On Foreign Soil Congress is proceeding with a plan to allow U.S. exporters to establish foreign sales corporation in other countries.
By Joan Szabo
Opinions expressed by BIZ Experiences contributors are their own.
Congress is moving ahead with legislation to amend a tax lawthat allows U.S. exporters to establish foreign sales corporations(FSCs) abroad. With FSCs, companies can lower their income tax rateon the profits made from selling products in other countries. (Formore details, see February 2000's "TaxTalk.")
The legislative push is in response to a recent ruling from theWorld Trade Organization (WTO) indicating that the 1982 lawallowing FSCs provides unfair subsidies to U.S. companies. TheEuropean Union brought the complaint to the WTO.
Because of the FSC tax law, U.S. exporters receive an estimated$4 billion in tax breaks per year. The U.S. government contendsthese breaks help maintain U.S. companies' pricecompetitiveness in world markets.
In February, the WTO upheld a preliminary ruling against theUnited States and recommended that it bring the law into conformitywith the WTO rules. Countries can ignore rulings, but then theymust compensate their trading partners or accept sanctions.
Congress is considering legislation designed to preserve thefinancial benefits that companies receive when setting up FSCs andat the same time address the EU complaint. The legislation wouldamend the law so it applies to exports or to goods made bycompanies' affiliates in foreign countries.
The EU isn't satisfied with Congress' effort. It saysthe legislation not only preserves the tax break available to U.S.companies but also extends to it other types of businesses.
The United States' solution is unusual, sources say.Normally, case-losing countries compromise. In this case, however,Congress feels the FSC law provides a benefit to U.S. companiesthat needs to be preserved.
If you operate an FSC, don't panic, says Saul B. Brenner, atax partner in charge of international taxation for the New YorkCity accounting firm David Berdon & Co. LLP. While there may besome modification in the FSC law, he says, U.S. companies are notlikely to lose the tax break altogether.
Joan Szabo is a writer in Great Falls, Virginia, who hasreported on tax issues for more than 13 years.
