Number: RS21143
Title: Policy Options for U.S. Export Taxation
Authors: David L. Brumbaugh, Government and Finance Division 
Abstract: Prior to 2004 the Extraterritorial Income (ETI) provisions of the U.S. tax code provided a tax benefit for exporters. ETI, like the Foreign Sales Corporation (FSC) provisions they replaced, was designed to boost U.S. exports. The European Union (EU), however, filed complaints with the World Trade Organization (WTO), charging that ETI and FSC were export subsidies and so violated the WTO agreements. In a succession of rulings, the WTO upheld the EU's charges, and authorized the EU to levy retaliatory tariffs on U.S. goods. The EU began a phased-in application of tariffs in March 2004. Several policy options for the United States were proposed in Congress, including retaining ETI and accepting whatever tariffs would be imposed; overhauling the U.S. method of taxing foreign-source income by adopting a "territorial" tax system; reforming the U.S. tax system in general by adopting a consumption tax similar to the value-added taxes levied by European countries; attempting negotiations with the EU; and repealing the ETI provisions while replacing them with tax cuts elsewhere. The last of these approaches was ultimately taken by Congress in October 2004 with the enactment of the American Jobs Creation Act (AJCA; P.L. 108-357). Although the EU lifted its tariffs in January 2005, it also lodged a WTO complaint against transition provisions in AJCA, which had the effect of rescinding the ETI only gradually in certain cases. In May 2006, a provision of the Tax Increase Prevention and Reconciliation Act (P.L. 109-222) repealed the transition rules, apparently bringing an end to the longsimmering controversy.
Pages: 6
Date: September 21, 2006