Foreign Sales Corporation Case Presented by: Michelle Vine Rob Miller Kultara Vongsumedh Brendan Gibbons
What is a FSC? Foreign Sales Corporation Sponsored by Department of Commerce Tax Reform Act of 1984 reduction of taxes by 15 - 30%
Who is eligible? US approved foreign country Business Management Requirements Business Transactions • exports • costs
What is wrong with FSC? EU challenges the FSC bargaining chips for other WTO disputes FSC a prohibited export subsidy FSC Litigation
What is ETI? Extraterritorial Income is generally defined as qualifying foreign trade income attributable to foreign trading gross receipts with respect to which the taxpayer has performed certain foreign economic processes.
Income must come from: • 1. Sale of qualifying property for use outside U.S. • 2. Leasing of qualifying property for use outside U.S. • 3. Provision of services related and subsidiary to first two categories. • 4. Provision of managerial services performed for unrelated persons in connection w/ first three categories • 5. Provision of engineering or architectural services for projects outside of U.S.
50% of fair market value of goods must be U.S. input Foreign Economic Processes: 1. Advertising and sales promotion 2. Processing of customer orders and arranging for delivery 3. Transportation outside U.S. in connection w/ delivery to customer 4. Billing activities 5. Assumption of credit risk
Qualifying Foreign Trade Income-Amount of income from covered transactions which would reduce the taxpayers’ taxable income by the greatest of: 1. 1.2% of total gross receipts 2. 15% of foreign trade income 3. 30% of foreign sale and leasing income Transition Relief (or Grandfathering)-avoids undue hardship on any business already involved in business transactions utilizing the FSC.
Main Differences BetweenETI and FSC FSC applied only to U.S. exports: goods man. In U.S. and sold elsewhere -British Ship Example -ETI is available to all U.S. companies -ETI exempts income from qualified foreign transactions-it doesn’t defer income like the FSC-ETI is treated differently
Differences in Taxation Systems:Why ETI was Needed Worldwide System of Taxation-Is the policy of a government to tax it’s citizens and businesses on any income that is earned, regardless of where that money is earned. -Leads to double taxation -Considered Direct Taxation
Territorial System of Taxation-Is the policy of a government to only tax businesses within it’s borders. -Asserts tax jurisdiction only over domestic income -No taxes on foreign sales -Considered indirect taxation-Consumption Tax -VAT is used mainly in this system -Example of German widget
What is the WTO Problem with ETI? Considered a subsidy: Why? -Used a “but for” test Contingent upon export performance-not available to domestic companies Reduced costs for marketing exports Provides less favorable treatment for imported goods
What is the EU Problem with ETI? Domestic income (and thus tax) is reduced Domestic companies excluded-thus exclusion for exporters Grandfathering-of FSC’s Competitiveness: Concern over the extensive use of FSC’s and increased usage of ETI
WTO provision on FSC AND ETI The FSC was declared illegal in the year 2000. The ETI also was declared illegal in 2002. WTO approved the EU’s sanction package $4 billion.
EU Point of views U.S. compliance period will expire at the end of this year. EU has submitted its retaliation list to WTO.
Will the U.S. Comply? U.S. Senate Finance committee passed a bill to replace FSC. • It takes 3 years to reduce the current tax breaks. U.S. will repeal FSC/ETI.
Bottom Line ETI ruled subsidy Acts as a means to level playing field Why does E.U. not see it this way? Another manifestation of Trans-Atlantic problems
U.S. Legislative Efforts: Senate Finance Committee passed S. 1637 Jumpstart Our Business Strength (JOBS) Act of 2003 • Cuts corporate taxes by $100 billion over 10 years • Eliminates $56 billion in export subsidies • Revenue neutral? Yes. • Provides three year transition relief for current beneficiaries of the ETI and the old FSC.
Efforts in the House of Representatives: House Ways and Means Committee considering H.R. 2896 American Jobs Creation Act of 2003 • Cuts corporate taxes $142 billion over 10 years • Eliminates $40 billion in export subsidies • Revenue Neutral? No. • Provides three year transition for current beneficiaries of the ETI and the old FSC.
Senate bill: Allows US companies to repatriate as much as $400 billion in retained foreign earnings at corporate tax rate of 5.25% instead of normal 35%. Lacks broad support. House bill: Lacks revenue neutrality. Partisan differences in Ways and Means Committee are very pronounced. Problems with Senate and House Bills
Possible EU Responses: EU has stated that any move away from the chief purpose of repealing the ETI will meet stiff opposition from the EU. The EU is considering applying tariffs on US products at 5% from next March. Tariffs would then be raised 1% each month until they reach 16%.
Conclusions: • The clock is running. • Sharp differences exist between House and Senate bills. • EU response is uncertain.