Taiyo Hawaii Company, Ltd. - Page 14

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          on Taxation, General Explanation of the Tax Reform Act of 1986,             
          at 1037 (J. Comm. Print 1987).  To achieve that result, three               
          distinct taxes may be imposed.6  Section 884(a) imposes a tax on            
          earnings of a U.S. trade or business deemed to be repatriated by            
          a foreign corporation.  Section 884(f)(1)(A) treats certain                 
          interest paid by the U.S. trade or business of a foreign                    
          corporation (referred to as branch interest) as if it were paid             
          by a domestic corporation.  This is accomplished by subjecting              
          the interest to withholding under sections 881(a) and 1442, as if           
          it were U.S.-source income paid to a foreign person or entity.              
          Finally, section 884(f)(1)(B) imposes a tax on excess interest to           
          the extent the interest deduction allocable to the U.S. trade or            
          business in computing its taxable ECI (as provided for in section           
          1.882-5, Income Tax Regs.) exceeds the branch interest of section           
          884(f)(1)(A).  The excess interest is treated as if it were paid            
          to the foreign corporation by a wholly owned domestic corporation           

               6  The three taxes to achieve parity are in addition to any            
          tax under sec. 882(a) on income of a foreign corporation engaged            
          in a trade or business within the United States that is                     
          effectively connected with the conduct of the trade or business             
          in the United States.                                                       
               "Effectively connected income" (ECI) is a term of art                  
          defined in sec. 864(c).  ECI includes certain types of foreign              
          source income earned by a foreign corporation.  Sec. 882 allows             
          certain deductions and credits for ECI, and the net income is               
          subject to tax.                                                             
               Conversely, income that is not effectively connected with              
          the conduct of a trade or business in the United States is                  
          subject to U.S. taxation at a flat rate of 30 percent unless a              
          different amount is provided for in an income tax treaty.  Sec.             

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