The Turnbull-James administration is lobbying hard to maintain the existence of Foreign Sales Corporations in the territory because they bring millions of dollars in revenue each year.
Last month, an appeals panel of the World Trade Organization ruled that FSCs, which enable U.S. companies to enjoy tax breaks on industrial and agricultural exports, are an export subsidy and therefore violate global free-trade rules.
About 3,500 FSCs are registered in the territory, according to Lt. Gov. Gerard Luz James II, whose Corporations and Trademarks Division has oversight for them. Over the last 15 years, he said, the program has generated more than $69 million for the V.I. treasury through franchise taxes.
James has been lobbying the White House, the Office of the U.S. Trade Representative and members of the Congressional Black Caucus to help save the FSC program.
"Along with thousands of U.S. exporters, the Virgin Islands has unquestionably been a major stakeholder in the FSC program," James said in a release. "The territory can ill afford to lose the economic benefits of the FSC program, particularly when the local government is experiencing a substantial budgetary shortfall."
The WTO had ordered the United States to dismantle the FSC program by Oct. 1 of this year. Because the ruling is against the United States, the territory has no direct status to appeal, James said.
Besides generating franchise taxes, James noted, the FSC program has a trickle-down effect economically. He said FSCs use local lawyers and accountants who have clerical and managerial staff who pay income taxes locally. There is also a derivative income earned by banks that hold FSC funds, he said.
Congress established the Foreign Sales Corporation system as an alternative to a previous program to which U.S. trade partners had objected. Exporters began using FSCs, offshore subsidiaries, in 1985. A portion of a company's export sales run through its FSC is exempt from federal taxes.
The European Union first signaled its intent to challenge the FSC system formally in November 1997. A series of formal and informal discussions followed between the EU and the United States, and the negotiations were reportedly ongoing throughout much of the WTO deliberative process.
Many observers believe such negotiations will intensify now. Meanwhile, several U.S. accounting firms have been working for months to develop alternatives to FSCs that will also give U.S. exporters some tax relief.
