Congress Sends Corporate Tax Bill To President

by Mike Godfrey, Tax-News.com, Washington

13 October 2004

US lawmakers were finally allowed to head for home on Monday after the Senate approved a package of tax measures that have been described as one of the most profound changes to the US corporate tax code in two decades.

The bill, dubbed the "American Jobs Creation Act of 2004," sets in train an eventual repeal of FSC-ETI subsidies for around 1,800 firms, and hopefully the lifting of European Union tariffs on US exports, and was eventually passed by the Senate in a 69-17 vote on Monday after the upper chamber was forced to sit an unusual Sunday session to iron out a dispute relating to a $10 billion buyout of quotas held by tobacco farmers.

The centrepiece of the new legislation is an effective 3% corporate tax cut for ‘qualifying’ US producers and manufacturers - a broad definition which includes traditional manufacturers, architects, Hollywood studios, and oil and gas drillers, among other sectors. The reduction, to be phased in through 2010, will eventually benefit around 200,000 firms, saving them $76.5 billion in tax, it has been estimated.

A one year ‘tax holiday’ which drops the corporate tax rate to 5.25% for firms repatriating earnings held offshore also found its way into the final version of the Act. This provision was welcomed by the hi-tech industry, who claim it will help to repatriate as much as $300 million to the US and create half a million new jobs. Opponents however, have criticized the move for effectively rewarding firms for outsourcing jobs overseas.

Another important measure will enable taxpayers residing in states that do not levy an income tax to deduct state sales tax on their federal tax returns for a temporary period.

Rules relating to foreign tax credits, interest expense allocation and other items have also been simplified under the bill in a bid to make US multinationals more competitive overseas.

Controversially, the hefty 650 page bill contains a cornucopia of other unrelated special interest measures that benefit a variety of recipients ranging from fishing tackle makers to racetrack owners.

It has been estimated that the package provides more than $100 billion in tax relief overall, although lawmakers insist that the bill is revenue neutral to the Treasury through the closure of tax loopholes and other revenue raising measures.

However, perhaps the most crucial measure of all - the repeal of the FSC-ETI legislation - is set to be phased out over the next three years, meaning EU tariffs may be in place for a while longer yet.

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