Legal Times, Volume XXVII No. 43
Last Friday, President George W. Bush signed into law the American Jobs Creation Act of 2004. The centerpiece of the legislation is the repeal of the extraterritorial income exclusion tax incentive for U.S. exporters. The extraterritorial income exclusion was the most recent U.S. tax incentive to be declared an illegal export subsidy by the World Trade Organization at the urging of the Western European governments.
After a two-year wind-down that has angered the Europeans, the extraterritorial income exclusion now will go the way of other export subsidies—such as the domestic international sales corporation, first enacted in 1971, and the foreign sales corporation, first enacted in 1984.
The Joint Committee on Taxation estimates that repeal of the extraterritorial income exclusion will produce a $50 billion tax windfall for the Treasury. Congress was encouraged, and agreed, to use the windfall to provide other tax benefits to business rather than to reduce the deficit. Thus, the legislation adds $88 billion in additional tax breaks, with the extra $38 billion to be paid for by a broad variety of anti-abuse provisions, loophole closers, user fees, and excise tax increases.
Before the act’s passage, the debate centered on how to spend the tax savings from extraterritorial income exclusion repeal. The exporters, of course, wanted recompense for their $50 billion loss. U.S. manufacturers wanted a tax benefit for domestic production activities, and they argued that such a benefit would also compensate exporters for their loss of the extraterritorial income exclusion.