Extraterritorial income benefits may still be alive.

• Author: Boyd, Chad

The extraterritorial income (ETI) regime was enacted in 2000 to provide domestic taxpayers with special tax benefits for certain export-related income. After only a few years on the books, however, the American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), repealed the ETI regime and generally discontinued ETI benefits for transactions entered into after 2006. At the time, many taxpayers assumed that ETI benefits were also discontinued for all income recognized after 2006. Recent IRS guidance confirms, however, that the ETI benefit may still be available for income that taxpayers recognized in post-2006 years from certain transactions occurring before the ETI regime was repealed.

Background

The FSC Repeal and Extraterritorial Income Exclusion Act of 2000, P.L. 106-519, generally replaced the foreign sales corporation (FSC) regime with the ETI regime. Congress created the ETI regime in response to a World Trade Organization (WTO) determination that the FSC regime constituted a prohibited export subsidy. The ETI regime gave domestic taxpayers a new tax benefit by amending the definition of gross income to exclude certain extraterritorial income. The ETI provisions were contained in Sees. 114 and 941-943 and generally were effective for "transactions" entered into after September 30,2000 (the ETI effective date).

In January 2002, the WTO determined that the ETI regime also constituted a prohibited export subsidy. Accordingly, Congress responded in the AJCA, which repealed the ETI regime for transactions entered into after December 31, 2004 (the ETI repeal date). In addition to the general repeal rule, the AJCA also provided a transition (or phaseout) rule that permits taxpayers to claim 80% of the ETI benefits that would have been available prior to repeal for income recognized from a transaction entered into during 2005 and 60% of ETI benefits for income from a transaction entered into during 2006.

When Does a Transaction Occur?

Assuming that the requirements of Secs. 114 and 941-943 are satisfied, income from a transaction will be eligible for ETI benefits only if the transaction was entered into after the ETI effective date and before the end of the ETI phaseout period. Sec. 943(b)(1)(A) of the ETI regime defines a transaction as:

* Any sale, exchange, or other disposition:

* Any lease or rental; or

* Any furnishing of services.

The term "lease" also includes a license. This discussion will focus on long-term leasing and licensing...