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Export Tax Benefits and the WTO: Foreign Sales Corporations (FSCs) and the Extraterritorial (ETI) Replacement Provisions , Record No.: RS20746, Date: July 25, 2001 1 (July 25, 2001)

handle is hein.tera/crstax0182 and id is 1 raw text is: Order Code RS20746 Updated July 25, 2001 Export Tax Benefits and the WTO: Foreign Sales Corporations (FSCs) and the Extraterritorial (ETI) Replacement Provisions David L. Brumbaugh Specialist in Public Finance Government and Finance Division Summary The U.S. tax code's Foreign Sales Corporation (FSC) provisions provided a tax benefit for U.S. exporters; it permitted U.S. exporters to exempt between 150% and 30% of income from U.S. tax. However, the countries of the European Union (EU) recently charged that the provision was an export subsidy and thus contravened the World Trade Organization (WTO) agreements. A WTO panel ruling essentially upheld the EU complaint, and to avoid WTO-sanctioned retaliatory tariffs, the United States in November 2000, enacted the FSC Repeal and Extraterritorial Income Exclusion Act. The new extraterritorial income (ETI) provisions consist of a tax benefit for exports of the same magnitude as FSC, but also extend tax free treatment to a certain amount of income from exporters' foreign operations. The EU has stated that it does not believe the ETI provisions bring U.S. tax law into WTO-compliance, and has asked the WTO to rule on the matter and to approve $4 billion in retaliatory tariffs on U.S. products if the new benefit is found to be not compliant. On July 23, a WTO panel ruled that the new provisions also contravene the WTO agreements. Some observers have suggested that the subsequent appeals process could continue until late November. For its part, economic analysis suggests that FSC and ETI do little to increase exports, but likely trigger exchange rate adjustments that also result in an increase in U.S. imports; the long run impact on the trade balance is probably extremely small. Economic theory also suggests the export incentives likely reduce U.S. economic welfare. This report will be updated as events in Congress and elsewhere occur. Historical Background: DISC and the General Agreements on Tariffs and Trade The current FSC/ETI controversy has its roots in the legislative antecedent of both: the U.S. tax code's Domestic International Sales Corporation (DISC) provisions, enacted as part of the Revenue Act of 1971 (P.L. 92-178). Like FSC and the ETI provisions, DISC provided a tax incentive to export, although its design was different in certain Congressional Research Service • The Library of Congress CRS Report for Congress Received through the CRS Web

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