CITE/FDTA Wish list for New Export Tax Legislation

Author: William Green
Publication Date: December 04, 2002

Here are a few thoughts for export-friendly tax legislation in 2003:

1) Future of the EIE Legislation

There is a sense of gloom in Washington, DC, about the future of the Extraterritorial Income Exclusion (EIE) legislation. The Republicans (Bush) want the WTO dispute resolved and do not appear adverse to terminating the legislation. This would be a good time for corporate executives to contact their Congressperson and let them know how the ETI legislation helps them to compete overseas.
There was some indication that the WTO dispute could be settled by the U.S. Trade Representative, but no agreement was expected soon.

2) ETI Rules!

Most companies at the meeting have opted to apply the ETI rules in 2000 and 2001. This decision was prompted by a number of factors: 
· more favorable treatment of military sales, 
· more favorable application of the 1.2% FTGR sourcing rules, 
· no separate entity with estimated and final tax payments and 
· no alternative minimum tax (AMT).

3) IRS Enforcement

Most of the recent Tax Court cases and issues outlined in IRS Field Service Advice (FSA) memoranda arise from redeterminations. Redetermintions arise where the taxpayer recomputes its FSC commission, or the amount of its exclusion, using transaction-by-transaction pricing software. These redeterminations often involve adding transactions (products or product lines) not contained in the initial return or applying a different expense apportionment methodology.

In any event, the redeterminations create large refund claims that must be reviewed by the Joint Committee of Congress. As a result, the IRS and Treasury Department officials do not like redeterminations, not only because they cause a drain on revenues, but also because it slows down the IRS audit process and results in more open years


What to Expect in 2003?

If the EIE provisions are repealed by the new Republican Congress, then corporate tax advisors should dust off their Tax Codes and review the IC-DISC (Interest-Charge Domestic International Sales Corporation) provisions. An IC-DISC, under Secs. 991-996, provides a deferral of U.S. tax on export sales, but an annual interest charge is imposed on the DISC-deferred tax liability. The IC-DISC provisions have not been criticized by the members of the World Trade Organization. In fact, the GATT hearings in 1982 found that the IC-DISC deferral does not confer benefits, like a subsidy, since interest is charged on the deferred tax amounts and the tax is not forgiven.

If repeal legislation is enacted, there is a consensus that there will be “sunset” provisions that will enable companies to retain EIE benefits through 2003 or 2004. The IRS, moreover, may be less willing to commit resources in training agents to audit the Form 8873. Thus, companies have been urged to maximize their export tax benefits over the next couple of years.

For 2003, look for CITE’s new series of export tax programs to examine what benefits are still available for U.S. manufacturers. New topics will be added on using the IC-DISC and FISC – a foreign selling arm of the DISC – and strategies for increasing the utilization of foreign tax credits on export sales under Sec. 863(b).