Congress Should Accelerate Tax Relief to Protect U.S. Exporters from Upcoming WTO Tax Ruling

WASHINGTON, D.C.—With the European Union (EU) continuing to challenge U.S. tax treatment of exports, a new Tax Foundation report concludes Congress should accelerate tax relief for companies in anticipation of an upcoming World Trade Organization (WTO) ruling that may harm U.S. exporters.

"The 2004 American Jobs Creation Act was supposed to square U.S. export tax law with WTO rules," said Staff Attorney Chris Atkins, author of the new report. "But the EU won't let the export tax issue die."

In 1999 a WTO panel ruled U.S. Extraterritorial Income (ETI) tax provisions constituted an illegal export subsidy. The 2004 Jobs Act aimed to repeal the FSC/ETI provisions slowly and provide transition relief to U.S. companies. The EU challenged that transition relief as well, arguing for immediate FSC/ETI repeal. A WTO panel ruling is expected by year end.

The report argues that the EU is likely to prevail, allowing the EU to impose punitive trade sanctions against U.S. exports.

"A ruling against transition relief would constitute a retroactive tax change that would be highly unfair to U.S. companies who've formed current contracts based on today's tax law," said Atkins. "The U.S. prohibits retroactive tax changes by the Internal Revenue Service at home, and it owes it to U.S. taxpayers to fight against unfair retroactivity in WTO law as well."

Although an EU victory at the WTO would be unfortunate, Congress can act today to help mitigate the potential harm to U.S. companies. One way is by accelerating and perhaps enhancing the tax cuts in the JOBS Act. In particular, Congress could accelerate the phase-in of the deductions for qualified production activities income (not scheduled to be fully implemented until 2009), and consider making the tax relief available to all U.S. corporations, not just those heavily engaged in manufacturing.

The report highlights a key lesson from the ongoing dispute with the EU over the tax treatment of export income: piecemeal tax reform can have disastrous results.

"The United State's tinkering with the tax system to give exporters a benefit gave the EU and WTO the chance to cry foul over export subsidies to begin with," said Atkins. "More fundamental tax reform of the U.S. tax code toward economic neutrality across industries would help alleviate these types of challenges in the WTO in the future."

The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization based in Washington, D.C.

(View the full report online here.)

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Media Contact: Chris Atkins (202) 464-6200