A political argument is brewing in the US House of Representatives which might illustrate how offshore jurisdictions like Bermuda are not necessarily unpatriotic, but on the contrary have in the past played a role in supporting the US manufacturing base.

In an ironic turn of events, the US is being criticised by the World Trade Organisation and the EU for illegal export subsidies.

In simple terms, the US has employed a system for the past 20 years which allowed corporations to avoid paying corporation tax on income from US manufactured goods which are being sent overseas.

The Foreign Sales Corporation system can be simply illustrated by the example of a Caterpillar digger sent to Venezuela. The money paid by the Venezuela construction company remitted back to Caterpillar in the US was not taxable, but the whole scheme had to be implemented by a related corporation formed in a foreign country. Hence the birth of FSCs incorporated outside the US in jurisdictions like Bermuda and the Cayman Islands.

The FSC system is now known as extraterritorial income exclusion (ETI).

Now the WTO has authorised the European Union to impose up to $4 billion in retaliatory tariffs on the US unless the ETI subsidy is removed.

Two tax reform bills in the US have proposed ways to cut the subsidy in response.

One was proposed last year by the House Ways and Means chairman, Republican, Bill Thomas. It appeared to do little to alleviate the extra tax burden that companies like Caterpillar will incur after removal of the subsidy if corporation tax applies to income remitted to the US.

Instead, Congressman Thomas' “American Competitiveness and Corporate Accountability Act,” favoured companies with large operations overseas, such as General Electric Co., Ford Motor Co. and Hewlett Packard Co.

It also provided penalties for companies with large manufacturing bases in the US who base their headquarters overseas to ensure that foreign income is not taxed.

Consequently, companies like Boeing, United Technologies Corp and Caterpillar lobbied hard to overturn Congressman Thomas' bill and it did not get through. They are now supporting a new tax reform bill which gains them tax “brownie points” for keeping their manufacturing base in the US.

In an unusual bipartisan challenge, two top House Ways and Means Committee members, Democrat Rep. Charles Rangel and Republican Rep. Philip Crane are proposing a bill that would repeal the foreign sales corporation benefit, replacing it with a lower corporate tax rate based on a company's US-based production.

Companies that produce 100 percent of their goods within the US would see their corporate tax rate reduced by 3.5 points - from 35 percent to 31.5 percent when the benefit is fully phased in.

Other companies would receive a sliding-scale rate reduction based on the value of their US production.

If the ETI subsidies are cut without this sort of measure, an obvious consequence might be that companies who have previously had large manufacturing operations in the US but benefitted from export tax conditions in their favour, may find it tempting to cut those US jobs and move manufacturing overseas to cheaper labour sources.

It would be especially devastating to the US aerospace industry.

“For Boeing, this could result in the potential loss or relocation of 9,600 high-paying, high-tech jobs,'' said a Boeing spokesperson in an article published in Boeing's local newspaper, King County Journal. “For our suppliers, this could mean the loss of 23,000 jobs.''

It appears that the Crane-Rangel bill may get support from House Speaker Dennis Hastert because Caterpillar, who supports the bill is based in his district. Caterpillar's government affairs manager Doug Crew issued a statement saying the company is “highly supportive” of the Crane and Rangel bill. He praised the authors for “their efforts to preserve manufacturing jobs and investments in the United States”.