ETI exclusion repeal: transition relief.

• Author: Rollinson, Marjorie A.
• Position: Extraterritorial income

In response to the World Trade Organization (WTO) declaring the foreign sales corporation (FSC) regime a prohibited export subsidy, the FSC rules were replaced by the extraterritorial income (ETI) provisions as part of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. Although the basic exclusion rules under the ETI regime function differently from the FSC regime, many of the concepts contained in the ETI rules are similar to those under the FSC regime. As a result, the European Union challenged the ETI regime in the WTO, as it had challenged the FSC regime. In January 2002, the WTO Appellate Body held that the ETI regime was also a prohibited export subsidy under the relevant trade agreements.

New Law

AJCA Section 101, amending Secs. 114 and 941-943, repeals the ETI regime for transactions entered into after 2004, subject to a phaseout that allows current beneficiaries to claim ETI benefits as follows:

Tax year FSC/ETI benefit 2004 100% 2005 80% 2006 60% 2007 and beyond 0% Binding contract rule: Benefits continue to be fully available for transactions undertaken pursuant to a binding contract with an unrelated person in effect on Sept. 17, 2003.

Effective Date

The provision is effective for transactions after 2004.

Implications

Because of the elimination of full ETI benefits after 2004, ETI beneficiaries should evaluate opportunities to accelerate...