ETI Program - Details
New IRS Code Section 114 establishes a new category of income, “extraterritorial income”. Not all extraterritorial income qualifies for the exclusion; extraterritorial income that is not qualifying foreign trade income will not qualify. Only income generated from “Qualifying foreign trade property” qualifies for the exclusion.
The new law provides that gross income does not include extraterritorial income. Deductions allocated to such excluded income generally are disallowed. Foreign tax credits paid with respect to excluded income are generally disallowed.
A taxpayer may apply any of three methods to “Qualifying foreign trade income”. The taxpayer may apply different methods (foreign trading gross receipts, foreign trade income or foreign sales and leasing income) for different transactions to maximize benefits.“
A taxpayer can elect on a transaction-by-transaction basis whether to treat the gross receipts from the transaction as foreign trading gross receipts. Therefore a taxpayer can elect to use foreign tax credits to avoid double taxation instead of excluding income under these rules.
Special rules are provided for shared foreign and domestic partnerships. The version of the bill approved by the Senate Finance Committee added some helpful technical provisions on this point. The new rules are effective for transactions entered into after September 30, 2000. In addition, no corporation may elect to be a FSC after September 30, 2000. Special transition rules are provided.
A taxpayer or parties related to one another must use either the new ETI rules or the FSC rules for transactions involving the same property. But a taxpayer can use the FSC rules for some transactions and ETI rules for other transactions. Congress specifically replicated the Shared FSC provisions with the Shared Partnership provisions in the new legislation.
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