US Passes Revised Foreign Sales Corporation Bill

Mike Godfrey, Tax-news.com, Washington

28 July 2000

Faced with EU sanctions said to be worth $26bn, the US has made a major push to restructure its Foreign Sales Corporation (FSC) legislation in a way that will conform with WTO rules and gain acceptance from Europe.

After a concerted effort over the last few weeks between business, the administration and congressional leaders, the powerful House Ways and Means Committee yesterday approved a bill to reform the FSC legislation by 34 votes to 1, with the only dissenter being Rep. Fortney ``Pete'' Stark, D-Calif. There is every chance that the bill will clear both House and Senate before the 106th Congress is dissolved and before the WTO's 1st October deadline, with the President's signature all but guaranteed by the administration's support for the bill.

The US had made a proposal in May to reform the FSC legislation in response to the WTO's Appeals Panel ruling which had struck down the existing scheme, but the May proposal was swiftly rejected by the EU. The proposal extended the benefits of the FSC regime to all US-based companies with offshore exporting subsidiaries, including US companies with foreign ownership. The US claimed that this equated the scheme to the EU's zero-rating of exports for VAT, but the EU disagreed.

The new proposals crucially attribute the tax break (equivalent to 15%) to all US exporters, including the parents of foreign subsidiary exporters, and this 'single entity' approach does seem to bring the operation of the scheme much closer to that of the VAT system in Europe. This widening of the scheme would cost an additional $300m a year, said the Treasury.

Considering that the current scheme is said to apply to more than 6,000 companies and to be worth $4.1bn annually in tax breaks, it can be seen that it already covers the vast majority of US exports. The planned extension of the scheme brings in arms manufacturers, and this was a cause of complaint among some Democrat members of the Ways and Means Committee. Rep. Peter DeFazio, D-Oregon denounced the legislation as expanding 'corporate welfare for US businesses, including military arms sales' although he still voted for it.

Administration officials were delighted by the vote. 'We are frankly thrilled by the outcome,' Deputy Treasury Secretary Stuart Eizenstat told reporters in a conference call after the vote, calling the measure `a remarkable cooperative effort among the administration, the Congress and the business community'.

An EU official in Washington is reported to have said off the record last night that 'considerable effort seems to have been made' but that the legislation would have to be reviewed.'

The offshore jurisdictions which host Foreign Sales Corporations, notably the US Virgin Islands, Barbados and Bermuda, may not be so delighted. In another off-the-record comment, a senior administration official said that any loss of income for Caribbean countries and territories caused by termination of the Foreign Sales Corporation program was expected to be 'extremely modest'. He had to speak anonymously in the context of his bosses' attack on 'offshore', but his remark may contain a grain of reassurance for beleagured Caribbean jurisdictions.

In fact, it is quite unclear whether US companies would bother to retain offshore subsidiaries under the new rules, and it might well come to depend on just how ferocious the Treasury Department's threatened sanctions on offshore jurisdictions turn out to be.

The European-American Business Council, a joint grouping of 85 prominent businesses from the US and the EU, has played a considerable behind-the-scenes role in the crafting of a package which may be acceptable to the EU. 'We're certainly pleased that it looks like something will pass Congress,' said Michael Bergsman, director of government affairs for the group, 'The new legislation will put off the possibility of sanctions for some time.'

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