[Congressional Record Volume 143, Number 25 (Monday, March 3, 1997)]
[Senate]
[Pages S1835-S1837]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Nickles, Mr. Breaux, 
        Mr. Gorton, Mrs. Feinstein, Mrs. Murray, and Mrs. Boxer):
  S. 387. a bill to amend the Internal Revenue Code of 1986 to provide 
equity to exports of software; to the Committee on Finance.


                     THE SOFTWARE EXPORT EQUITY ACT

  Mr. HATCH. Mr. President, I rise today to introduce the Software 
Export Equity Act. I am pleased to be joined in this bipartisan effort 
by my colleagues on the Senate Finance Committee, Senators Max Baucus, 
Don Nickles, John Breaux, as well as Patty Murray, Slade Gorton, Dianne 
Feinstein, and Barbara Boxer. Identical legislation has been introduced 
in the House by Representative Jennifer Dunn and a strong bipartisan 
group of her House colleagues.
  This bill highlights an issue that I have mentioned many times in the 
Finance Committee. Currently, the section of the Internal Revenue Code 
outlining what qualifies for foreign sales corporation [FSC] treatment 
and tax benefits is unclear and has left out software that is exported 
overseas. Our bill would clarify the treatment of software.
  What is a foreign sales corporation? It is a corporate entity 
established by Congress to help facilitate the export of American made 
goods to foreign markets. The FSC rules allow a corporation a tax 
benefit on a portion of its earnings generated by the sale or lease of 
export property. It is consistent with sound U.S. policy to promote 
U.S. exports.
  When the foreign sales corporation statute was enacted in 1971, the 
computer software industry was relatively new. The original FSC statute 
was drafted with the intent that only U.S. job-creating property 
manufactured or produced in the United States and sold or leased 
outside the United States qualifies for export benefits. The FSC rules 
are designed to assist U.S. exporters in competing with products made 
in other countries that have more favorable rules for taxing exports.
  Mr. President, it is in our best interests to encourage the export of 
American goods and services. The United States is currently the world 
leader in software development, employing approximately 2 million 
people in software development jobs. As this industry continues to 
grow, much of the expansion of the industry is due to the growth of 
exports. However, as the software industry has grown in response to 
global markets, the tax laws have not kept up.
  Currently, the statute allows films, tapes, records or similar 
reproductions to qualify for FSC benefits. However, because of a narrow 
interpretation of the FSC rules, software does not generally receive 
this export incentive.
  Let me provide an example that I have shared before with my 
colleagues on the Finance Committee. Suppose you have two CD-ROM's--one 
containing a musical recording, the other containing dictionary 
software with musical recordings included. The two look the same and 
are very similar except for the software. If the you export a master 
CD-ROM of the musical recording to another country for reproduction, 
the export qualifies for FSC benefits. However, if you export a master 
copy of the software CD-ROM with a license to make additional copies, 
you will be denied FSC benefits. This is simply wrong and unfair. In an 
age where many computer products are multipurpose--with music and 
software--this makes no sense.
  Now this problem is not beyond repair. The Treasury Department does 
not believe that it has the authority to issue regulations to correct 
this problem. However, they support the legislative fix I am 
introducing today. The FSC statute must be clarified to allow exported 
software with the right to reproduce to receive fair and equitable 
treatment.
  Mr. President, this problem hits home in my State of Utah. There are 
a number of software manufacturers in Utah that have developed a 
worldwide presence. Watching musical and other intangible items receive 
FSC treatment while highly sophisticated software is left out, is 
simply discouraging for these sometimes small software companies. This 
legislation corrects this inequity and reestablishes our commitment to 
promoting American competitiveness.
  I am please to introduce the Software Export Equity Act today. I urge 
all of my colleagues to support this bipartisan effort and cosponsor 
this bill.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 387

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Software Export Equity 
     Act''.

[[Page S1836]]

     SEC. 2. CLARIFICATION OF APPLICATION OF FOREIGN SALES 
                   CORPORATION RULES TO SOFTWARE.

       Subparagraph (B) of section 927(a)(2) of the Internal 
     Revenue Code of 1986 (relating to property excluded from 
     eligibility as FSC export property) is amended by inserting 
     ``, and software, whether or not patented'' after ``for 
     commercial or home use''.

  Mr. NICKLES. Mr. President, I am pleased to join Senator Hatch, 
Senator Baucus, and Senator Breaux in the introduction today of the 
Software Export Equity Act, a bill to provide that software exports 
receive the same tax treatment as other products made in the United 
States. Our bill will help ensure that the U.S. software industry, the 
current world leader, maintains their competitive edge.
  The Software Export Equity Act simply clarifies that software 
produced in the United States for export fully qualifies for foreign 
sales corporation [FSC] export incentives the same as most other U.S. 
products. The bill proposes no special or unique benefit for the 
software industry, just equal and fair treatment under existing law.
  The FSC statute and its predecessor, the domestic international sales 
corporation statute, were enacted by Congress to help U.S. companies 
compete abroad. The FSC statute provides a tax exemption of up to 5 
percent of a company's income attributable to export sales of U.S.-made 
products. Only those products manufactured or produced in the United 
States for export to a foreign market qualify for FSC benefits to 
ensure domestic economic growth and job creation.
  Unfortunately, the fledgling software industry was not specifically 
considered by Congress when the FSC statute was enacted, and subsequent 
Treasury Department rules disqualified them for FSC benefits. Indeed, 
Treasury's narrow interpretation allows nearly identical products, 
exported in an identical manner, such as movies and compact disc 
recordings, to fully qualify for FSC benefits, but not software.
  Repeated attempts to convince the Treasury Department to modify their 
rules have failed, Mr. President, leaving only the alternative of 
amending the law. Fortunately, this issue has broad bipartisan support 
in the House and Senate and was recently included in President 
Clinton's fiscal year 1998 budget request.
  Employing over 2 million people and exporting more than $26 billion 
in software each year, the U.S. software industry is an important and 
growing part of our economy. They lead the world in the development of 
innovative products and cutting-edge technology. In today's competitive 
global economy, incentives to encourage firms to develop products here 
for export abroad are vitally important. The enactment of this 
legislation will assure that we provide these incentives to all U.S. 
products equally.
  I encourage all my colleagues to join us in supporting this 
legislation.
  Mr. BREAUX. Mr. President, I am pleased today to join Mr. Hatch, Mr. 
Nickles, and Mr. Baucus in introducing the Software Export Equity Act. 
This legislation is extremely important to maintaining the U.S. 
software industry's competitiveness and the growth of high-skilled, 
high-paying software industry jobs in the United States. The Software 
Export Equity Act has broad bipartisan support and was included in the 
fiscal year 1998 budget that the President submitted to Congress. I 
urge my colleagues to join with us in support of swift enactment of 
this legislation.
  The U.S. software industry is a vital and growing part of the U.S. 
economy, creating many new high-paying, high technology jobs in the 
United States. Much of the expansion of the software industry is due to 
the growth of export sales. The Software Export Equity Act clarifies 
the application of the foreign sales corporation [FSC] rules to exports 
of U.S. software.
  The FSC rules were enacted to address the competitive disadvantages 
faced by U.S. exporters vis-a-vis exports from other countries that 
have more favorable tax systems, particularly those that effectively 
exempt export sales from home country tax. The goal of the FSC 
provisions was to prevent manufacturing and production jobs from moving 
out of the United States. Unfortunately, a narrow IRS interpretation of 
these rules precludes exports of U.S. software from fully qualifying 
for the FSC incentive. I am very concerned that this problem could 
cause U.S. software companies to begin examining such options as moving 
high-skilled, high-paying software development jobs overseas where 
highly skilled labor is available at much lower wages. The FSC 
incentive will help offset higher U.S. labor costs by providing 
benefits on the export of products developed in the United States. 
Moreover, there is no justification to deny U.S. software exports the 
FSC incentive. Virtually every other U.S. exporter fully qualifies for 
these incentives. I believe it is vital to quickly enact legislation 
that would clarify these rules to reflect the Congress' intent with 
respect to software, not only to protect U.S. software development 
jobs, but also to preserve ownership of this technology in the United 
States.
  Mr. BAUCUS. Mr. President, I am pleased today to join Senator Hatch 
in cosponsoring the Software Export Equity Act. I believe the continued 
vitality of the U.S. software industry is extremely important to the 
U.S. economy. The Software Export Equity Act will not only help us to 
retain high-paying U.S. software development jobs with successful U.S. 
software companies, but also will help smaller U.S. software companies 
to enter the export market by helping to offset the high costs of 
exporting.
  The Software Export Equity Act ensures that U.S. software exports 
qualify for the benefits of the foreign sales corporation [FSC] rules, 
which are very important to maintaining a high level of U.S. exports. 
The foreign sales corporation rules were enacted to provide an 
incentive for U.S. companies to manufacture their products in the 
United States for export overseas, thus retaining U.S. development and 
manufacturing jobs. It is clearly as important to Congress to retain 
U.S. software development jobs, which are among the highest paying jobs 
in the United States, as it is to retain other manufacturing and 
development jobs. Nonetheless, the IRS has questioned the application 
of the FSC rules to software because independent software products did 
not exist when this incentive was originally enacted in 1971. Our tax 
laws must keep up with changes in technology and recognize that FSC 
rules should apply to software.
  This legislation is about fairness, but more importantly, this 
legislation is about jobs and preserving the ownership of technology in 
the United States. The Department of Commerce estimates that every $1 
billion of export trade is worth domestic jobs. Today there are nearly 
600,000 U.S. employees working directly in the software industry, with 
at least another 1.5 million software developers employed in related 
industries. These are high-paying jobs, with average compensation in 
1992 of $55,000 per employee. The Software Export Equity Act will 
prevent U.S. software companies from moving those high-paying software 
development jobs overseas, where highly skilled labor is available for 
much lower wages. The Software Export Equity Act will also help smaller 
software companies to enter the export market by helping to offset the 
high cost of exporting, which was one of the principal purposes for 
creating the FSC rules. FSC treatment is as important to exports of 
software as it is to exports of other U.S. products that are clearly 
covered by these rules.
  Finally, the Software Export Equity Act will protect U.S. ownership 
of technology. If software development jobs were moved outside the 
United States, ownership of the technology created would also move 
outside the United States. Today the software industry has revenues of 
$200 billion a year and a growth rate of 13 percent per year. To lose 
U.S. ownership of the future of this industry would mean not only a 
tremendous direct loss to the GDP, but also would mean a loss of the 
spillover benefits that U.S.-developed technology has on other U.S. 
industries. In summary, the loss of ownership of this technology would 
be devastating to the growth potential of the U.S. economy.
  I appreciate the fact that the administration supports our position 
and has recommended FSC treatment for computer software in the budget. 
Enactment of this legislation will make that recommendation reality. I 
urge my colleagues to join Senators Hatch, Breaux, Nickles, and myself 
in support of swift action on the Software Export Equity Act.

[[Page S1837]]

 Mr. GORTON. Mr. President, I am pleased to join Senator Hatch 
today in introducing the Software Export Equality Act. In 1971, 
Congress created foreign service corporations [FSC] in order to 
encourage U.S. exports and increase U.S. competitiveness in the 
international marketplace. Under current law, FSC legislation gives 
U.S. manufacturers a tax incentive for exports of domestically produced 
goods. Today, virtually every U.S. product manufactured for export 
abroad qualifies for FSC benefits. Yet current tax laws continue to 
discriminate against one of the America's fastest growing exports: 
software.
  Due to the IRS's narrow interpretation of FSC rules, the software 
industry is precluded from qualifying for any FSC benefits despite the 
fact that approximately 85 percent of products sold by U.S. software 
companies are developed in the United States and it currently ranks 
seventh in U.S. industry exports. This bill will clarify that computer 
software qualifies as export property and is eligible for FSC benefits. 
Continuing to deny the benefits of FSC rules to the software industry 
is not only unfair, it poses a serious impediment to the 
competitiveness of U.S. manufactured software.
  Software is one of the America's fastest growing industries, with 
revenues of more than $200 billion and a growth rate of 13 percent per 
year on average. As the world leader in software development, the 
United States is home to more than 8,000 software companies that 
provide, directly and indirectly, millions of high-paying, high-skilled 
American jobs in many States.
  Software is a vital and growing part of many State economies, 
including my own State of Washington. In Washington State, the software 
industry accounted for $3.5 billion worth, and 12 percent, of 
Washington State exports and employed over 22,509 people in 1995. 
Microsoft, the State's largest software producer, alone supported 1.5 
percent of the State's economy in 1995. But these impressive numbers do 
not even take into account the significant impact the numerous small 
and middle-sized software companies that make up the majority in 
Washington State have on the State's economy.
  The worldwide market for software is exploding and global competition 
is quickly on the rise. In this increasingly competitive world economy, 
incentives to encourage firms to develop and export from the United 
States are more important than ever to job creation and economic 
stability. This bill provides a simpe way to ensure the U.S. software 
industry remains the world leader in software manufacturing and 
American software jobs are protected.
  I encourage my colleagues to join me in support of this very 
important legislation and urge its quick passage in the Senate.
                                 ______