Foreign
Sales Corporations
Under legislation dating from 1984, which was
eventually declared unacceptable by the World
Trade Organization after a complaint from the
European Union, the US Internal Revenue Code authorized
the establishment of foreign sales corporations
(FSCs), 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 (at
35% tax) that companies kept 5.25% more of their
revenue.
The
TRA of 1984 replaced DISCs 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. FSCs are exempt 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.
A FSC is a corporation that has met all of the
following tests:
-
It must be a corporation created or organized
under the laws of a qualifying foreign country
or a US possession. A qualifying foreign country
is a foreign country that meets the exchange
of information requirements of the law. A US
possession is defined in the law to include
Guam, American Samoa, the Commonwealth of the
Northern Mariana Islands, and the US Virgin
Islands, but not Puerto Rico.
- It
must have no more than 25 shareholders at any
time during the tax year.
-
It must not have preferred stock outstanding
at any time during the tax year.
- During
the tax year, it must maintain an office in
a qualifying foreign country or a U..possession
and maintain a set of permanent books of account
at that office. Also, it must maintain at a
location in the United States the books and
records required to sufficiently establish the
amount of gross income, deductions, credits,
or other matters required to be reported on
its tax return.
-
At all times during the tax year, it must have
at least one director who is not a resident
of the United States.
-
It must not be a member, at any time during
the tax year, of a controlled group of which
a DISC is a member.
-
The FSC tax year must conform to the tax year
of the principal shareholder who, at the beginning
of the FSC's tax year, has the highest percentage
of voting power.
- It
must have elected to be a FSC or a small FSC
by filing Form 8279, Election To Be Treated
as a FSC or as a Small FSC, at any time during
the 90-day period immediately preceding the
beginning of the taxable year or during the
first 90 days of its taxable year if the FSC
is a new corporation.
Foreign trading gross receipts (FTGR) are gross
receipts of a FSC that has met certain foreign
management and foreign economic process requirements.
These receipts must be from the sale, lease, or
rental of export property for use outside the
United States or for an engineering or architectural
services for a construction project located outside
the United States. An FSC (other than a small
FSC) is treated as having FTGR for the tax year
only if the management of the FSC takes place
outside the United States. These management activities
include:
-
Meetings of the board of directors and shareholders.
-
Disbursement of cash dividends, outside legal
and accounting fees, salaries of officers, and
salaries or fees of directors out of the principal
bank account.
-
Maintaining the principal bank account at all
times during the tax year.
There are some other production and content requirements;
however the FSC is by now largely of historical
interest only since the regime was abolished in
response to EU and WTO pressure in 2000.
A very high proportion of qualifying companies
made use of the FSC legislation, typically through
tax-exempt companies in the US Virgin Islands,
the Bahamas, Barbados and Bermuda.
After
the World Trade Organization (WTO) finally ruled
in early 2000 that the FSC constituted an illegal
trading subsidy, the US passed replacement legislation
called The Extra-Territorial Income Exclusion
Act.
This
in turn was ruled illegitimate by the WTO, and
after much to-ing and fro-ing, including the imposition
of permitted tariffs by the EU during 2004 on
many US imports, US President George W Bush finally
signed a law in late 2004 which repealed the FSC-ETI
legislation in favour of broader tax reliefs.
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