[Pages H11881-H11899]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

FSC REPEAL AND EXTRATERRITORIAL INCOME EXCLUSION ACT OF 2000

Mr. ARCHER. Mr. Speaker, I move to suspend the rules and concur in
the Senate amendment to the bill (H.R. 4986) to amend the Internal
Revenue Code of 1986 to repeal the provisions relating to foreign sales
corporations (FSCs) and to exclude extraterritorial income from gross
income.
The Clerk read as follows:

Senate amendment:
Strike out all after the enacting clause and insert:

SECTION 1. SHORT TITLE.

(a) Short Title.--This Act may be cited as the ``FSC Repeal
and Extraterritorial Income Exclusion Act of 2000''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a
section or other provision, the reference shall be considered
to be made to a section or other provision of the Internal
Revenue Code of 1986.

SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

Subpart C of part III of subchapter N of chapter 1
(relating to taxation of foreign sales corporations) is
hereby repealed.

SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

(a) In General.--Part III of subchapter B of chapter 1
(relating to items specifically excluded from gross income)
is amended by inserting before section 115 the following new
section:

``SEC. 114. EXTRATERRITORIAL INCOME.

``(a) Exclusion.--Gross income does not include
extraterritorial income.
``(b) Exception.--Subsection (a) shall not apply to
extraterritorial income which is not qualifying foreign trade
income as determined under subpart E of part III of
subchapter N.
``(c) Disallowance of Deductions.--
``(1) In general.--Any deduction of a taxpayer allocated
under paragraph (2) to extraterritorial income of the
taxpayer excluded from gross income under subsection (a)
shall not be allowed.
``(2) Allocation.--Any deduction of the taxpayer properly
apportioned and allocated to the extraterritorial income
derived by the taxpayer from any transaction shall be
allocated on a proportionate basis between--

[[Page H11882]]

``(A) the extraterritorial income derived from such
transaction which is excluded from gross income under
subsection (a), and
``(B) the extraterritorial income derived from such
transaction which is not so excluded.
``(d) Denial of Credits for Certain Foreign Taxes.--
Notwithstanding any other provision of this chapter, no
credit shall be allowed under this chapter for any income,
war profits, and excess profits taxes paid or accrued to any
foreign country or possession of the United States with
respect to extraterritorial income which is excluded from
gross income under subsection (a).
``(e) Extraterritorial Income.--For purposes of this
section, the term `extraterritorial income' means the gross
income of the taxpayer attributable to foreign trading gross
receipts (as defined in section 942) of the taxpayer.''.
(b) Qualifying Foreign Trade Income.--Part III of
subchapter N of chapter 1 is amended by inserting after
subpart D the following new subpart:

``Subpart E--Qualifying Foreign Trade Income

``Sec. 941. Qualifying foreign trade income.
``Sec. 942. Foreign trading gross receipts.
``Sec. 943. Other definitions and special rules.

``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

``(a) Qualifying Foreign Trade Income.--For purposes of
this subpart and section 114--
``(1) In general.--The term `qualifying foreign trade
income' means, with respect to any transaction, the amount of
gross income which, if excluded, will result in a reduction
of the taxable income of the taxpayer from such transaction
equal to the greatest of--
``(A) 30 percent of the foreign sale and leasing income
derived by the taxpayer from such transaction,
``(B) 1.2 percent of the foreign trading gross receipts
derived by the taxpayer from the transaction, or
``(C) 15 percent of the foreign trade income derived by the
taxpayer from the transaction.
In no event shall the amount determined under subparagraph
(B) exceed 200 percent of the amount determined under
subparagraph (C).
``(2) Alternative computation.--A taxpayer may compute its
qualifying foreign trade income under a subparagraph of
paragraph (1) other than the subparagraph which results in
the greatest amount of such income.
``(3) Limitation on use of foreign trading gross receipts
method.--If any person computes its qualifying foreign trade
income from any transaction with respect to any property
under paragraph (1)(B), the qualifying foreign trade income
of such person (or any related person) with respect to any
other transaction involving such property shall be zero.
``(4) Rules for marginal costing.--The Secretary shall
prescribe regulations setting forth rules for the allocation
of expenditures in computing foreign trade income under
paragraph (1)(C) in those cases where a taxpayer is seeking
to establish or maintain a market for qualifying foreign
trade property.
``(5) Participation in international boycotts, etc.--Under
regulations prescribed by the Secretary, the qualifying
foreign trade income of a taxpayer for any taxable year shall
be reduced (but not below zero) by the sum of--
``(A) an amount equal to such income multiplied by the
international boycott factor determined under section 999,
and
``(B) any illegal bribe, kickback, or other payment (within
the meaning of section 162(c)) paid by or on behalf of the
taxpayer directly or indirectly to an official, employee, or
agent in fact of a government.
``(b) Foreign Trade Income.--For purposes of this subpart--
``(1) In general.--The term `foreign trade income' means
the taxable income of the taxpayer attributable to foreign
trading gross receipts of the taxpayer.
``(2) Special rule for cooperatives.--In any case in which
an organization to which part I of subchapter T applies which
is engaged in the marketing of agricultural or horticultural
products sells qualifying foreign trade property, in
computing the taxable income of such cooperative, there shall
not be taken into account any deduction allowable under
subsection (b) or (c) of section 1382 (relating to patronage
dividends, per-unit retain allocations, and nonpatronage
distributions).
``(c) Foreign Sale and Leasing Income.--For purposes of
this section--
``(1) In general.--The term `foreign sale and leasing
income' means, with respect to any transaction--
``(A) foreign trade income properly allocable to activities
which--
``(i) are described in paragraph (2)(A)(i) or (3) of
section 942(b), and
``(ii) are performed by the taxpayer (or any person acting
under a contract with such taxpayer) outside the United
States, or
``(B) foreign trade income derived by the taxpayer in
connection with the lease or rental of qualifying foreign
trade property for use by the lessee outside the United
States.
``(2) Special rules for leased property.--
``(A) Sales income.--The term `foreign sale and leasing
income' includes any foreign trade income derived by the
taxpayer from the sale of property described in paragraph
(1)(B).
``(B) Limitation in certain cases.--Except as provided in
regulations, in the case of property which--
``(i) was manufactured, produced, grown, or extracted by
the taxpayer, or
``(ii) was acquired by the taxpayer from a related person
for a price which was not determined in accordance with the
rules of section 482,
the amount of foreign trade income which may be treated as
foreign sale and leasing income under paragraph (1)(B) or
subparagraph (A) of this paragraph with respect to any
transaction involving such property shall not exceed the
amount which would have been determined if the taxpayer had
acquired such property for the price determined in accordance
with the rules of section 482.
``(3) Special rules.--
``(A) Excluded property.--Foreign sale and leasing income
shall not include any income properly allocable to excluded
property described in subparagraph (B) of section 943(a)(3)
(relating to intangibles).
``(B) Only direct expenses taken into account.--For
purposes of this subsection, any expense other than a
directly allocable expense shall not be taken into account in
computing foreign trade income.

``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

``(a) Foreign Trading Gross Receipts.--
``(1) In general.--Except as otherwise provided in this
section, for purposes of this subpart, the term `foreign
trading gross receipts' means the gross receipts of the
taxpayer which are--
``(A) from the sale, exchange, or other disposition of
qualifying foreign trade property,
``(B) from the lease or rental of qualifying foreign trade
property for use by the lessee outside the United States,
``(C) for services which are related and subsidiary to--
``(i) any sale, exchange, or other disposition of
qualifying foreign trade property by such taxpayer, or
``(ii) any lease or rental of qualifying foreign trade
property described in subparagraph (B) by such taxpayer,
``(D) for engineering or architectural services for
construction projects located (or proposed for location)
outside the United States, or
``(E) for the performance of managerial services for a
person other than a related person in furtherance of the
production of foreign trading gross receipts described in
subparagraph (A), (B), or (C).
Subparagraph (E) shall not apply to a taxpayer for any
taxable year unless at least 50 percent of its foreign
trading gross receipts (determined without regard to this
sentence) for such taxable year is derived from activities
described in subparagraph (A), (B), or (C).
``(2) Certain receipts excluded on basis of use; subsidized
receipts excluded.--The term `foreign trading gross receipts'
shall not include receipts of a taxpayer from a transaction
if--
``(A) the qualifying foreign trade property or services--
``(i) are for ultimate use in the United States, or
``(ii) are for use by the United States or any
instrumentality thereof and such use of qualifying foreign
trade property or services is required by law or regulation,
or
``(B) such transaction is accomplished by a subsidy granted
by the government (or any instrumentality thereof) of the
country or possession in which the property is manufactured,
produced, grown, or extracted.
``(3) Election to exclude certain receipts.--The term
`foreign trading gross receipts' shall not include gross
receipts of a taxpayer from a transaction if the taxpayer
elects not to have such receipts taken into account for
purposes of this subpart.
``(b) Foreign Economic Process Requirements.--
``(1) In general.--Except as provided in subsection (c), a
taxpayer shall be treated as having foreign trading gross
receipts from any transaction only if economic processes with
respect to such transaction take place outside the United
States as required by paragraph (2).
``(2) Requirement.--
``(A) In general.--The requirements of this paragraph are
met with respect to the gross receipts of a taxpayer derived
from any transaction if--
``(i) such taxpayer (or any person acting under a contract
with such taxpayer) has participated outside the United
States in the solicitation (other than advertising), the
negotiation, or the making of the contract relating to such
transaction, and
``(ii) the foreign direct costs incurred by the taxpayer
attributable to the transaction equal or exceed 50 percent of
the total direct costs attributable to the transaction.
``(B) Alternative 85-percent test.--A taxpayer shall be
treated as satisfying the requirements of subparagraph
(A)(ii) with respect to any transaction if, with respect to
each of at least 2 subparagraphs of paragraph (3), the
foreign direct costs incurred by such taxpayer attributable
to activities described in such subparagraph equal or exceed
85 percent of the total direct costs attributable to
activities described in such subparagraph.
``(C) Definitions.--For purposes of this paragraph--
``(i) Total direct costs.--The term `total direct costs'
means, with respect to any transaction, the total direct
costs incurred by the taxpayer attributable to activities
described in paragraph (3) performed at any location by the
taxpayer or any person acting under a contract with such
taxpayer.
``(ii) Foreign direct costs.--The term `foreign direct
costs' means, with respect to any transaction, the portion of
the total direct costs which are attributable to activities
performed outside the United States.
``(3) Activities relating to qualifying foreign trade
property.--The activities described in this paragraph are any
of the following with respect to qualifying foreign trade
property--
``(A) advertising and sales promotion,
``(B) the processing of customer orders and the arranging
for delivery,
``(C) transportation outside the United States in
connection with delivery to the customer,
``(D) the determination and transmittal of a final invoice
or statement of account or the receipt of payment, and

[[Page H11883]]

``(E) the assumption of credit risk.
``(4) Economic processes performed by related persons.--A
taxpayer shall be treated as meeting the requirements of this
subsection with respect to any sales transaction involving
any property if any related person has met such requirements
in such transaction or any other sales transaction involving
such property.
``(c) Exception From Foreign Economic Process
Requirement.--
``(1) In general.--The requirements of subsection (b) shall
be treated as met for any taxable year if the foreign trading
gross receipts of the taxpayer for such year do not exceed
$5,000,000.
``(2) Receipts of related persons aggregated.--All related
persons shall be treated as one person for purposes of
paragraph (1), and the limitation under paragraph (1) shall
be allocated among such persons in a manner provided in
regulations prescribed by the Secretary.
``(3) Special rule for pass-thru entities.--In the case of
a partnership, S corporation, or other pass-thru entity, the
limitation under paragraph (1) shall apply with respect to
the partnership, S corporation, or entity and with respect to
each partner, shareholder, or other owner.

``SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

``(a) Qualifying Foreign Trade Property.--For purposes of
this subpart--
``(1) In general.--The term `qualifying foreign trade
property' means property--
``(A) manufactured, produced, grown, or extracted within or
outside the United States,
``(B) 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
``(C) not more than 50 percent of the fair market value of
which is attributable to--
``(i) articles manufactured, produced, grown, or extracted
outside the United States, and
``(ii) direct costs for labor (determined under the
principles of section 263A) performed outside the United
States.
For purposes of subparagraph (C), the fair market value of
any article imported into the United States shall be its
appraised value, as determined by the Secretary under section
402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection
with its importation, and the direct costs for labor under
clause (ii) do not include costs that would be treated under
the principles of section 263A as direct labor costs
attributable to articles described in clause (i).
``(2) U.S. taxation to ensure consistent treatment.--
Property which (without regard to this paragraph) is
qualifying foreign trade property and which is manufactured,
produced, grown, or extracted outside the United States shall
be treated as qualifying foreign trade property only if it is
manufactured, produced, grown, or extracted by--
``(A) a domestic corporation,
``(B) an individual who is a citizen or resident of the
United States,
``(C) a foreign corporation with respect to which an
election under subsection (e) (relating to foreign
corporations electing to be subject to United States
taxation) is in effect, or
``(D) a partnership or other pass-thru entity all of the
partners or owners of which are described in subparagraph
(A), (B), or (C).
Except as otherwise provided by the Secretary, tiered
partnerships or pass-thru entities shall be treated as
described in subparagraph (D) if each of the partnerships or
entities is directly or indirectly wholly owned by persons
described in subparagraph (A), (B), or (C).
``(3) Excluded property.--The term `qualifying foreign
trade property' shall not include--
``(A) property leased or rented by the taxpayer for use by
any related person,
``(B) patents, inventions, models, designs, formulas, or
processes whether or not patented, copyrights (other than
films, tapes, records, or similar reproductions, and other
than computer software (whether or not patented), for
commercial or home use), goodwill, trademarks, trade brands,
franchises, or other like property,
``(C) oil or gas (or any primary product thereof),
``(D) products the transfer of which is prohibited or
curtailed to effectuate the policy set forth in paragraph
(2)(C) of section 3 of Public Law 96-72, or
``(E) any unprocessed timber which is a softwood.
For purposes of subparagraph (E), the term `unprocessed
timber' means any log, cant, or similar form of timber.
``(4) Property in short supply.--If the President
determines that the supply of any property described in
paragraph (1) is insufficient to meet the requirements of the
domestic economy, the President may by Executive order
designate the property as in short supply. Any property so
designated shall not be treated as qualifying foreign trade
property during the period beginning with the date specified
in the Executive order and ending with the date specified in
an Executive order setting forth the President's
determination that the property is no longer in short supply.
``(b) Other Definitions and Rules.--For purposes of this
subpart--
``(1) Transaction.--
``(A) In general.--The term `transaction' means--
``(i) any sale, exchange, or other disposition,
``(ii) any lease or rental, and
``(iii) any furnishing of services.
``(B) Grouping of transactions.--To the extent provided in
regulations, any provision of this subpart which, but for
this subparagraph, would be applied on a transaction-by-
transaction basis may be applied by the taxpayer on the basis
of groups of transactions based on product lines or
recognized industry or trade usage. Such regulations may
permit different groupings for different purposes.
``(2) United states defined.--The term `United States'
includes the Commonwealth of Puerto Rico. The preceding
sentence shall not apply for purposes of determining whether
a corporation is a domestic corporation.
``(3) Related person.--A person shall be related to another
person if such persons are treated as a single employer under
subsection (a) or (b) of section 52 or subsection (m) or (o)
of section 414, except that determinations under subsections
(a) and (b) of section 52 shall be made without regard to
section 1563(b).
``(4) Gross and taxable income.--Section 114 shall not be
taken into account in determining the amount of gross income
or foreign trade income from any transaction.
``(c) Source Rule.--Under regulations, in the case of
qualifying foreign trade property manufactured, produced,
grown, or extracted within the United States, the amount of
income of a taxpayer from any sales transaction with respect
to such property which is treated as from sources without the
United States shall not exceed--
``(1) in the case of a taxpayer computing its qualifying
foreign trade income under section 941(a)(1)(B), the amount
of the taxpayer's foreign trade income which would (but for
this subsection) be treated as from sources without the
United States if the foreign trade income were reduced by an
amount equal to 4 percent of the foreign trading gross
receipts with respect to the transaction, and
``(2) in the case of a taxpayer computing its qualifying
foreign trade income under section 941(a)(1)(C), 50 percent
of the amount of the taxpayer's foreign trade income which
would (but for this subsection) be treated as from sources
without the United States.
``(d) Treatment of Withholding Taxes.--
``(1) In general.--For purposes of section 114(d), any
withholding tax shall not be treated as paid or accrued with
respect to extraterritorial income which is excluded from
gross income under section 114(a). For purposes of this
paragraph, the term `withholding tax' means any tax which is
imposed on a basis other than residence and for which credit
is allowable under section 901 or 903.
``(2) Exception.--Paragraph (1) shall not apply to any
taxpayer with respect to extraterritorial income from any
transaction if the taxpayer computes its qualifying foreign
trade income with respect to the transaction under section
941(a)(1)(A).
``(e) Election To Be Treated as Domestic Corporation.--
``(1) In general.--An applicable foreign corporation may
elect to be treated as a domestic corporation for all
purposes of this title if such corporation waives all
benefits to such corporation granted by the United States
under any treaty. No election under section 1362(a) may be
made with respect to such corporation.
``(2) Applicable foreign corporation.--For purposes of
paragraph (1), the term `applicable foreign corporation'
means any foreign corporation if--
``(A) such corporation manufactures, produces, grows, or
extracts property in the ordinary course of such
corporation's trade or business, or
``(B) substantially all of the gross receipts of such
corporation are foreign trading gross receipts.
``(3) Period of election.--
``(A) In general.--Except as otherwise provided in this
paragraph, an election under paragraph (1) shall apply to the
taxable year for which made and all subsequent taxable years
unless revoked by the taxpayer. Any revocation of such
election shall apply to taxable years beginning after such
revocation.
``(B) Termination.--If a corporation which made an election
under paragraph (1) for any taxable year fails to meet the
requirements of subparagraph (A) or (B) of paragraph (2) for
any subsequent taxable year, such election shall not apply to
any taxable year beginning after such subsequent taxable
year.
``(C) Effect of revocation or termination.--If a
corporation which made an election under paragraph (1)
revokes such election or such election is terminated under
subparagraph (B), such corporation (and any successor
corporation) may not make such election for any of the 5
taxable years beginning with the first taxable year for which
such election is not in effect as a result of such revocation
or termination.
``(4) Special rules.--
``(A) Requirements.--This subsection shall not apply to an
applicable foreign corporation if such corporation fails to
meet the requirements (if any) which the Secretary may
prescribe to ensure that the taxes imposed by this chapter on
such corporation are paid.
``(B) Effect of election, revocation, and termination.--
``(i) Election.--For purposes of section 367, a foreign
corporation making an election under this subsection shall be
treated as transferring (as of the first day of the first
taxable year to which the election applies) all of its assets
to a domestic corporation in connection with an exchange to
which section 354 applies.
``(ii) Revocation and termination.--For purposes of section
367, if--

``(I) an election is made by a corporation under paragraph
(1) for any taxable year, and
``(II) such election ceases to apply for any subsequent
taxable year,

such corporation shall be treated as a domestic corporation
transferring (as of the 1st day of the first such subsequent
taxable year to which such election ceases to apply) all of
its property to a foreign corporation in connection with an
exchange to which section 354 applies.
``(C) Eligibility for election.--The Secretary may by
regulation designate one or more classes of corporations
which may not make the election under this subsection.

[[Page H11884]]

``(f) Rules Relating to Allocations of Qualifying Foreign
Trade Income From Shared Partnerships.--
``(1) In general.--If--
``(A) a partnership maintains a separate account for
transactions (to which this subpart applies) with each
partner,
``(B) distributions to each partner with respect to such
transactions are based on the amounts in the separate account
maintained with respect to such partner, and
``(C) such partnership meets such other requirements as the
Secretary may by regulations prescribe,
then such partnership shall allocate to each partner items of
income, gain, loss, and deduction (including qualifying
foreign trade income) from any transaction to which this
subpart applies on the basis of such separate account.
``(2) Special rules.--For purposes of this subpart, in the
case of a partnership to which paragraph (1) applies--
``(A) any partner's interest in the partnership shall not
be taken into account in determining whether such partner is
a related person with respect to any other partner, and
``(B) the election under section 942(a)(3) shall be made
separately by each partner with respect to any transaction
for which the partnership maintains separate accounts for
each partner.
``(g) Exclusion for Patrons of Agricultural and
Horticultural Cooperatives.--Any amount described in
paragraph (1) or (3) of section 1385(a)--
``(1) which is received by a person from an organization to
which part I of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products, and
``(2) which is allocable to qualifying foreign trade income
and designated as such by the organization in a written
notice mailed to its patrons during the payment period
described in section 1382(d),
shall be treated as qualifying foreign trade income of such
person for purposes of section 114. The taxable income of the
organization shall not be reduced under section 1382 by
reason of any amount to which the preceding sentence applies.
``(h) Special Rule for DISCs.--Section 114 shall not apply
to any taxpayer for any taxable year if, at any time during
the taxable year, the taxpayer is a member of any controlled
group of corporations (as defined in section 927(d)(4), as in
effect before the date of the enactment of this subsection)
of which a DISC is a member.''

SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

(1) The second sentence of section 56(g)(4)(B)(i) is
amended by inserting before the period ``or under section
114''.
(2) Section 275(a) is amended--
(A) by striking ``or'' at the end of paragraph (4)(A), by
striking the period at the end of paragraph (4)(B) and
inserting ``, or'', and by adding at the end of paragraph (4)
the following new subparagraph:
``(C) such taxes are paid or accrued with respect to
qualifying foreign trade income (as defined in section
941).''; and
(B) by adding at the end the following the following new
sentence: ``A rule similar to the rule of section 943(d)
shall apply for purposes of paragraph (4)(C).''.
(3) Paragraph (3) of section 864(e) is amended--
(A) by striking ``For purposes of'' and inserting:
``(A) In general.--For purposes of''; and
(B) by adding at the end the following new subparagraph:
``(B) Assets producing exempt extraterritorial income.--For
purposes of allocating and apportioning any interest expense,
there shall not be taken into account any qualifying foreign
trade property (as defined in section 943(a)) which is held
by the taxpayer for lease or rental in the ordinary course of
trade or business for use by the lessee outside the United
States (as defined in section 943(b)(2)).''.
(4) Section 903 is amended by striking ``164(a)'' and
inserting ``114, 164(a),''.
(5) Section 999(c)(1) is amended by inserting
``941(a)(5),'' after ``908(a),''.
(6) The table of sections for part III of subchapter B of
chapter 1 is amended by inserting before the item relating to
section 115 the following new item:

``Sec. 114. Extraterritorial income.''.

(7) The table of subparts for part III of subchapter N of
chapter 1 is amended by striking the item relating to subpart
E and inserting the following new item:

``Subpart E. Qualifying foreign trade income.''.

(8) The table of subparts for part III of subchapter N of
chapter 1 is amended by striking the item relating to subpart
C.

SEC. 5. EFFECTIVE DATE.

(a) In General.--The amendments made by this Act shall
apply to transactions after September 30, 2000.
(b) No New FSCs; Termination of Inactive FSCs.--
(1) No new fscs.--No corporation may elect after September
30, 2000, to be a FSC (as defined in section 922 of the
Internal Revenue Code of 1986, as in effect before the
amendments made by this Act).
(2) Termination of inactive fscs.--If a FSC has no foreign
trade income (as defined in section 923(b) of such Code, as
so in effect) for any period of 5 consecutive taxable years
beginning after December 31, 2001, such FSC shall cease to be
treated as a FSC for purposes of such Code for any taxable
year beginning after such period.
(c) Transition Period for Existing Foreign Sales
Corporations.--
(1) In general.--In the case of a FSC (as so defined) in
existence on September 30, 2000, and at all times thereafter,
the amendments made by this Act shall not apply to any
transaction in the ordinary course of trade or business
involving a FSC which occurs--
(A) before January 1, 2002; or
(B) after December 31, 2001, pursuant to a binding
contract--
(i) which is between the FSC (or any related person) and
any person which is not a related person; and
(ii) which is in effect on September 30, 2000, and at all
times thereafter.
For purposes of this paragraph, a binding contract shall
include a purchase option, renewal option, or replacement
option which is included in such contract and which is
enforceable against the seller or lessor.
(2) Election to have amendments apply earlier.--A taxpayer
may elect to have the amendments made by this Act apply to
any transaction by a FSC or any related person to which such
amendments would apply but for the application of paragraph
(1). Such election shall be effective for the taxable year
for which made and all subsequent taxable years, and, once
made, may be revoked only with the consent of the Secretary
of the Treasury.
(3) Exception for old earnings and profits of certain
corporations.--
(A) In general.--In the case of a foreign corporation to
which this paragraph applies--
(i) earnings and profits of such corporation accumulated in
taxable years ending before October 1, 2000, shall not be
included in the gross income of the persons holding stock in
such corporation by reason of section 943(e)(4)(B)(i), and
(ii) rules similar to the rules of clauses (ii), (iii), and
(iv) of section 953(d)(4)(B) shall apply with respect to such
earnings and profits.
The preceding sentence shall not apply to earnings and
profits acquired in a transaction after September 30, 2000,
to which section 381 applies unless the distributor or
transferor corporation was immediately before the transaction
a foreign corporation to which this paragraph applies.
(B) Existing fscs.--This paragraph shall apply to any
controlled foreign corporation (as defined in section 957)
if--
(i) such corporation is a FSC (as so defined) in existence
on September 30, 2000,
(ii) such corporation is eligible to make the election
under section 943(e) by reason of being described in
paragraph (2)(B) of such section, and
(iii) such corporation makes such election not later than
for its first taxable year beginning after December 31, 2001.
(C) Other corporations.--This paragraph shall apply to any
controlled foreign corporation (as defined in section 957),
and such corporation shall (notwithstanding any provision of
section 943(e)) be treated as an applicable foreign
corporation for purposes of section 943(e), if--
(i) such corporation is in existence on September 30, 2000,
(ii) as of such date, such corporation is wholly owned
(directly or indirectly) by a domestic corporation
(determined without regard to any election under section
943(e)),
(iii) for each of the 3 taxable years preceding the first
taxable year to which the election under section 943(e) by
such controlled foreign corporation applies--

(I) all of the gross income of such corporation is subpart
F income (as defined in section 952), including by reason of
section 954(b)(3)(B), and
(II) in the ordinary course of such corporation's trade or
business, such corporation regularly sold (or paid
commissions) to a FSC which on September 30, 2000, was a
related person to such corporation,

(iv) such corporation has never made an election under
section 922(a)(2) (as in effect before the date of the
enactment of this paragraph) to be treated as a FSC, and
(v) such corporation makes the election under section
943(e) not later than for its first taxable year beginning
after December 31, 2001.
The preceding sentence shall cease to apply as of the date
that the domestic corporation referred to in clause (ii)
ceases to wholly own (directly or indirectly) such controlled
foreign corporation.
(4) Related person.--For purposes of this subsection, the
term ``related person'' has the meaning given to such term by
section 943(b)(3).
(5) Section references.--Except as otherwise expressly
provided, any reference in this subsection to a section or
other provision shall be considered to be a reference to a
section or other provision of the Internal Revenue Code of
1986, as amended by this Act.
(d) Special Rules Relating to Leasing Transactions.--
(1) Sales income.--If foreign trade income in connection
with the lease or rental of property described in section
927(a)(1)(B) of such Code (as in effect before the amendments
made by this Act) is treated as exempt foreign trade income
for purposes of section 921(a) of such Code (as so in
effect), such property shall be treated as property described
in section 941(c)(1)(B) of such Code (as added by this Act)
for purposes of applying section 941(c)(2) of such Code (as
so added) to any subsequent transaction involving such
property to which the amendments made by this Act apply.
(2) Limitation on use of gross receipts method.--If any
person computed its foreign trade income from any transaction
with respect to any property on the basis of a transfer price
determined under the method described in section 925(a)(1) of
such Code (as in effect before the amendments made by this
Act), then the qualifying foreign trade income (as defined in
section 941(a) of such Code, as in effect after such
amendment) of such person (or any related person) with
respect to any other transaction involving such property (and
to which the amendments made by this Act apply) shall be
zero.

The SPEAKER pro tempore. Pursuant to the rule, the gentleman from

[[Page H11885]]

Texas (Mr. Archer) and the gentleman from California (Mr. Stark) each
will control 20 minutes.
The Chair recognizes the gentleman from Texas (Mr. Archer).

General Leave

Mr. ARCHER. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
and to include extraneous material on H.R. 4986.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Texas?
There was no objection.
Mr. ARCHER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, today the House is, once again, considering one of the
most important bills of this Congress. It is critical for the continued
U.S. competitiveness in the global marketplace. It is critical for our
Nation's economic security. Most important, it is critical to preserve
as many as 5 million jobs for American workers and their families. That
is right, almost 5 million jobs hang in the balance.
Why? Because the U.S. has an ill-advised, antiquated system that
overtaxes our businesses when they operate overseas and when they
export, placing them at a gigantic disadvantage against their foreign
competitors. This bill only partially addresses that gigantic
disadvantage, a disadvantage so great that it is causing major U.S.
businesses one by one to move overseas instead of being headquartered
in the United States of America. This was evidenced recently by
Chrysler becoming a German-based corporation, no longer headquartered
in the U.S.
Mr. Speaker, we must pass this bill and have it signed into law
immediately if we are to avert what could be the mother of all trade
wars with the European Union. Last summer, the World Trade Organization
ruled that our foreign sales corporation provisions in the U.S. Tax
Code violated global trading rules. The U.S. appealed the decision, but
lost; and the WTO set an original deadline of October 1 for the U.S. to
comply with the decision. Despite a heroic effort by a bipartisan
majority of members on the Committee on Ways and Means, the Senate
Finance Committee, the White House, the Treasury, and the work of the
Joint Committee on Taxation, we were unable to meet the October 1
deadline.
Now, to avoid immediate retaliation by the EU, the U.S. entered into
an agreement with the EU which moved the deadline to November 1. Now
that has also passed by. If we do not have this legislation signed into
law by November 17, the EU will begin the ugly and devastating process
of trade retaliation against American products, our workers, and our
businesses. The clock is ticking, and only by acting now can we avoid a
transatlantic trade war which will be destructive to all parties,
perhaps to the world. There will be no winners in such a war, only
losers; and the biggest losers will be American workers whose products
will no longer have access to the European market on a competitive
basis.
Moreover, I believe that passage of this legislation today, which
reflects a bipartisan compromise with the Senate, fully agreed to by
the administration, will put us into compliance so that we can avoid
retaliation, even if the EU should challenge the substance of the
underlying proposal.
Mr. Speaker, we have had a remarkable economic surge in the past few
years. Failing to act on this legislation could very well halt and even
reverse that progress. We cannot risk that happening.
The substance of the Senate amendment to H.R. 4986 is identical to
title I of H.R. 5542, the ``Taxpayer Relief Act of 2000,'' incorporated
by reference into the conference report on H.R. 2614. The Senate
amendment, like the language in the conference report on H.R. 2614, is
a compromise between the versions of H.R. 4986 passed by the House and
reported by the Finance Committee. Since the statutory language has
been modified slightly from the version of H.R. 4986 reported by the
Committee on Ways and Means, I am introducing into the Record an
explanation of the Senate amendment prepared by the staff of the Joint
Committee on Taxation. This explanation is substantially identical to
the relevant Statement of Managers language in H.R. 2614. Senator Roth
has similarly endorsed this explanation. Accordingly, taxpayers are
welcome to rely on this explanation (or, for that matter, the Statement
of Managers language in H.R. 2614) for guidance in interpreting the
statute.

Technical Explanation of the Senate Amendment to H.R. 4986, the ``FSC
Repeal and Extraterritorial Income Exclusion Act of 2000''

i. introduction

This document, prepared by the staff of the Joint Committee
on Taxation, is a technical explanation of H.R. 4986 as
passed by the Senate on November 1, 2000. H.R. 4986 was
passed by the House of Representatives on September 13, 2000.
The Senate Finance Committee favorably reported the bill with
an amendment on September 19, 2000. The conference agreement
to H.R. 2614 included legislation that resolved the
differences between the House and Senate on this matter. The
Senate amendment to H.R. 4986, as passed by the Senate on
November 1, 2000, adopts the compromise language of the
conference agreement to H.R. 2614.

ii. overview of present-law foreign sales corporation rules

Summary of U.S. income taxation of foreign persons
Income earned by a foreign corporation from its foreign
operations generally is subject to U.S. tax only when such
income is distributed to a U.S. persons that hold stock in
such corporation. Accordingly, a U.S. person that conducts
foreign operations through a foreign corporation generally is
subject to U.S. tax on the income from those operations when
the income is repatriated to the United States through a
dividend distribution to the U.S. person. The income is
reported on the U.S. person's tax return for the year the
distribution is received, and the United States imposes tax
on such income at that time. An indirect foreign tax credit
may reduce the U.S. tax imposed on such income.
Foreign sales corporations
The income of an eligible foreign sales corporation
(``FSC'') is partially subject to U.S. income tax and
partially exempt from U.S. income tax. In addition, a U.S.
corporation generally is not subject to U.S. income tax on
dividends distributed from the FSC out of certain earnings.
A FSC must be located and managed outside the United
States, and must perform certain economic processes outside
the United States. A FSC is often owned by a U.S. corporation
that produces goods in the United States. The U.S.
corporation either supplies goods to the FSC for resale
abroad or pays the FSC a commission in connection with such
sales. The income of the FSC, a portion of which is exempt
from U.S. income tax under the FSC rules, equals the FSC's
gross markup or gross commission income less the expenses
incurred by the FSC. The gross markup or the gross commission
is determined according to specified pricing rules.
A FSC generally is not subject to U.S. income tax on its
exempt foreign trade income. The exempt foreign trade income
of a FSC is treated as foreign-source income that is not
effectively connected with the conduct of a trade or business
within the United States.
Foreign trade income, other than exempt foreign trade
income, generally is treated as U.S.-source income
effectively connected with the conduct of a trade or business
conducted through a permanent establishment within the United
States. Thus, a FSC's income, other than exempt foreign trade
income, generally is subject to U.S. tax currently and is
treated as U.S.-source income for purposes of the foreign tax
credit limitation.
Foreign trade income of a FSC is defined as the FSC's gross
income attributable to foreign trading gross receipts.
Foreign trading gross receipts generally are the gross
receipts attributable to the following types of transactions:
the sale of export property; the lease or rental of export
property; services related and subsidiary to such a sale or
lease of export property; engineering and architectural
services for projects outside the United States; and export
management services. Investment income and carrying charges
are excluded from the definition of foreign trading gross
receipts.
The term ``export property'' generally means property (1)
which is manufactured, produced, grown or extracted in the
United States by a person other than a FSC; (2) which is held
primarily for sale, lease, or rental in the ordinary course
of a trade or business for direct use or consumption outside
the United States; and (3) not more than 50 percent of the
fair market value of which is attributable to articles
imported into the United States. The term ``export property''
does not include property leased or rented by a FSC for use
by any member of a controlled group of which the FSC is a
member; patents, copyrights (other than films, tapes,
records, similar reproductions, and other than computer
software, whether or not patented), and other intangibles;
oil or gas (or any primary product thereof); unprocessed
softwood timber; or products the export of which is
prohibited or curtailed. Export property also excludes
property designated by the President as being in short
supply.
If export property is sold to a FSC by a related person (or
a commission is paid by a related person to a FSC with
respect to export property), the income with respect to the
export transaction must be allocated between the FSC and the
related person. The taxable income of the FSC and the taxable
income of the related person are computed based upon

[[Page H11886]]

a transfer price determined under section 482 or under one of
two formulas specified in the FSC provisions.
The portion of a FSC's foreign trade income that is treated
as exempt foreign trade income depends on the pricing rule
used to determine the income of the FSC. If the amount of
income earned by the FSC is based on section 482 pricing, the
exempt foreign trade income generally is 30 percent of the
foreign trade income the FSC derives from a transaction. If
the income earned by the FSC is determined under one of the
two formulas specified in the FSC provisions, the exempt
foreign trade income generally is 15/23 of the foreign trade
income the FSC derives from the transaction.
A FSC is not required or deemed to make distributions to
its shareholders. Actual distributions are treated as being
made first out of earnings and profits attributable to
foreign trade income, and then out of any other earnings and
profits. A U.S. corporation generally is allowed a 100
percent dividends-received deduction for amounts distributed
from a FSC out of earnings and profits attributable to
foreign trade income. The 100 percent dividends-received
deduction is not allowed for nonexempt foreign trade income
determined under section 482 pricing. Any distributions made
by a FSC out of earnings and profits attributable to foreign
trade income to a foreign shareholder is treated as U.S.-
source income that is effectively connected with a business
conducted through a permanent establishment of the
shareholder within the United States. Thus, the foreign
shareholder is subject to U.S. tax on such a distribution.

III. TECHNICAL EXPLANATION OF THE SENATE AMENDMENT TO H.R. 4986

Overview
The Senate amendment repeals the present-law FSC rules and
replaces them with an exclusion for extraterritorial income.
The Senate amendment, like the Senate Finance Committee
reported version of the bill, does not include the provision
in the House bill that provides a dividends-received
deduction for certain dividends allocable to qualifying
foreign trade income. The Senate amendment adopts the
compromise language of the conference agreement to H.R. 2614.
Repeal of the FSC rules
The Senate amendment repeals the present-law FSC rules
found in sections 921 through 927 of the Code.
Exclusion of extraterritorial income
The Senate amendment provides that gross income for U.S.
tax purposes does not include extraterritorial income.
Because the exclusion of such extraterritorial income is a
means of avoiding double taxation, no foreign tax credit is
allowed for income taxes paid with respect to such excluded
income. Extraterritorial income is eligible for the exclusion
to the extent that it is ``qualifying foreign trade income.''
Because U.S. income tax principles generally deny deductions
for expenses related to exempt income, otherwise deductible
expenses that are allocated to qualifying foreign trade
income generally are disallowed.
The Senate amendment applies in the same manner with
respect to both individuals and corporations who are U.S.
taxpayers. In addition, the exclusion from gross income
applies for individual and corporate alternative minimum tax
purposes.
Qualifying foreign trade income
Under the Senate amendment, qualifying foreign trade income
is the amount of gross income that, if excluded, would result
in a reduction of taxable income by the greatest of (1) 1.2
percent of the ``foreign trading gross receipts'' derived by
the taxpayer from the transaction, (2) 15 percent of the
``foreign trade income'' derived by the taxpayer from the
transaction, or (3) 30 percent of the ``foreign sale and
leasing income'' derived by the taxpayer from the
transaction. The amount of qualifying foreign trade income
derived using 1.2 percent of the foreign trading gross
receipts is limited to 200 percent of the qualifying foreign
trade income that would result using 15 percent of the
foreign trade income. Notwithstanding the general rule
that qualifying foreign trade income is based on one of
the three calculations that results in the greatest
reduction in taxable income, a taxpayer may choose instead
to use one of the other two calculations that does not
result in the greatest reduction in taxable income.
Although these calculations are determined by reference to
a reduction of taxable income (a net income concept),
qualifying foreign trade income is an exclusion from gross
income. Hence, once a taxpayer determines the appropriate
reduction of taxable income, that amount must be ``grossed
up'' for related expenses in order to determine the amount
of gross income excluded.
If a taxpayer uses 1.2 percent of foreign trading gross
receipts to determine the amount of qualifying foreign trade
income with respect to a transaction, the taxpayer or any
other related persons will be treated as having no qualifying
foreign trade income with respect to any other transaction
involving the same property. For example, assume that a
manufacturer and a distributor of the same product are
related persons. The manufacturer sells the product to the
distributor at an arm's-length price of $80 (generating $30
of profit) and the distributor sells the product to an
unrelated customer outside of the United States for $100
(generating $20 of profit). If the distributor chooses to
calculate its qualifying foreign trade income on the basis of
1.2 percent of foreign trading gross receipts, then the
manufacturer will be considered to have no qualifying foreign
trade income and, thus, would have no excluded income. The
distributor's qualifying foreign trade income would be 1.2
percent of $100, and the manufacturer's qualifying foreign
trade income would be zero. This limitation is intended to
prevent a duplication of exclusions from gross income because
the distributor's $100 of gross receipts includes the $80 of
gross receipts of the manufacturer. Absent this limitation,
$80 of gross receipts would have been double counted for
purposes of the exclusion. If both persons were permitted to
use 1.2 percent of their foreign trading gross receipts in
this example, then the related-person group would have an
exclusion based on $180 of foreign trading gross receipts
notwithstanding that the related-person group really only
generated $100 of gross receipts from the transaction.
However, if the distributor chooses to calculate its
qualifying foreign trade income on the basis of 15 percent of
foreign trade income (15 percent of $20 of profit), then the
manufacturer would also be eligible to calculate its
qualifying foreign trade income in the same manner (15
percent of $30 of profit). Thus, in the second case, each
related person may exclude an amount of income based on their
respective profits. The total foreign trade income of the
related-person group is $50. Accordingly, allowing each
person to calculate the exclusion based on their respective
foreign trade income does not result in duplication of
exclusions.
Under the Senate amendment, a taxpayer may determine the
amount of qualifying foreign trade income either on a
transaction-by-transaction basis or on an aggregate basis for
groups of transactions, so long as the groups are based on
product lines or recognized industry or trade usage. Under
the grouping method, ti is intended that taxpayers be given
reasonable flexibility to identify product lines or groups on
the basis of recognized industry or trade usage. In general,
provided that the taxpayer's grouping is not unreasonable, it
will not be rejected merely because the grouped products fall
within more than one of the two-digit Standard Industrial
Classification codes. The Secretary of the Treasury is
granted authority to prescribe rules for grouping
transactions in determining qualifying foreign trade income.
Qualifying foreign trade income must be reduced by illegal
bribes, kickbacks and similar payments, and by a factor for
operations in or related to a country associated in carrying
out an international boycott, or participating or cooperating
with an international boycott.
In addition, the Senate amendment directs the Secretary of
the Treasury to prescribe rules for marginal costing in those
cases in which a taxpayer is seeking to establish or maintain
a market for qualifying foreign trade property.
Foreign trading gross receipts
Under the Senate amendment, ``foreign trading gross
receipts'' are gross receipts derived from certain activities
in connection with ``qualifying foreign trade property'' with
respect to which certain ``economic processes'' take place
outside of the United States. Specifically, the gross
receipts must be (1) from the sale, exchange, or other
disposition of qualifying foreign trade property; (2) from
the lease or rental of qualifying foreign trade property for
use by the lessee outside of the United States; (3) for
services which are related and subsidiary to the sale,
exchange, disposition, lease, or rental of qualifying foreign
trade property (as described above); (4) for engineering or
architectural services for construction projects located
outside of the United States; or (5) for the performance of
certain managerial services for unrelated persons. Gross
receipts from the lease or rental of qualifying foreign trade
property include gross receipts from the license of
qualifying foreign trade property. Consistent with the policy
adopted in the Taxpayer Relief Act of 1997, this includes the
license of computer software for reproduction abroad.
Foreign trading gross receipts do not include gross
receipts from a transaction if the qualifying foreign trade
property or services are for ultimate use in the United
States, or for use by the United States (or an
instrumentality thereof) and such use is required by law or
regulation. Foreign trading gross receipts also do not
include gross receipts from a transaction that is
accomplished by a subsidy granted by the government (or any
instrumentality thereof) of the country or possession in
which the property is manufactured.
A taxpayer may elect to treat gross receipts from a
transaction as not foreign trading gross receipts. As a
consequence of such an election, the taxpayer could utilize
any related foreign tax credits in lieu of the exclusion as a
means of avoiding double taxation. It is intended that this
election be accomplished by the taxpayer's treatment of such
items on its tax return for the taxable year. Provided that
the taxpayer's taxable year is still open under the statute
of limitations for making claims for refund under section
6511, a taxpayer can make redeterminations as to whether the
gross receipts from a transaction constitute foreign trading
gross receipts.
Foreign economic processes
Under the Senate amendment, gross receipts from a
transaction are foreign trading gross receipts only if
certain economic processes take place outside of the United
States.

[[Page H11887]]

The foreign economic processes requirement is satisfied if
the taxpayer (or any person acting under a contract with the
taxpayer) participates outside of the United States in the
solicitation (other than advertising), negotiation, or making
of the contract relating to such transaction and incurs a
specified amount of foreign direct costs attributable to the
transaction. For this purpose, foreign direct costs include
only those costs incurred in the following categories of
activities: (1) advertising and sales promotion; (2) the
processing of customer orders and the arranging for delivery;
(3) transportation outside of the United States in connection
with delivery to the customer; (4) the determination and
transmittal of a final invoice or statement of account or the
receipt of payment; and (5) the assumption of credit risk. An
exception from the foreign economic processes requirement is
provided for taxpayers with foreign trading gross receipts
for the year of $5 million or less.
The foreign economic processes requirement must be
satisfied with respect to each transaction and, if so, any
gross receipts from such transaction could be considered as
foreign trading gross receipts. For example, all of the lease
payments received with respect to a multi-year lease
contract, which contract met the foreign economic processes
requirement at the time it was entered into, would be
considered as foreign trading gross receipts. On the other
hand, a sale of property that was formerly a leased asset,
which was not sold pursuant to the original lease agreement,
generally would be considered a new transaction that must
independently satisfy the foreign economic processes
requirement.
A taxpayer's foreign economic processes requirement is
treated as satisfied with respect to a sales transaction
(solely for the purpose of determining whether gross receipts
are foreign trading gross receipts) if any related person has
satisfied the foreign economic processes requirement in
connection with another sales transaction involving the same
qualifying foreign trade property.
Qualifying foreign trade property
Under the Senate amendment, the threshold for determining
if gross receipts will be treated as foreign trading gross
receipts is whether the gross receipts are derived from a
transaction involving ``qualifying foreign trade property.''
Qualifying foreign trade property is property manufactured,
produced, grown, or extracted (``manufactured'') within or
outside of the United States that is held primarily for sale,
lease, or rental, in the ordinary course of a trade or
business, for direct use, consumption, or disposition outside
of the United States. In addition, not more than 50 percent
of the fair market value of such property can be attributable
to the sum of (1) the fair market value of articles
manufactured outside of the United States plus (2) the direct
costs of labor performed outside of the United States.
It is understood that under current industry practice, the
purchaser of an aircraft contracts separately for the
aircraft engine and the airframe, albeit contracting with the
airframe manufacturer to attach the separately purchased
engine. It is intended that an aircraft engine be qualifying
foreign trade property (assuming that all other requirements
are satisfied) if (1) it is specifically designed to be
separated from the airframe to which it is attached without
significant damage to either the engine or the airframe, (2)
it is reasonably expected to be separated from the airframe
in the ordinary course of business (other than by reason of
temporary separation for servicing, maintenance, or repair)
before the end of the useful life of either the engine or the
airframe, whichever is shorter, and (3) the terms under which
the aircraft engine was sold were directly and separately
negotiated between the manufacturer of the aircraft engine
and the person to whom the aircraft will be ultimately
delivered. By articulating this application of the foreign
destination test in the case of certain separable aircraft
engines, no inference is intended with respect to the
application of any destination test under present law or with
respect to any other rule of law outside the Senate
amendment.
The Senate amendment excludes certain property from the
definition of qualifying foreign trade property. The excluded
property is (1) property leased or rented by the taxpayer for
use by a related person, (2) certain intangibles, (3) oil and
gas (or any primary product thereof), (4) unprocessed
softwood timber, (5) certain products the transfer of which
are prohibited or curtailed to effectuate the policy set
forth in Public Law 96-72, and (6) property designated by
Executive order as in short supply. In addition, it is
intended that property that is leased or licensed to a
related person who is the lessor, licensor, or seller of the
same property in a sublease, sublicense, sale, or rental to
an unrelated person for the ultimate and predominate use by
the unrelated person outside of the United States is not
excluded property by reason of such lease or license to a
related person.
With respect to property that is manufactured outside of
the United States, rules are provided to ensure consistent
U.S. tax treatment with respect to manufacturers. The Senate
amendment requires that property manufactured outside of the
United States be manufactured by (1) a domestic corporation,
(2) an individual who is a citizen or resident of the United
States, (3) a foreign corporation that elects to be subject
to U.S. taxation in the same manner as a U.S. corporation, or
(4) a partnership or other pass-through entity all of the
partners or owners of which are described in (1), (2), or (3)
above.
Foreign trade income
Under the Senate amendment, ``foreign trade income'' is the
taxable income of the taxpayer (determined without regard to
the exclusion of qualifying foreign trade income)
attributable to foreign trading gross receipts. Certain
dividends-paid deductions of cooperatives are disregarded in
determining foreign trade income for this purpose.
Foreign sale and leasing income
Under the Senate amendment, ``foreign sale and leasing
income'' is the amount of the taxpayer's foreign trade income
(with respect to a transaction) that is properly allocable to
activities that constitute foreign economic processes (as
described above). For example, a distribution company's
profit from the sale of qualifying foreign trade property
that is associated with sales activities, such as
solicitation or negotiation of the sale, advertising,
processing customer orders and arranging for delivery,
transportation outside of the United States, and other
enumerated activities, would constitute foreign sale and
leasing income.
Foreign sale and leasing income also includes foreign trade
income derived by the taxpayer in connection with the lease
or rental of qualifying foreign trade property for use by the
lessee outside of the United States. Income from the sale,
exchange, or other disposition of qualifying foreign trade
property that is or was subject to such a lease (i.e., the
sale of the residual interest in the leased property) gives
rise to foreign sale and leasing income. Except as provided
in regulations, a special limitation applies to leased
property that (1) is manufactured by the taxpayer or (2) is
acquired by the taxpayer from a related person for a price
that was other than arm's length. In such cases, foreign sale
and leasing income may not exceed the amount of foreign sale
and leasing income that would have resulted if the taxpayer
had acquired the leased property in a hypothetical arm's-
length purchase and then engaged in the actual sale or lease
of such property. For example, if a manufacturer leases
qualifying foreign trade property that it manufactured, the
foreign sale and leasing income derived from that lease may
not exceed the amount of foreign sale and leasing income that
the manufacturer would have earned with respect to that lease
had it purchased the property for an arm's-length price on
the day that the manufacturer entered into the lease. For
purposes of calculating the limit on foreign sale and leasing
income, the manufacturer's basis and, thus, depreciation
would be based on this hypothetical arm's-length price. This
limitation is intended to prevent foreign sale and leasing
income from including profit associated with manufacturing
activities.
For purposes of determining foreign sale and leasing
income, only directly allocable expenses are taken into
account in calculating the amount of foreign trade income. In
addition, income properly allocable to certain intangibles is
excluded for this purpose.
General example
The following is an example of the calculation of
qualifying foreign trade income.
XYZ Corporation, a U.S. corporation, manufactures property
that is sold to unrelated customers for use outside of the
United States. XYZ Corporation satisfies the foreign economic
processes requirement through conducting activities such as
solicitation, negotiation, transportation, and other sales-
related activities outside of the United States with respect
to its transactions. During the year, qualifying foreign
trade property was sold for gross proceeds totaling $1,000.
The cost of this qualifying foreign trade property was $600.
XYZ Corporation incurred $275 of costs that are directly
related to the sale and distribution of qualifying foreign
trade property. XYZ Corporation paid $40 of income tax to a
foreign jurisdiction related to the sale and distribution of
the qualifying foreign trade property. XYZ Corporation also
generated gross income of $7,600 (gross receipts of $24,000
and cost of goods sold of $16,400) and direct expenses of
$4,225 that relate to the manufacture and sale of products
other than qualifying foreign trade property. XYZ Corporation
also incurred $500 of overhead expenses. XYZ Corporation's
financial information for the year is summarized as follows:

------------------------------------------------------------------------
Other
Total property OFTP
------------------------------------------------------------------------
Gross receipts......................... $25,000 $24,000 $1,000
Cost of goods sold..................... 17,000 16,400 600
--------------------------------
Gross income........................... 8,000 7,600 400
Direct expenses........................ 4,500 4,225 275
Overhead expenses...................... 500 ......... .........
--------------------------------
Net income......................... 3,000 ......... .........
------------------------------------------------------------------------

Illustrated below is the computation of the amount of
qualifying foreign trade income that is excluded from XYZ
Corporation's gross income and the amount of related expenses
that are disallowed. In order to calculate qualifying foreign
trade income, the amount of foreign trade income first must
be determined. Foreign trade income is the taxable income
(determined without regard to the exclusion of qualifying
foreign trade income) attributable to foreign trading gross
receipts. In this example, XYZ Corporation's foreign trading
gross receipts equal $1,000. This amount of gross receipts is
reduced by

[[Page H11888]]

the related cost of goods sold, the related direct expenses,
and a portion of the overhead expenses in order to arrive at
the related taxable income. Thus, XYZ Corporation's foreign
trade income equals $100, calculated as follows:

Foreign trading gross receipts...................................$1,000
Cost of goods sold..................................................600
________

Gross income....................................................400
Direct expenses.....................................................275
Apportioned overhead expenses........................................25
________

Foreign trade income............................................100

Foreign sale and leasing income is defined as an amount of
foreign trade income (calculated taking into account only
directly-related expenses) that is properly allocable to
certain specified foreign activities. Assume for purposes of
this example that of the $125 of foreign trade income ($400
of gross income from the sale of qualifying foreign trade
property less only the direct expenses of $275), $35 is
properly allocable to such foreign activities (e.g.,
solicitation, negotiation, advertising, foreign
transportation, and other enumerated sales-like activities)
and, therefore, is considered to be foreign sale and leasing
income.
Qualifying foreign trade income is the amount of gross
income that, if excluded, will result in a reduction of
taxable income equal to the greatest of (1) 30 percent of
foreign sale and leasing income, (2) 1.2 percent of foreign
trading gross receipts, or (3) 15 percent of foreign trade
income. Thus, in order to calculate the amount that is
excluded from gross income, taxable income must be determined
and then ``grossed up'' for allocable expenses in order to
arrive at the appropriate gross income figure. First, for
each method of calculating qualifying foreign trade income,
the reduction in taxable income is determined. Then, the $275
of direct and $25 of overhead expenses, totaling $300,
attributable to foreign trading gross receipts is apportioned
to the reduction in taxable income based on the proportion of
the reduction in taxable income to foreign trade income. This
apportionment is done for each method of calculating
qualifying foreign trade income. The sum of the taxable
income reduction and the apportioned expenses equals the
respective qualifying foreign trade income (i.e., the amount
of gross income excluded) under each method, as follows:

------------------------------------------------------------------------
1.2% FTGR 15% FTI 30% FS&LI
\1\ \2\ \3\
------------------------------------------------------------------------
Reduction of taxable income:
1.2% of FTGR (1.2% *$1,000).... 12.00 ........ ............
15% of FTI (15% *$100)......... ........... 15.00 ............
30% of FS&LI (30% *$35)........ ........... ........ 10.50
Gross-up for disallowed expenses:
$300 *($12/$100)............... 36.00 ........ ............
$300 *($15/$100)............... ........... 45.00 ............
$275 *($10.50/$100) \4\........ ........... ........ 28.88
------------------------------------
Qualifying foreign trade 48.00 60.00 39.38
income......................
------------------------------------------------------------------------
\1\ ``FTGR'' refers to foreign trading gross receipts.
\2\ ``FTI'' refers to foreign trade income.
\3\ ``FS&LI'' refers to foreign sale and leasing income.
\4\ Because foreign sale and leasing income only takes into account
direct expenses, it is appropriate to take into account only such
expenses for purposes of this calculation.

In the example, the $60 of qualifying foreign trade income
is excluded from XYZ Corporation's gross income (determined
based on 15 percent of foreign trade income). In connection
with excluding $60 of gross income, certain expenses that are
allocable to this income are not deductible for U.S. Federal
income tax purposes. Thus, $45 ($300 of related expenses
multiplied by 15 percent, i.e., $60 of qualifying foreign
trade income divided by $400 of gross income from the sale of
qualifying foreign trade property) of expenses are
disallowed.

------------------------------------------------------------------------
Other Excluded/
property QFTP disallowed Total
------------------------------------------------------------------------
Gross receipts............... $24,000 $1,000 .......... ........
Cost of goods sold........... 16,400 600 .......... ........
------------------------------------------
Gross income............. 7,600 400 (60.00) 7,940.00
Direct expenses.............. 4,225 275 (41.25) 4,458.75
Overhead expenses............ 475 25 (3.75) 496.25
------------------------------------------
Taxable income........... ........ ......... .......... 2,985.00
------------------------------------------------------------------------

XYZ Corporation paid $40 of income tax to a foreign
jurisdiction related to the sale and distribution of the
qualifying foreign trade property. A portion of this $40 of
foreign income tax is treated as paid with respect to the
qualifying foreign trade income and, therefore, is not
creditable for U.S. foreign tax credit purposes. In this
case, $6 of such taxes paid ($40 of foreign taxes multiplied
by 15 percent, i.e., $60 of qualifying foreign trade income
divided by $400 of gross income from the sale of qualifying
foreign trade property) is treated as paid with respect to
the qualifying foreign trade income and, thus, is not
creditable.
The results in this example are the same regardless of
whether XYZ Corporation manufacturers the property within the
United States or outside of the United States through a
foreign branch. If XYZ Corporation were an S corporation or
limited liability company, the results also would be the
same, and the exclusion would pass through to the S
corporation owners or limited liability company owners as the
case may be.
Other rules
Foreign-source income limitation
The Senate amendment provides a limitation with respect to
the sourcing of taxable income applicable to certain sale
transactions giving rise to foreign trading gross receipts.
This limitation only applies with respect to sale
transactions involving property that is manufactured within
the United States. The special source limitation does not
apply when qualifying foreign trade income is determined
using 30 percent of the foreign sale and leasing income from
the transaction.
This foreign-source income limitation is determined in one
of two ways depending on whether the qualifying foreign trade
income is calculated based on 1.2 percent of foreign trading
gross receipts or on 15 percent of foreign trade income. If
the qualifying foreign trade income is calculated based on
1.2 percent of foreign trading gross receipts, the related
amount of foreign-source income may not exceed the amount of
foreign trade income that (without taking into account this
special foreign-source income limitation) would be treated as
foreign-source income if such foreign trade income were
reduced by 4 percent of the related foreign trading gross
receipts.
For example, assume that foreign trading gross receipts are
$2,000 and foreign trade income is $100. Assume also that the
taxpayer chooses to determine qualifying foreign trade income
based on 1.2 percent of foreign trading gross receipts.
Taxable income after taking into account the exclusion of the
qualifying foreign trade income and the disallowance of
related deductions is $76. Assume that the taxpayer
manufactured its qualifying foreign trade property in the
United States and that title to such property passed outside
of the United States. Absent a special sourcing rule, under
section 863(b) (and the regulations thereunder) the $76 of
taxable income would be sourced as $38 U.S. source and $38
foreign source. Under the special sourcing rule, the amount
of foreign-source income may not exceed the amount of the
foreign trade income that otherwise would be treated as
foreign source if the foreign trade income were reduced by 4
percent of the related foreign trading gross receipts.
Reducing foreign trade income by 4 percent of the foreign
trading gross receipts (4 percent of $2,000, or $80) would
result in $20 ($100 foreign trade income less $80). Applying
section 863(b) to the $20 of reduced foreign trade income
would result in $10 of foreign-source income and $10 of U.S.-
source income. Accordingly, the limitation equals $10. Thus,
although under the general sourcing rule $38 of the $76
taxable income would be treated as foreign source, the
special sourcing rule limits foreign-source income in this
example of $10 (with the remaining $66 being treated as U.S.-
source income).
If the qualifying foreign trade income is calculated based
on 15 percent of foreign trade income, the amount of related
foreign-source income may not exceed 50 percent of the
foreign trade income that (without taking into account this
special foreign-source income limitation) would be treated as
foreign-source income.
For example, assume that foreign trade income is $100 and
the taxpayer chooses to determine its qualifying foreign
trade income based on 15 percent of foreign trade income.
Taxable income after taking into account the exclusion of the
qualifying foreign trade income and the disallowance of
related deductions is $85. Assume that the taxpayer
manufactured its qualifying foreign trade property in the
United States and that title to such property passed outside
of the United States. Absent a special sourcing rule, under
section 863(b) the $85 of taxable income would be sourced as
$42.50 U.S. source and $42.50 foreign source. Under the
special sourcing rule, the amount of foreign-source income
may not exceed 50 percent of the foreign trade income that
otherwise would be treated as foreign source. Applying
section 863(b) to the $100 of foreign trade income would
result in $50 of foreign-source income and $50 of U.S.-source
income. Accordingly, the limitation equals $25, which is 50
percent of the $50 foreign-source income. Thus, although
under the general sourcing rule $42.50 of the $85 taxable
income would be treated as foreign source, the special
sourcing rule limits foreign-source income in this example to
$25 (with the remaining $60 being treated as U.S.-source
income).
Treatment of withholding taxes
The Senate amendment generally provides that no foreign tax
credit is allowed for foreign taxes paid or accrued with
respect to qualifying foreign trade income (i.e., excluded
extraterritorial income). In determining whether foreign
taxes are paid or accrued with respect to qualifying foreign
trade income, foreign withholding taxes generally are treated
as not paid or accrued with respect to qualifying foreign
trade income. Accordingly, the Senate amendment's denial of
foreign tax credits would not apply to such taxes. For this
purpose, the term ``withholding tax'' refers to any foreign
tax that is imposed on a basis other than residence and that
is otherwise a creditable foreign tax under sections 901 or
903. It is intended that such taxes would be similar in
nature to the gross-basis taxes described in sections 871 and
881.
If, however, qualifying foreign trade income is determined
based on 30 percent of foreign sale and leasing income, the
special rule for withholding taxes is not applicable. Thus,
in such cases foreign withholding taxes may be treated as
paid or accrued with respect to qualifying foreign trade
income and, accordingly, are not creditable under the Senate
amendment.
Election to be treated as a U.S. corporation
The Senate amendment provides that certain foreign
corporations may elect, on an

[[Page H11889]]

original return, to be treated as domestic corporations. The
election applies to the taxable year when made and all
subsequent taxable years unless revoked by the taxpayer or
terminated for failure to qualify for the election. Such
election is available for a foreign corporation (1) that
manufactures property in the ordinary course of such
corporation's trade or business, or (2) if substantially all
of the gross receipts of such corporation are foreign trading
gross receipts. For this purpose, ``substantially all'' is
based on the relevant facts and circumstances.
In order to be eligible to make this election, the foreign
corporation must waive all benefits granted to such
corporation by the United States pursuant to a treaty. Absent
such a waiver, it would be unclear, for example, whether the
permanent establishment article of a relevant tax treaty
would override the electing corporation's treatment as a
domestic corporation under this provision. A foreign
corporation that elects to be treated as a domestic
corporation is not permitted to make an S corporation
election. The Secretary is granted authority to prescribe
rules to ensure that the electing foreign corporation pays
its U.S. income tax liabilities and to designate one or more
classes of corporations that may not make such an election.
If such an election is made, for purposes of section 367 the
foreign corporation is treated as transferring (as of the
first day of the first taxable year to which the election
applies) all of its assets to a domestic corporation in
connection with an exchange to which section 354 applies.
If a corporation fails to meet the applicable requirements,
described above, for making the election to be treated as a
domestic corporation for any taxable year beginning after the
year of the election, the election will terminate. In
addition, a taxpayer, at its option and at any time, may
revoke the election to be treated as a domestic corporation.
In the case of either a termination or a revocation, the
electing foreign corporation will not be considered as a
domestic corporation effective beginning on the first day of
the taxable year following the year of such termination or
revocation. For purposes of section 367, if the election to
be treated as a domestic corporation is terminated or
revoked, such corporation is treated as a domestic
corporation transferring (as of the first day of the first
taxable year to which the election ceases to apply) all of
its property to a foreign corporation in connection with an
exchange to which section 354 applies. Moreover, once a
termination occurs or a revocation is made, the former
electing corporation may not again elect to be taxed as a
domestic corporation under the provisions of the Senate
amendment for a period of five tax years beginning with the
first taxable year that begins after the termination or
revocation.
For example, assume a U.S. corporation owns 100 percent of
a foreign corporation. The foreign corporation manufactures
outside of the United States and sells what would be
qualifying foreign trade property were it manufactured by a
person subject to U.S. taxation. Such foreign corporation
could make the election under this provision to be treated as
a domestic corporation. As a result, its earnings no longer
would be deferred from U.S. taxation. However, by electing to
be subject to U.S. taxation, a portion of its income would be
qualifying foreign trade income. The requirement that the
foreign corporation be treated as a domestic corporation
(and, therefore, subject to U.S. taxation) is intended to
provide parity between U.S. corporations that manufacture
abroad in branch form and U.S. corporations that
manufacture abroad through foreign subsidiaries. The
election, however, is not limited to U.S.-owned foreign
corporations. A foreign-owned foreign corporation that
wishes to qualify for the treatment provided under the
Senate amendment could avail itself of such election
(unless otherwise precluded from doing so by Treasury
regulations).
Shared partnerships
The Senate amendment provides rules relating to allocations
of qualifying foreign trade income by certain shared
partnerships. To the extent that such a partnership (1)
maintains a separate account for transactions involving
foreign trading gross receipts with each partner, (2) makes
distributions to each partner based on the amounts in the
separate account, and (3) meets such other requirements as
the Treasury Secretary may prescribe by regulations, such
partnership then would allocate to each partner items of
income, gain, loss, and deduction (including qualifying
foreign trade income) from such transactions on the basis of
the separate accounts. It is intended that with respect to,
and only with respect to, such allocations and distributions
(i.e., allocations and distributions related to transactions
between the partner and the shared partnership generating
foreign trading gross receipts), these rules would apply in
lieu of the otherwise applicable partnership allocation rules
such as those in section 704(b). For this purpose, a
partnership is a foreign or domestic entity that is
considered to be a partnership for U.S. Federal income tax
purposes.
Under the Senate amendment, any partner's interest in the
shared partnership is not taken into account in determining
whether such partner is a ``related person'' with respect to
any other partner for purposes of the Senate amendment's
provisions. Also, the election to exclude certain gross
receipts from foreign trading gross receipts must be made
separately by each partner with respect to any transaction
for which the shared partnership maintains a separate
account.
Certain assets not taken into account for purposes of
interest expense allocation
The Senate amendment also provides that qualifying foreign
trade property that is held for lease or rental, in the
ordinary course of a trade or business, for use by the lessee
outside of the United States is not taken into account for
interest allocation purposes.
Distributions of qualifying foreign trade income by
cooperatives
Agricultural and horticultural producers often market their
products through cooperatives, which are member-owned
corporations formed under Subchapter T of the Code. At the
cooperative level, the Senate amendment provides the same
treatment of foreign trading gross receipts derived from
products marketed through cooperatives as it provides for
foreign trading gross receipts of other taxpayers. That is,
the qualifying foreign trade income attributable to those
foreign trading gross receipts is excluded from the gross
income of the cooperative. Absent a special rule, however,
patronage dividends or per-unit retain allocations
attributable to qualifying foreign trade income paid to
members of cooperatives would be taxable in the hands of
those members. It is believed that this would disadvantage
agricultural and horticultural producers who choose to market
their products through cooperatives relative to those and
individuals who market their products directly or through
pass-through entities such as partnerships, limited liability
companies, or S corporations. Accordingly, the Senate
amendment provides that the amount of any patronage dividends
or per-unit retain allocations paid to a member of an
agricultural or horticultural cooperative (to which Part I of
Subchapter T applies), which is allocable to qualifying
foreign trade income of the cooperative, is treated as
qualifying foreign trade income of the member (and, thus,
excludable from such member's gross income). In order to
qualify, such amount must be designated by the organization
as allocable to qualifying foreign trade income in a written
notice mailed to its patrons not later than the payment
period described in section 1382(d). The cooperative cannot
reduce its income (e.g., cannot claim a ``dividends-paid
deduction'') under section 1382 for such amounts.
Gap period before administrative guidance is issued
It is recognized that there may be a gap in time between
the enactment of the Senate amendment and the issuance of
detailed administrative guidance. It is intended that during
this gap period before administrative guidance is issued,
taxpayers and the Internal Revenue Service may apply the
principles of present-law regulations and other
administrative guidance under sections 921 through 927 to
analogous concepts under the Senate amendment. Some examples
of the application of the principles of present-law
regulations to the Senate amendment are described below.
These limited examples are intended to be merely illustrative
and are not intended to imply any limitation regarding the
application of the principles of other analogous rules or
concepts under present law.
Marginal costing and grouping
Under the Senate amendment, the Secretary of the Treasury
is provided authority to prescribe rules for using marginal
costing and for grouping transactions in determining
qualifying foreign trade income. It is intended that similar
principles under present-law regulations apply for these
purposes.
Excluded property
The Senate amendment provides that qualifying foreign trade
property does not include property leased or rented by the
taxpayer for use by a related person. It is intended that
similar principles under present-law regulations apply for
this purpose. Thus, excluded property does not apply, for
example, to property leased by the taxpayer to a related
person if the property is held for sublease, or is subleased,
by the related person to an unrelated person and the property
is ultimately used by such unrelated person predominantly
outside of the United States. In addition, consistent with
the policy adopted in the Taxpayer Relief Act of 1997,
computer software that is licensed for reproduction outside
of the United States is not excluded property. Accordingly,
the license of computer software to a related person for
reproduction outside of the United States for sale,
sublicense, lease, or rental to an unrelated person for use
outside of the United States is not treated as excluded
property by reason of the license to the related person.
Foreign trading gross receipts
Under the Senate amendment, foreign trading gross receipts
are gross receipts from among other things, the sale,
exchange, or other disposition of qualifying foreign trade
property, and from the lease of qualifying foreign trade
property for use by the lessee outside of the United States.
It is intended that the principles of present-law regulations
that define foreign trading gross receipts apply for this
purpose. For example, a sale includes an exchange or other
disposition and a lease includes a rental or sublease and a
license or a sublicense.
Foreign use requirement
Under the Senate amendment, property constitutes qualifying
foreign trade property

[[Page H11890]]

if, among other things, the property is held primarily for
lease, sale, or rental, in the ordinary course of business,
for direct use, consumption, or disposition outside of the
United States. It is intended that the principles of the
present-law regulations apply for purposes of this foreign
use requirement. For example, for purposes of determining
whether property is sold for use outside of the United
States, property that is sold to an unrelated person as a
component to be incorporated into a second product which is
produced, manufactured, or assembled outside of the United
States will not be considered to be used in the United States
(even if the second product ultimately is used in the United
States), provided that the fair market value of such seller's
components at the time of delivery to the purchaser
constitutes less than 20 percent of the fair market value of
the second product into which the components are
incorporated (determined at the time of completion of the
production, manufacture, or assembly of the second
product).
In addition, for purposes of the foreign use requirement,
property is considered to be used by a purchaser or lesee
outside of the United States during a taxable year if it is
used predominantly outside of the United States. For this
purpose, property is considered to be used predominantly
outside of the United States for any period if, during that
period, the property is located outside of the United States
more than 50 percent of the time. An aircraft or other
property used for transportation purposes (e.g., railroad
rolling stock, a vessel, a motor vehicle, or a container) is
considered to be used outside of the United States for any
period if, for the period, either the property is located
outside of the United States more than 50 percent of the time
or more than 50 percent of the miles traveled in the use of
the property are traveled outside of the United States. An
orbiting satellite is considered to be located outside of the
United States for these purposes.
Foreign economic processes
Under the Senate amendment, gross receipts from a
transaction are foreign trading gross receipts eligible for
exclusion from the tax base only if certain economic
processes take place outside of the United States. The
foreign economic processes requirement compares foreign
direct costs to total direct costs. It is intended that the
principles of the present-law regulations apply during the
gap period for purposes of the foreign economic processes
requirement including the measurement of direct costs. It is
recognized that the measurement of foreign direct costs under
the present-law regulations often depend on activities
conducted by the FSC, which is a separate entity. It is
recognized that some of these concepts will have to be
modified when new guidance is promulgated as a result of the
Senate amendment's elimination of the requirement for a
separate entity.
Effective date
In general
The Senate amendment is effective for transactions entered
into after September 30, 2000. In addition, no corporation
may elect to be a FSC after September 30, 2000.
The Senate amendment also provides a rule requiring the
termination of a dormant FSC when the FSC has been inactive
for a specified period of time. Under this rule, a FSC that
generates no foreign trade income for any five consecutive
years beginning after December 31, 2001, will cease to be
treated as a FSC.
Transition rules
Winding down existing FSCs and binding contract relief
The Senate amendment provides a transition period for
existing FSCs and for binding contractual agreements. The new
rules do not apply to transactions in the ordinary course of
business involving a FSC before January 1, 2002. Furthermore,
the new rules do not apply to transactions in the ordinary
course of business after December 31, 2001, if such
transactions are pursuant to a binding contract between a FSC
(or a person related to the FSC on September 30, 2000) and
any other person (that is not a related person) and such
contract is in effect on September 30, 2000, and all times
thereafter. For this purpose, binding contracts include
purchase options, renewal options, and replacement options
that are enforceable against a lessor or seller (provided
that the options are a part of a contract that is binding and
in effect on September 30, 2000).
Old earnings and profits of corporations electing to be
treated as domestic corporations
A transition rule also provided for certain corporations
electing to be treated as a domestic corporation under the
Senate amendment. In the case of corporation to which this
transition rule applies, the corporation's earnings and
profits accumulated in taxable years ending before October 1,
2000 are not included in the gross income of the shareholder
by reason of the deemed asset transfer for section 367
purposes that the Senate amendment provides. Thus, although
the electing corporation may be treated as transferring all
of its assets to a domestic corporation in a reorganization
described in section 368(a)(1)(F), the earnings and profits
amount that would otherwise be treated as a deemed dividend
to the U.S. shareholder under the regulations under section
367(b) will not include the earnings and profits accumulated
in taxable years ending before October 1, 2000. This
treatment is similar to the treatment of earnings and profits
of a foreign insurance company that makes the election to be
treated as a domestic corporation under section 953(d), which
election was a model for the election to be treated as a
domestic corporation under the Senate amendment. Under
section 953(d), earnings and profits accumulated in taxable
years beginning before January 1, 1988 were not included in
the earnings and profits amount that would be a deemed
dividend for section 367(b) purposes.
Like the pre-1988 earnings and profits of a domesticating
foreign insurance company under section 953(d), the earnings
and profits to which this transition rule applies would
continue to be treated as earnings and profits of a foreign
corporation even after the corporation elects to be treated
as a domestic corporation. Thus, a distribution out of
earnings and profits of an electing corporation accumulated
in taxable years ending before October 1, 2000 would be
treated as a distribution made by a foreign corporation.
Rules similar to those applicable to corporations making the
section 953(d) election that prevent the repatriation of pre-
election period earnings and profits without current U.S.
taxation apply for this purpose. Thus, for example, the
earnings and profits accumulated in taxable years beginning
before October 1, 2000 would continue to be taken into
account for section 1248 purposes.
The earnings and profits to which the transition rule
applies are the earnings and profits accumulated by the
electing corporation in taxable years ending before October
1, 2000. The transition rule will not apply to earnings and
profits accumulated before that date that are succeeded to
after that date by the electing corporation in a transaction
to which section 381 applies unless, like the electing
corporation, the distributor or transferor (from whom the
electing corporation acquired the earnings and profits) could
have itself made the election under the Senate amendment to
be treated as a domestic corporation and would have been
eligible for the transition relief.
The transition rule for old earnings and profits applies to
two classes of taxpayers. The first class is FSCs in
existence on September 30, 2000 that make an election to be
treated as a domestic corporation because they satisfy the
requirement that substantially all of their gross receipts
are foreign trading gross receipts. To be eligible for the
transition relief, the election must be made not later than
for the FSC's first taxable year beginning after December 31,
2001.
The second class of corporations to which this transition
relief applies is certain controlled foreign corporations (as
defined in section 957). Notwithstanding other requirements
for making the election to be treated as a domestic
corporation provided under the Senate amendment's general
provisions, such controlled foreign corporations are eligible
under the transition rule to make the election to be treated
as a domestic corporation and will not have the resulting
deemed asset transfer cause a deemed inclusion of earnings
and profits for earnings and profits accumulated in taxable
years ending before October 1, 2000. To be eligible for the
transition relief, such a controlled foreign corporation must
be in existence on September 30, 2000. The controlled foreign
corporation must be wholly owned, directly or indirectly, by
a domestic corporation. The controlled foreign corporation
must never have made an election to be treated as a FSC and
must make the election to be treated as a domestic
corporation not later than for its first taxable year
beginning after December 31, 2001. In addition, the
controlled foreign corporation must satisfy certain tests
with respect to its income and activities. For administrative
convenience, these tests are limited to the three taxable
years preceding the first taxable year for which the election
to be treated as a domestic corporation applies. First,
during that three-year period, all of the controlled foreign
corporation's gross income must be subpart F income. Thus,
the income was subject to full inclusion to the U.S.
shareholder and, accordingly, subject to current U.S.
taxation. Second, during that three-year period, the
controlled foreign corporation must have, in the ordinary
course of its trade or business, entered into transactions in
which it regularly sold or paid commissions to a related FSC
(which also was in existence on September 30, 2000). If an
electing corporation in this second class ceases to be
(directly or indirectly) wholly owned by the domestic
corporation that owns it on September 30, 2000, the election
to be treated as a domestic corporation is terminated.
Limitation on use of the gross receipts method
Similar to the limitation on use of the gross receipts
method under the Senate amendment's operative provisions, the
Senate amendment provides a rule that limits the use of the
gross receipts method for transactions after the effective
date of the Senate amendment if that same property generated
foreign trade income to a FSC using the gross receipts
method. Under the rule, if any person used the gross receipts
method under the FSC regime, neither that person nor any
related person will have qualifying foreign trade income with
respect to any other transaction involving the same item of
property.
Coordination of new regime with prior law
Notwithstanding the transition period, FSCs (or related
persons) may elect to have the rules of the Senate amendment
apply in lieu of the rules applicable to FSCs. Thus, for
transactions to which the transition rules apply (i.e.,
transactions after September 30, 2000 that occur (1) before
January

[[Page H11891]]

1, 2002 or (2) after December 31, 2001 pursuant to a binding
contract which is in effect on September 30, 2000), taxpayers
may choose to apply either the FSC rules or the amendments
made by this Senate amendment, but not both. In addition, a
taxpayer would not be able to avail itself of the rules of
the Senate amendment in addition to the rules applicable to
domestic international sales corporations because the Senate
amendment provides that the exclusion of extraterritorial
income will not apply if a taxpayer is a member of any
controlled group of which a domestic international sales
corporation is a member.

Mr. Speaker, I urge all Members to support this vital, time-sensitive
legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. STARK. Mr. Speaker, I yield myself such time as I may consume.
In the efforts of the new Congress to be gentler, although I am
adamantly opposed to this bill, I would like to give the two best shots
they have to the gentleman from Texas (Mr. Archer), the distinguished
chairman of the Committee on Ways and Means, and the gentleman from
Michigan (Mr. Levin), the distinguished ranking member of the
Subcommittee on Trade. I want to give him 4 minutes, and we will
proceed to destroy their arguments in subsequent time.
Mr. Speaker, I yield 5 minutes to the distinguished gentleman from
Michigan (Mr. Levin).
Mr. LEVIN. Mr. Speaker, I deeply appreciate the gentleman yielding me
this time, under any terms.
Mr. Speaker, I rise in support of this bill. It passed the House
earlier this session, 315 to 109, and we are considering it again today
because the Senate, as the gentleman from Texas (Mr. Archer) mentioned,
made a modification with the agreement of the House and the
administration.
Let me take a few minutes to review the history as to why this bill
is on the floor today. Our country has what is known as a worldwide
taxation system. In general, U.S. residents are taxed on income,
regardless of where it is earned. Rules such as the foreign tax credit
ensure against double taxation. By contrast, most European countries
have a form of territorial taxation. Under those systems, income is
taxed only if it is earned within the territory of the taxing
jurisdiction. This system tends to favor exports over comparable
domestic transactions.
To put our exports on a level playing field with Europe and others,
we enacted in 1971 the Domestic International Sales Corporation Law,
DISC. The European community successfully challenged that law in the
GATT, and we successfully challenged the territorial tax regimes of
Belgium, France, and the Netherlands. These disputes ultimately were
resolved in 1981 by an understanding adopted by the GATT Council.
Based on the 1981 understanding, we replaced the DISC with FSC, the
Foreign Sales Corporation statute. The goal of that statute was to
ensure that when U.S. producers of goods, both industrial and
agricultural, export, our tax system does not put them at a
disadvantage.
This system worked well for almost 20 years; but in 1988, the
European Union decided to walk away from it and challenge the FSC. In
its decision adopted by the WTO earlier this year, the FSC statute was
held to violate WTO's subsidy rules and the U.S. was directed to
withdraw the subsidy by October 1.
Whatever one may think of the reasoning of the WTO dispute panel, our
commitment to a rules-based trading system requires that we bring our
law into compliance with its decision, and this bill does that
precisely. It does so in a way that makes our tax regime a bit more
like a territorial tax regime.
What this bill does is to define a category of foreign source income
that is excluded from gross income and, therefore, not subject to U.S.
tax. It makes clear that to come within this category, income need not
arise from an export transaction. Qualifying transactions will include
certain sales of property produced outside the United States. Thus,
this bill definitively eliminates the export contingency that the EU
argued was a WTO inconsistency.
At the same time, and I emphasize this, as is clear from the bill
itself in the committee report, this bill does not provide an incentive
for U.S. producers to move their operations overseas. It carefully
defines the property that can be involved in transactions subject to
the new tax regime. No more than 50 percent of the fair market value of
such property can consist of, a, non-U.S. components, plus, b, non-U.S.
direct labor. This provision has been carefully reviewed by those of us
on the Committee on Ways and Means, as well as the Department of
Treasury, and, I might add, the minority leader.
Enactment of this bill is critical to U.S. businesses, workers, and
farmers. The cloud of the WTO decision affects everyone from airplane
manufacturers and manufacturers of other industrial products to
software developers, to wheat growers, and so on. If we fail to enact
this bill, there is a serious risk that the EU will go back to the WTO.
It would cause great harm to U.S. businesses, to workers, and to
farmers.
As I said in September, there are other issues, tobacco issues,
pharmaceutical issues. They cannot be considered, though, within this
bill. If we need to amend, to modify U.S. laws, we should do so later
on. But we have a constraint. The deadline was October 1, now it is
November 17; and if we fail to act by that date, as I said earlier in
September, we are going to hurt American businesses and the workers who
work for them, and we are simply going to help European competitors. As
I said a month ago, if we want to help European producers, vote against
this bill. But if we want to help American workers, businesses and
manufacturing goods, let us vote for this bill.
Mr. ARCHER. Mr. Speaker, I yield 3 minutes to the gentleman from
Illinois (Mr. Crane), a respected member of the Committee on Ways and
Means, who has worked so very hard on this legislation and the chairman
of the Subcommittee on Trade.
Mr. CRANE. Mr. Speaker, I rise in strong support of this legislation,
which fulfills the United States' obligation to bring the foreign sales
corporation tax regime into compliance with WTO trade agreements. H.R.
4986 moves the U.S. closer to a territorial tax system, more like the
one governing the international activities of so many European
businesses.
Many issues divide the Congress in these days before and after the
close national election. But with respect to the difficult choices
facing us on FSC, both parties worked in concert with the
administration to address a looming threat to innocent United States
exporters. Make no mistake: this bill averts a trade war that is poised
to hit unsuspecting U.S. exporters with millions of dollars of
retaliatory tariffs.
Another issue we need to be very clear about, the FSC regime and its
replacement reduced the anti-growth biases of our international tax
system that would otherwise hamstring our companies and our workers.
Some Members, even proponents of this legislation, sometimes have
called the FSC replacement a subsidy. We need to be more careful with
our language.

{time} 1015

This is not a subsidy. It is a partial, repeat, partial, reduction in
an excessive tax burden our companies, and by extension, our workers,
face when competing in the world economy.
By way of analogy, our current tax law is a felony. The fiscal
replacement reduces the charge to a misdemeanor, but the net result
still violates the economic law of neutrality that should govern all of
our tax policies.
The European Union is challenging us, not as Republicans or
Democrats, not as Congress or the administration, but as a country. By
completing the difficult work necessary to send this bill to the
President, we have put the United States in the best possible position
to defend our interests in the WTO.
H.R. 4986 represents an achievement of bipartisan cooperation in the
best interests of American businesses and workers. I urge a yes vote.
Mr. STARK. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, there is an old rule of tax law which started with
actually then Secretary of the Treasury Baker when we reformed the Tax
Code under President Reagan. It was, if it quacks like a subsidy and
walks like a subsidy and looks like a subsidy, it is a subsidy.
The distinguished chairman of the Subcommittee on Trade would discuss

[[Page H11892]]

the overburden of taxation. When the pharmaceutical companies charge
our people, our seniors, our young people, two to four times more for
the same drug that they charge people in Europe, and yet they have the
lowest tax rate of any industry group in this country, why should we
give them hundreds of millions of dollars of subsidy, gift, reduction?
Members may call it what they want, but we are rewarding the
pharmaceutical industry for charging less in Europe and more in this
country.
Tell me what it is, Mr. Speaker. I call it disgraceful, I call it
obscene, $750 million a year to General Electric and Boeing to sell
weapons, which they do not even sell, the State Department and the
Defense Department arrange the sale of weapons. Yet, we give them a
reduction of $750 million a year? That is a subsidy, pure and simple.
Now, software was mentioned. Those poor folks in Seattle. Software?
Do Members know how much Microsoft paid in taxes last year? Zero, Mr.
Speaker, a goose egg. This big or this big, zero is still zero. Yet,
they get a subsidy which gets them down to zero for all the software
they sell overseas. Is that a gift? And this poor overtaxed Bill Gates
is walking around, so we subsidize his sales overseas.
Mr. Speaker, we have been doing this for generations. For 25 years,
we have been giving $5 billion a year away in subsidies to corporations
who would do the same thing whether or not they got this subsidy. And
they do not set their prices based on their taxes. As any distinguished
economist, like my friend, the gentleman from Illinois (Mr. Crane), the
distinguished chair of the Subcommittee on Trade, knows, corporations
do not price their products based on taxes, they price their products
based on competitive and manufacturing costs, all the other things, as
he so well knows.
So all we are doing is giving a break, a tax break, a subsidy, to the
richest corporations in this country, rewarding those corporations who
gyp our senior citizens by overcharging in this country, by rewarding
them.
And my distinguished friend, the gentleman from Texas, will tell us
about tobacco, subsidizing the sale of tobacco to hook little kids in
other parts of the world while we are trying to spend money here at
home. Just think, if we had some of this $5 billion a year to spend to
train our children not to smoke, how much healthier and safer they
would be. Think if we had some of this $5 billion a year to spend on
education to hire teachers, which the gentleman could not find the
money to do on the Republican side. Think if we had this $5 billion a
year to provide a drug benefit to the senior citizens.
No, we are going to continue this charade and give this money away in
unconscionable subsidies to the corporations who least need it for
doing what they would do anyway. It is the silliest kind of gift to the
people who need it least, when we have people in this country who need
help. We are turning our backs on the people in this country and
helping the richest corporations in this country.
End this charade now and vote against this bill.
Mr. CRANE. Mr. Speaker, will the gentleman yield?
Mr. STARK. I yield to the gentleman from Illinois.
Mr. CRANE. Mr. Speaker, first of all, with regard to tobacco
subsidies, that would keep people from getting to the polls, I guess,
if we eliminated subsidies.
But let me ask a second question. That is, do businesses pay taxes?
Mr. STARK. Most of these do not, no.
Mr. CRANE. No, do businesses pay taxes?
Mr. STARK. Some businesses do. The ones getting the subsidy for the
most part do not. They have so many loopholes and subsidies, as in
this, that they end up paying no taxes.
Mr. CRANE. Will the gentleman go back to Econ 101? Businesses do not
pay taxes and never have. That is a cost, like plant and equipment and
labor are costs.
Mr. STARK. Mr. Speaker, this is my time and I reclaim it. That is as
silly as supply side economics. The gentleman ought to know better.
Mr. Speaker, I reserve the balance of my time.
Mr. ARCHER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise simply to say that the gentleman from California
says that it is a corporate subsidy if we do not double tax all of the
earnings overseas. We are one of the very few developed countries in
the world that double taxes earnings overseas. So if we eliminate
partially, only partially, the double taxation of those earnings to be
only partially competitive with our foreign competitors, he calls it a
subsidy. I do not believe the American people would agree with that.
Mr. Speaker, I include for the Record a letter from Secretary Summers
on behalf of the administration strongly supporting this legislation.
The document referred to is as follows:

Department of the Treasury,

Washington, DC, November 2, 2000.
Hon. J. Dennis Hastert,
Speaker, House of Representatives,
Washington, DC.
Dear Mr. Speaker: Enactment of legislation (H.R. 4986)
repealing and replacing the Foreign Sales Corporation
(``FSC'') regime has been and remains a top priority for the
President. As you know, H.R. 4986 is the product of a unique
bipartisan effort involving the Administration, Chairmen
Archer and Roth, Ranking Members Rangel and Moynihan, and
their staffs.
It was carefully drafted to address issues raised by the
WTO regarding the FSC regime. The Administration strongly
supports passage of this legislation that has such important
consequences for jobs, the national economy, and
international relations with some of our most important
trading partners.
Passage of H.R. 4986, is absolutely essential to avoiding
the potential imposition by the European Union of significant
sanctions on American industries and to satisfying the United
States' obligations in the WTO. Failure to pass this
legislation immediately will compromise the United States'
ability to avoid a confrontation with the European Union.
Moreover, it would jeopardize an important procedural
agreement reached with the European Union to this end. The
procedural agreement delays the possibility of retaliation by
ensuring that the WTO will review the new replacement
legislation before any decision may be made authorizing
retaliation. The benefits of the agreement, however, are
contingent upon the immediate enactment of the FSC
replacement legislation.
Therefore, I urge you in the strongest possible terms to
allow the House to act on H.R. 4986 as soon as possible.
Sincerely,
Lawrence H. Summers,
Secretary.

Mr. Speaker, I include for the Record a statement of administration
policy from OMB strongly supporting this legislation.
The document referred to is as follows:
Executive Office of the President, Office of Management
and Budget,
Washington, DC, September 12, 2000.

Statement of Administration Policy

(This statement has been coordinated by OMB with the
concerned agencies)

h.r. 4986--fsc repeal and extraterritorial income exclusion act of 2000
(archer (r) texas)

The Administration strongly supports H.R. 4986, which would
repeal provisions of the Internal Revenue Code relating to
foreign sales corporations and provide an exclusion from U.S.
tax for certain income earned overseas.
H.R. 4986 addresses the issues with respect to foreign
sales corporations (FSCs) that were raised by the World Trade
Organization (WTO) Appellate Body decision in February 2000.
Because the legislation provides an exclusion for certain
income earned overseas (referred to as ``qualifying foreign
trade income''), there is no forgone revenue that would
otherwise be due and thus there is no subsidy. Further, by
treating all qualifying foreign sales alike, regardless of
whether the goods were manufactured in the United States or
abroad, the proposed legislation is not export-contingent.
H.R. 4986 has been developed through an extraordinary
bipartisan, bicameral process. The Administration believes
that enactment of this law, prior to October 1, 2000, is
necessary to avoid an immediate confrontation with the
European Union (EU), to ensure that the United States is in
compliance with the WTO Appellate Body decision, and to avoid
possible sanctions that would otherwise be imposed by the EU.
This legislation would assure that no U.S. companies are
disadvantaged. Passage of this legislation is the only way to
avoid potential EU sanctions against U.S. exports.

pay-as-you-go scoring

H.R. 4986 would affect direct spending and receipts;
therefore, it is subject to the pay-as-you-go (PAYGO)
requirement of the Omnibus Budget Reconciliation Act of 1990.
The Joint Committee on Taxation estimates that the bill would
produce revenue losses of $1.5 billion in fiscal years 2001
through 2005. The Administration's scoring of the bill is
under development. The Administration will work with Congress
to avoid an unintended sequester.

[[Page H11893]]

Mr. ARCHER. Mr. Speaker, I yield 3 minutes to the gentleman from New
York (Mr. Rangel), the ranking Democrat on the Committee on Ways and
Means, who has worked very closely with us from beginning to end on a
bipartisan basis to get to where we are today, and who has contributed
a great deal to this legislation.
(Mr. RANGEL asked and was given permission to revise and extend his
remarks.)
Mr. RANGEL. Mr. Speaker, let me thank the chairman of the Committee
on Ways and Means, the gentleman from Texas (Mr. Archer), my fellow
Democrats, and join my colleagues on the floor in asking support for
this piece of legislation, which is supported by the President and
which our official Secretary Stuart Eizenstat, assistant Secretary Jon
Talisman, have worked on, as well as the Senate, which has made some
changes here.
It is interesting to note the concerns that some of my colleagues
have about the policies of some of our domestic corporations,
especially those dealing with pharmaceutical products, as well as
tobacco.
It would seem to me within this body and the other body that we
should be able to determine from a domestic point of view exactly to
what extent we expect to control the conduct of these businesses in the
United States.
But much like foreign policy, with all of the problems I have with my
government, somehow when I leave the United States, those problems
disappear when I am dealing with foreign bodies. I have concerns about
the production and sale of tobacco, but not to the extent that I am
prepared to accept a criticism of a foreign body as to how we conduct
international business. This is especially so since I have more
criticism about how foreign countries conduct their business, and I am
not allowed to participate in terms of what I think is right and what I
think is wrong and what I think is totally unfair.
For that reason, I have to support those people who diplomatically
and legally have to work with the World Trade Organization, knowing
that if we do not support our diplomatic efforts in this area, then it
allows foreigners to arbitrarily select how they are going to penalize
American businesses, American exports, American workers.
I just do not like that one bit. I do not like the idea that they can
arbitrarily select those exports that we have that have nothing to do
with pharmaceuticals, nothing to do with tobacco, and decide they have
to punish us because they do not like the way we treat our exports.
We do not mind them looking over as to whether or not we have been
fair in creating an even playing field for all of our businesses. We do
not mind if they say they want to come to the table and renegotiate how
we do this thing so we can say we do not like the way they treat their
companies that are doing exports.
But it does appear to me that when we are dealing with the European
Union, when we are dealing with the World Trade Organization, we should
be able to stand by those people who negotiate on behalf of the United
States of America, United States businesses, and those Americans.
We should be able to distinguish between our concern about how we
treat American businesses here, how we penalize them for conduct that
we think is unhealthy to the environment or to our people, distinguish
that as it appears to be when foreigners are attempting to critique us,
and indeed, provide sanctions against American businesses, the American
community, American workers, and indeed, I would say, America in
general.
So while I do not challenge the good-faith interests people have in
challenging this legislation, I ask my colleagues to support it. For
those that have reservations, I ask them to continue to study and find
ways that we can reach objectives they want.
But on the international playing field, that flag should be flying
for us. I support the flag, I support those people that negotiated with
the WTO. I hope in the final analysis we get better than a fair
advantage as it relates to American businesses, because as far as I am
concerned, the more jobs for America, the better country we have.
Mr. STARK. Mr. Speaker, I yield 7 minutes to the distinguished
gentleman from Texas (Mr. Doggett).

{time} 1030

Mr. Speaker, this bill has a whopping cost to Americans of $42
billion in this decade. To be bipartisan about it, in the words of
Senator John McCain, ``this legislation is an example of the costly
corporate welfare that cripples our ability to respond to truly urgent
social needs.'' Indeed it is.
To make matters worse, despite all the proclamations about how urgent
this bill is and how we will avoid a trade war and save all of these
jobs, to make matters worse, this bill does not work. And even its
supporters concede in private that it will not work and that we will be
back here as soon as the World Trade Organization considers and rejects
this bill, doing this all over again, because of the well justified
criticism that has been levied against this very obvious straight
subsidy.
With good reason, the Europeans have already rejected this ill-
conceived proposal. Not only does it not work in the world forum, it
does not work, according to even Republican sources, like the
Republican Congressional Budget Office. It announced in March of this
year that ``export subsidies'' such as this bill ``reduce economic
welfare and typically even reduce the welfare of the country granting
the subsidy.''
The assistant director of the General Accounting Office in August of
this year said ``most of the benefits are received by a small number of
large corporations.'' He noted: ``Policymakers have available a number
of tax and other government incentives that meet WTO standards, and
that could be expanded to replace the prohibited direct tax subsidy
provided by the FSC tax regime.''
And to those who say they want more free trade, this bill does not
provide free trade. It provides distorted trade and chooses winners and
losers. This legislation asks local stores that sell groceries and
clothing to customers at a mall or along Main Street across this
country to pay higher taxes than the multinationals that sell
cigarettes and machine guns abroad.
Mr. Speaker, $4 of every $5 in this bill go to companies that have
assets exceeding $1 billion. It offers no significant benefit to
smaller companies in this country.
Indeed, I think the Congress ought to heed the words of commentator
Paul Magnusson in ``Business Week'' on September 4 of this year who
wrote that ``the larger problem with subsidies is that they invite
countersubsidies and so accomplish little besides transferring money
from consumers and taxpayers to politically powerful producers''; and
that is exactly what is happening today. I agree with that commentary
that ``it's time to call a halt to such waste by both sides; getting
rid of subsidies for exports would be a good place to start. The
Clinton administration should drop its plans to expand FSC and get back
to the negotiating table and start proposing some real solutions such
as eliminating all export subsidies.''
Indeed, the administration should have done just that. Now who is
driving the corporate welfare Cadillacs that are lining up outside the
Capitol to get more welfare under this proposal? Well, driver number
one is Mr. Phillip Morris and the tobacco lobby. They get $100 million
a year under this proposal to export death and disease to the rest of
the world, to use the slick tactics that they developed here in America
addicting our children to nicotine in order to encourage a global
pandemic addicting the children of the world.
And to my colleagues from the tobacco-producing States, the industry
does not even have to use American tobacco. All they have to do is slip
a little Marlboro label on the package and they can use exclusively
foreign tobacco, and still be tax subsidized by American taxpayers to
the tune of over $100 million a year to promote death and disease.
The Clinton administration agreed to oppose this wrong. The
administration were true to the last minute; and then they abandoned,
in the face of the lobbying power of the tobacco industry, their stated
willingness to end this promotion of death and disease.
Who is the second big corporate welfare Cadillac driver? There has
been the suggestion that we could not have any amendments to this bill.
Well,

[[Page H11894]]

there was an amendment that was done behind closed doors, and the
effect was to double, absolutely double with an increase by $300
million every year the amount of money that those who make weapons in
this country will get by selling them abroad.
We already dominate the world scene in terms of the manufacture of
weapons being sent to every arms race in every corner of the world. But
under this bill, American tax payers will have to subsidize and offer
more corporate welfare to those weapon manufacturers to keep up the
good business they have that results in death and destruction all over
this world.
Instead of being a leader and trying to reduce the amount of those
arms races around the world, we are subsidizing it to the tune of $300
million more, even though last year, the Treasury said it was not a
good idea, and the Defense Department, in 1994, indicated it was not
necessary. Even though Republican groups in this Congress said it was
unwise, they could not, in an election year, resist the dominance and
power of the arms manufacturers.
And then another driver of this corporate welfare Cadillac is the
pharmaceutical industry. It is an industry that today gets a reward for
making prescriptions here in America and selling them for less abroad.
They will get a tax subsidy, a bit of corporate welfare, for doing that
at the same time they gouge consumers at home. This bill is wrong, that
is why it was done behind closed doors, that is why they are fearful of
amendments and discussion and it ought to be rejected.
Mr. DOGGETT. Mr. Speaker, this bill has a long title, but it is quite
simply a welfare bill. It has a huge price tag that will cost Americans
billions of dollars. It has been prepared entirely behind closed doors
by those who will receive the welfare benefits. With the blessing of
both the Clinton administration and the Republican leadership here in
Congress, a very interesting process was followed: If one was going to
get something out of this bill, they were invited to the behind-closed-
doors negotiations. If they were left out, they were excluded from the
negotiations to prepare this legislation.
Once this product of all of the clandestine wheeling and dealing
sessions was presented to this Congress, every effort was made, both
here in the House and across the Capitol in the Senate, to ensure that
no questions were asked and no amendments were offered. There was as
little talk possible about all of this behind-the-scenes wheeling and
dealing to get as much welfare for themselves, by some who wrote the
bill, as they possibly could: ``Do not look at the details of the
largesse, just give it to us as fast as you can.''
This bill represents everything that is wrong with the special
interest domination of the legislative process in America today. It
provides ample justification for the cynicism that more and more
Americans have that their government is not serving them, but serving
only those who can afford to have a lobbyist and a political action
committee located in Washington.
The SPEAKER pro tempore (Mr. Simpson). Without objection, the
gentleman from Illinois (Mr. Crane) will control the time for the
majority.
There was no objection.
Mr. CRANE. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I have recognition of my opponents' opposition here to
our bill. We had Smoot-Hawley in our party, and they shared many of the
same convictions we heard here tonight. But I am happy that the
gentleman from Missouri (Mr. Gephardt) and the gentleman from New York
(Mr. Rangel), our ranking minority member, are supportive of this
bipartisan legislation.
Mr. Speaker, I yield 2\1/2\ minutes to the gentleman from
Pennsylvania (Mr. English), our distinguished colleague.
Mr. ENGLISH. Mr. Speaker, I am delighted to be here to urge strong
bipartisan support for this very important legislation. Legislation
that may be the most important action we take at the close of this
Congress, and perhaps for years to come.
This is critical legislation to protect the jobs of working families
who have members who work in some of our best-paying export oriented
jobs in America. I am surprised to hear the strange rhetoric on the
floor of this House that is essentially rhetoric directed against their
jobs.
We have heard the opponents of this legislation adopt the same
rhetoric of our European trade competitors in criticizing our tax
system. The thing to understand and what FSC is intended to address,
this legislation is not a welfare bill, corporate or otherwise. It is
not a subsidy. It is an adjustment of our tax system to establish a
level playing field, and that is what our European trade competitors
have not wanted.
FSC was originally created and made necessary, only because the U.S.
maintains an archaic worldwide tax system which taxes foreign-source
income and because the U.S. taxes export income. By refusing to reform
FSC today, this Congress would be inviting massive retaliation against
U.S. export trade leaving our exporters and their employees high and
dry. Failing to reform FSC today would make an already tough global
market next to impossible for U.S. employers to compete in.
If we do not act today, we would impose a huge cost on the economy of
this country, particularly on some of the industries in manufacturing
that have the best paying jobs. If we do not act today, we would put
our workers at a competitive disadvantage and effectively balance our
budget on their backs.
Mr. Speaker, if we do not act today, we will explode our already
large trade deficit and put our economy in a downward spiral because,
if we do not act today, we will set up the dynamics for a trade war
between Europe and the United States. We cannot afford that. They
cannot afford that. We should not move down this slippery slope.
Pass this legislation. It is the one responsible thing we can do
today.
Mr. STARK. Mr. Speaker, I am happy to yield 30 seconds to the
gentleman from Guam (Mr. Underwood).
(Mr. UNDERWOOD asked and was given permission to revise and extend
his remarks.)
Mr. UNDERWOOD. Mr. Speaker, I rise to express my concerns regarding
H.R. 4986, the FSC Repeal and Extraterritorial Income Exclusion Act of
2000. I urge congressional leaders and the Clinton administration to
help the U.S. territories who will be adversely impacted by this
legislation, particularly the U.S. Virgin Islands and Guam when the
House reconvenes in December.
In Guam, there are over 200 FSC licenses generating around $170,000
to the government of Guam. However, license fees are only some of the
direct benefits from FSC. Other direct benefits include compensation
for the professional community. But be that as it may, I am appealing
to the Clinton administration, particularly the Treasury Department, to
offset the economic impact of today's legislation by allowing
territories to promote economic self-sufficiency, including
establishing empowerment zones for the territories and tax equity
treatment for Guam.
Mr. Speaker, I rise to express my concerns regarding H.R. 4986, the
FSC Repeal and Extraterritorial Income Exclusion Act of 2000. I urge
congressional leaders and the Clinton administration to help the U.S.
territories who will be adversely impacted by this legislation,
particularly the U.S. Virgin Islands and Guam, when the House
reconvenes in December.
Since the WTO decision last fall on Foreign Sales Corporations
(FSCs), I know that the administration worked closely with House Ways
and Means Committee Chairman Archer and Representative Rangel, the
ranking member, to ensure that the United States passes legislation to
meet the October 1, 2000, deadline set by the WTO to comply with its
ruling. Although the deadline has passed, today's passage of H.R. 4986
is necessary to fulfill a commitment by U.S. officials to address the
concerns raised by the European Union.
As many of you know, the WTO panel issued a ruling last fall that
subsidies for Foreign Sales Corporations under U.S. tax laws violated
the WTO Subsidies Agreement. U.S. negotiators have since worked in good
faith on a proposal to retain many of the tax benefits of the FSC
structure, while establishing a new structure which would be responsive
to the European Union's challenge.
However, I simply want to express my concern over the impact that
H.R. 4986 would have on the U.S. territories. Under the current FSC
system, U.S. territories have been able to benefit through tax
exemptions for U.S. exporting industries. With the repeal of the FSC
system, we will no longer to be able to offer this incentive although I
understand that current contracts will be honored.

[[Page H11895]]

In Guam, there are around 211 FSC licensees, generating around
$170,000 to the Government of Guam. However, license fees are only some
of the direct benefits from FSCs. Other direct benefits include
compensation for Guam attorneys and other professionals, bank deposits,
and funds generated through the hotel and restaurant industries that
host FSC corporate meetings. Indirect benefits would be the cumulative
effect that FSCs and other tax incentives have on attracting U.S.
businesses to Guam.
Be it as it may, the writing is on the wall for FSCs as we now know
it. Therefore, I am appealing to the Clinton administration,
particularly the Treasury Department, to offset the economic impact of
today's legislation with the means necessary to allow the U.S.
territories to promote economic self-sufficiency during any
negotiations with the Congress on any final omnibus budget or tax
package.
Apart from H.R. 3247, which would provide empowerment zones for the
U.S. territories, I have worked closely with my colleagues to enact
legislation that I authorized which would level the playing field for
foreign investors in Guam through the passage of the Guam Foreign
Direct Investment Equity Act.
My legislation would provide Guam with the same tax rates as the
fifty states under international tax treaties. Since the U.S. cannot
unilaterally amend treaties to include Guam in its definition of United
States, my bill amends Guam's Organic Act, which has an entire tax
section that ``mirrors'' the U.S. Internal Revenue Code.
As background, under the U.S. Code, there is a 30 percent withholding
tax rate for foreign investors in the United States. Since Guam's tax
law ``mirrors'' the rate established under the U.S. Code, the standard
rate for foreign investors in Guam is 30 percent.
The Guam Foreign Direct Investment Equity Act provides the Government
of Guam with the authority to tax foreign investors at the same rates
as states under U.S. tax treaties with foreign countries since Guam
cannot change the withholding tax rate on its own under current law.
Under U.S. Tax treaties, it is a common feature for countries to
negotiate lower withholding rates on investment returns. Unfortunately,
while there are different definitions for the term ``United States''
under these treaties, Guam is not included. Such an omission has
adversely impacted Guam since 75 percent of Guam's commercial
development is funded by foreign investors. As an example, with Japan,
the U.S. rate for foreign investors is 10 percent. That means while
Japanese investors are taxed at a 10 percent withholding tax rate on
their investments in the fifty states, those same investors are taxed
at a 30 percent withholding rate on Guam.
While the long term solution is for U.S. negotiators to include Guam
in the definition of the term ``United States'' for all future tax
treaties, the immediate solution is to amend the Organic Act of Guam
and authorize the Government of Guam to tax foreign investors at the
same rates as the fifty states. Other territories under U.S.
jurisdiction have already remedied this problem through Delinkage,
their unique covenant agreements with the federal government, or
through federal statute. Guam, therefore, is the only state or
territory in the United States which is unable to take advantage of
this tax benefit.
As the House considers H.R. 4986, as amended by the Senate, I implore
my colleagues and the Clinton Administration to support the Guam
Foreign Direct Investment Equity Act to offset the adverse impact of
H.R. 4986 on Guam. Please include equitable tax treatment for foreign
investors in Guam during any final omnibus budget or tax package.
Mr. CRANE. Mr. Speaker, I yield 2 minutes to the gentlewoman from the
Virgin Islands (Mrs. Christensen), our distinguished colleague.
Mrs. CHRISTENSEN. Mr. Speaker, I want to thank the distinguished
gentleman from Illinois (Mr. Crane), the chairman of the Subcommittee
on Trade, for yielding me this time to speak on an issue that is very
important to all of the territories, and my constituents included.
Mr. Speaker, while H.R. 4986 is clearly necessary for our country to
avoid having sanctions imposed on us by the European Union, for me and
the people of the Virgin Islands, who I represent, its enactment into
law will mean the loss of nearly $11 million to our already depressed
local treasury.
Through no fault of our own and despite the efforts of my colleagues
on the Committee on Ways and Means and the administration to mitigate
the adverse effects on us, the Virgin Islands stands to lose hundreds
of direct and indirect jobs in the FSC industry, in addition to the
millions in FSC franchise fees that the local government collects.
This action by the European Union to challenge our FSC program in the
WTO could not have come at a worse time for the Virgin Islands as our
local economy continues to suffer from the effects of 10 years of
devastation from several killer hurricanes.
What I want my colleagues to understand that while this bill is
necessary because of what it means for the country, it is a blow for
the people of the Virgin Islands and the other territories. It is my
intention to continue to work with my colleagues in the Congress and
the administration to assist the Virgin Islands and the other
territories in replacing the loss of this program and the loss of
revenues that this bill will mean for us.
Mr. Speaker, I thank the gentleman from Illinois once again for
yielding me this time.
Mr. STARK. Mr. Speaker, I yield such time as he may consume to the
gentleman from Oregon (Mr. DeFazio).
(Mr. DeFAZIO asked and was given permission to revise and extend his
remarks.)
Mr. DeFAZIO. Mr. Speaker, I rise in strong opposition to the
legislation.
We again find ourselves debating replacing a rather arcane section of
the tax code that allows corporations to avoid a portion of their tax
bill by establishing largely paper entities in a filing cabinet in a
tax haven like Barbados with the equally arcane tax provisions of H.R.
4986, the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
And, once again, the legislation has been brought to the floor under
suspension of the rules, which cuts off any ability to improve what is
a truly dismal bill.
Creating this new, expanded loophole to assist corporations in
escaping their fair share of the tax burden in the U.S. makes a mockery
of pleas by my colleagues to simplify the tax code and improve
fairness.
For nearly two decades, beginning with the Revenue Act of 1971 (P.L.
92-178), the U.S. provided tax incentives for exports. However, our
trading partners complained that these incentives violated our
commitments under the General Agreement on Tariffs and Trade (GATT).
While not conceding the violation, in 1984, Congress scrapped the
Domestic International Sales Corporation (DISC) provisions and created
the Foreign Sales Corporation (FSC) provisions. The differences are
highly technical and probably only understood by international tax
bureaucrats.
Under the FSC provision, corporations can exempt between 15 and 30
percent of their export income from taxation by routing a portion of
their exports through a FSC. Our trading partners, specifically the
European Union (EU), were not satisfied with the somewhat cosmetic
changes made to the U.S. tax code.
Going back on a verbal gentleman's agreement not to challenge our
respective tax codes under global trading rules, the EU filed a
complaint with the World Trade Organization (WTO), successor to GATT,
essentially arguing the same thing that was argued about DISCs. Namely
that export subsidies were illegal under global trading rules by
conferring an unfair advantage on recipient companies.
A secretive WTO tribunal ruled against the U.S. Dutifully, the U.S.
appealed the decision. Earlier this year, the WTO appeals panel upheld
the earlier decision and ordered the U.S. to repeal the FSC provision
or risk substantial retaliatory measures.
Specifically, the WTO appeals panel wrote, ``By entering into the WTO
Agreement, each Member of the WTO has imposed on itself an obligation
to comply with all terms of that Agreement. This is a ruling that the
FSC measure does not comply with all those terms. The FSC measure
creates a `subsidy' because it creates a `benefit' by means of a
`financial contribution', in that government revenue is foregone that
is `otherwise due.' This `subsidy' is a `prohibited export subsidy'
under the SCM Agreement [Agreement on Subsidies and Countervailing
Measures] because it is contingent on export performance. It is also an
export subsidy that is inconsistent with the Agreement on Agriculture.
Therefore, the FSC Measure is no consistent with the WTO obligations of
the United States.''

In other words, it is unfair and illegal under global trade rules for
the U.S. tax code to provide welfare for corporations by allowing them
to escape taxes that would otherwise be due.
At this point, one would expect that my colleagues who, on most
occasions eloquently defend the need for ``rules based trade'' and
``free markets'', to adhere to the WTO directive and repeal FSC.
Because I assumed my colleagues would want to be intellectually
consistent, I introduced legislation shortly after the WTO ruling to
repeal FSC.
After all, precedent proved the U.S. was more than willing to bend to
the will of the WTO. When the WTO ruled against a provision of the 1990
Clean Air Act, the Environmental Protection Agency gutted its clean air
regulations in order to allow dirtier gasoline from Venezuela to be
sold in the U.S.
Similarly, when Mexico threatened a WTO enforcement action on a 1991
GATT case it

[[Page H11896]]

had won that eviscerated the Dolphin Protection Act, the U.S. went
along to get along. In fact, the Clinton Administration sent a letter
to Mexican President Ernesto Zedillo declaring that weakening the
standard by which tuna must be caught in ``dolphin-safe'' nets ``is a
top priority for my administration and me personally.''
The WTO also ruled against the Endangered Species Act provisions that
required U.S. and foreign shrimpers to equip their nets with
inexpensive turtle excluder devices if they wanted to sell shrimp in
the U.S. market. The goal was to protect endangered sea turtles. The
Clinton Administration agreed to comply with the ruling.
Given this record of acquiescing to the WTO, one could be forgiven
for assuming the Clinton Administration and Congress would behave in a
similar manner when losing a case on tax breaks for corporations.
Of course, sea turtles and dolphins don't make massive campaign
contributions, or any campaign contributions for that matter. But, the
large corporations who would be impacted by the WTO decisions against
FSCs do.
Apparently not bothered by the hypocrisy, immediately after the
ruling by the WTO appeals panel, the Clinton Administration, a few
Members of Congress, and the business community openly declared the
need to maintain the subsidy in some form and began meeting in secret
to work out the details on how to circumvent the WTO ruling and
maintain these valuable, multi-billion dollar tax incentives.
Now, it is will-known that I am not a big fan of the WTO. It is an
unaccountable, secretive, undemocratic bureaucracy that looks out
solely for the interests of multinational corporations and investors at
the expense of human rights, labor standards, national sovereignty, and
the environment.

But, by pointing out that export subsidies like FSCs are corporate
welfare, however, the WTO has done U.S. taxpayers a favor.
Unfortunately, this legislation before us today only does wealthy
corporations a favor.
I have several problems with H.R. 4986 besides the intellectual
inconsistency. I will touch on each of these now.
First, and perhaps most importantly, there is little or no economic
rationale for export subsidies like FSCs or the provisions of H.R.
4986. In its April 1999 Maintaining Budgetary Discipline report, the
Congressional Budget Office (CBO) noted ``Export subsidies, such as
FSCs, reduce global economic welfare and may even reduce the welfare of
the country granting the subsidy, even though domestic export-producing
industries may benefit.''
Similarly, in August 1996, CBO wrote, ``Export subsidies do not
increase the overall level of domestic investment and domestic
employment . . . In the long run, export subsidies increase imports as
much as exports. As a result, investment and employment in import-
competing industries in the United States would decline about as much
as they increased in the export industries.''
Need further evidence? The Congressional Research Service (CRS) has
written ``Economic analysis suggests that FSC does increase exports,
but likely triggers exchange rate adjustments that also result in an
increase in U.S. imports; the long run impact on the trade balance is
probably nil. Economic theory also suggests that FSC probably reduces
aggregate U.S. economic welfare.
Of course, protests will be heard from supporters of H.R. 4986 that
it gets rid of the export requirement. In testimony before the Ways and
Means Committee, Deputy Secretary Eizenstat said the Chairman's mark is
``not export-contingent.'' Of course, that claim is absurd. If a
company sells products solely in the U.S., they don't qualify for the
tax subsidy. That is, by definition, an export subsidy. Therefore, the
criticisms of export subsidies previously mentioned would apply to this
new legislation as well.
President Nixon originally proposed export subsidies, which became
the DISC and then FSC, because he was alarmed at the size of the U.S.
trade deficit, which was $1.4 billion in 1971, a number that seems
almost quaint by today's standards. As Paul Magnusson noted in the
September 4, 2000, Business Week, FSC ``produced some hefty tax savings
for big U.S. exporters, but it never did actually do much to narrow the
trade deficit, which hit a record $339 billion last year.'' And which,
I should add, has continued to set new records virtually every month
this year.
I can't understand why it makes sense to subsidize U.S. exporters to
the tune of $5 billion or more when the economic impact is ``probably
nil'' or worse.
The economic rationale further deteriorates when one realizes, as the
previous quotes suggest, that export subsidies discriminate against
mom-and-pop stores who don't have the resources to export and against
U.S. industries that must compete with imports. This means that export
subsidies distort markets by pre-ordaining winners and losers. The
winners? Large exporters and foreign consumers who get to enjoy lower
priced U.S. products subsidized by U.S. taxpayers. The losers? Small
businesses, U.S. taxpayers, and import-competing industries.
I find it interesting while Treasury has spent a great deal of time
figuring out how to combat corporate tax shelters that have no economic
rationale, as discussed in a July 1999 report, that they would push
this corporate welfare, which also has no economic rationale.
So, who specifically benefits? The journal Tax Notes conducted a
revealing study of FSCs in its August 14, 2000, edition. The article
profiled the 250 companies that reported $1.2 billion in FSC tax
savings in 1998. The top 20 percent of the companies in the sample
claimed 87 percent of the benefits. The two largest FSC beneficiaries
were the General Electric Company and Boeing, which saw their tax bills
reduced by $750 million and $686 million, respectively from 1991-1998.
What are some of the other top FSC corporate welfare queens?
Motorola, Caterpillar, Allied-Signal, Cisco Systems, Monsanto, Archer
Daniels Midland, Oracle, Raytheon, RJR Nabisco, International Paper,
and ConAgra. The list reads like a who's who of extraordinarily
profitable multinational corporations. Hardly companies that should
need to feed from the taxpayer trough.
Furthermore, American subsidiaries of European firms take advantage
of U.S. taxpayers through export subsidies. British Petroleum,
Unilever, BASF, Daimler Benz, Hoescht, and Rhone-Poulenc are all FSC
beneficiaries. The fact that foreign companies can also claim export
benefits pokes a large hole in the argument that these tax benefits are
needed to ensure the competitiveness of U.S. businesses.
Similarly, isn't it a bit odd that economists and U.S. policymakers
like to lecture European nations about their high tax burdens, but now,
suddenly their tax burden is too low and, therefore, U.S. companies
need subsidies in order to compete?
Let's be clear, this legislation is not about the competitiveness of
large, wealthy, multinational corporations based in the United States.
It is about wealthy campaign contributors wanting to keep and expand
their $5 billion-plus tax subsidies and elected officials willing to do
their bidding.
Not only does H.R. 4986 allow these companies to continue receiving
billions in tax breaks, but it actually expands them. This legislation
will cost U.S. taxpayers another $300 million a year or more.
It is also unfortunate that this legislation subsidizes a number of
industries--such as defense contractors, tobacco companies, and
pharmaceutical firms--that have no business receiving any more taxpayer
hand-outs.
Take the defense industry, for example. Under the current FSC regime,
defense contractors can only claim 50 percent of the tax benefit
available to other industries. The legislation before us today allows
the defense industry to claim the full benefit available to others.
Leaving aside the fact that U.S. taxpayers are already overly
generous to defense contractors, which no doubt they are, expanding
this corporate welfare will have no discernable impact on overseas
sales. The Treasury Department noted in August 1999, ``We have seen no
evidence that granting full FSC benefits would significantly affect the
level of defense exports.''
In 1997, the CBO made a similar point, ``U.S. defense industries have
significant advantages over their foreign competitors and thus should
not need additional subsidies to attract sales.''
Even the Pentagon has acknowledged this fact by concluding in 1994,
``In a large number of cases, the U.S. is clearly the preferred
provider, and there is little meaningful competition with suppliers
from other countries. An increase in the level of support the U.S.
government currently supplies is unlikely to shift the U.S. export
market share outside a range of 53 to 59 percent of worldwide arms
trade.''
As Ways and Means Committee Member, Representative Doggett, noted in
his dissenting views on H.R. 4986, ``In 1999, without the bonanza
provided by this bill, U.S. defense contractors sold almost $11.8
billion in weapons overseas--more than a third of the world's total and
more than all European countries combined.''
The U.S. should stop the proliferation of weapons and war, not expand
it as this bill intends.
The pharmaceutical industry is another industry that does not need or
deserve additional subsidies from U.S. taxpayers. The industry already
receives substantial research and development tax credits as well as
the benefits flowing from discoveries by government scientists. As
Representative Stark noted in his dissenting views, drug companies
lowered their effective tax rate by nearly 40 percent relative to other
industries from 1990 to 1996 and were named the most profitable
industry in 1999 by Fortune Magazine.
The industry sells prescription drugs at far cheaper prices abroad
than here in the U.S. For example, seniors in the U.S. pay twice as
much for prescriptions as those in Canada or

[[Page H11897]]

Mexico. It is an affront to U.S. taxpayers to force them to further
subsidize an industry that is already gouging them at the pharmacy as
this bill would do.
In direct contradiction of various federal policies to combat tobacco
related disease and death in the U.S., this legislation would force
U.S. taxpayers to subsidize the spread of big tobacco's coffin nails to
foreign countries. This violates the American taxpayers' sense of
decency and respect. Their money should not be used to push a product
onto foreign countries that kills one-third of the people who use it as
intended.
By placing H.R. 4986 on the suspension calendar, debate is
prematurely cut off and amendments to reduce support for drug
companies, the defense industry or tobacco companies can not
be considered. But, I guess that is just par for the course for a
process that has taken place in relative secrecy between a few Members
of Congress, the Administration, and the industries that stand to
benefit from this legislation.

You may not hear this in the debate much, but it is important to
point out that the EU has already put the U.S. on notice that H.R. 4986
does not satisfy its demands. According to the EU, H.R. 4986 still
provides an export subsidy, maintains a requirement that a portion of a
product contain U.S.-made components, and does not repeal FSCs by the
October 1st deadline. Therefore, it is likely the EU will ask the WTO
to rule on the legality of the U.S. reforms. Most independent analysts
agree with the EU critique of H.R. 4986.
So, it is reasonable to assume the WTO will again rule against the
U.S. and allow the EU to impose retaliatory sanctions against U.S.
products. According to some press accounts, the EU would be able to
impose 100 percent tariffs on around $4 billion worth of U.S. goods.
These would be the largest sanctions ever imposed in a trade dispute.
In other words, this inadequate reform of export subsidies will open up
the U.S. to retaliatory action by the EU, which will harm exports as
much or more than any perceived benefit that would be provided by H.R.
4986. Of course, the exporters that will be hurt by retaliatory
sanctions probably won't be the same businesses that will enjoy the tax
windfall provided by this legislation.
Mr. Speaker, ADM is not suffering. Cisco Systems is not suffering.
Raytheon is not suffering. Miscroft is not struggling mightily to keep
its head above water. But, the American people are. Schools are
crumbling, 45 million Americans have no health insurance, individuals
are working longer hours for less money with the predictable stress on
families, million of seniors do not have access to affordable
prescription drugs, and poverty remains stubbornly high, particularly
among children.
Rather than debating how to preserve billions in tax subsidies for
some of our largest corporations, we should be figuring out how to
address some of these issues. How many times over are we going to spend
projected, and I stress projected, surpluses. If we want to pay down
the national debt, provide prescription drugs, shore up Social Security
and Medicare, and increase funding for education, Congress cannot keep
showering wealthy corporations with unjustifiable tax subsidies.
I will end with a quote from a newspaper I'm not normally inclined to
agree with editorially, the Washington Times. In an editorial on
September 5, 2000, the Washington Times wrote, ``The Ways and Means
Committee boasts that support for its revised FSC bill was bipartisan
and near unanimous. It remains a bipartisan and near unanimous
blunder.''
I urge my colleagues to vote against H.R. 4986.
Mr. STARK. Mr. Speaker, I yield 2 minutes to the gentleman from
Massachusetts (Mr. Tierney).
Mr. TIERNEY. Mr. Speaker, I rise today in opposition to this.
Mr. Speaker, basically, I want to point out in response to some of
the comments made by our colleagues on the other side, this attempt to
replace current legislation for the Foreign Sales Corporation tax
provision really in some instances doubles the benefit that existing
companies are now getting, in particular those of the arms
manufacturers and exporters.
At the very least, we would hope we would have an opportunity to go
through committee and deal with this on a matter where we could have
some amendments and if not eliminate this Foreign Sales Corporation tax
provision, at least put amendments in there that would bring it back to
what is now, as there is no basis in fact or any argument for why we
are doubling in some instances the benefit the corporations would get.
In fact, passage of their particular replacement legislation is going
to result in a rejection by the WTO. Everybody knows that in advance.
We are going to be in a position where the United States companies are
going to be penalized, and it is not going to be the companies
necessarily that would be the ones benefitting from this proposed
replacement legislation. There is going to be other small businesses,
people that depend on financing their business operations and paying
their help and their workers, who are going to be penalized when the
WTO allows retribution for this.
We are going to be exposed to penalties that we ought not to be
exposed to. This situation is not even a close call. Mr. Speaker, no
one questions whether this is even good tax policy. The General
Accounting Office, the Congressional Budget Office, the Congressional
Research Service have all argued the foreign sales corporations have a
negligible effect on trade.

{time} 1045

In fact, the Congressional Research Service argues that one of the
greatest beneficiaries of this tax preference is foreign consumers who
will pay a lower price for products subsidized at our taxpayers'
expense. As there exists no evidence that the foreign sales
corporations actually improve United States trade or create jobs, this
hardly seems to be a judicious use of some $5 billion.
Given that this bill was written almost completely behind closed
doors, one would hope that it would at least be given a full public
debate. Instead, proponents cynically assume that the public will not
understand the matter of tax policy; indeed, they count on the public
not understanding it, and they permit a measly 40 minutes of debate
time.
Instead of actually debating the issue and letting the chips fall
where they may, Mr. Speaker, they rush to submit something, anything to
the WTO as soon as possible, even something they will most certainly
reject, and have expedited the legislative process to a point of
incoherence. We should vote against this legislation.
Mr. CRANE. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, let me just commend our colleagues on the other side of
the aisle who have joined in a collegial and bipartisan way in support
of advancing a piece of legislation that is of profound significance
and importance to the welfare of our economy and the advancement of our
continuing role as the biggest export country on the face of this
Earth.
We have an opportunity here to continue to move down that positive
path. We have always had that good bipartisan support for these kinds
of initiatives in the post-World War II era.
I thank Members on both sides, and I urge my colleagues to get behind
this bill and vote aye.
Mr. PAUL. Mr. Speaker, today we are faced with a decision to do the
right thing for the wrong reasons or the wrong thing for the wrong
reasons. We have heard proponents of this FSC bill argue for tax breaks
for U.S. exporters, which, of course, should be done. Those proponents,
however, argue that this must be done to move the United States into
compliance with a decision by the WTO tribunal. Alternatively,
opponents of the bill, argue that allowing firms domiciled in the
United States to keep their own earnings results in some form of
subsidy to the ``evil'' corporations. If we were to evaluate this
legislation based upon the floor debated, we would be left with the
choice of abandoning U.S. sovereignty in the name of WTO compliance or
denying private entities freedom from excess taxation.
Setting aside the aforementioned false choice of globalism or
oppression by taxation, there are three reasons to consider voting
against this bill. First, it perpetuates an international trade war.
Second, this bill is brought to the floor as a consequence of a WTO
ruling against the United States. Number three, this bill gives more
authority to the President to issue Executive Orders.
Although this legislation deals with taxes and technically actually
lowers taxes, the reason the bill has been brought up has little to do
with taxes per se. To the best of my knowledge there has been no
American citizen making any request that this legislation be brought to
the floor. It was requested by the President to keep us in good
standing with the WTO.
We are now witnessing trade war protectionism being administered by
the World (Government) Trade Organization--the WTO. For two years now
we have been involved in an ongoing trade war with Europe and this is
just one more step in that fight. With this legislation the U.S.
Congress capitulates to the demands of the WTO. The actual reason for
this

[[Page H11898]]

legislation is to answer back to the retaliation of the Europeans for
having had a ruling against them in favor of the United States on meat
and banana products. The WTO obviously spends more time managing trade
wars than it does promoting free trade. This type of legislation
demonstrates clearly the WTO is in charge of our trade policy.
The Wall Street Journal reported on 9/5/00, ``After a breakdown of
talks last week, a multi-billion-dollar trade war is now about certain
to erupt between the European Union and the U.S. over export tax breaks
for U.S. companies, and the first shot will likely be fired just weeks
before the U.S. election.''
Already, the European Trade Commissioner, Pascal Lamy, has rejected
what we're attempting to do here today. What is expected is that the
Europeans will quickly file a new suit with the WTO as soon as this
legislation is passed. They will seek to retaliate against United
States companies and they have already started to draw up a list of
those products on which they plan to place punitive tariffs.
The Europeans are expected to file suit against the United States in
the WTO within 30 days of this legislation going into effect.
This legislation will perpetuate the trade war and certainly support
the policies that have created the chaos of the international trade
negotiations as was witnessed in Seattle, Washington.
The trade war started two years ago when the United States obtained a
favorable WTO ruling and complained that the Europeans refused to
import American beef and bananas from American owned companies.
The WTO then, in its administration of the trade war, permitted the
United States to put on punitive tariffs on over $300 million worth of
products coming into the United States from Europe. This only generated
more European anger who then objected by filing against the United
States claiming the Foreign Sales Corporation tax benefit of four
billion dollars to our corporations was ``a subsidy.''
On this issue the WTO ruled against the United States both initially
and on appeal. We had been given till November 1st to accommodate our
laws to the demands of the WTO.
H.R. 4986 will only anger the European Union and accelerate the trade
war. Most likely within two months, the WTO will give permission for
the Europeans to place punitive tariffs on hundreds of millions of
dollars of U.S. exports. These trade problems will only worsen if the
world slips into a recession when protectionist sentiments are
strongest. Also, since currency fluctuations by their very nature
stimulate trade wars, this problem will continue with the very
significant weakness of the EURO.
The United States is now rotating the goods that are to receive the
100 to 200 percent tariff in order to spread the pain throughout the
various corporations in Europe in an effort to get them to put pressure
on their governments to capitulate to allow American beef and bananas
to enter their markets. So far the products that we have placed high
tariffs on have not caused Europeans to cave in. The threat of putting
high tariffs on cashmere wool is something that the British now are
certainly unhappy with.
The Europeans are already well on their way to getting their own list
ready to ``scare'' the American exporters once they get their
permission in November.
In addition to the danger of a recession and a continual problem with
currency fluctuation, there are also other problems that will surely
aggravate this growing trade war. The Europeans have already complained
and have threatened to file suit in the WTO against the Americans for
selling software products over the Internet. Europeans tax their
Internet sales and are able to get their products much cheaper when
bought from the United States thus penalizing European countries. Since
the goal is to manage things in a so-called equitable manner the WTO
very likely could rule against the United States and force a tax on our
international Internet sales.
Congress has also been anxious to block the Voice Stream
Communications planned purchase by Deutsche Telekom, a German
government-owned phone monopoly. We have not yet heard the last of this
international trade fight.
The British also have refused to allow any additional American
flights into London. In the old days the British decided these
problems, under the WTO the United States will surely file suit and try
to get a favorable ruling in this area thus ratcheting up the trade
war.
Americans are especially unhappy with the French who have refused to
eliminate their farm subsidies--like we don't have any in this country.
The one group of Americans that seem to get little attention are
those importers whose businesses depend on imports and thus get hit by
huge tariffs. When 100 to 200 percent tariffs are placed on an imported
product, this virtually puts these corporations out of business.
The one thing for certain is this process is not free trade; this is
international managed trade by an international governmental body. The
odds of coming up with fair trade or free trade under WTO are zero.
Unfortunately, even in the language most commonly used in the Congress
in promoting ``free trade'' it usually involves not only international
government managed trade but subsidies as well, such as those obtained
through the Import/Export Bank and the Overseas Private Investment
Corporation and various other methods such as the Foreign Aid and our
military budget.
Lastly, despite a Constitution which vests in the House authority for
regulating foreign commerce (and raising revenue, i.e. taxation), this
bill unconstitutionally delegates to the President the ``authority''
to, by Executive order, suspend the tax break by designating certain
property ``in short supply.'' Any property so designated shall not be
treated as qualifying foreign trade property during the period
beginning with the date specified in the Executive order.
Free trade should be our goal. We should trade with as many nations
as possible. We should keep our tariffs as low as possible since
tariffs are taxes and it is true that the people we trade with we are
less likely to fight with. There are many good sound, economic and
moral reasons why we should be engaged in free trade. But managed trade
by the WTO does not qualify for that definition.
Mr. STARK. Mr. Speaker, I rise today in adamant opposition to H.R.
4986, the Foreign Sales Corporation replacement bill. This bill is a
blatant form of corporate welfare, ruled illegal under international
trade laws by the World Trade Organization (WTO). The U.S. has already
missed two deadlines imposed by the WTO and the European Union for
repealing the FSC. I don't know which is worse--that the current
leadership is so incapable of governing that they can't meet an
extended deadline, or that they have failed to comply with the WTO
ruling by attempting to replace one export subsidy with something
remarkably similar.
Then the Senate Finance Committee made some minor changes to the bill
that appears to bring the U.S. closer to WTO compliance than the House
version without sacrificing the current tax benefit received by
Caterpillar Inc. This version came back to the House and was voted on
in H.R. 2614, the $240 billion GOP tax package. The House leadership
thought they were doing their corporate constituents a favor by
attaching the FSC to a bloated tax package. Now we're here once again
because the majority leadership thought they could bait Clinton into
signing a bad tax bill if they attached the FSC to it. No such luck!
Clinton has threatened to veto the tax bill and the Senate has no
intentions of acting on it.
The bill before us today is nothing more than corporate welfare for
some of the nation's most profitable industries. The European Union has
filed a complaint with the World Trade Organization (WTO) that the FSC
is an export tax subsidy and therefore illegal under international
trade laws. I completely agree. Yet instead of repealing the tax
subsidy and complying with our international trade obligations, this
bill seeks to remedy the FSC with a near exact replacement.
The Institute on Taxation and Economic Policy recently released a
report that shows a rise in pretax corporate profits by a total of 23.5
percent from 1996 through 1998. At the same time, U.S. Treasury
corporate income tax revenues only rose by a mere 7.7 percent. In
addition to the myriad of corporate tax deductions this Congress
insists on expanding, programs such as the FSC can help explain the
disparity in corporate profits and corporate income tax rates.
The FSC helps subsidize some of the most profitable industries such
as the pharmaceutical, tobacco and weapons export industries. Why
should Congress help out the pharmaceutical industry if the industry
insists on charging U.S. consumers more for prescription drugs than
they charge in Europe? We shouldn't! The pharmaceutical industry sells
prescription drugs in the U.S. at prices that are 190-400 percent
higher than what they charge in Europe. The U.S. subsidizes the
pharmaceutical industry by approximately $123 million per year through
the FSC. This is unfair to the American taxpayer and must not be
allowed to happen.
The top 20 percent of FSC beneficiaries obtained 87 percent of the
FSC benefit in 1998. The two largest FSC beneficiaries, General
Electric and Boeing, received almost $750 million and $686 million in
FSC benefits over 8 years, respectively. RJ Reynolds' FSC benefit
represents nearly six percent of its net income while Boeing's FSC
benefit represents twelve percent of its earnings!
It is high time we stop allowing corporate interests to dictate U.S.
spending. We didn't pass a prescription drug benefit for seniors in the
106th Congress so we shouldn't be rushing through a piece of
legislation that gives corporations a $5 billion per year tax break. I
urge my colleagues to put working families, children and our seniors
first, and oppose H.R. 4986.

[[Page H11899]]

Ms. KILPATRICK. Mr. Speaker, I rise today in opposition to the
passage of H.R. 4986, the Senate Amendments to the Foreign Sales
Corporation (FSC) Repeal and Extraterritorial Income Exclusion Act.
While it is important that our nation's businesses have the benefit of
a level playing field when competing against foreign businesses, we
should not do so on the back of the American Public or to the detriment
of the health and welfare of those outside of our borders. Let it not
be said that we are a nation willing to sacrifice all principles for
the welfare of our nation's businesses.
The measure before us, effective for transactions entered after
September 30, 2000, will allow both individuals and companies an
exemption from federal taxes of all income earned abroad (whether or
not the product is manufactured in the United States or abroad). The
measure does require that 50% of the components of the final product be
manufactured in the United States. The measure also eliminates current
law allowing for the creation of Foreign Sales Corporations. Although I
supported the measure when it was originally considered in the House
facts have come to light that have given me pause to support the
measure.
I believe that there are questions concerning the process used to
move this measure. The FSC is a complicated matter that warrants the
full and deliberate consideration of the entire House. Considering this
measure under suspension of the rules clearly inhibits this body's
ability to make the most informed decision about this important matter
which will affect the people we represent.
Policy questions concerning this matter also abound. For example,
during consideration of the bill an amendment was pursued that would
have exempted tobacco companies from the tax exemption provided under
the measure. It is argued that this measure will give tobacco companies
an estimated $100 million in taxpayer subsidies to export cigarettes.
It is further argued that this subsidy provides incentives to tobacco
companies to maximize and promote sales in other countries. It gives me
pause to think that the policy Congress endorses in this measure will
give the impression that while we care about the health risks imposed
by tobacco use on American lives, we are not concerned about the health
risks imposed by tobacco use on foreign lives.
Questions have also been raised on the effect this measure will have
on the U.S. economy. Proponents of the measure argue that the bill will
spur domestic investment and employment through an increase in exports,
while opponents point to studies that indicate that ``export subsidies,
such as FSC's, reduce global economic welfare and typically even reduce
the welfare of the country granting the subsidy . . . [C]ompanies in
import-competing industries reduce domestic investment and
employment.'' I am hesitant to support a measure that may in fact be
detrimental to the well being of our nation's economy.
Mr. Speaker, for these reasons I rise in opposition to H.R. 4986, and
I recommend a nay vote on its passage.
Mr. Crane. Mr. Speaker, I yield back the balance of my time.
The SPEAKER pro tempore (Mr. Simpson). The question is on the motion
offered by the gentleman from Texas (Mr. Archer) that the House suspend
the rules and concur in the Senate amendment to the bill, H.R. 4986.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds of
those present have voted in the affirmative.
Mr. STARK. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the
Chair's prior announcement, further proceedings on this motion will be
postponed.

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