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Export Tax Benefits and the WTO: The Extraterritorial Income Exclusion and Foreign Sales Corporations, April 24, 2007 1 (April 24, 2007)

handle is hein.tera/crstax0189 and id is 1 raw text is: Order Code RS20746 Updated April 24, 2007 ACRS Report for Congress Export Tax Benefits and the WTO: The Extraterritorial Income Exclusion and Foreign Sales Corporations 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 was also not WTO-compliant, and WTO decisions again supported the EU while approving the EU's request for tariffs. The EU began to phase in tariffs on U.S. goods in March 2004. In October 2004 Congress approved legislation (P.L. 108-357) that repealed ETI while implementing a mix of business tax benefits not explicitly related to exports. While the EU lifted its tariffs, it also lodged a complaint with the WTO, objecting to the repeal legislation's phase-out provisions, and in 2005 a WTO panel supported the EU's complaint. EU officials stated their intention to reimpose tariffs, but in May 2006, the Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222) included a provision repealing a part of the ETI transition rules, and the EU did not reimpose its tariffs. Thus, the dispute over the U.S. export tax-subsidies appears to have ended. Economic analysis suggests that provisions like 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. History: DISC and the General Agreements on Tariffs and Trade The FSC/ETI controversy had 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 Congressional Research Service -f-! The Library of Congress Prepared for Members and Commitees of Congress

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