Federal legislation to replace the Foreign Sales Corporation has stalled, but industry representatives still expect the program to close out within a year.
In the U.S. Virgin Islands, where about a dozen management companies handle well over half of all FSCs, virtually no new business has come in since Sept. 30. Under the pending legislation, that was the last date a corporation could elect FSC status, although existing FSCs could continue to operate until Dec. 31, 2001.
The United States is under the gun from the World Trade Organization, which sided with the European Union in determining that an FSC constitutes an unfair trade practice. An FSC is a subsidiary set up by a U.S. manufacturer in order to get a tax break on export sales.
Federal legislation was introduced in August to eliminate FSCs by the WTO's deadline of Sept. 30. Although the bill had widespread support in Congress and was backed by the White House, it was attached to a tax bill loaded with unrelated items. Because of objections to some of those items, President Clinton promised to veto the bill.
The United States has now missed even an extended deadline of Nov. 1, and the European Union may apply to the WTO to impose sanctions against the United States for its failure to comply with the WTO ruling. Such sanctions could take the form of high tariffs on U.S. goods.
Meanwhile, administration officials continue to negotiate with the EU, but sources within the industry do not expect the EU to back off from its demand for an end to the FSC program.
Graham Dunn, an FSC manager with Trident Trust Company (VI) Ltd. in St. Thomas, said even if the legislation eliminating the FSC program is passed next week, he still expects it to be retroactive to Sept. 30, 2000.
For now, without the federal legislation in place, management companies can still set up companies intended to act as foreign sales corporations, but for the most part that isn't happening.
"If anyone wants us to set up (such) a company, we'd certainly do it," Dunn said, but only if the client understands the program will probably be eliminated soon.
Trident and other management firms are not actively marketing FSCs right now. "I think everybody's still holding off," Dunn said.
