Direct’ and ‘indirect’ taxes on trade

The lengthy dis­pute[⇒ relat­ed sto­ry] between the USA and EU over the Unit­ed States’ FSC income-tax con­ces­sions to US exporters has its roots in an his­tor­i­cal error, accord­ing to one of the authors of the FSC leg­is­la­tion: Gar­ry Huf­bauer. He rec­om­mends that the error be cor­rect­ed, but his pro­pos­als seem to require either a sig­nif­i­cant change in the tax arrange­ments now in place in the rest of the world or a change in the WTO rules on export sub­si­dies. In an arti­cle in today’s Finan­cial Times, Huf­bauer reveals that the USA has been ‘caught out’ by a con­ces­sion it made to France on the tax treat­ment of exports back in the 1960s when build­ing Europe was a US for­eign pol­i­cy pri­or­i­ty. With his co-author, Huf­bauer rec­om­mend that as it repeals the FSC exemp­tions, as it is bound to do by the terms of the WTO deci­sion that they are an export sub­sidy, the USA should insist that the erro­neous dis­tinc­tion that per­mits WTO mem­bers to oper­ate a VAT exemp­tion on exports but not an income tax exemp­tion on exporters be abol­ished. bq. Con­gress should simul­ta­ne­ous­ly urge US trad­ing part­ners to cease exempt­ing their exports from VAT and cease impos­ing those tax­es on imports. If they do not amend their tax prac­tices with­in a decent peri­od, the US tax code should at least be amend­ed to exclude export income from US cor­po­rate income tax and allow Amer­i­can-made goods and ser­vices a fair oppor­tu­ni­ty to com­pete in world mar­kets. (Huf­bauer and Chris­t­ian in the “FT”: [sub]) Accord­ing to Huf­bauer, the his­tor­i­cal deal between the USA and the Euro­pean Com­mis­sion made a dis­tinc­tion between ‘direct’ tax­es like income tax­es that impact­ed pro­duc­ers and val­ue-added tax­es such as a VAT (or GST in Aus­tralia) that were said to be ‘indi­rect’, impact­ing con­sumers in the same way as an excise on alco­hol or cig­a­rettes. But, he claims, VAT and income tax­es are now under­stood both to impact the pro­duc­ers of goods and ser­vices: VAT is not like excise at all. Because they have the same impact, says Huf­bauer, both tax­es deserve the same treat­ment under WTO rules. They should be imposed on exports and remit­ted on imports.  Instead, under cur­rent WTO rules, VAT may be remit­ted on exports but imposed on imports. I think it’s high­ly unlike­ly that the USA could con­vince its trad­ing part­ners to ‘turn back the clock’ on VAT exemp­tions on exports (and impo­si­tion on imports) although this approach would have the high­ly desir­able fea­ture of resolv­ing the prob­lem of col­lect­ing nation­al VAT tax­es on goods and ser­vices trad­ed over the inter­net. The prob­lem is that VAT exemp­tions on exports are now built-in to too many tax arrange­ments around the world to be read­i­ly changed. The USA will have to find a long-term solu­tion to the per­ceived dis­ad­van­tage for its exporters that is in its own hands. But would the exemp­tion of US firms from all income tax on export income solve or exac­er­bate the export sub­sidy prob­lem posed by the cur­rent FSC exemp­tions? The WTO “rules say(link to text of Sub­si­dies Agree­ment on WTO site)”: that any remis­sion of a direct tax on an exporter (“tax rev­enue fore­gone” in the terms of Arti­cle 1.1 (ii) of the Agree­ment on Sub­si­dies) is a sub­sidy. Even if we admit that the dis­tinc­tion between income tax­es and VAT is a dis­tinc­tion with­out a dif­fer­ence, amend­ing the US tax code to exempt income tax does not seem to get around this WTO rule. Should the WTO rule on export sub­si­dies be changed to accom­mo­date the US his­tor­i­cal reluc­tance to add a fed­er­al val­ue-added tax to the over­all tax mix? Who would gain and who would lose from this?

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