House Of Representatives Introduces New Export Subsidy Bill

by Mike Godfrey, Tax-News.com, Washington

23 April 2003

Attention has returned to the issue of US export subsidies following the recent introduction of another bill in the US House of Representatives - the Job Protection Bill of 2003 - aimed at ending the imbroglio between the EU, the US and the WTO (World Trade Organisation) over Foreign Sales Corporations incentives (now known as Extra-Territorial Income Exclusions - ETIs).

The Foreign Sales Corporation system has been employed by the United States for the past twenty years, and works by allowing export income to attract tax deductions for US companies as long as the sale is booked via a related company in a foreign country. This has been cited by experts as a major reason for the popularity of Bermuda, or the Cayman Islands for example, amongst large US based corporations.

However, in the eyes of the European Union, and more importantly, the WTO, this amounts to an unfair subsidy for American firms, and the WTO has allowed the EU to impose $4 billion in retaliatory tariffs on imported goods from the US. Until, that is, the programme is dismantled by the United States.

Various proposals have been put forward to end the export subsidy system, including two bills introduced in Congress. One of these was the 'American Competitiveness and Corporate Accountability Act' drawn up by Republican chairman of the House Ways and Means Committee, Bill Thomas last year. However, it was felt by industry that the measures did not do enough to compensate for the extra tax burden which would be shouldered by US companies with overseas interests. The bill was dropped after a lobbying campaign by major corporations such as Boeing and Caterpillar.

The new, more popular Job Protection Bill, proposed by House Ways and Means Committee members Charles Rangel (a Democrat), and Philip Crane (a Republican) would give firms tax "brownie points" whilst also lowering the rate of corporate tax payable on foreign earnings. The Job Protection Act of 2003 would repeal the FSC/ETI tax program and replace it with a corporate rate deduction for domestic manufacturers. This would mean firms with 100% of their production based in the US would see a 3.5% reduction in corporate tax on export-generated profits to 31.5%. A sliding scale would be introduced according to a firm's ratio of domestic/international production.

“We all agree that we must repeal the FSC/ETI exemption and replace it with a WTO-compliant solution. The issue is how best to do it. Our plan will bring U.S. tax laws into compliance with WTO rules, as well as provide incentives for domestic job creation by U.S. companies and foreign subsidiaries operating in U.S. territory. That is a crucial component to any good solution,” Crane said. “Any revenues raised from the repeal of FSC/ETI should be used to encourage companies to maintain and expand their operations in the United States. This bill is about protecting and creating jobs and allowing U.S. manufacturers to remain competitive in the global marketplace.”

“The United States need to comply with our international commitments, but we should do so in a way that preserves American jobs. If we want our nation to be strong, we must remember the importance of these three words: ‘Made in USA.’ The products may change - today we produce more software and high-tech machinery than textiles and stereos - but keeping a healthy manufacturing base remains vital to our national interest,” Rangel said.

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