*EPF304 03/03/2004
Senate Begins Debate on Repealing WTO-Illegal Export Tax Breaks
(House Republican leader outlines revised version of companion bill) (1010)

By Bruce Odessey
Washington File Staff Writer

Washington -- Two days after the European Union (EU) began imposing retaliatory tariffs on imports from the United States the U.S. Senate started debating a legislative proposal aimed at repealing the offending U.S. law that led to the sanctions.

The Bush administration has urged Congress to pass repeal quickly although it has taken no position in favor of any of the three leading legislative proposals, one in the Senate and two in the House of Representatives.

At issue is a series of U.S. laws that the World Trade Organization (WTO) has ruled as illegal export subsidies. The WTO first ruled illegal longstanding Foreign Sales Corporation (FSC) tax breaks for certain U.S. exporters. Then in 2002 the WTO ruled illegal tax breaks made under the Extraterritorial Income Act (ETI), the FSC successor law.

The WTO authorized the EU to impose sanctions amounting to $4 billion a year. After waiting for the United States to act, the EU finally began March 1 imposing tariffs worth 5 percent of the authorized level, prepared to increase the level by one percentage point a month up to 17 percent.

Before the full Senate March 3 was a bill approved 19-2 in October by the Senate Finance Committee called the Jumpstart Our Business Strength (JOBS) Act. The main provision would over three years repeal FSC/ETI and reduce the tax rate for all U.S.-based manufacturing companies -- not just for certain exporting companies and not for offshore manufacturing -- to 32 percent from 35 percent.

Other provisions aim at reforming the U.S. international tax regime, including ending double taxation of income and shutting down offshore tax shelters.

"Flaws in our international tax rules seriously undermine America's ability to compete in the global marketplace," said Senator Chuck Grassley, Republican chairman of the Finance Committee. "International reform is long overdue. Our current system is based on a framework enacted during President Kennedy's administration. We clean up problems that cause foreign earnings to be double taxed by both the U.S. and the foreign country where the profits are earned."

Several members are expected to challenge the bill by amendments.

Some Republicans, in line with administration criticism, want to amend the bill by reducing the top corporate tax rate for all corporations, not just for manufacturers. Grassley said he would oppose such an amendment, arguing that manufacturing, the sector that would be hurt by FSC/ETI repeal, should get any benefits from repeal legislation. He also argued that the proposed amendment would reduce taxes only for the biggest corporations, not for small family-held corporations or partnerships as the JOBS bill would.

Senator Tom Harkin, a Democrat from Grassley's state of Iowa, pledged to propose a potentially controversial amendment that would prevent final adoption of a Bush administration rule aimed at exempting overtime pay guarantees for millions of U.S. workers. Both the Senate and House of Representative actually passed such provisions in 2003 appropriations bills, but Republican leaders deleted them from the compromise measure given final passage by the two chambers.

Another amendment offered by Democrats aims to restrict foreign outsourcing of U.S. jobs paid for by U.S. federal government spending.

The Bush administration has opposed one provision of the JOBS bill called the Homeland Reinvestment Act. It would reduce, for one year only, the tax rate to 5-1/4 percent from 35 percent on past income from a foreign tax haven of a U.S. parent corporation. The U.S. parent would have to dedicate the tax break for U.S. reinvestment, including worker hiring and training and research and development. It would apply only retroactively, not prospectively.

Republican sponsors of the provision argue that the one-time tax break for repatriation of this foreign income would generate perhaps half a million new U.S. jobs.

Administration officials have argued, however, it would treat unfairly those companies lacking foreign tax havens that have been steadily repatriating their income over years at the higher ordinary rate.

The Senate approved amendments to the Senate Finance bill on the first day of debate. One would extend research and development tax credits.
Another would close a tax shelter that the administration said was open to abuse. According to Grassley's office, U.S. companies using this shelter receive huge tax deductions by pretending to lease infrastructure such as bridges and dams from tax-exempt agencies in foreign countries and then pretending to lease it back.

"These arrangements have resulted in U.S. taxpayers picking up the tab for a huge portion of Europe's transit infrastructure," Grassley's office said in a press release.

When the Senate would finish work on FSC/ETI repeal was uncertain. The Republican leadership has scheduled debate to begin February 8 on the federal budget whether work on the FSC/ETI bill was finished or not; the Senate is scheduled to take a recess the following week.

Meanwhile, companion legislation in the House of Representatives has been stuck in a stalemate for months.

Representative Bill Thomas, Republican chairman of the House Ways and Means Committee, told reporters March 3 he was aiming to bring to the House floor in a few weeks a revised version of a FSC/ETI bill he pushed through committee in October.

The Ways and Means bill would have decreased tax revenue about $60 billion over 10 years while his revised version would cost only about $3 billion, he said. The Senate Finance bill is supposed to be revenue neutral.

Thomas failed to gain support for the Ways and Means bill, however, from about 25 House Republicans who opposed tax breaks for U.S. companies with overseas operations.

In past weeks House members sponsoring a rival to the Thomas bill have pressed Republican leaders to schedule a House vote on their bill, which is closer to the Senate Finance measure.

To become law an FSC/ETI repeal bill would have to be passed in both the House and Senate and signed by the president.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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