Senate To Consider FSC Repeal

ByPeter Strozniak The U.S. Senate Finance Committee is expected to review new legislation that would repeal the foreign sales corporation (FSC) and replace it with a new provision that would exempt tax on foreign-source income. The FSC Repeal and Extraterritorial Income Exclusion Act (HR 4986) was approved by a 325:109 vote by the House of Representatives Sept. 13. Since the 1980s an estimated 6,000 U.S. companies have used FSCs to take advantage of a collective multibillion-dollar tax break on foreign exports. The FSC program allows U.S. corporations to set up export subsidiaries in tax havens such as the Virgin Islands. By selling exports through these subsidiaries, U.S. companies reduce income taxes by 15% to 30%. However, the World Trade Organization determined in February that the FSC is an "illegal subsidy" and ruled that it must be removed by Oct. 1. Not eliminating the FSC would allow the European Union to retaliate against the U.S. with sanctions and trigger a major trade war. It was the EU that requested a WTO dispute panel consider whether the FSC complied with international trade rules. The proposed legislation would repeal the FSC tax break and comply with the WTO ruling. But it also would exempt taxes on foreign exports and products made by U.S. companies abroad, a benefit that is provided to foreign companies in many European tax systems. "It is critical for continued U.S. competitiveness in the global marketplace," says Rep. Bill Archer (R, Tex.), chairman of the House Ways and Means Committee, which developed the proposed legislation. "It is extremely important that we send a message to the Europeans that we are serious about this issue. The mother of all trade wars is something to be avoided." Jenny Flynn, a spokeswoman for the U.S. Senate Finance Committee, said after the committee reviews the legislation next week, it would be introduced to the Senate floor. The Senate is expected to approve the measure in time to meet the Oct. 1 deadline imposed by the WTO. Archer has said the legislation has bipartisan support in both Houses of Congress and Clinton Administration.