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Rare Sunday action replaces export FSC/ETI program with tax breaks

WASHINGTON, DC - 10/12/04 - In a move that some hope might help defuse the possibility of a transatlantic trade war, the US Senate has approved a package of sweeping corporate tax incentives aimed at replacing the controversial Foreign Sales Corporation / Extraterritorial Tax Incentive (FSC/ETI) mechanism.

US exporters taking advantage of the FSC/ETI program racked-up roughly $5 billion a year in tax breaks tax break for exporters that was found to be an illegal trade subsidy by the Geneva-headquartered World Trade Organization (WTO).

The European Union began imposing punitive tariffs on US-made products in March in retaliation because of inaction in Washington on scrapping the program.

The final package was hammered out by a House-Senate conference committee late last week and cleared the House of Representatives last Thursday on a vote of 280-141.

The final bill includes a provision that will end a Depression-era subsidy program for tobacco growers, in return paying producers $10.1 billion.

The move to dismantle the export tax program comes as trade tensions between the US and the European Union have reached a fever pitch since last week's "stereo" filings of complaints with the WTO by both Washington and Brussels charging the other with "illegal" subsidies to Boeing and Airbus SAS, respectively.

The aircraft subsidy issue has, many feel, the possibility of exploding into a full-fledged trade war that could impact the most massive bilateral trade relationship in the world.

The US and the 25-member EU are the largest players in global trade with each accounting for a full fifth of each other's bilateral trade - or close to $1.2 billion every day.

In 2003, exports of EU-sourced goods to the US amounted to $278 billion, 26% of total EU exports, while imports from the US amounted to $192 billion, or 17% of total EU imports.

Some observers have said that the dismantling of the FSC/ETI program could help soothe transatlantic trade relations at "a critical time," while press reports in the EU have quoted unnamed trade officials in Brussels as saying that the Congressional action would have "no impact one way or the other" on the aircraft subsidy issue.

"These are two separate issues and Brussels will treat them as such," said one unnamed EU trade quoted in several European papers.

Action in the Senate on the new tax package during the rare Sunday session was delayed by filibuster by a bi-partisan group of senators angry over the removal of language from the bill that would have required US Food & Drug Administration (FDA) regulatory authority over tobacco products.

However, the filibuster delay failed when it fell far short of the 41 votes needed in the 100-member Senate to keep it alive. The Senate eventually voted 66-14 to end debate, with one senator voting "present."

The procedural vote signaled easy passage was likely for the bill.

Next stop would then be the White House, where President Bush is expected to sign it into law.

According to sources, the new tax cuts for domestic manufacturers will eventually bring their top corporate rate down by 3 percentage points to 32%.

Repeal of the FSC/ETI provisions will also boost revenues by around $57 billion over 10 years. Those will be replaced with tax breaks that total around $137 billion. The package is projected to be budget neutral over 10 years due to the closure of several tax loopholes, raising customs fees and other revenue-raising measures.

The bill also offers a one-year window that allows US multinationals to repatriate foreign-earned profits at a tax rate of 5.25%, rather than 35%.

The measure, which had been the subject of specific objections by the Treasury Department, could be a boon to firms in a range of industries from drugs to toys to financial services.

While efforts to replace the FSC/ETI provisions with tax break for domestic manufacturers had wide support, opponents of the final package complained that lawmakers had loaded the bill with perks for special interests.

According to press reports, the bill would also allow taxpayers in seven states that don't have a state income tax to deduct sales taxes from their federal income tax returns. It also includes a number of tax breaks aimed at farmers and a number of specific businesses, including tackle-box manufacturers and makers of bows and arrows.

Senate Finance Committee Chairman Charles Grassley (R-Iowa), who led Senate negotiators on the conference committee, underlined efforts in the bill to close numerous corporate tax loopholes.

Closures "will end around $50 billion worth of fraud," he told the Associated Press.

The US Constitution "may say that revenue measures have to start in the House, but the truth is they are being created in the Senate by cracking down on corporate loopholes," said Grassley, who is on the record saying he will continue pursuing "a crackdown on corporate tax shelters" in the next Congress.

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