Export Tax Benefits and the WTO: The Extraterritorial Income Exclusion and Foreign Sales Corporations (CRS Report for Congress)
| Release Date |
Revised April 24, 2007 |
| Report Number |
RS20746 |
| Report Type |
Report |
| Authors |
David L. Brumbaugh, Government and Finance Division |
| Source Agency |
Congressional Research Service |
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Summary:
The U.S. tax code's Foreign Sales Corporation (FSC) provisions provided a taxbenefit for U.S. exporters. However, the European Union (EU) in 1997 charged that theprovision 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 notWTO-compliant, and WTO decisions again supported the EU while approving the EU'srequest for tariffs. The EU began to phase in tariffs on U.S. goods in March, 2004.Congress considered ETI legislation throughout much of 2003 and 2004, and inSpring, 2004, both the House and Senate approved versions of legislation that proposedto repeal ETI while implementing a mix of tax benefits for foreign and domesticinvestment not explicitly related to exports. The House and Senate approved aconference agreement on the legislation in October; the measure became P.L. 108-357.(For a summary of the measure, see CRS Report RL32652, The 2004 Corporate Tax andFSC/ETI Bill: The American Jobs Creation Act of 2004.) While the EU lifted its tariffsin January, 2005, it also lodged a complaint with the WTO, objecting to the repeallegislation's transition provisions. On August 12, 2005 a WTO panel issued a rulingsupporting the EU's complaint. There have been indications that the United States willappeal the decision, but the reimposition of tariffs by the EU is also a possibility.For its part, economic analysis suggests that FSC and ETI do little to increaseexports 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.
