The House Ways and Means Committee Oct. 28 approved broad corporate tax legislation (H.R. 2896) by a party-line 24-15 vote that would repeal the U.S. system of export tax breaks and replace it with rate cuts for domestic manufacturers and smaller corporations and a range of tax relief for the overseas operations of U.S. multinationals...

... Passage of the mark of H.R. 2896 is a critical milestone in congressional efforts to get rid of the Extraterritorial Income Exclusion (ETI) Act by the end of the year after the World Trade Organization ruled the measure a prohibited export subsidy in 2002.

The House Ways and Means Committee Oct. 27 will mark up controversial legislation (H.R. 2896) that would repeal the U.S. system of export tax breaks and replace it with a mix of domestic manufacturing and international tax relief, the committee announced Oct. 17.......The decision to move forward with the legislation came two days after Thomas met with committee Republicans to discuss significant changes to the bill that involved dropping key international provisions, expanding the tax relief for domestic manufacturers, and reducing the net cost of the bill from $128 billion over 10 years to about $60 billion...

House Ways and Means Committee Chairman William Thomas (R-Calif.) Sept. 9 said he is considering adding more relief for domestic manufacturers to his legislation (H.R. 2896) to replace the controversial system of U.S. export tax breaks.

In what he termed a slight modification, Thomas confirmed he has floated to House leadership and Ways and Means members a provision that would reduce the tax rate to 32 percent for manufacturers for whom at least 50 percent of the content of their product is made in the United States.

The Thomas action comes as tension grows over how best to replace the Extraterritorial Income Exclusion (ETI) Act after it was ruled a prohibited export subsidy by the World Trade Organization in 2002. An alternative measure (H.R. 1769) that would replace ETI with a tax exclusion for domestic manufacturers, proposed by Reps. Philip Crane (R-Ill.) and Charles Rangel (D-N.Y.), now has 140 House co-sponsors.

Sen. Orrin Hatch (R-Utah) late July 28 introduced the first Senate legislation (S. 1475) to repeal the controversial U.S. export tax regime and replace it with a mix of tax relief for international and domestic operations of U.S. corporations.

Hatch unveiled the substance of his proposal side by side with House Ways and Means committee Chairman William Thomas (R-Calif.) July 25, but some minor last-minute changes delayed formal introduction of the Hatch measure, a Hatch aide told BNA July 28.

Similar to the legislation (H.R. 2896) Thomas introduced at their joint news conference, the Hatch bill would repeal the Extraterritorial Income Exclusion (ETI) Act after the World Trade Organization ruled it a prohibited export subsidy early last year. Both measures provide some domestic tax relief but focus significant attention on international incentives....

The Hatch bill shares very similar international relief provisions with the Thomas measure, broadening beneficial tax treatment for foreign operations of U.S. multinationals under the Subpart F rules and allowing increased use of the foreign tax credit.

House Ways and Means Committee Chairman William Thomas (R-Calif.) July 25 unveiled sweeping corporate tax reform legislation (H.R. 2896) that would repeal the controversial U.S. export tax regime after it was ruled a prohibited trade subsidy last year by the World Trade Organization. The $190 billion measure, supported by 176 companies, would replace the Extraterritorial Income Exclusion (ETI) Act with a mix of international tax relief for U.S. multinationals with substantial operations overseas and provisions aimed at assisting the ailing U.S. domestic manufacturing industry.  It also has language to curb abusive corporate inversions and tax shelter transactions.

The legislation would drop the top tax rate for Subchapter C corporations with less than $10 million in income from 35 percent to 32 percent, a change that Ways and Means staff said would affect more than 99 percent of the nation's businesses.  In addition to a wide range of international reforms that Thomas included in an earlier measure (H.R. 5095) last July, the legislation also would provide a package of depreciation relief, including a $34.5 billion benefit for manufacturing equipment, relief from the alternative minimum tax, and extension and expansion of the research and development tax credit.

House Ways and Means Committee Chairman William Thomas (R-Calif.) could introduce his long-awaited legislation to replace the U.S. export tax regime as early as July 23, while top Senate Finance Committee officials will wait until after the August recess to introduce their version of the legislation, congressional aides told BNA July 20….

…The Thomas measure is expected to focus on replacing lost ETI benefits with international tax relief for U.S. multinational companies that have substantial operations overseas. That approach is expected to be challenged in the Ways and Means Committee by legislation (H.R. 1769) introduced by Reps. Philip Crane (R-Ill.) and Charles Rangel (D-N.Y.) that would make up for the lost export tax relief with a tax exclusion for domestic manufacturers.

A Senate aide told BNA July 21 that Finance Chairman Charles Grassley (R-Iowa) and ranking member Sen. Max Baucus (D-Mont.) have decided to postpone introduction of their ETI replacement bill because they have not yet reached consensus on how best to help U.S. manufacturers with mostly domestic operations…

Hatch to Unveil Bill
… Hatch said at the hearing that he supports "a mix of incentives," and told reporters later July 15 he is set to introduce his own ETI repeal legislation by July 25. Hatch said he expects the measure will be "similar" to a proposal being crafted by House Ways and Means Committee Chairman William Thomas (R-Calif.).
" We're not too far apart," Hatch said, adding the bill would address business depreciation and the research credit. A Hatch aide told BNA July 14 it is possible Hatch and Thomas may do a joint event near the end of the week to introduce their legislation (135 DTR G-7, 7/15/03).

The Hatch aide said that, although the international provisions in the two measures are likely to be extremely similar, their approaches on providing relief for domestic companies will differ. The Thomas proposal is expected to face significant opposition in the Ways and Means Committee, where the Crane-Rangel measure appears to be gaining support.

The measure, which has House Small Business Committee Chairman Donald Manzullo (R-Ill.) as another primary sponsor, now has 125 co-sponsors, including seven House committee chairmen.

U.S. companies will face up to $4 billion in trade sanctions starting Jan. 1 if the federal government is not "on the way" to bringing its tax code in line with international rules by the fall, the European Union said yesterday.

The World Trade Organization (WTO) yesterday authorized the 15-nation European Union to hit American exports including jewelry, machinery, appliances, and wood and paper products with stiff tariffs….

To view the full text go to The Washington Times

Reps Charles Rangel (D-N.Y.) and Philip Crane (R-I.L.) April 11 unveiled legislation (H.R. 1769) that would repeal the existing U.S. export tax regime and replace it with a corporate rate deduction for domestic manufacturers.

The action taken by Rangel and Crane - respectively the ranking Democrat and senior Republican on the House Ways and Means Committee-appeared to be directly challenging Ways and Means Chairman William Thomas (R-Calif), who soon is planning to reintroduce his own legislation on the export tax question.

The approach taken by the Rangel/Crane legislation conflicts with legislation (H.R. 5095) Thomas introduced last year after the World Trade Organization ruled the U.S. export tax regime a prohibited export subsidy. That bill offered a range of international tax relief for overseas business operations, an approach that drew significant fire from U.S. based manufacturers...

To view the text of H.R. 1769 and H.R. 5095 go to http://thomas.loc.gov

In testimony February 26 before the House of Representatives Ways and Means Committee, U.S. Trade Representative Robert Zoellick noted that a series of WTO rulings against the Foreign Sales Corporation (FSC) and its successor Extraterritorial Income (ETI) Act mean that the United States faces possible European Union (EU) sanctions on more than $4,000 million worth of U.S. exports a year.

Earlier that day, the EU released a list of potential U.S. products that would be subject to the retaliatory tariffs.

Asked to comment on publication of the list, Zoellick said he believed the EU was less interested in retaliation than in U.S. compliance and urged Congress to move quickly on the issue.

"Personally, I think the EU will hold off for a while, but I don't know for how long," Zoellick said. "We have got to get this fixed."

Some members of the committee expressed concern that certain U.S. exporters - struggling amid a still-sluggish global economy - would be further harmed by legislation that would effectively raise their taxes. While Zoellick did not respond directly, he did underline that U.S. businesses and consumers would certainly be affected by any retaliatory tariffs. Moreover, he said, it is important for the United States to "live up to its obligations under WTO rules."    For full text

Following successive WTO rulings against the Foreign Sales Corporation (FSC) and its successor Extraterritorial Income (ETI) Act, the United States faces the possibility of European Union (EU) sanctions on more than $4,000 million worth of U.S. exports a year.

"The United States must comply with the WTO rulings in the FSC/ETI case," Treasury Department said in a February 3 document explaining major revenue-related provisions of President Bush's budget request for fiscal year 2004.

Treasury said that the administration has identified three areas for possible reform, including rules covering investment-type income earned by a foreign subsidiary, foreign tax credits and the allocation of overseas interest expenses. The administration is also calling for a "complete reexamination" of the tax code to ensure that U.S. rules do not hamper the ability of U.S. businesses to compete successfully around the world.

The following is an excerpt from this document.

Compliance with the WTO decisions in the FSC/ETI case requires substantive changes to our current international tax laws. One area of attention for reform efforts is the subpart F rules. The focus of the subpart F rules is on passive, investment-type income that is earned abroad through a foreign subsidiary. However, the reach of the subpart F rules extends beyond passive income to encompass some forms of income from active foreign business operations. While the subpart F rules are intended to differentiate passive or mobile income from active business income, they can operate to subject to current tax some classes of income arising from active business operations structured and located in a particular country for business reasons wholly unrelated to tax considerations.

Another area of focus is the foreign tax credit rules. The rules for determining and applying the current-law foreign tax credit limitation are detailed and complex and can have the effect of subjecting U.S.-based companies to double taxation on their income earned abroad.

The expense allocation rules for foreign tax credit purposes can treat interest expense of a U.S. group as relating to the group's foreign subsidiaries even where those subsidiaries are equally or more highly leveraged than the U.S. group. This can result in an over-allocation of interest expense to foreign income, understating foreign income and reducing the foreign tax credit limitation. These limitation rules can have the effect of denying U.S.-based companies the full ability to credit foreign taxes paid on income earned abroad against the U.S. tax liability with respect to that income and therefore can result in the imposition of the double taxation that the foreign tax credit rules are intended to eliminate.

As we make the changes to our tax law that are needed to comply with WTO rules, we must keep our focus on the objectives served by the FSC and ETI provisions and look to removing biases against the ability of U.S. businesses to compete in today's global economy. For full text