Export Tax Incentives.

• Author: MORRIS, DANIEL D.
• Position: Brief Article

The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 repealed the foreign sales corporation rules and replaced them with new tax rules regarding foreign sales.

The Act should produce the same tax benefits as FSCs, simply in a different format. Like FSCs, the Act reduces the related supplier's effective federal tax rate by 5.25 percent, but does so by exempting 15 percent of qualifying foreign income from taxation.

EC CHALLENGE

The Act evolved from a European Communities' successful challenge before the World Trade Organization, in which it contended that FSCs established special tax treatments that were inconsistent with U.S. obligations under the 1994 GATT and related trade agreements. The WTO held that these illegal provisions must be eliminated prior to Oct. 1, 2000. The U.S. and EC subsequently negotiated an extension until the Act could be approved by Congress and signed into law.

The EC informed the United States that it does not believe the Act complies with the WTO ruling on FSCs. The WTO is reviewing the EC's request. If the WTO agrees, the EC could request immediate sanctions, which could unilaterally increase annual trade tariffs on U.S. exports by approximately $4 billion. The WTO's decision could be finalized by late this summer. Meanwhile the IRC provides for FSC benefits to continue through 2001 concurrent with eligible relief under the Act.

NEW BENEFITS FOR FOREIGN TRANSACTIONS

The Act provides a number of very important new benefits for foreign transactions. Unlike FSCs, which required establishing a foreign corporation along with additional administrative costs, the Act excludes income from taxation. Accordingly, individuals are eligible to exclude income from all sources including sole proprietorships and pass-through entities. Additionally, the excluded income is exempt from alternative minimum tax.

To qualify, the income must be qualified foreign trade income, which is generated from transactions involving qualifying foreign trade property. IRC Sec. 943 defines QFTP as property that is:

* Manufactured, produced, grown or extracted within or outside the United States;

* Held primarily for sale, lease or rental, in the ordinary course of trade or business for direct use, consumption or disposition outside the United States; and

* Not more than 50 percent of the fair market value of which is attributable to articles manufactured, produced, grown or extracted outside the United States; and direct costs for labor...