Sept. 3, 2002 – Foreign sales corporations, which constitute a major tax-break vehicle for big U.S. exporters that spins off some lesser benefits to the Virgin Islands, are facing renewed assault from the World Trade Organization.
According to recent mainland news reports, the WTO, acting in accord with European economic interests, has again threatened action that would in effect impose a $4 billion fine on American exporters if the FSC program continues. Saturday accounts in The New York Times and the Washington Post did not mention that the U.S. Virgin Islands and other islands would suffer some losses as a result.
The WTO made a similar $4 billion threat in the summer of 2001; there having been no response from the United States that satisfied the critics, they have now made it again.
The WTO contends that the FSC program is a hidden subsidy to major exporters such as General Electric, Caterpillar Tractor and Boeing, and is thus in conflict with global trade agreements. The WTO, based in Switzerland, serves as judge and jury in international trade disputes. It is threatening to raise tariffs on American exports to counter the effects of the FSC program unless Congress eliminates the program — or modifies it enough to meet the WTO criticism.
WTO's hope, according to reports, is that this threat will help break the current deadlock in Congress over this issue. All concerned hope that there will be no $4 billion fine, as that would disrupt trade agreements generally.
The FSC program gives American exporters a federal tax break if they establish foreign sales corporations in the territory and in other islands to handle their export sales. This does not mean that exported goods are shipped through the Virgin Islands or that substantial corporate offices must be opened locally in order to meet the requirement.
What it does mean is that the corporations must register their FSC's with the local government, and this in turn has caused the flow of registration fees into the local treasury. The exact size of these contributions in the Virgin Islands and what has happened to them in recent years is not known. At one point a few years ago, such revenues were estimated to be upwards of $7 million a year.
As far as can be determined, no one has figured out the exact division of the FSC tax break between the major exporters and the island governments. Most observers assume that the major exporters get the lion's share of the benefits.
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