A ruling by an international trade group could derail a domestic tax break that saves U.S. corporations billions annually. But there's a strong likelihood that Uncle Sam will appeal the decision, and Congress may be called upon to draft new provisions that help companies compete internationally. The World Trade Organization (WTO) handed down the ruling, which declared the U.S. tax incentive an illegal export subsidy under global trading rules. The tax incentive gives U.S. businesses that export products through offshore subsidiaries--called foreign sales corporations--a partial exemption on the profits from the sales of those products, if they have a high level of domestic-made content.
Passed in 1984, the law creating the tax incentive was aimed at putting U.S. companies on an even footing with European competitors and preserving domestic jobs. Under international law, countries with an indirect tax on exports, such as the value-added tax, or VAT, can allow a business to rebate that tax when it sells a product in a foreign country. Direct taxes--like our income tax-- cannot be rebated. Since a direct tax is imposed on U.S. exports, a mechanism was needed to level the playing field for domestic companies selling into foreign markets, explains Calman J. Cohen, president of the Emergency Committee for American Trade, in Washington, D.C. That mechanism was the tax exemption for concerns selling goods through a foreign trade corporation. It is widely believed that the WTO decision will be appealed by the Clinton Administration. If the decision by the WTO cannot be appealed, Congress will have to create another mechanism to protect domestic businesses, according to Cohen.