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July 2, 2001
Volume 79, Number 27
CENEAR 79 27 p.6
ISSN 0009-2347
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Failure to tax all foreign sales income runs afoul of international law


A new ruling by an international trade tribunal threatens tax breaks for chemical manufacturers and other U.S. companies that export their products.

TROUBLED WATERS Chemical products exported via the Houston Ship Channel and other U.S. ports may be subject to EU sanctions.
The U.S. system that excludes a portion of foreign sales income from federal taxes is illegal under international law, says a World Trade Organization (WTO) dispute panel. This marks the second time WTO has ruled against a U.S. tax-break system.

Last November, Congress did away with the so-called Foreign Sales Corporations (FSCs) system because WTO had ruled it was illegal. FSCs provided a tax exemption for part of the income generated by corporate subsidiaries established by U.S. firms outside of U.S. territory. Chemical and pharmaceutical makers reaped about $500 million per year in tax savings through FSCs, says Stephen G. Elkins, tax team leader for the American Chemistry Council.

In the face of the WTO ruling, Congress replaced FSCs with a new system that allows corporations to directly exclude a portion of foreign sales income from U.S. taxes, even if the money was not derived from exported goods.

The European Union (EU), which brought the successful challenge against FSCs, asked WTO to review the legality of the new system. That led to the latest ruling against the U.S.

Losing the tax break is just part of the problem. Of equal importance, according to Elkins, is the $4 billion per year that the EU is seeking in sanctions against U.S. exports. Both could have major impacts on U.S. chemical makers and EU importers of their products. He says U.S. exporting companies plan to appeal the latest WTO decision.

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