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Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial Replacement Provisions , Record No.: RS20746, Date: September 03, 2002 1 (September 3, 2002)

handle is hein.tera/crstax0185 and id is 1 raw text is: Order Code RS20746 Updated September 3, 2002 CRS Report for Congress Received through the CRS Web Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial 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. However, the countries of the European Union (EU) in 1997 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upheld the EU complaint, and to avoid WTO-sanctioned retaliatory tariffs, the United States in November 2000 repealed FSC and enacted new extraterritorial income (ETI) provisions, consisting of a redesigned export tax benefit of the same magnitude as FSC. The EU maintained that the new provisions are also not WTO-compliant and asked the WTO to rule on the matter and approve $4 billion in retaliatory tariffs on U.S. products. A WTO panel report in August 2001 concluded the ETI provisions are not WTO- compliant. The United States appealed the decision, but on January 14, 2002, an appellate body denied the appeal. On August 30, a WTO arbitration panel approved the EU' s request for up to $4 billion of tariffs. In the meantime, Chairman William Thomas of the House Ways and Means Committee on July 11 introduced H.R. 5095, which combines repeal of ETI with a range of tax reductions for U.S. firms' foreign business operations. 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 respects. It was thought that a tax incentive for exports was desirable to stimulate the Congressional Research Service ** The Library of Congress

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