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Charlotte Amalie
Thursday, March 28, 2024
HomeNewsArchivesHOUSE VOTE KILLS FSCs; CLINTON EXPECTED TO SIGN

HOUSE VOTE KILLS FSCs; CLINTON EXPECTED TO SIGN

Legislation to repeal the Foreign Sales Corporation tax regime passed the House Wednesday with enough votes to ensure it will become law before the end of the month.
The vote was 315 to 109, or more than two-thirds of the 435-member body. A two-thirds vote puts it on the fast track in the Senate. The administration backs the bill, and President Clinton is expected to sign it into law quickly once he receives it from Congress.
The U.S. is trying to meet an Oct. 1 deadline imposed by the World Trade Organization, which ruled last year that the FSC constitutes an unfair trade subsidy to U.S. exporters.
The bill replaces the FSC with another tax scheme, the Extraterritorial Income Exclusion Act. Like the FSC program, it is designed to encourage U.S. foreign trade. But unlike the FSC, it does not require U.S. companies to set up subsidiaries off-shore.
With the demise of the FSC, the Virgin Islands government stands to lose an estimated $10 million annually. The territory has been the primary location for FSCs since the program began in 1985. Last year the local government collected $6.9 million in franchise taxes from FSCs plus an uncalculated amount of revenues in the form of business licenses, gross receipts taxes and income taxes generated by management companies servicing FSCs, and from indirect contributions such as banking revenues.
Delegate Donna Christian-Christensen announced several weeks ago that the Clinton administration has assured the Virgin Islands it will be compensated in some way for the lost revenues.
Brian Modeste, legislative aide to Christensen, said Wednesday that passage of the Extraterritorial Income Exclusion Act "is not a win for the Virgin Islands at first glance." But he did have some words of encouragement. Besides the promise of compensation, the Virgin Islands may still be in a position to garner a small amount of income from U.S. corporations under the new program.
Among the eligibility requirements for Extraterritorial Income Exclusion Act treatment will be the performance of certain economic activities outside the U.S. such as advertising or sales promotion. Off-shore management companies now typically perform such services for their FSC clients. Modeste noted that there will likely be some carry over, although the level of work is not expected to come close to what now exists with the FSCs.
The congressional action to establish the EIE program comes despite its rejection by the European Union. The EU, which brought the FSC issue to the World Trade Organization, already has said it will file a similar complaint against the new program once it is in place.
Under the legislation, no companies may choose FSC status after Sept. 30, 2000, and all FSCs must close out by Dec. 31, 2001.

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