(A) foreign oil related income, and “(B) other taxable income. “(2) Other taxpayers.— In the case of a taxpayer other than a corporation, the provisions of subsection (a) shall not apply and the provisions of section 904 shall be applied separately with respect to— “(A) foreign oil and gas extraction income, and “(B) other taxable income (including other foreign oil related income). In the ease of a corporation, with respect to foreign oil-related income, and in the case of a taxpayer other than a corporation, with respect to foreign oil and gas extraction income, the overall limitation provided 90 STAT. 1631by section 904(a)(2) shall apply and the per-country limitation provided by subsection (a)(1) shall not apply.” (c) Tax Credit for Production-Sharing Contracts.— (1) For purposes of section 901 of the Internal Revenue Code of 1954. there shall be treated as income, war profits, and excess profits taxes to betaken into account under section 907(a) of such Code amounts designated as income taxes of a foreign government by such government (which otherwise would not be treated as taxes for purposes of section 901 of such Code) with respect to production-sharing contracts for the extraction of foreign oil or gas. (2) The amounts specified in paragraph (1) shall not exceed the lesser of— (A) the product of the foreign oil and gas extraction income with respect to all such production-sharing contracts multiplied by the sum of the normal tax rate, and the surtax rate for the taxable year specified in section 11 of such Code, or (B) the excess of the total amount of foreign oil and gas extraction income (as defined in section 907(c)(1) of such Code) for the taxable year multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code over the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid) without regard to paragraph (1) during the taxable year with respect to foreign oil and gas extraction income. (3) The production-sharing contracts taken into account for purposes of paragraph (1) shall be those contracts which were entered into before April 8, 1976, for the sharing of foreign oil and gas production with a foreign government (or an entity owned by such government) with respect to which amounts claimed as taxes paid or accrued to such foreign government for taxable years beginning before June 30, 1976, will not be disallowed as taxes. No such contract shall be taken into account for any taxable year ending after December 31, 1977. (d) Carryback and Carryover of Disallowed Credits.— (1) In general.— Section 907 (as amended by section 1033) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: “(f) Carryback and Carryover of Disallowed Credits.— “(1) In general.— If the amount of the oil and gas extraction taxes paid or accrued during any taxable year exceeds the limitation provided by subsection (a) for such taxable year (hereinafter in this subsection referred to as the ‘unused credit year’), so much of such excess as does not exceed 2 percent of foreign oil and gas extraction income for such taxable year shall be deemed to be oil and gas extraction taxes paid or accrued in the second preceding taxable year, in the first preceding taxable year, and in the first, second, third, fourth, or fifth succeeding taxable year, in that order and to the extent not deemed tax paid or accrued in a prior taxable year by reason of the limitation imposed by paragraph (2). Such amount deemed paid or accrued in any taxable year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions. For purposes of this 90 STAT. 1632subsection, the terms ‘second preceding taxable year’, and ‘first preceding taxable year’ do not include any taxable year ending before January 1, 1975. For purposes of determining the amount of such taxes which may be deemed paid or accrued in any taxable year ending in 1975, 1976, or 1977. the first sentence of this paragraph shall be applied by substituting ‘such excess’ for ‘so much of such excess as does not exceed 2 percent of the foreign oil and gas extinction income for such taxable year’. “(2) Limitation.— The amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any preceding or succeeding taxable year shall not exceed the lesser of— “(A) the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of— “(i) the oil and gas extraction taxes paid or accrued during such taxable year, plus “(ii) the amounts of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year; or “(B) the amount by which the limitation provided by section 904 on taxes paid or accrued with respect to foreign oil-related income for such taxable year exceeds the sum of— “(i) the taxes paid or accrued (or deemed to have been paid under section 902 or 960) to all foreign countries and possessions of the United States with respect to such income during such taxable year, “(ii) the amount of such taxes which were deemed paid or accrued in such taxable year under section 904 (c) and which are attributable to taxable years preceding the unused credit year, plus “(iii) the amount of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year. “(3) Special ruins.— “(A) in the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under section 904(c) with respect to oil-related income, the provisions of this subsection shall be applied before section 904(c). “(B) For purposes of determining the amount of oil-related taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding taxable year under section 904(c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this subsection shall be considered to be tax paid or accrued in such preceding or succeeding taxable year, “(C) For purposes of determining the amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any taxable year ending before January 1, 1977, subparagraph (A) of paragraph (2) shall be applied as if the amendment made by section 1035(a) of the Tax Reform Act of 1976 applied to such taxable year.” (2) Definition of on and gas extraction taxes.— Subsection (c) of section 907 is amended by adding at the end thereof the following new paragraph: 90 STAT. 1633 “(5) Oil and gas extraction taxes.— The term ‘oil and gas extraction taxes’ means any income, war profits, and excess profits tax paid or accrued (or deemed to have been paid under section 902 or 960) during the taxable year with respect to foreign oil and gas extraction income (determined without regard to paragraph (4)) or loss which would he taken into account for purposes of section 901 without regard to this section,” (3) Technical amendment.— Subsection (i) of section 6501, as amended by section 1031, (relating to foreign tax carrybacks) is amended— (A) by striking out “excess foreign taxes)” and inserting in lieu thereof “excess foreign taxes) or under section 907(f) (relating to carryback and carryover of disallowed oil and gas extraction taxes)”; and (B) by striking out “section 904(c)” the second place it appears and inserting in lieu thereof “section 904(c) or 907(f)”. (e) Effective Dates.— (1) The amendment made by subsection (a) shall apply to taxable years ending after December 31, 1976. (2) The amendment made by subsection (b) shall apply to taxable years ending after December 31, 1974; except that the last sentence of section 907(b) of the Internal Revenue Code of 1954 shall only apply to taxable years ending after December 31, 1975. (3) The amendment made by subsection (c) shall apply to taxable years beginning after June 29, 1976. (4) The amendments made by subsection (d) shall apply to taxes paid or accrued during taxable years ending after the date of the enactment of this Act.