FSC/ETI Transition Relief in the New JOBS Act: Does the U.S. Have to Quit Cold Turkey?
Special Report No. 133
The U.S. policy on taxing exports has taken more twists and turns than a movie by M. Night Shyamalan. The American Jobs Creation Act (a.k.a. “JOBS Act” or “FSC/ETI repeal”) recently passed by Congress was supposed to be the last scene of the movie. Like a villain in a bad horror thriller, however, the export tax issue just will not die. The European Union (EU) challenged the transition relief in the JOBS Act (soon after its passage) as a violation of World Trade Organization (WTO) law.1 Though the U.S. has tried to block the challenge, it is almost certain that a new WTO panel will review and rule on the transition relief by the end of the year.
The JOBS Act eliminated Extraterritorial Income (ETI) tax benefits that the WTO had branded as illegal export subsidies. The JOBS Act allowed those benefits to continue, however, for certain companies that entered into contracts for long-term sale, lease and delivery of goods and services. The JOBS Act also slowly phases out ETI benefits over a two-year period, meaning that new transactions can still partially benefit from ETI benefits until full repeal in 2007.
Despite the reasonableness of these measures from a U.S. tax policy perspective, the EU is challenging the transition relief as a separate violation of WTO law. Some U.S. lawmakers, like Senator Max Baucus (D-MT), think the EU will use this new challenge as leverage in a separate WTO dispute over EU subsidies for Airbus Industries.
Based on previous WTO decisions on transition relief, it seems likely that the EU will prevail. If the U.S. fails to persuade the WTO that the transition relief is legal, the EU could re-impose trade sanctions on U.S. goods sold in Europe, putting us back to square one with regard to making our export tax policy competitive with Europe. Although this would be unfortunate, Congress would do well to respond by accelerating the tax cuts in the JOBS Act and otherwise seek to shield U.S. exporters (and all U.S.-based companies) from the potential damage of an adverse WTO decision on transition relief.