Why FDII is an Export Subsidy : A Reply to Prof. Sanchirico

When the Foreign Derived Intangible Income (FDII) provision was enacted as part of the Tax Cuts and Jobs Act (TCJA) in 2017, commentators immediately pointed out that unlike the domestic manufacturing deduction that it replaced, it may be a violation of the World Trade Organization (WTO) Subsidies and Countervailing Measures (SCM) agreement. This point was also made before FDII was enacted by the finance ministers of six EU member states. The SCM prohibits export subsidies, which are defined to include situations where “government revenue that is otherwise due is foregone.” An export subsidy is a subsidy that is contingent de jure or de facto on exporting goods (but not services, since the SCM does not apply to services).There is no question that FDII provides a lower tax rate (13.125%, as against the regular corporate rate of 21%) that is contingent de jure on exporting goods. However, Professor Chris Sanchirico has ingeniously argued that FDII is nevertheless not a prohibited subsidy under the SCM because it is not a subsidy at all, since if FDII were abolished the affected corporations could shift their export profits to their foreign subsidiaries and benefit from the Global Intangible Low-Taxed Income (GILTI) rate of 10.5%. Therefore, Sanchirico argues, the proper baseline for evaluating FDII is not the 21% domestic corporate rate but the 10.5% GILTI rate, and since that rate is lower than the 13.125% FDII rate, there is no foregone revenue and no subsidy.This is a serious argument, but in my opinion it is wrong, primarily because shifting from FDII to GILTI is for most corporations not as easy as Sanchirico assumes it is. And under the SCM, it is enough that FDII provide an export subsidy to some corporations exporting goods from the US for it to be a prohibited subsidy that risks the imposition of trade sanctions if litigated before the WTO