GATT RULES CONCERNING EXPORT AIDS By John W. Evans I. INVENTORY OF PROPOSALS. II. THE RELEVANT GATT LAW. RECOMMENDATIONS. The purpose of this study is to examine, from the point of view of General Agreement on Trade and Tariff rights and obligations, various forms of governmental assistance to exports, with emphasis on those that have been proposed for use by the United States to assist the balance of payments. Forms of possible export incentives or assistance will first be inventoried, classified and briefly described. The relevant GATT rules will be examined and related to the measures that have been suggested for use by the United States. The practices of other GATT contracting parties will be considered in order to determine whether any of these GATT provisions have been so widely ignored as to render them inoperative. The potential costs of breaching the rules will be examined, and, finally, the case for or against seeking to negotiate modifications in them. I. INVENTORY OF PROPOSALS Since the beginning of the decline in the U.S. positive balance of trade, various suggestions have been made for governmental action to stimulate exports. These suggestions have come from government agencies, from business advisory councils and from business associations. They differ in their stated purposes. Some have been advocated as a means of offsetting existing disincentives to exporting as compared with selling in the domestic market. Others have been proposed as a means of equalizing disadvantages believed to be suffered by U.S. exports in world competition. The provisions of the GATT, however, are more concerned with mechanisms than with purpose. This study, therefore, will classify proposed measures in accordance with the nature of the incentive they would provide, such as: income tax relief, rebate of indirect taxes, assistance in export financing; insurance or guarantees John W. Evans is an International Economist specializing in commercial policy recently retired from the U.S. Department of State. against export risks. In a number of cases the suggestion has been derived from two or more sources. When the proposals differ in detail but not sufficiently to affect their status under the GATT these differences have been ignored and the description of the proposal has been limited to its salient characteristics. In many cases the proponents of a measure have simply recommended that it be considered and not necessarily that it be adopted. A number of the proposals below have been taken from a broader group of suggestions for the extension of "export expansion assistance." Since they were intended to be applied only to firms meeting special qualifications they differ conceptually from most of the other proposals. They have nevertheless been included in the inventory because, being generally the most extreme, they help illustrate the sorts of measure that would be inconsistent with the GATT. Income Tax Relief Domestic International Sales Corporation (DISC) The form of incentive that has been most prominent in recent discussions is the Domestic International Sales Corporation (DISC). A domestic corporation would be permitted to establish an exporting subsidiary the earnings of which would not be subject to corporate profits tax so long as they are used for export-related activities and are not distributed as dividends to the parent company. The version of the DISC incorporated in H.R. 18970 includes additional potential benefits to the parent corporation that are described in the Appendix. Accelerated or Special Depreciation Allowance (a) Under accelerated depreciation a firm would be permitted more rapid depreciation of assets acquired for the development of export markets, including facilities devoted to production for export, than for assets devoted to domestic sales. (b) A special or bonus depreciation allowance proposed under the Trade Expansion Assistance proposal would permit an additional "depreciation," as a deduction from gross income, equal to the dollar increase in exports. The aggregate of the annual special depreciation deductions would be limited to a fixed percentage of the actual cost of export-related assets. Thus, if the ratio chosen were 50 percent the qualifying exporter could ultimately receive a deduction from gross income for tax purposes of 150 percent of his capital costs. Tax Deferral through a Bad Debt Reserve (a) A company selling abroad on credit would be permitted to defer income tax on its earnings up to a given percentage of its outstanding foreign credits, or alternatively up to a given percentage of the increase during the year in its foreign accounts receivable. In either case, the bad debt reserve would be decreased and the reduction would become subject to tax in any year in which the firm's foreign accounts receivable should decline. (b) The proposal for Trade Expansion Assistance also includes a deduction from net income of a "reserve" that is unrelated to outstanding foreign accounts receivable. The deduction would be determined as a percentage of the annual increase in exports of the assisted product and would be recaptured in part in any year in which exports decrease, or in whole if the reserve is distributed as dividends. Any balance in the reserve after the termination of the approved export expansion plan would be permanently excluded from net income for tax purposes. Preferential Income Tax Rate on 'Profits From Exports This proposal would tax export profits at a lower rate than profits from domestic sales. This could be done by extending worldwide the Western Hemisphere Trade Corporation provisions of the tax code under which a 14-percentage-point tax reduction is granted on business outside the United States but within the Western Hemisphere. This possibility is popular with business groups since there are already in existence 700 to 800 WHTC's already operating and these could easily be converted into worldwide exporting media. Overexpensing of Export Promotion Expenditures An extra deduction would be allowed to exporters for expenses incurred in the promotion of U.S. goods abroad. The extra deduction is additional to deductions already allowed by the tax code, so that for every one dollar of eligible expenditure taxpayers would be entitled to a total deduction from taxable income of, say, $1.50. Eligible expenditures would include such things as advertising, trade fairs, travel, market research, etc. Similar plans have been utilized by Australia and several other countries. Relief from Indirect Taxes Exports are already excused from U.S. excise taxes and, of course, from state and local retail sales taxes levied on the domestic product if sold domestically. But various proposals have been made for broadening the base for the rebate of indirect taxes in order to put U.S. exports on a more even footing with the production of foreign countries that rely more heavily than the United States on indirect taxes. Rebate of Average "Hidden" Taxes One proposal is to rebate to exporters an amount estimated to compensate on the average for U.S. and state taxes incurred during their production, such as communications, transport, and gasoline taxes and local taxes on purchased supplies, i.e. on what have been called in international discussions "hidden taxes" or taxes occultes. Because of the impossibility of allocating such taxes to a unit of product and of avoiding discrimination between different exporters of identical prod ucts, these proposals all involve a flat percentage rebate based on an estimated average of such tax costs on all manufactured exports. Chairman Mills introduced a bill on September 10, 1969 (H.R. 13713) that would amend the Tariff Act of 1930 to enlarge the concept of drawback. It would provide for the drawback of local, state and federal taxes that the Secretary of the Treasury determines are borne directly or indirectly by the exported article and merchandise used in the manufacture of such article. In introducing the bill Chairman Mills recognized that its implementation would require averaging. Value-added Tax A related proposal would substitute a value-added tax (TVA) for all or part of the federal business income tax. Since a TVA could be fully rebated on exports, the effect would be to relieve exports of all or part of their share of present direct taxes incurred by producers. One variant 1 would involve the imposition of a business receipts tax (either a single stage transaction tax or a TVA) at a rate sufficient to permit the elimination of existing selective excise taxes and a reduction in the rates of both corporate and personal income taxes. Retaliatory Tax Rebates Bearing a superficial resemblance to this category is a proposal 2 for tax "rebates" on exports to offset any border tax imposed by a foreign country when the product is imported. The proponents have suggested that, in order to improve the chance of justifying these rebates under GATT, they be accomplished not by new legislation but administratively as part of the foreign tax credit allowed to the exporter in his federal income tax return. Rebate of Direct Taxes There have been no recent suggestions by responsible organizations that exports be favored by a simple rebate of corporate income taxes. This category is included in the present inventory, however, because payment of such a rebate has been implicit in the occasional suggestion that the GATT rules be altered so as to provide identical treatment of direct and indirect taxes. Export Credit Rediscount Facilities It has been suggested that existing facilities for the rediscount of export paper should be improved. Some would employ the Federal Reserve System; others would enhance the present operations of the Export-Import Bank. The stress is sometimes on greater ease or auto 1C.E.D., Next Steps in Federal Tax Policy, 1965. 2 National Export Expansion Council, Report of the Industry Committee on Electrical Generating Equipment and Switch Gear, 1969. |