Foreign Sales Corporations (FSC’s) was a means previously provided by United States taxation law for US companies to receive a reduction in US federal income taxes for profits resulting from exports through the use of an offshore subsidiary.
The European Union (EU) launched proceedings against these provisions in the World Trade Organization (WTO) in 1999, claiming that they were an export subsidy. In March of 2000, the Appellate Body of the WTO found that the FSC provisions constituted a prohibited export subsidy under the General Agreement on Tariffs and Trade (GATT) Uruguay Round code on Subsidies and Countervailing Measures (SCM). The US Congress then adopted the Extraterritorial Income Exclusion Act (ETI; Public Law 106-519; 114 Stat. 2423) in November of 2000 to repeal the FSC legislation and to introduce new provisions to exclude extraterritorial income from taxation.
The FSC was created in 1984 to replace the old export-promoting tax scheme called the DISC. The origins of the FSC dispute date back to 1971, when the US introduced legislation providing for "Domestic international sales corporations" (DISC’s). These were challenged by the European Community under the GATT. The United States then counterclaimed that European tax regulations concerning extraterritorial income were also GATT-incompatible.
In 1976, a GATT panel found that both DISCs and the European tax regulations were GATT-incompatible; however, these cases were settled by the Tokyo Round Code on Subsidies and Countervailing Duties, and the GATT Council decided in 1981 to adopt the panel reports subject to the understanding that the terms of the settlement would apply. However, the WTO Panel in the 1999 case would later rule that the 1981 decision did not constitute a legal instrument within the meaning of GATT-1994, and was not binding on the panel.
The FSC evolved from 1971 tax legislation which provided benefits for domestic international sales corporations. A defunct provision in the U.S. federal income tax code which allowed for reduction in taxes on income derived from sales of exported goods. The code required the use of a subsidiary entity in a foreign country which existed for the purposes of selling the exported goods.
The foreign sales corporation was eliminated by the Extraterritorial Income Exclusion Act in 2000 which introduced new rules for income not subject to U.S taxation. The tax provision was disputed by several countries on the grounds that is constituted an export subsidy that was not allowed under a certain international trade treaties.
A FSC must maintain its office and books of account in a country that has exchange of information agreement with the US, have at least one director residing in the country of the office, and stem income from export of US goods and/or services to that country. Once formerly called the domestic international sales corporation (DISC).
Under legislation dating from 1984, which was eventually declared unacceptable by the World Trade Organization, the US Internal Revenue Code authorized the establishment of foreign sales corporations (FSC’s), being corporate entities in foreign jurisdictions through which US manufacturing companies could channel exports. 15% of the revenue concerned was exempted from corporation tax, meaning that companies kept 5.25% more of their revenue.
FSC’s are excused from US tax on a portion of export income. The exempt income is generally at least 15% of the combined taxable income (CTI) earned by the FSC and its related supplier from qualified exports. The TRA of 1984 replaced DISC’s with FSC provisions to counter arguments from major trading partners that the DISC provisions constituted an illegal export subsidy under the General Agreement on Tariffs and Trade.
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