HTML _ RS20571 - The Foreign Sales Corporation (FSC) Tax Benefit for Exporting and the WTO
11-Oct-2000; David L. Brumbaugh; 4 p.

Abstract: The Foreign Sales Corporation (FSC) provisions of the U.S. tax code permit U.S. firms to exempt between 15% and 30% of export income from taxation. FSC was enacted in 1984 to replace another tax benefit for exporting - the Domestic International Sales Corporation (DISC) provisions. U.S. trading partners had charged that DISC was an export subsidy, and so violated the General Agreement on Tariffs and Trade (GATT). In 1998 the European Union (EU) complained to the World Trade Organization (WTO, GATT's successor) that FSC itself is an export subsidy and violates the agreements on which the WTO is based. A WTO panel subsequently supported the EU. Under WTO procedures, the FSC provisions must be brought into compliance by October 2000, or the United States will face compensatory damages or retaliatory measures. On September 13, 2000, the House of Representatives approved a replacement for FSC that would provide an export tax benefit similar in size to FSC but that would also include--unlike FSC--a partial tax exemption for income from foreign operations. The measure is supported by the Administration and U.S. exporters, but the EU notified the United States that it considers the proposal to be not WTO-compliant. The full House approved the bill on September 13; the Senate Finance Committee approved it on September 19. While the full Senate did not act on H.R. 4986 before the October 1 deadline, the EU agreed to an extension of the deadline to November 1. The EU has indicated that it then expects to ask a WTO panel to rule on the acceptability of H.R. 4986 under the WTO rules. For its part, economic analysis suggests that FSC does increase U.S. exports, but likely triggers exchange rate adjustments that also result in an increase in U.S. imports; the long run impact on the trade balance--assuming no changes in investment flows--is probably nil. Economic theory also suggests that FSC likely reduces aggregate U.S. economic welfare. This report will be updated with events in Congress and elsewhere. [read report]

Topics: International, Economics & Trade, International Finance

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