In XQuery, the rules for the base URI of a newly constructed element (3.7.1.3 clause 5b and 3.7.3.1 clause 4b) say: 

base-uri is taken from the first of the following sources that exists:

   1. the value of the constructed node's attribute named xml:base, if this attribute exists;
   2. base URI in the static context.

This differs from the equivalent rule in XSLT, which is (last paragraph of 11.2): "The base URI of the new element is copied from the base URI of the xsl:element instruction in the stylesheet, unless the content of the new element includes an xml:base attribute, in which case the base URI of the new element is the value of that attribute, resolved (if it is a relative URI) against the base URI of the xsl:element instruction in the stylesheet."

I think the XSLT rule is the right one, because it caters for xml:base being a relative URI (which is common, and useful).

But I think the rule should also reference XML Base to ensure that the processing of the xml:base attribute is consistent with the rules of that specification. For example, XML Base mandates percent-escaping of special characters. Currently this will be done for a document constructed from an Infoset, but not for a document constructed by a query.

Proposed replacement text:

base-uri is taken from the base URI in the static context, unless the constructed node has an attribute named xml:base, in which case the base-uri is the value of this attribute, resolved if it is relative against the base URI in the static context. The xml:base attribute is processed as described in [XML Base]: for example, certain special characters are percent-encoded.