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EXPORT INCENTIVES – GET ‘EM WHILE YOU CAN

September 25, 2002

Kick the Taliban out of Afghanistan? Done.

Pass a complex farm bill? Done.

Campaign finance reform? Done.

Change export tax laws to avoid $4 billion in trade sanctions? Hmm. We’ll get back to you on that one.

If international trade laws had a “3 strikes and you’re out” provision, Congress would be set to do some hard time. In January the World Trade Organization (WTO) ruled for the fourth time that our tax law’s export incentives violate international trading rules. The first three attempts to comply were mere tweaks of the system; more, apparently, will be required. Absent compliance, our trading partners threaten to impose punitive tariffs of $4 billion. The sanctions would be rotated among different industries – from grain and livestock to iron and steel -- presumably to annoy those affected into lobbying for repeal of the offending incentives.

As practitioners and taxpayers, we take a more detached view of the dispute. Rather than pondering the integrity of the international trading system, we say: “Illegal export subsidies? Where can I get some of that?”

IT MAY BE AT YOUR FINGERTIPS. The offending provisions are the “Extraterritorial Income Exclusion” (not to be confused with the Extraterrestrial Income Exclusion). This enables taxpayers to avoid U.S. tax on up to 20% of income from export sales. For taxpayers with over $5,000,000 in annual export sales, this exclusion is available as long as certain activities take place outside the United States. For those of us with UNDER $5,000,000 in annual export sales, the exclusion is there for the taking, for sales after September 30, 2000.

WHAT DO I HAVE TO DO? All that is required to take the exemption is to claim it on Form 8873. If you have not yet claimed it, you may be able to claim it on an amended return. To learn more, contact Joe Kristan or Ken Boeke at Roth & Company, P.C. Remember – even though the exclusion is illegal under international trading rules, it is perfectly legal on your tax return. Our legislators have taken this approach:

“Congress: we put the “legal” in “illegal.”

BUT ACT NOW! These incentives aren’t going to last. Well, actually, they probably will last awhile. Yesterday a “bipartisan working group” met to discuss a solution to the problem. Max Baucus (D-Idaho), the chief Senate tax writer, said “This is not an attempt to delay… We did not discuss a specific solution, but plan to have recommendations by the end of the year.”

Yep, gotta love that quick action.

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