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New Domestic Production Incentive Legislation
- Executive Highlights
New ETI/FSC replacement legislation has been enacted as part of the American Jobs Creation Act of 2004 (the Act). This legislation was introduced in the House and the Senate during the summer to replace the WTO-outlawed ETI and FSC export tax incentive regimes. The replacement proposal, therefore, is designed to satisfy U.S. trading partners and meet WTO trade obligations, while providing comparable tax benefits to U.S. manufacturers. Some highlights of interest in the Act are outlined, below.
1) Exporters and domestic manufacturers eligible for existing ETI
benefits should be paying over 2% more tax under the new replacement
legislation. A comparison of tax rates is difficult, however, since you are
comparing two different pre-tax figures: net export income and net domestic
production activities income.
Generally, the current ETI benefit for corporations in 2004 is a 15% reduction
in pretax export income, or an effective tax rate of 29.75%. Under the new
replacement legislation, the benefit is a 9% deduction of domestic production
activities income, or an effective tax rate of 31.85%. As a result, this
legislation should increase the tax liability of exporters in future years.
2) The new legislation contains important phase-out rules for ETI
benefits in 2005 and 2006. For companies not eligible for the new domestic
production deduction, their tax rate on exports will increase to 30.8% in 2005
and 31.85% in 2006. In 2007, ETI benefits will have expired, so these companies
will be subject to tax at regular tax rates.
3) Companies eligible for the domestic production deduction can
receive benefits under both the ETI phase-out and domestic production phase-in
rules in 2005 and 2006. It is difficult to determine the combined benefits of
these two programs, since one is based on net export income and the other is
based on domestic production activities income. Neither the existing ETI rules
or the new legislation contains any restrictions on the use of other tax benefit
provisions in the same tax year. So, presumably, a taxpayer can claim both, if
applicable. The ETI phase-out rules will apply and can provide some savings in
2005 and 2006. Under the phase-in rules for the new domestic production
deduction, however, limited benefits (3%) also are available in 2005 and 2006.
In 2007-9, companies will receive only limited benefits (6%) under the domestic
production phase-in rules. Thus, these companies will be subject to an effective
tax rate of 32.9%, or over 3% higher tax rate than under the ETI provisions.
4) Not all exporters will be eligible for the domestic production
deduction, so many companies will lose benefits completely in 2007. Big losers
include distributors and architectural and engineering companies at overseas
construction sites.
On the other hand, many U.S. companies, other than exporters, that couldn't
qualify for ETI benefits will be eligible for the domestic production deduction.
Some winners will include domestic manufacturers, movie producers, agricultural
and utility companies with domestic and export sales, architectural and
engineering companies at U.S. construction sites and companies conducting
construction activities in the United States.
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