Extra-Territorial Income Exclusion Act
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effectively 'repatriated' the FSC tax break.

Remedial US Legislation
Repealing the export subsidy legislation was a difficult process in the Congress.

Remedial US Legislation

Various proposals were put forward between 2002 and 2004 to end the export subsidy system, including various 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 in 2002. 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 more popular Job Protection Bill, proposed by House Ways and Means Committee members Charles Rangel (a Democrat), and Philip Crane (a Republican) offered to give firms tax "brownie points" whilst also lowering the rate of corporate tax payable on foreign earnings. The Job Protection Act of 2003 would have repealed the FSC/ETI tax program and replaced it with a corporate rate deduction for domestic manufacturers. This would have meant that 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 US tax laws into compliance with WTO rules, as well as provide incentives for domestic job creation by US 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 US 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.

The composite tax-package legislation of May, 2003 also incorporated a short-term substitute for the ETI legislation in the form of a provision that reduces tax on the repatriated foreign earnings of US corporations to 5.25% for a period of one year. The bill also contained measures that will allow US multinationals to more easily take advantage of foreign tax credits.

The European Union became impatient with the long-drawn-out efforts in the US Congress to respond to the WTO's banning of the FSC and ETI regimes and put in place counter tariffs in March 2004 on a range of US goods, starting at a rate of 5%. This was designed to rise in 1% increments every month until the EU became satisfied that appropriate action had been taken by US lawmakers.

The United States had aimed to complete the replacement legislation before the European Union imposed the retaliatory tariffs. However the European Union still objected to a proposed three-year transitional period before the new legislation came fully into force. "We have already waited for three years to get the legislation repealed," Arancha Gonzalez, spokeswoman for EU Trade Commissioner at the time, Pascal Lamy, observed at a news conference, continuing: "an extra three-year period could not be acceptable to us."

Chairman of the Senate Finance Committee Charles Grassley refuted the EU's claim over the transitional period, arguing that the new proposals removed the obligation on a firm to physically export goods before qualifying for the tax break. "I would think the European Union would have some appreciation for the extent of this undertaking and show some restraint and patience," said the Iowa Republican said. "The imposition of sanctions now will only contribute to soften the economic recovery and slow economic growth worldwide."

The FSC and ETI regimes were finally abolished by the American Jobs Creation Act 2004. See here for an account of the Act and its consequences in 2005.

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Extra-Territorial Income Exclusion Act
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 effectively 'repatriated' the FSC tax break.

Remedial US Legislation
Repealing the export subsidy legislation was a difficult process in the Congress.