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Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial Replacement Provisions , Record No.: RS20746, Date: September 25, 2003 1 (September 25, 2003)

handle is hein.tera/crstax0188 and id is 1 raw text is: Order Code RS20746 Updated September 25, 2003 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 European Union (EU) in 1997 charged that the provision was an export subsidy and contravened the World Trade Organization (WTO) agreements. A WTO ruling upheld the EU complaint, and to avoid retaliatory tariffs, U.S. legislation in 2000 replaced FSC with a redesigned export benefit, the extraterritorial income (ETI) provisions. The EU maintained that ETI is also not WTO-compliant, and WTO panel reports again supported the EU, and approved the EU's request for up to $4 billion of tariffs. The EU, however, has indicated it will not impose tariffs as long as the United States makes progress on achieving WTO compliance. In the 107th Congress, Representative Thomas introduced H.R. 5095, combining repeal of ETI with tax reductions for U.S. firms' foreign business operations, but no action was taken on the bill. In the 108th Congress, Representatives Crane and Rangel and Senator Hollings proposed H.R. 1769 and S. 970, which would replace ETI with a tax benefit linked to domestic U.S. production income. Representative Thomas introduced H.R. 2896, containing provisions similar to those in H.R. 5095, but with the addition of several tax benefits for domestic investment. Senator Hatch introduced S. 1475, a similar, but not identical proposal. On September 18, Senators Grassley and Baucus proposed S. 1637, with a different mix of benefits for domestic and overseas investment. 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 that export benefits likely reduce U.S. economic welfare. This report will be updated as events warrant. Congressional Research Service A+ The Library of Congress

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