Foreign Tax Credit for VATs: Another Arrow in the ETI/E-VAT Quiver

Tax Notes International, May 2003

47 Pages Posted: 24 Jul 2008

Date Written: April 1, 2003

Abstract

Everyone, with the possible exception of a few lone and lonely holdouts, is resigned to the fact that the FSC Repeal and Extraterritorial Income Exclusion Act (ETI) will itself soon be repealed. Everyone, with few to no holdouts, is also convinced that American exporters still need the quantum of help that ETI and its predecessors gave them. Last year, William M. Thomas, Chairman of the House Ways and Means Committee, proposed several offsets for ETI repeal, but his proposals drew sharp criticism because, by and large, they would only benefit multinationals, not U.S.-based businesses. Reps. Charles B. Rangel and Philip M. Crane have recently addressed this concern by proposing a 3.5% tax break for corporate domestic production phased in between 2006 and 2010 and a five-year phaseout of the FSC/ETI subsidies beginning in 2004. Chairman Thomas also expressed frustration with the continuing tax tensions between the European Union (EU) and the U.S., saying that the distinction between direct and indirect taxation was, "in today's world, . . . a distinction without a difference."

I agree with the Chairman's statement and propose, as another arrow in the ETI-repeal quiver, creditability of value added taxes, or VATs (an indirect tax) against U.S. income tax (a direct tax), capped at an appropriate level. VAT credit has the potential to benefit both U.S.-based businesses and U.S. multinationals. Some of those businesses pay VAT to foreign governments now, either due to the presence of subsidiaries or branches in VAT countries or, in the case of U.S.-based businesses, due to the structure required for certain international transactions. Further, many more U.S. businesses will be paying VAT very soon. Starting July 1, Directive 2002/38/EC (E-VAT Directive) will require any business delivering software or other digital e-products to an EU consumer over the Internet to pay VAT on that sale. Creditability is justified because VATs, like income taxes, are sometimes non-shiftable, and therefore can violate Capital Export Neutrality by lowering the rate of return on investment for activities abroad. Adding a capped foreign tax credit for VATs will thus relieve double taxation and, at the same time, put Chairman Thomas's insight regarding direct and indirect taxes into practice.

Keywords: foreign tax credit, value added tax, VAT, electronic commerce, incidence, World Trade Organization, WTO, subsidies and countervailing measures

JEL Classification: H22, H25, K33, K34

Suggested Citation

Tittle, Martin B., Foreign Tax Credit for VATs: Another Arrow in the ETI/E-VAT Quiver (April 1, 2003). Tax Notes International, May 2003, Available at SSRN: https://ssrn.com/abstract=1173122

Martin B. Tittle (Contact Author)

Law Office of Martin B. Tittle ( email )

P.O. Box 1541
Ann Arbor, MI
United States
734-846-3864 (Phone)

HOME PAGE: http://www.martintittle.com

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