Manufacturers must wait for top rate reduction as alternative bill is introduced in House

US Congressional efforts to reform an export tax break opposed by Europe and ruled illegal by the World Trade Organisation (WTO) have hit a hurdle with the introduction of competing legislation in the House of Representatives. The Senate has already approved a bill that would replace the Foreign Sales Corporation (FSC) law and its successor, the Extraterritorial Income Exclusion (ETI) act, with a broad-based tax reduction for all US domestic manufacturers.

A version of the Senate legislation, which would reduce the top tax rate for US manufacturers from 35% to 32%, has been introduced in the House, but faces competition from an alternative FSC/ETI repeal bill that offers the same tax cut, but adds a host of tax benefits for small and medium-sized businesses. While the Senate bill is estimated to have the same $50 billion annual cost as FSC/ETI, the alternative legislation has been assessed as costing $128 billion.

The US Aerospace Industries Association has put its backing behind the Senate bill and its House version, arguing that it is "revenue neutral" and provides for a reasonable transition period from the tax break for exporters to the top-rate tax cut for manufacturers, whereas the alternative bill phases out the export tax break well before the domestic tax cut takes effect in 2009.

The WTO ruled in September last year that FSC/ETI constituted an illegal export subsidy, and authorised the European Union to levy over $4 billion a year in punitive sanctions against the USA. The EU is holding off imposing the sanctions as long as the USA is making progress towards reforming its international tax laws, raising concerns that any delay in the House and Senate agreeing on a replacement for FSC/ETI could trigger damaging sanctions.

Source: Flight International