WILLIAM ARMBRUSTER
Business coalition says VATs should be top priority for US trade negotiators
AMTAC says other countries' VAT policies cost U.S. companies $474 billion
Value-added taxes are little known in the United States, but the VAT
policies of foreign governments should be the top priority for U.S.
trade negotiators, according to a business coalition.
VATs put U.S. companies at a competitive disadvantage in both domestic
and foreign markets, according to the American Manufacturing Trade
Action Coalition. It estimates that VATs had a negative impact of $474
billion on U.S. companies last year, including $368 billion on goods
producers. That equates to 46 percent of the $794 billion U.S.
merchandise trade deficit last year. The estimated impact was $428
billion in 2006, including $327 billion on goods.
VATs are assessed on the increase in the value of goods as they pass
through each stage from raw materials through the production and
distribution processes to final consumption. The tax on processors or
merchants is levied on the amount by which they increase the value of
goods they purchase.
AMTAC said 149 countries, including nearly every major U.S. trading
partner, have value-added taxes. Most of them rebate part or all of
the VATs paid by their companies on some or all exports, according to
Lloyd Wood, director of membership and media outreach for the
coalition.
Because those countries rebate the value-added paid by their producers
on exports and impose a VAT on imports, they simultaneously heavily
subsidize exports and erect massive trade barriers to imports,
according to Washington-based AMTAC. Wood said it represents companies
that employ about 50,000 manufacturing workers. Most of them are in
the textile sector.
The U.S. does not have a value-added tax, although some tax experts
have called for it over the years.
The U.S. charges lower taxes on most imports than on goods produced
domestically, according to Wood. He was referring to the large number
of products that enter the U.S. duty-free or that are subject to very
low tariffs. In contrast, the statuary U.S. corporate tax rate is 35
percent.
Wood said AMTAC came up with its estimates by taking each country's
VAT rate and checking its exports to the U.S. and American exports to
those countries.
VAT rebates were the coalition's top priority in 2008 and will be again in 2009.
Frank Reynolds, a trade consultant, agrees with the AMTAC critique of
VAT rebates.
"U.S. exporters are at a huge disadvantage when competing with
countries that have a value-added tax regime for the simple fact that
these taxes are forgiven for exports. This makes their export pricing
as much as 21 percent lower than comparable domestic selling prices
with the same net return to the seller," said Reynolds, who is also
president of International Projects, a Toledo, Ohio-based trading
company.
"Since the U.S. taxes profits rather than sales, the most our
exporters can get is a waiver of state sales tax — let's say from 4 to
8 percent at most — and then only for states that tax sales," Reynolds
added.
China has a value-added tax, but it does not draw much attention. Yet
it's "much more of a driver of China's (trade) surplus than exchange
rates," said John Frisbie, president of the U.S.-China Business
Council. (Story, Page 8.)
(China's refusal to let its currency, the yuan, appreciate to its
fair-market value, has been a hot-button issue for critics of its
trade policy. The yuan has risen about 17.5 percent since Beijing
loosened the controls in July 2005, but critics say it should
appreciate at least another 15 percent to reflect the strength of its
economy.)
VAT rebates are legal under a loophole built into the rules of the
WTO's predecessor organization, the General Agreement on Tariffs and
Trade, when it was created in 1947.
"The U.S. negotiating team was outnegotiated," said Cathy Schultz,
vice president of taxes for the National Foreign Trade Council. "The
VAT puts us at a competitive disadvantage. We have fights all the time
over that and other issues."
Congress tried in the 1990s to level the playing field by passing
legislation that allowed U.S. companies to create offshore
subsidiaries known as Foreign Sales Corporations. Companies that
established FSCs could then receive a reduction in US federal income
taxes for profits derived from exports. The World Trade Organization,
however, ruled in favor of a challenge by the European Union that the
tax benefits from the FSCs, constituted a prohibited export subsidy.
The GATT had rejected an earlier form of FSCs, known as Domestic
International Sales Corporations.
After the WTO blocked FSCs in early 2000, Congress tried again,
through legislation known as the Extraterritorial Income Exclusion
Act, but that was ruled illegal, too.
Besides attempting to create programs with benefits similar to VATs
for U.S. exporters, Congress has repeatedly mandated that the U.S.
Trade Representative seek to eliminate the VAT rule, but those efforts
have all failed, too. The most recent attempt came in 2003, during the
early stages of the Doha Round of global trade talks. U.S. negotiators
found very little support, a USTR spokesman said. "In large measure
it's because most countries have a VAT system. We're one of the few
that doesn't. It's a very difficult issue."
Bill Reinsch, president of the NFTC, appears resigned to the
continuing disadvantage created by the VAT system. "I don't think
anyone has any illusion that any other countries are going to agree
with us," he said.
Marty Regalia, vice president for tax and economic policy at the U.S.
Chamber of Commerce, said the inequity could be addressed by
eliminating taxes on foreign sales by U.S. companies. That would help
U.S. exporters, but it would not do anything to offset the advantage
that VAT rebates give foreign companies in the U.S.
The latest attempt to tackle the VAT issue came when a bipartisan
group of four congressmen introduced a bill called the Border Tax
Equity Act on June 6, 2007. It was referred to the House Ways and
Means Committee's trade subcommittee 10 days later, but no hearings
were ever held. The sponsors were Representatives Bill Pascrell,
D-N.J., Duncan Hunter, R-Calif., Mike Michaud, D-Maine, and Walter
Jones R-N.C.
As with some of the previous legislation, the bill would direct the
U.S. Trade Representative to negotiate a remedy for the VAT inequity
through the WTO. If it failed to do by an unspecified date in 2007,
the U.S. then would begin charging an offsetting tax on goods and
services at the U.S. border equal to the VAT rebated by the exporting
country. In addition, the U.S. would give tax rebates to U.S.
companies exporting goods to foreign countries at the same rate as the
VAT imposed by those countries at their borders.
The U.S. Chamber of Commerce, the NFTC and the National Association of
Manufacturers all oppose the bill, saying it's a blatant violation of
WTO rules. Pat Mears, a spokeswoman for NAM, said the U.S. would file
a complaint with the WTO immediately if any other country enacted such
legislation.
