Uncertainties Remain Over New US Trade Tax Regime

by Leroy Baker, Tax-News.com, New York

12 September 2003

The battle continued in Congress this week on how to replace the foreign sales corporation subsidy system, which has been ruled illegal by the World Trade Organisation.

At present there are two competing ideas, one a bill drafted by House Ways and Means Committee Chairman Bill Thomas (R - Calif) and the other a proposal sponsored by a cross party group of Representatives.

Under the Thomas proposals, the foreign sales corporation legislation (now known as the Extra-Territorial Income Exclusion Act) would be repealed in favour of a series of beneficial measures for US multinationals. However, whilst the top tax writer boasts the support of 35 chief executives from firms including AOL Time Warner and Walt Disney, the snag is that the overall cost of the measures to the taxpayer will be in the order of $130 billion over ten years ($200 million in tax breaks offset by $71.9 billion in tax increases). Given the possibility of a $450 billion budget deficit next year, and with President Bush requesting an extra $87 billion to fight the peace in Iraq, this is unlikely to be the most popular measure with budget conscious lawmakers in the Capitol.

The other proposal, put forward by Reps. Phil Crane (R - Ill), Don Manzullo (R - Ill) and Charles Rangel (D - NY) would effectively offset the repeal of the ETI regime by reducing corporate tax from 35% to 31.5%, and is considered to be the more revenue neutral solution. The bill also has the support of 140 Congressmen including seven committee chairmen.

Karen Myers, director of tax policy at EDS Corp and a member of the lobby group Coalition for Fair International Taxation, is one who has a stake in the future tax reforms, but concedes that Thomas will have an uphill struggle in convincing Congress of the merits of his bill. "In an environment when the federal budget is in deficit and when there are significant demands on resources for priorities such as a war you do have difficulty passing any legislation that involves revenue," Myers told Reuters.

Nevertheless, whatever Congress decides, they had better decide it fairly swiftly before the European Union loses patience and imposes up to $4 billion worth of tariffs on US goods, something it is empowered by the WTO to do as early as January 2004.

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