Opening Statement of the Hon. Bill Thomas, a Representative in Congress from the State of California,
and Chairman, Committee on Ways and Means

Testimony Before the House Committee on Ways and Means

Hearing on the WTO's Extraterritorial Income Decision

February 27, 2002

Good morning.  As the world's largest importer and exporter, an orderly international trading system is crucial to the economic success of the United States.  Given our global leadership, it is important that America complies with the established rules of engagement that the World Trade Organization (WTO) referees.  It is in our interest that others follow the rules and therefore it is imperative that we follow the rules as well. 

To that end, we must carefully and thoroughly address the problems created at the intersection of our tax code and our international trade obligations.

On January 14^th of this year, the WTO issued an appellate ruling that the U.S. tax code prohibits an export subsidy. 

This decision marks the fourth time that the WTO has ruled this way, twice in the Foreign Sales Corporation (FSC) case and now twice in the Extraterritorial Income (ETI) case.

Four times the WTO has sent the United States this same clear message -- our tax system as it is currently constituted violates international trade rules.  In the opinion of the Chairman of this committee, the time has come for us to listen. Our corporate tax structure is in need of major restructuring, not another attempt at a short-term fix.   More fundamental reform is required.

In an economy struggling to recover, the United States cannot afford to dismiss the European’s proposed $4 billion, $3 billion, $2 billion, $1 billion, pick a number - retaliation as an empty threat. Many people said the Europeans would never challenge us on this portion of the code because they would be damaged as well.  It has even been called a nuclear weapon.  Well, it’s been triggered.  It is not an empty threat.  The United States Trade Representative Robert Zoellick is forcefully challenging the EU's assessment of harm, but if we do nothing trade sanctions against our country still remain a distinct possibility. 

The EU has graciously indicated that it will be reasonably patient and that it does recognize the difficulty of changing our corporate tax code, but Congress and, I believe, this administration must also demonstrate its commitment to address the problem.

It’s not an easy task -- it will require collaboration from all Members of this Committee, Republican and Democrat.   We must build consensus on a new approach that will meet our international obligations while maintaining the competitiveness of American businesses and workers in the global marketplace.

It will be impossible to recreate a system, which duplicates the current winners, but we must act in good faith, and we must begin this difficult process now. 

 Today’s hearing, during which we will discuss the history of the Foreign Sales Corporation dispute, the January 14^th Appellate Body Decision, and the threat of retaliation, marks the beginning of this process.  But no discussion of history, no attempt to justify the correctness of the US position can be a beginning.

 A beginning begins with the realization that previous attempts have failed.  One chapter has been closed and we need to open a new one. Following this full committee hearing, the Subcommittee on Select Revenue will hold a series of hearings to examine options in reforming America's corporate tax structure. 

To give you an idea how difficult that will be we have a second panel today in which there will be some suggested options.  My assumption is there will be an examination of the viability of several of those options. This is never pleasant and it is always difficult.  The United States believes we should set our own course, but we are a partner among partners and we have to start with the recognition that we have to change. 

I now recognize the ranking member from New York for his opening statement.