Congress Passes FSC-Replacement Legislation; Complies With WTO Ruling.

Business Editors

WASHINGTON--(BUSINESS WIRE)--Nov. 14, 2000

The following was released today by the National Foreign Trade Council, Inc.:

The United States Congress today voted to repeal the tax rules applicable to foreign sales corporations, commonly referred to as FSC's, and, in their place, enacted broad changes to U.S. international tax rules that limit U.S. authority to tax income earned outside the United States. The President is expected to sign the bill.

The legislation complies with a ruling of the World Trade Organization that the FSC tax regime provides prohibited export subsidies. "By passing this measure, the United States has signaled its strong commitment to meeting its WTO obligations and to providing business with a level playing field," stated Richard J. Swift, CEO of Foster Wheeler Corporation and Chairman of the Board of the NFTC.

The Administration worked diligently with congressional leaders in developing the legislation, which enjoyed unusually broad, bipartisan support in both the House and the Senate. According to Fred F. Murray, Vice-President of the NFTC: "To enact any tax legislation, especially legislation that makes significant changes to U.S. international tax rules, just before adjournment of Congress in this election year is a major achievement for which both the Administration and congressional leadership deserve a lot of credit."

Shifting to a Territorial Tax Regime:

The legislation fulfills two stated goals: First, it complies with the WTO ruling by repealing the FSC provisions. Second, it accords companies that pay U.S. taxes treatment similar to that afforded by European governments.

Many European countries impose territorial limits on their taxing authority. In these territorial systems, companies are not subject to tax in their home country on income earned outside that country, since they may be subject to tax in the country in which that income is earned. In contrast, the U.S. tax system typically taxes all income irrespective of where it is earned. The FSC provisions were passed in 1984 to give U.S. exporters partial relief of U.S. taxation on their foreign source income in order to prevent them from being disadvantaged in relation to their European counterparts.

The WTO found that the FSC was improper because it applied only to exports. To remedy this problem, the legislation would impose broader territorial limits on U.S. taxing authority so that extraterritorial income, or income earned outside the United States, will not be taxed. "These new rules are analogous to similar European tax systems," stated Fred Murray.

Legislation Consistent with WTO Rules:

By imposing new territorial limits on U.S. taxing authority, the United States has made a significant change to its tax system in order to comply with WTO subsidy rules.

In a highly technical ruling earlier this year, the WTO distinguished exceptions to general tax rules from tax exemptions that result from a general rule of taxation -- the former constituting a subsidy; the latter not. "The territorial limits imposed by this legislation establish a new normative benchmark or general rule that income earned outside the United States is not subject to U.S. tax," stated Homer E. Moyer, Jr., trade counsel to the NFTC. "Consequently, the exclusion of tax on extraterritorial income, including income generated in an export transaction, is not based on an exception to U.S. tax rules but, rather, is consistent with a new general rule, thereby not conferring a subsidy."

This new general rule also ensures that tax treatment for extraterritorial income is not export-contingent, as required by the WTO. "The benefits of these territorial limits extend to companies that pay U.S. taxes irrespective of whether the company in question is a U.S. company and irrespective of whether they engage in exporting. Therefore, the legislation is not contingent on exports, the central concern raised in the WTO decision," stated Moyer.

The NFTC hopes that the European Commission will recognize that the legislation is similar to European territorial tax systems and is consistent with WTO rules. The NFTC believes that traders on both sides of the Atlantic would be best served by ending this dispute.

The NFTC is an association of businesses with some 550 members, founded in 1914. It is the oldest and largest U.S. association of businesses devoted to international trade matters. Its membership consists primarily of U.S. firms engaged in all aspects of international business, trade, and investment. Most of the largest U.S. manufacturing companies and most of the 50 largest U.S. banks are Council members. Council members account for at least 70 percent of all U.S. non-agricultural exports and 70 percent of U.S. private foreign investment.