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Tech Firms Rally Behind Foreign Tax Bill
In a show of bipartisanship, the Clinton administration, along with Congress and businesses, have quickly crafted a new corporate tax bill to comply with World Trade Organization rules — a testament to how important the foreign sales corporation (FSC) tax credit is to American firms, including the high-tech industry.
While most companies that export goods are eligible for tax benefits created by FSC, the issue is particularly important to the software sector, since it fought in 1997 to be included among the industries covered under that part of the tax code.
"The software industry has been working on this for many, many years," said Ken Glueck, vice president of government affairs at Oracle. "You get a little more energy on this (from the software industry), because we were more recently involved."
The FSC essentially allows a U.S. corporation to set up a subsidiary abroad to handle the sale of exported goods and exempt the foreign revenue from U.S. income tax. The European Union successfully argued before the WTO that the tax structure amounted to an illegal export subsidy.
This spring, the WTO told the United States that it had until Oct. 1 to reform the tax code to conform with WTO rules or face sanctions of up to 100 percent tariffs on U.S. exports. The challenge was for the United States to craft a viable alternative that preserved a comparable tax advantage, but ameliorated the European objections.
U.S. Sees FSC As Leveling The Playing Field
From the American perspective, the FSC levels the playing field between the United States and Europe, where the value-added tax (VAT) is rebated on exports, allowing products to be sold at a lower cost. The U.S. tax break was created in 1971 to try to address the trade imbalance. It has since been amended several times, including in 1984 when it became FSC. The European Union objected to the law since the 1980s, but did not vigorously pursue remedies until 1999.
"If we had to replace FSC without a viable alternative, it would jack up the price of exports by $4 billion. Is that what we want to do to our exporters? It really is counter-intuitive," said Kimberly Pinter, director of corporate finance and tax and the National Association of Manufacturers.
The software industry exports between 50 percent to 60 percent of its products. Industry representatives say companies could see a considerable impact on their balance sheets if they had to pay U.S. income tax on those revenues, although no specific dollar figures are available.
One Solution: H.R. 4986
In July, the House Ways and Means Committee approved, 34 to 1, legislation designed to address the problem. H.R. 4986, the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, eliminates the need to create a foreign subsidiary, expands the tax credit to goods manufactured abroad by U.S. firms and exempts extraterritorial income from U.S. tax. The lone voice on the ways & means committee who voted against the FSC bill was Rep. Peter Stark, D-CA.
Similar to the current FSC act, H.R. 4986 excludes 15 percent to 30 percent of export income from tax and requires a corporation to conduct a portion of its business on foreign soil. This measure also would eliminate the requirement that a U.S. company seeking this tax break would have to establish a separate foreign subsidiary. By expanding the credit to goods manufactured overseas, the credit is no longer export contingent, and, therefore, should meet WTO requirements, supporters say.
"Quite frankly, this is a marvelous display of bipartisan and bicameral cooperation," said Mark Nebergall, president of the Software Finance Tax Executives Council.
Late last week, the House committee met to hammer out remaining issues, but John Meagher, House Ways and Means Committee special counsel, declined to detail which issues had been resolved. The bill is scheduled to be taken up Tuesday on the House floor under the suspension calendar, and it is expected to be approved.
Senate, WH Input Boosts Chances For Passage
Because the Senate and administration offered input into the House bill, supporters believe it will move quickly through the Senate and on to the president's desk for signing. The stakes are high for not complying with the WTO ruling. If the code is amended by the Oct. 1 deadline, the European Union will have to take its complaint back to the WTO, where the case will be heard and likely appealed by the losing party, pushing any sanctions off by at least six months.
"You can't take the risk of not complying," said Meagher, because U.S. exports will face billions of dollars in tariffs. "This is going to be quite a month before elections. The EU will float a list and it will be very politically sensitive. What we are trying to do is preclude their ability to do that," he said.
The Objections
The European Union doesn't like the bill, intends to go back to the WTO. An official said the European Union is not putting together a specific list of imports on which to slap tariffs, saying such a list was "a bit premature," although it is considering sanctions.
The European Union is debating its options. "If you want to take a considered decision on which route to go, it's quite a good idea to have a roadmap of each of the routes," the commission official said, "And a road map of retaliation would include actually thinking about how we would retaliate, what sorts of things would be retaliated on and so on."
At the end of August, Pascal Lamy, EU trade commissioner, wrote U.S. Deputy Treasury Secretary Stuart Eizenstat to voice his problems with the House bill, complaining that it was still export contingent, and therefore, not compatible with WTO regulations. Lamy warned that if the House bill were to become law "we would have no choice but to invoke the appropriate provisions of the DSU in order to protect our rights," the letter said.
With the bill still being drafted, Glueck said the objections from the EU are premature. "I don't know what is in the bill. I know the basic concept, but it has not been finalized. I am not exactly sure how this can be deemed non-compliant at this point," he said.
Meagher complained that the EU was continually hardening its position, "making it harder every minute" to reach a workable solution, stressing that the United States isn't interested in starting a trade war.
The European Union also objects to a provision in the new bill that would keep in place the "domestic content rule" that requires 50 percent of an exported product's value be added in the United States. The WTO declined to rule on that part of the EU's complaint.
It is unclear how the WTO would rule, but the European Union noted in a press release that the trade body recently condemned a similar rule required by the automotive regime of Canada. The European Union intends to pursue this part of its complaint when it goes back before the WTO.
Pinter thinks the new law has a good chance of withstanding WTO scrutiny.
But the bill is not without U.S. critics. Rep. Peter DeFazio, D-OR, cast was one of more than 100 who rejected the proposal on the House floor.
"Rather than manipulating and expanding this corporate welfare to get around an unfavorable WTO ruling, Congress should eliminate the tax subsidy all together," he said.
The Politics
Some EU critics say the squabble over FSC is sour grapes over losing the bananas and beef dispute with the United States a couple of years ago and to pursue other interests. "The EU really wants the FSC victory to be used as a chit in its agriculture negotiations," Meagher said.
But the European Union denies those accusations, noting that it has been objecting to the law since it was amended in 1984 to create the FSC, but the matter was not further pursued due to the opening of the Uruguay Round trade negotiations. In 1997, the European Union began formal contacts with U.S. tax authorities but no solution was found.
Other see it as a push to dictate U.S. tax policy by trying to force the creation of a territorial tax system similar to Europe's "and Congress shouldn't bite," Nebergall said.
But Meagher said if the European Union insists on pushing the United States toward a different tax system "it is the worst thing that could ever happen to them." He noted that legislation has been drafted that would entirely revamp U.S. tax laws to be more similar to the European model with border-adjustable taxes.
A new system would make the United States a tax haven, and "we will eat their lunch," he said.
Completely revamping the tax code is far too complicated and controversial and it could never happen, observers say, so resolving this issue without starting an all-out trade war is of paramount concern.
 | - by Teri Rucker |
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