Less than a week after the U.S. took the first step in replacing its Foreign Sales Corporation tax regime, the European Union has already signaled its rejection of the new proposal.
Speaking in Geneva, EU officials have been quoted in published reports saying the latest U.S. move is taking the two sides in the direction of an all-out trade war.
Under the World Trade Organization ruling won by the EU, the U.S. was to take action by Oct. 1 to abandon or replace the FSC. The program saves U.S. companies billions of dollars on federal income taxes each year. It also contributes an estimated $10 million annually into the economy of the Virgin Islands, which hosts the largest number of FSCs.
Industry groups, Treasury and Congress have been working for months to formulate a new program that would be WTO-compliant and still do what the FSC was created to do – promote U.S. foreign trade.
On the eve of the August recess, the House Ways and Means Committee overwhelmingly (on a vote of 34-1) voted out a measure that would phase out the FSC program over the next year. No new FSCs could be set up after Sept. 30 of this year, and the FSC benefit would disappear by Dec. 31, 2001.
The replacement program would no longer require a company to set up an offshore subsidiary (a FSC) but rather would allow it to elect to pay at a lower tax rate for foreign sales income.
V.I. Delegate Donna Christian-Christensen announced last week that administration officials have assured her the U.S. will compensate the territorial government for its losses, but they were not specific as to how. She pegged the value of the program to the V.I. at $10 million.
Franchise taxes, based on a FSC's gross receipts, represent the bulk of that money. FSCs also pay an annual $100 license fee as well as one-time incorporation and one-time dissolution fees. The government also realizes revenue in the form of gross receipts, franchise and income taxes from about a dozen management companies that represent FSCs in the territory.
Considering the show of support from the Ways and Means Committee, the new bill was expected to sail through Congress once it went back into session after Labor Day. Now it is unclear whether Congress will proceed with the measure, given the initial unfavorable reaction. The committee has not even formally notified the EU of its action, so it may well be September before the EU issues an official word.
Failure by the U.S. to comply with the WTO ruling against the FSC would open the U.S. up to sanctions, possibly in the billions of dollars.
