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Congress Finally Passes Replacement FSC Legislation

Mike Godfrey, Tax-news.com, Washington

15 November 2000


Yesterday the US Congress finally passed the bill setting up a new export sales taxation regime to replace the banned Foreign Sales Corporation (FSC) rules, sending it to the White House for what was expected to be swift approval by President Clinton. The vote was 316 to 72.

The lame duck session of the 106th Congress has therefore shown that it is capable of resolute action after months of dithering. Originally the bill, which always had bi-partisan support, was supposed to have become law by 1st October, the deadline set by the WTO way back in the early summer for the US to come up with an acceptable new regime - but it became mired in Congressional in-fighting over domestic tax cuts, and was included in a composite bill which Clinton said he would veto. The EU (which had originally brought the action against the US under WTO trading rules) agreed to an extension to 1st November, and the Senate quickly passed a stand-alone version of the new FSC rules, only to see it fall victim to horse-trading in the House. A flurry of international activity and intense lobbying by business resulted in a final 'stay of execution' by the EU until 17th November, and the House has now passed the Senate's bill without amendment.

Because the earlier deadlines were missed the EU now has the right to impose trade sanctions on the US, and must announce by this Friday what they will be. It is expected to list possible sanctions but not to apply them, pending the WTO's word on the new rules, which may not come for six months or more.

The new legislation effectively repatriates the tax breaks which exporters used to be able to gain through offshore subsidiaries, and opens them up to a wider range of businesses; the benefit to business will rise from about $4bn annually to perhaps $6bn annually. The EU says that the new regime is still not acceptable, but now it is for the WTO to say.

Said US Trade Representative Charlene Barshevsky: 'The strong bipartisan support to pass the FSC repeal and replacement legislation demonstrates the United States' commitment to abide by its WTO obligations.'

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