US Deputy Treasury Secretary Stuart Eizenstat will today present the administration's proposals for changes to its 'Foreign Sales Corporation' tax rules to Pascal Lamy, EU Commissioner for External Trade, and other top European officials.
The rules, which were originally embodied in the Tax Reform Act 1963 were substantially amended in 1984 after a first attack by Europe in the GATT, and have now been outlawed by the WTO despite an appeal by the US. They allow exporters to establish subsidiaries in offshore jurisdictions, which benefit from reduced rates of taxation on sales mark-ups; more than 6,000 major US exporters have foreign sales corporation subsidiaries.
Addressing an audience at the US Chamber of Commerce on Monday, Eizenstat said that he had support for his proposals both from Charles Rangel (D, New York), the ranking Democrat on the House Ways and Means Committee, Bill Archer, (R, Texas), the Committee's Chairman, and Senate Finance Committee Chairman William Roth, (R, Del.). Eizenstat says he also has support from business.
The Treasury Secretary would not give details of his proposals, but officials later said that they amounted to a repeal of the disputed provisions, and the establishment of a reduced rate of income tax for all foreign subsidiaries of US corporations. That would cover their imports to the US, as well as exports, and would presumably also apply to the subsidiaries of foreign-owned US corporations - Airbus could establish a Barbados company owned by its American branch in order to sell subsidised planes to US airlines?
The Americans have always claimed that the Foreign Sales Corporation rules do no more than compensate for the EU's VAT regime, which exempts exports from VAT; it is not clear how the EU will react to these latest proposals. The US has until 1st October to comply with the WTO ruling.
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