Extra-Territorial
Income Exclusion Act
The FSC Repeal and Extraterritorial Income Exclusion
Act of 2000 effectively 'repatriated' the FSC
tax break and extended it to all types of entity
with qualifying foreign sales, including 'S' corporations
and LLCs, which were previously excluded. Foreign
companies which are US taxpayers could also use
the tax break, which was not the case previously.
There are rules requiring a certain proportion
of US-manufactured content and a certain proportion
of foreign costs; and foreign tax credits on the
goods concerned are not available to a participating
entity. Actual manufacture can take place either
inside or outside the US.
The
amount of the tax saving was the same as before
under the new rules, but the total foregone by
the Government was more, because a wider range
of companies could take part.
As under the previous law, the benefit applied
to exports and a 50% US-content rule remained.
Those features caused the new regime to continue
to resemble an export tax subsidy. In response,
the Administration pointed to the elimination
of administrative transfer pricing rules. The
argument was disingenuous because the separate
company requirement of the FSC and DISC legislation
had been eliminated. Without the need for two
companies – a manufacturing company and a
sales company – no need existed for transfer
pricing rules.
The
EU did not accept the new legislation as conforming
with WTO rules, and after a long series of hearings
and appeals, the WTO ruled definitively against
the ETI rules in late 2002. The EU then prepared
a list of US products on which it intended to
apply sanctions in the form of countervailing
duties, and obtained the WTO's permission for
such action, which it finally put into effect
in early 2004 in the absence of a substantial
change in the ETI regime.
After
much to-ing and fro-ing, US President George W
Bush finally signed a law in late 2004 which repealed
the FSC-ETI legislation in favour of broader tax
reliefs.
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