[Congressional Record Volume 146, Number 106 (Tuesday, September 12, 2000)]
[House]
[Pages H7416-H7431]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
FSC REPEAL AND EXTRA-TERRITORIAL INCOME EXCLUSION ACT OF 2000
Mr. ARCHER. Mr. Speaker, I move to suspend the rules and pass 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, as amended.
The Clerk read as follows:
H.R. 4986
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
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hereby repealed.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--
``(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.
[[Page H7417]]
``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
``(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.
[[Page H7418]]
``(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 may reasonably be expected to be 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
[[Page H7419]]
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.
``(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 designated by the organization as allocable
to qualifying foreign trade income 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.''
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 245 is amended by adding at the end the
following new subsection:
``(d) Certain Dividends Allocable to Qualifying Foreign
Trade Income.--In the case of a domestic corporation which is
a United States shareholder (as defined in section 951(b)) of
a controlled foreign corporation (as defined in section 957),
there shall be allowed as a deduction an amount equal to 100
percent of any dividend received from such controlled foreign
corporation which is distributed out of earnings and profits
attributable to qualifying foreign trade income (as defined
in section 941(a)).''
(3) 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).''
(4) 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)).''
(5) Section 903 is amended by striking ``164(a)'' and
inserting ``114, 164(a),''.
(6) Section 999(c)(1) is amended by inserting
``941(a)(5),'' after ``908(a),''.
(7) 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.''
(8) 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.''
(9) 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) Related person.--For purposes of this subsection, the
term ``related person'' has the meaning given to such term by
section 943(b)(3) of such Code, as added 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
amendments) 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
Texas (Mr. Archer) and the gentleman from New York (Mr. Rangel) each
will control 20 minutes.
Mr. STARK. Mr. Speaker, I oppose the bill, and I would like to claim
the time in opposition.
The SPEAKER pro tempore. Is the gentleman from New York (Mr. Rangel)
opposed to the motion?
Mr. RANGEL. No, I am not, Mr. Speaker. I support the bill.
The SPEAKER pro tempore. The gentleman from New York (Mr. Rangel) is
not opposed to the motion. Therefore, the gentleman from California
(Mr. Stark) may claim the 20 minutes of debate reserved for opposition
to the motion under clause 1(c) of Rule XV.
Mr. RANGEL. Mr. Speaker, I ask whether the gentleman from California
(Mr. Stark) would yield 10 minutes of his time for those of us on the
committee that support the motion.
Mr. STARK. I am not prepared at this point, Mr. Speaker, to yield any
time.
The SPEAKER pro tempore. Under the rule, the gentleman from 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 include extraneous material on H.R. 4986.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Texas?
[[Page H7420]]
There was no objection.
Mr. ARCHER. Mr. Speaker, I yield such time as he may consume to the
gentleman from New York (Mr. Rangel).
Mr. RANGEL. Mr. Speaker, I thank the gentleman from Texas (Chairman
Archer) for yielding me this time and for this opportunity in working
with him on this very important issue that has affected our Foreign
Sale Corporation legislation.
As most everyone knows, the World Trade Organization has required the
administration and, indeed, this Congress to work together to replace a
tax treatment consistent with our trade agreements.
I would like to commend the Republicans and Democrats on this
committee, the leadership, as well as the administration, to commend
Treasury Undersecretary Stuart Eizenstat and Assistant Secretary John
Talisman in the way they approached this very sensitive situation,
which, of course, the World Trade Organization has made such an issue.
We in Congress could have ignored the WTO ruling down in April much
as the European Union has ignored many of the issues and beef hormones
and other disputes. But we have sought to work it out diplomatically.
When that has failed, we have now come with a legislative resolution.
It is a very sensitive situation, and I thank the gentleman from
Texas (Chairman Archer) so much for giving me the opportunity to
support the overwhelming majority of the people on the committee as
well as this leadership on this issue.
Mr. STARK. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, whether or not one agrees that tobacco, pharmaceutical,
and military industries should be exempt from receiving this subsidy,
which is referred to as the foreign sales credit, everyone should be
opposed to the bill before us today.
Whether or not one agrees that the new tax scheme is, in fact, an
export subsidy, which most of us feel it is, as does the World Trade
Organization, in a form of egregious corporate welfare, one should be
opposed to the bill.
This bill spends $5 billion of taxpayers' money every year in
perpetuity, and our leadership is allowing a mere 40 minutes of debate
and not allowing amendments.
I can understand why the administration and my colleagues want to
rush this legislation through, and I understand they want as little
debate as possible to avoid public disclosure that will aid the
European Union in their case before the World Trade Organization.
However, our commitment first and foremost should be to our
constituents. Our first commitment should be to the health and welfare
of our seniors and children. Does not every taxpayer have a right to
know how their hard-earned taxpayer dollars are being spent? Of course
they do.
The new FSC has a new name and a new face, but it is the same old
subsidy. If it quacks like a subsidy and walks like a subsidy, it still
is a subsidy. The new scheme essentially leaves the export benefit in
place, but now the Treasury will forego an additional $300 million a
year to subsidy our exporters. The Treasury will give more than $5
billion a year to help Boeing, R.J. Reynolds and Monsato peddle their
products overseas. The exporters will receive lower tax rate on income
from export sales than they do from domestic sales. Clearly this is
prohibited under the WTO Agreement on Subsidies and Countervailing
Measures.
Proponents of the FSC claim that it is needed to compete with
Europe's value-added tax. That is simply nonsense.
International trade allows rebates on consumption taxes such as the
VAP and U.S. excise and State sales tax. That is a level playing field.
Europe's corporate income tax is comparable to ours and in fact
investors often criticize Europe for imposing too high a corporate
income tax.
The FSC replacement is an export subsidy that will help industry such
as the pharmaceutical, tobacco, and military weapons industries
capitalize on the generosity of the Congress and on taxpayers.
Let us start, for example, with the pharmaceutical industry. Is there
anyone who says that we should encourage the U.S. pharmaceutical
companies to sell cheaper drugs to foreigners while selling them at
higher prices here at home to our uninsured and our seniors? That is
exactly what we will be doing if we vote for H.R. 4986.
{time} 1630
The pharmaceutical company does not need another corporate subsidy at
the expense of the American taxpayer. This offers incentives for the
pharmaceutical companies to sell their products in other developed
countries for less than they sell them here at home. Drug companies
already reap huge tax benefits that lower their average effective rate
40 percent below other U.S. industries in America.
The richest drug company had greater profits than the entire airline
industry and more than twice the profits of the entire engineering and
construction industry. Yet, studies show that American seniors without
drug coverage often pay twice as much as people in Canada and Mexico.
Last week, the Committee on Ways and Means rejected my amendment,
which would have prohibited pharmaceutical companies from receiving
this FSC subsidy if they charged American consumers 5 percent more than
what they charge foreign consumers. That amendment made sense. Why
should our seniors who go without their prescription drugs further have
to subsidize the pharmaceutical companies who sell them abroad? It is
an insult to American seniors and all taxpayers.
I urge my colleagues to vote to help the seniors obtain affordable
prescription drugs and to do away with this egregious corporate
welfare.
Without an option to offer or an amendment, no amendments are allowed
under today's rules, the American public will be forced to help a
pharmaceutical industry that cares nothing about the well-being of
American citizens. The tobacco industry indeed will get subsidized
exporting their poison to help kill and addict millions of children
around the world.
The weapons industry, who does nothing to encourage the sale of their
weapons of destruction because those sales are made for them by the
Department of Defense and by the U.S. State Department, why should they
get a subsidy to sell nuclear materials or tanks or weapons of
destruction when that is arranged for them? Why should we subsidize
this arms race?
The answer is we should not. We should not go through this, and when
we want to promote world law, we should not be here with a second-rate
subterfuge trying to call a subsidy something it is not. We should give
up. We should recognize that the World Trade Organization is correct.
We should allow our American industry to compete as they can on quality
and on ingenuity and not have to subsidize these large manufacturers as
a mere give-away just before election.
Mr. Speaker, as the only member of the Ways and Means to vote against
H.R. 4986, the FSC Repeal and Extraterritorial Income Exclusion Act of
2000, I must explain the reasons for my vote.
I believe that this bill will not suffice under the scrutiny of the
World Trade Organization. H.R. 4986 is as much of a subsidy as the
current FSC. The entire process was undemocratic, constituting backroom
consultations with private industry and select members of Congress.
Finally, the bill is expanded and additional taxpayer dollars will be
lost under the new scheme. It is not right that we ask U.S. taxpayers
to pay for an export subsidy for large pharmaceutical corporations when
the U.S. pharmaceutical industry is charging less in wealthy foreign
markets for the same prescription drugs that our seniors are unable to
afford here.
process
Select members of the House Ways and Means Committee and Senate
Finance Committee were consulted on revising the Foreign Sales
Corporation (FSC) prior to the World Trade Organization's October 2000
deadline. In addition, those who will benefit from the new subsidy were
also consulted--private industry. However, there were many members of
the Ways and Means Committee who were not consulted on the details of
the new proposal. This hardly reflects the democratic process under
which this legislative body is supposed to operate.
I was one of the members who was not consulted on repealing and
replacing the current FSC for a new plan, yet
[[Page H7421]]
I was one of the members who was here to vote in 1984 to repeal the
Domestic International Sales Corporation and replace it with the
Foreign Sales Corporation.
benefits to military weapons exporters
In 1976, I led Congress in voting to decrease the benefit to weapons
dealers. Therefore, I was dismayed to see that the new FSC benefit will
actually be expanded to increase the benefit of the subsidy to military
weapons exporters.
The U.S. already spends about $8 billion annually to subsidize U.S.
weapons manufacturers. These subsidies include taxpayer-backed loans,
grants, and government promotional activities that assist U.S. weapons
makers to sell their products to foreign customers. Under the current
Foreign Sales Corporation scheme, weapons exporters may qualify for up
to 50 percent of the FSC benefit. Under the new scheme, arms dealers
will be able to reap the full benefit of the subsidy. It is
incomprehensible that we would allow an industry that already receives
more than its fair share of pork barrel spending to receive increased
subsidies through the new FSC plan.
benefits to pharmaceutical industry
The pharmaceutical industry is another branch of corporate America
that clearly does not need an export subsidy at the expense of the
American taxpayer. H.R. 4986 offers export incentives to pharmaceutical
companies who sell their products to other developed countries for less
than the U.S. consumer can purchase the exact same drugs.
Drug companies already reap huge benefits that lowered their average
effective tax rates nearly 40 percent relative to the other major U.S.
industries from 1990 to 1996. Fortune magazine again rated the
pharmaceutical industry the most profitable industry in 1999. Merck,
the richest drug company, had greater profits than the entire airline
industry and more than twice the profits of the engineering-
construction industry. Drug spending increased more than 15 percent in
1998, 18 percent in 1999 and is expected to continue to increase at
phenomenal rates in the future. Yet, studies have shown that American
seniors without drug coverage often pay about twice as much as people
in Canada and Mexico.
The Ways and Means Committee rejected my amendment which would have
prohibited pharmaceutical companies from receiving the full FSC benefit
if they discounted more than 5 percent to foreign consumers relative to
U.S. consumers. This amendment simply makes sense. It is only fair to
the millions of U.S. seniors who go without their much needed
prescription drugs. Why subsidize an industry already receiving huge
corporate tax credits? We should have exempted pharmaceutical
companies. The members of the Ways and Means Committee chose otherwise.
This is an insult not only to American seniors, but to all U.S.
taxpayers.
export subsidy
Finally, H.R. 4986 does not address the concerns of the WTO dispute
panel. The new scheme attempts to allay the European Unions' concerns
by allowing some foreign operations to also receive the subsidy. The
new scheme eliminates the requirement on a firm to sell its exports
through a separately chartered foreign corporation in order to receive
the benefit. The only portion that is eliminated is the paper
subsidiary. Instead of creating a tax haven, U.S. exporters will be
able to receive the benefit outright. The new scheme doesn't prevent
arms exporters or any other industry from receiving the entire benefit
of the subsidy.
The new scheme essentially leaves the export benefit in place but now
the U.S. Treasury will forego an additional $300 million per year to
subsidize U.S. exporters. The U.S. Treasury will forego more than $3
billion per year to help companies like Boeing and R.J. Reynolds peddle
their products. Exporters will continue to receive a lower tax rate on
income from export sales than from domestic sales. This is clearly
prohibited under the WTO Agreement on Subsidies and Countervailing
Measures.
It is a sad commentary on the Ways and Means Committee that is
willing to fight a WTO ruling all in the name of corporate profits but
ignores environmental, human rights and labor interests.
Mr. Speaker, I reserve the balance of my time.
Mr. ARCHER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, the one thing this bill is not is corporate welfare. The
one thing this bill is not is a subsidy to corporations.
Almost every one of our foreign competitors singly taxes the earnings
of their corporations overseas. We double tax in an ill-advised,
antiquated system the earnings of our corporations overseas and place
them at a gigantic disadvantage against their foreign competitors.
The FSC program simply mollifies to a small degree this giant
disadvantage to our corporations, a disadvantage which is so great that
it is causing one by one major corporations to move overseas instead of
having their headquarters in the U.S., signified recently by Chrysler
having to become a German corporation.
The gentleman from California (Mr. Stark) can speak his rhetoric, but
he is ill-advised when he calls this a subsidy or corporate welfare.
This bill is critical for continued U.S. competitiveness in the
global marketplace. It is critical for our economy. And most important,
it is critical to preserve as many as five million jobs for American
workers and their families. That is right, approximately 4.8 million
American jobs are directly related to the manufacture of products
benefiting from the Foreign Sales Corporation provisions in the Tax
Code.
So while this is a complex issue, we must succeed for the most basic
reasons.
This bill enables the U.S. to comply with a decision of the World
Trade Organization, which last year held that our FSC provisions of the
Internal Revenue Code violated certain provisions of the WTO rules
which prohibit export subsidies. The Clinton administration and the
Congress strongly disagreed with this decision and the case was
appealed. Unfortunately, the appeal was not granted.
Unless Congress changes the law to comply with the decision, U.S.
consumers and businesses face the possibility of retaliation by the
European Union on or after October 1. This would negate the ability of
our domestically produced goods to enter the European market in an
amount of anywhere from 4 to $40 billion a year with devastation on the
workers in those industries in this country.
I believe the approach in this legislation is the best way to comply
with the decision, continue to honor our trade agreements consistent
with the obligations they impart, and maintain our global
competitiveness.
This legislation enjoys strong bipartisan support in both Houses of
Congress and is strongly supported by the administration.
Deputy Treasury Secretary Eizenstat has been involved in the
construction of this legislation from the very beginning, as well as
Members and staff from both the majority and the minority.
I also mention the extraordinary work of the Joint Committee on
Taxation to develop this product in a short period of time. This bill
is the product of extensive deliberations of a bipartisan, bicameral,
and administration working group which consulted with both tax and
trade experts on how best to fashion a measure to allow the U.S. to
comply with the WTO decision.
This bill is also supported by U.S. companies and their workers who
would be most negatively impacted by the WTO ruling.
I also hope that this legislation ends the longstanding challenge by
the EU to our tax system. It is an important step in making our tax
system not only compliant with our obligations under the WTO rules but
in also making our system relevant to the global marketplace in which
our citizens and businesses must compete.
I look forward to continuing to work in a bipartisan fashion to see
this bill signed into law to help preserve American jobs, businesses,
and our economy in the next century.
Starting this week, America's Olympic athletes will compete against
the world's best in Sydney, Australia, and all competitors will play by
the rules.
In the far fiercer global economic competition of the 21st century,
we must work hard to give U.S. workers and companies that same
opportunity. That is exactly what this bill is designed to do.
[[Page H7422]]
I urge all Members to support this vital legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. STARK. Mr. Speaker, I yield 2 minutes to the gentleman from
California (Mr. Waxman).
Mr. WAXMAN. Mr. Speaker, I rise in opposition to H.R. 4986.
While I believe that we must promote U.S. competitiveness in global
markets, I strongly object to forcing American taxpayers to support the
export of tobacco and tobacco addiction.
The most recent IRS statistics reveal that tobacco companies have
used the FSC for a tax break of more than $100 million a year. Under
the new system unveiled in this bill, they will benefit even more. This
is wrong.
The dangers of nicotine are well known, and these dangers do not stop
at our borders. Smoking causes more than 3.5 million deaths each year
throughout the world. That number is expected to rise to 10 million
people within 20 years, with 70 percent of all smoking-related deaths
projected to occur in developing countries that are the newest targets
of the tobacco industry.
This Congress has done nothing to address the tobacco epidemic that
rages both here and abroad. Tragically, this bill only helps big
tobacco promote it. We could easily address this problem by allowing
for consideration of the Doggett amendment to exempt manufacture of
tobacco from the bill. Instead, the bill was added to the suspension
calendar, which allows no amendments and very limited debate.
Mr. Speaker, we have FSC exemption for national security. We have
exemptions to protect certain domestic industries. It is long overdue
to have an exemption for public health.
The American taxpayers should not be a partner in the export of death
and disease. We should not be enabling big tobacco to escape public
health restrictions in our market by peddling cigarettes to children
around the globe.
I urge my colleagues to oppose this bill because the procedure does
not allow us to engage in a meaningful debate on this issue or to vote
on the Doggett amendment.
Mr. ARCHER. Mr. Speaker, I yield 3 minutes to the gentleman from
California (Mr. Thomas), a respected member of the Committee on Ways
and Means.
(Mr. THOMAS asked and was given permission to revise and extend his
remarks.)
Mr. THOMAS. Mr. Speaker, I thank the chairman very much for yielding
me the time.
Mr. Speaker, first of all, I want to compliment the chairman and the
ranking member. There has been an unprecedented degree of cooperation
not only between the Democrats and the Republicans in the House, but
between the House and the Senate and the administration in responding
to what is clearly a crisis in our international responsibilities.
Very often adults are prone in dealing with children to in essence
say, Do as I say, not as I do. And today we are seeing an example of
this country telling the rest of the world, Do as we do, not as we say.
In stark contrast, for example, to the Europeans and their abject
failure to respond to adverse decisions in the World Trade
Organization, continuing to drag their feet when the international
community says they are wrong, what we have here is an example of the
United States moving with clear rapidity to make fundamental changes to
bring us into compliance. Do not just take my word for it.
Mr. Speaker, I include for the Record the following text of a letter
from Deputy Secretary Eizenstat to the European Union Commissioner for
Trade:
Dep Sec. Eizenstat FSC Letter,
Date: August 11, 2000-Inside US Trade,
July 28, 2000.
Mr. Pascal Lamy,
Commissioner for Trade, Rue du la Loi 200, B-1049, Brussels,
Belgium.
Dear Pascal: Following passage yesterday by the House Ways
and Means Committee of legislation to repeal the FSC, I am
writing to you to enclose a copy of the proposal and briefly
explain the details of this new proposal.
The new proposal embodied in the Chairman's mark represents
a major departure from the FSC and, furthermore, a
significant evolution from the proposal I discussed with you
in May. This proposal directly addresses the issues raised by
the WTO Appellate Body. Further, it addresses additional
concerns raised by the EU, as expressed in our meeting on May
2, in your letter to me of May 26, and in our telephone call
of July 14.
In compliance with the Appellate Body decision, the FSC
provisions are to be repealed from the Internal Revenue Code.
The new tax provisions embodied in the Chairman's mark have
the following key elements.
The Chairman's work provides an exclusion of tax on certain
extraterritorial income. Because this would be our general
rule, there is no foregone revenue that is otherwise due and
thus no subsidy.
Further, because it treats foreign sales alike, whether the
goods were manufactured in the U.S. or abroad, it is not
export-contingent. Thus, a company would receive the same tax
treatment on foreign sales regardless of whether it exports.
The Chairman's mark excludes qualifying foreign trade
income directly at the level of the entity that produces the
relevant good or produces the qualifying service. It does not
require foreign sales transactions to be routed through
separate offshore companies. Thus it eliminates the
Administrative Pricing Rules for transfer pricing between
affiliated companies, which the EU alleged violated the arms
length provision of the Subsidies Agreement, Further, it
eliminates the dividends received deduction.
Likewise, this approach address EU concerns about alleged
incentives to use low or no-tax jurisdictions since a
separated affiliate would not be necessary for this
exclusion.
The Chairman's mark is the product of an unprecedented
bipartisan effort in which Congress and the Administration
worked together both to develop a proposal that is WTO
compliant and to act quickly in an effort to comply with the
October 1 deadline set by the WTO.
The House Ways and Means Committee voted 34-to-1 yesterday
to support this legislation that meets our WTO obligations.
Our key Congressional tax and trade committees understand
that we have left the door open to further consultation with
the EU as this legislation moves forward. We remain prepared
to negotiate a solution on the basis of this proposal.
I hope that we can work together to avoid an escalation of
this conflict. It would not be in the interest of either the
U.S. or Europe to engage in a major trade war over this
issue. Both U.S. and European businesses would needlessly
suffer the consequences.
The legislation I am attaching herewith represents a
serious effort on the part of the U.S. to comply with the
Appellate Body's decision before its October 1st deadline. As
we move to pass this legislation before that deadline, I hope
that we can have a dialogue to resolve this conflict on the
basis of this new proposal.
For your review I'm attaching three documents: (1) A copy
of the statement I delivered at the Committee mark up, (2)
the joint Tax Committee's description of the bill, and (3)
the text of the legislation as reported by the Ways and Means
Committee; please note that the formal bill is not yet
available.
I look forward to talking with you again about these
matters.
Yours Very Truly,
Steve E. Eizenstat.
Mr. Speaker, a portion of that letter states: ``The Chairman's mark
is the product of an unprecedented bipartisan effort in which Congress
and the administration worked together both to develop a proposal that
is WTO compliant and to act quickly in an effort to comply with the
October 1 deadline set by the WTO.''
He goes on to quote, ``The House Ways and Means Committee voted 34-1
to support this legislation.''
I believe what we are seeing worked out on the floor is the result of
that 34-1 vote.
Let me say also to everyone in this country that when we are dealing
on an international basis, one of the things we need to do is to show
bipartisanship.
I want to compliment the ranking member from New York who has done
that. I want to compliment the chairman.
For those friends of ours who are listening and not part of our
system, I do want to refer to a section of the Constitution. It is in
Article I, section VI. To a degree, what is occurring here today is
going to be covered, thankfully, for some of the participants by that
portion of section VI, which says: ``And for any speech or debate in
either House, they shall not be questioned in any other place.''
That is, on the floor of the House, we are allowed to say certain
things for which we can never be questioned anywhere else.
As we discuss this bill and statements are made, keep in mind the
speech-and-debate clause, which allows some folks to say what they are
saying.
Mr. STARK. Mr. Speaker, I yield 4 minutes to the gentleman from
Oregon (Mr. DeFazio).
[[Page H7423]]
{time} 1645
Mr. DeFAZIO. Mr. Speaker, this is an extraordinary debate, a $5
billion per year perpetual tax break to the largest, most profitable
corporations in the world; forty minutes of debate and that is it. No
amendments are allowed.
This bill was secretly negotiated, this bipartisan group, very secret
and small group, revealed to members of the committee on the same day
that the secret negotiations were concluded; perfunctory markup was
held and now it is being rushed through.
We cannot agree on marriage penalty relief. We cannot agree on small
business relief. We cannot agree on inheritance tax relief but, by God,
the administration, the Republican leadership, they can put this one
together behind closed doors because it benefits the largest, most
profitable corporations in this country.
Over the last decade, almost $2 billion of these proceeds went to two
companies, Boeing and General Electric, mostly for arms manufacturers.
Now, we need to help our arms manufacturers. They already dominate the
world market, but we need to give them another leg up because not 100
percent of the arms being bought out there by our enemies and our
allies are U.S. made yet. We have to give them a leg up.
The pharmaceutical manufacturers, well, they need an incentive to
export because overseas they sell drugs cheaper than they sell them to
the Americans who subsidize their manufacture here. So we have to give
them a little tax break to export those cheap drugs to foreigners but
not provide affordable drugs here at home.
The tobacco companies, of course we want to export tobacco. Maybe
that will hurt the productivity of our competitors around the world as
they become sick and die from this product that is being promoted
through this tax break.
This is outrageous. We are taking $5 billion of hard-earned
taxpayers' money and shifting it to some of the largest, most
profitable corporations in this country under the dubious assumption
that somehow this is countering unfair things the Europeans are doing.
If they are doing unfair and illegal things, you people wanted this
rules-based trade agreement, you wanted a WTO with a secret,
deliberative body that would adjudicate these complaints. I did not. I
voted against it.
Well then file a complaint against the Europeans. Do not extend an
unfair subsidy that does not even meet the laugh test. This does not
comply with the last ruling. The Europeans will still get to penalize
U.S. industries if this goes into effect, and they may well not
penalize with tariffs the industries that are getting the tax break.
Other U.S. manufacturers might be hurt.
You are doing this country a double disservice today with this
legislation. It is extraordinary that this would be rushed through in
this manner while there is virtually nobody in this Chamber; virtually
half the Members are probably not even in town yet. They are still
enjoying the hospitality of some of our airlines.
If it is an Endangered Species Act provision, by God, we have to
comply. If it is a Clean Air Act provision, by God, the U.S. has to
comply. If we can make the Europeans eat beef that has been treated
with bovine growth hormone, which they have protested against because
of health concerns, by God, they have to comply. But when it comes to
corporate tax breaks, we will not comply.
This is the highest and best use of trade policy. That is what it is
all about. Trade policy was written for, by, and about the largest
corporations in this country; and we will do anything behind closed
doors or even here on the floor of the House under very restrictive
conditions to defend those tax breaks in the name of free trade.
If you have a problem with the European tax system, file a complaint.
Answer that one. Why not file a complaint against OPEC? They are
violating the WTO. It is awfully strange that we will not use this
rules-based organization. Well, we are told we had a gentleman's
agreement on taxes, gentleman's agreement.
I voted against entering into the WTO. I never heard any discussion
on the floor about gentleman's agreements that were binding as part of
this that went to the Tax Code. Pretty strange way to have an
enforceable rules-based trade agreement with gentlemen's agreements
that no one knows about.
If you have a problem with the Europeans, file a complaint. Do not
use the tax dollars of American taxpayers to continue this outrageous
subsidy, double the subsidy to arms manufacturers, extend it to
pharmaceuticals and tobacco. It is outrageous.
Mr. ARCHER. Mr. Speaker, I yield myself such time as I may consume to
briefly respond to the gentleman from Oregon (Mr. DeFazio).
The gentleman speaks passionately but he does not speak the facts,
and passion is no substitute for the facts. The facts are that the
current law already gives incentives to overcome the double taxation
that our corporations face competing overseas, and this replaces that
in the code. It does not cost $5 billion. He knows that.
If there is such opposition to the existing incentives that are in
the code or the reduction of the barriers that are in the code, why
were they not out front a long time ago? Why are there not amendments
offered over and over again in committee? And they were not.
Mr. DeFAZIO. Mr. Speaker, will the gentleman yield?
Mr. ARCHER. I do not have the time, as the gentleman knows.
Mr. DeFAZIO. I did introduce legislation to repeal these provisions
of law.
The SPEAKER pro tempore (Mr. Stearns). The gentleman is not
recognized.
Mr. ARCHER. Mr. Speaker, they come forward now, claim secret
clandestine negotiations, when we had a full, open markup in the
Committee on Ways and Means, as a matter of public record. As my
colleague from California said, the Constitution protects whatever one
wants to say on the floor of the House.
Mr. Speaker, I yield 2 minutes to the gentleman from Texas (Mr. Sam
Johnson), a respected colleague and member of the Committee on Ways and
Means.
(Mr. SAM JOHNSON of Texas asked and was given permission to revise
and extend his remarks.)
Mr. SAM JOHNSON of Texas. Mr. Speaker, listen, it is wrong, wrong,
wrong to say secret or totally Republican. This was a measured response
to an injustice by the WTO and it was a measured response from the
President, from the Trade Commission, from the Democrats and from the
Republicans.
This thing was not done in secret, and it is for all businesses in
this country that are legal. We should not question that. It is for
America.
Know what? This bill replaces the FSC in its entirety. It changes it.
In its place, it adopts key features of the certain European tax
systems moving the United States closer to a territorial system. It
eliminates administrative pricing rules which the European Union
objected to. Most importantly, this legislation is not export
contingent.
I sincerely hope that this legislation will end our dispute with the
European Union. They must understand they cannot use the WTO to impose
a permanent tax advantage over United States companies. We are doing
this for America, for the people of America, for the businesses in
America. God bless America.
Mr. STARK. Mr. Speaker, I yield 5 minutes to the gentleman from Texas
(Mr. Doggett) to discuss a bill which is not yet complete and which
nobody in this room has read.
Mr. DOGGETT. Mr. Speaker, God bless America and God bless the
democracy that involves public participation--a concept at the core of
what our American government is all about. Such public participation
was not very evident in the process that produced this bill.
This bill was conceived behind closed doors with no public
participation, no public hearings, no public involvement. It was
designed to continue what is, in essence, a legal scheme of tax
avoidance for the world's largest corporations by channeling some of
their profits through foreign tax havens.
This bill is basically a product of meetings between the Treasury
Department and those who benefit from the tax subsidy. The lobbyists
have met with the Treasury Department, but the Treasury Department
official responsible for the bill was unwilling to answer questions in
public from even the members of the Committee on Ways and Means.
[[Page H7424]]
I voted for this bill in committee. I am committed to promoting
international trade, but it was a very contrived circumstance that
produced this bill, and the arrogance and the deception associated with
this bill as well as the additional information that I now have about
this bill cause me today to reconsider my position and to oppose
strongly H.R. 4986.
This bill is not actually the bill that our committee considered.
Rather this is a bill that the lobby has massaged for another few weeks
after the initial bill was approved in the Committee on Ways and Means.
This particular version has never had a hearing or a vote. There are
not three Members on this floor today that can say they have even read
the particular bill that is before us today.
The cost of this bill, however, is $4 million to $6 million,
according to the best estimates we can get: every year that has to be
made up by other American taxpayers. With this bill, the Congress would
be saying basically that local stores that sell groceries or clothes to
people on any Main Street or at any mall in America, those businesses
would have to pay higher taxes so that multinational corporations that
sell tobacco and cigarettes and machine guns abroad can pay lower
taxes.
Even then, an independent analysis of this bill by the Congressional
Research Service says that it has ``a negligible effect on the trade
balance.'' That its overall impact in creating trade is practically
nil.
Now, it was suggested that only some ill-informed people here on the
floor were condemning this bill as corporate welfare. Well, perhaps the
gentleman is unfamiliar with the recommendation of his own Republican
Congressional Budget Office, I think for about 3 years in a row,
suggesting that the Foreign Sales Corporation Act be repealed just as
the gentleman from Oregon (Mr. DeFazio) has proposed in his own
separate legislation. Perhaps he did not listen to Senator John McCain
on ABC's This Week when in February he said he was opposed to the
Foreign Sales Corporation Act.
Announcement by the Speaker Pro Tempore
The SPEAKER pro tempore. The gentleman from Texas (Mr. Doggett) will
refrain from characterizing positions of individual Senators.
The gentleman may proceed.
Mr. DOGGETT. A distinguished Arizona citizen commenting on ABC's This
Week program made very clear his opposition to foreign sales
corporations, as did the Washington Times which referred to the
bipartisan involvement, called it ``an almost unanimous blunder.'' Let
us be very clear about what this bill does.
An eligible product need have little or no U.S. manufactured content
in order to qualify for this special new tax treatment. If one has a
pair of Levis and it is made entirely outside the United States but one
slaps on a label that says ``Levis,'' under this bill's supporters are
unable to say that this foreign manufactured product will not qualify
for special tax relief.
If one has a Marlboro cigarette that does not have one percentage
point of tobacco from American tobacco farmers in it but one slaps
``Marlboro'' on it, and that gives it more than 50 percent value, it
qualifies for a tax break. If one has a zocor tablet that is
manufactured outside the United States but one puts ``zocor'' on it and
adds 50 percent of the value, it qualifies for a tax break.
Every one of those under this bill is going to receive a special tax
subsidy, and that is not going to help American workers, and it
certainly is unfair to American consumers who have to pay the highest
pharmaceutical costs in the entire world; to pay a higher cost here and
then to add insult to injury by being forced to provide a tax subsidy
on top of that for the pharmaceutical company to sell it to someone
else at a lesser price in another country.
It is particularly outrageous that this bill would be taken up on the
floor of the Congress on the very day that a new study is announced
showing that tobacco is even more addictive for children than we ever
knew previously. Only a couple of weeks of contact with cigarettes can
addict children to a life of nicotine, posing the resulting threat of
death and disease, very painful disease.
This bill allows Phillip Morris to continue marketing to children
around the world and addicting them as a part of what is becoming a
pandemic that will kill 10 million people every year in this world as a
result of our promotion of tobacco. Today the American people are asked
to be an unwilling accomplice, to give $100 million a year to Phillip
Morris and the other big tobacco companies that are in the addiction
business to go around the world promoting their tobacco to other
people's kids. Well, those other children of the world have value, too,
and we ought to be concerned about their health and their lives. We
certainly ought not to encourage these tobacco companies with $100
million per year in tax subsidy to cause death and disease for children
around this world.
Mr. ARCHER. Mr. Speaker, I yield 5 minutes to the gentleman from New
York (Mr. Rangel), the minority leader of the Committee on Ways and
Means, and I ask unanimous consent that he be able to yield the time as
he sees fit.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Texas?
There was no objection.
{time} 1700
Mr. RANGEL. Mr. Speaker, I yield such time as she may consume to the
gentlewoman from the Virgin Islands (Mrs. Christensen).
(Mrs. CHRISTENSEN asked and was given permission to revise and extend
her remarks.)
Mrs. CHRISTENSEN. Mr. Speaker, I rise to express my views on the
adverse effect that the loss of FSC will have to my district, but I am
in support of H.R. 4986.
Mr. RANGEL. Mr. Speaker, I yield 2\1/2\ minutes to the gentleman from
Michigan (Mr. Levin), the ranking Democrat on the Subcommittee on
Trade.
Mr. ARCHER. Mr. Speaker, I yield 30 seconds to the gentleman from
Michigan.
(Mr. LEVIN asked and was given permission to revise and extend his
remarks.)
Mr. LEVIN. Mr. Speaker, let me try quickly to put this in
perspective. The U.S. has a worldwide taxation system; we tax income on
earnings wherever earned. The Europeans have a territorial system, and
I will not go into a lot of detail. In essence, what that does is to
favor exports over other transactions, especially domestic
transactions, so they have a system that nurtures exports.
We responded by creating a system, a DISC system that was an effort
to put our producers of goods, manufacturing goods and agricultural
goods, on a level playing field with Europe. It went into effect, and
it lasted for a couple of decades; and then it was decided by the
European community, I think, partly tactically to challenge it, and the
WTO said it was an illegal subsidy. So what we are faced with is an
October 1 deadline; and it is being faced by producers of goods,
manufacturing goods and agricultural goods.
We have been striving to find a replacement, and now we have one here
facing the October 1 deadline. I want to make it clear this bill does
not provide an incentive for U.S. producers to move their operations
overseas. No more, under this provision, than 50 percent of the fair
market value of such property can consist of a non-U.S. component plus
non-U.S. direct labor.
This provision has been carefully reviewed by Democrats, by
Republicans, by the Treasury Department, and by outside groups. Let me
be clear, if we fail to enact this bill by October 1, and that is the
constraint we are under, there is a serious risk that the EU will go
back to the WTO and seek authority to retaliate by raising tariffs on
potentially billions of dollars of goods made in the U.S. and exported
from the U.S., causing great harm to the U.S., both businesses, workers
and farmers.
Look, there are other issues, tobacco issues, pharmaceutical issues.
They cannot be considered within this context. If we need to amend U.S.
laws, we can do so later on. We have a constraint, October 1; and if we
fail to act by that date, we are going to hurt American businesses and
the workers who work for them; and we are simply going to help European
competitors, nothing to do with tobacco, nothing to do with
pharmaceuticals, nothing at all.
If we want to help European producers, vote against this. If we want
to help American workers, businesses, manufacturing goods, we are not
talking about services, vote in favor of this bill; and then we will go
on to these other issues at some other point.
Mr. RANGEL. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, I think it is great that we in the Congress can take
issue with
[[Page H7425]]
our domestic policy, our foreign policy, our trade policy. That is what
makes America such a great country, and we should always be able to
challenge the procedure in which legislation is brought to the House,
but I know that sometimes when I have series problems with my country's
foreign policy, one place I do not have a problem with it, and that is
in foreign countries. This is not a question of liberals against
conservatives, Republicans against Democrats, or the Congress against
the administration. It is the European Union that has challenged us,
and we can bet our life, they are not concerned with our economic
health.
They are not concerned with pharmaceuticals. They are not concerned
with arms. They are concerned in having a better-than-an-equal chance
to compete against the United States of America.
We had plenty of opportunity to work out our differences. We had
approaches that we have taken to them, and this is one time that we
came behind the administration and said try to work this out and avoid
an economic crisis. And it has been rejected.
What the administration has asked those of us on the Committee on
Ways and Means to do is to come together with a piece of legislation,
to say that we stand behind the United States of America in trying to
resolve the differences we have with the European Union and the World
Trade Organization.
If we do nothing, if we debate among ourselves, if we say let us see
what is going to happen, then sanctions come against us; and there is
no other body for us to take this to. I think it is a great country. We
have internal differences, political differences, and they should be
worked out; but it just seems to me that when other countries are
challenging our country, whether they are challenging our foreign
policy or whether they are challenging our trade policy, when that flag
goes up with the United States of America, that the President should be
supported by the administration, and this Congress should support the
administration.
We are a long way from resolving this issue; but if we do nothing and
find that our corporations are unable to effectively compete, we will
not have the opportunity to say but we had concerns about the policy. I
hope nobody in this Chamber ever is completely satisfied with any
policy of any administration, but there has to come a time when we do
come together to say America first, America first with exports for the
jobs that are provided and America when that flag goes up.
Mr. STARK. Mr. Speaker, I yield 2 minutes to the gentleman from
Massachusetts (Mr. Tierney).
Mr. TIERNEY. Mr. Speaker, I thank the gentleman from California (Mr.
Stark) for yielding time to me, and I want to say that today this is
supposedly an effort on the part of the United States to comply with
the ruling by the WTO in an effort to expedite this action is actually
an effort that purports to repeal the corporate tax subsidy called the
Foreign Sales Corporation.
Unfortunately, what happens when we turn around we are going to
actually increase this subsidy. There has been little dispute and far-
ranging agreement that existing FSCs have long been a tax windfall to
companies like Boeing, General Motors, Big Tobacco, many in the
pharmaceutical industry and other corporate giants. As they export,
those companies need only set up offshore paper companies and
subsidiaries, and they receive the benefit. And that has been a pretty
substantial benefit, the single loophole that cost taxpayers more than
$10 billion, with $8 billion of that flowing to the very largest
corporations all for simply funneling it through an offshore office.
Adding insult to injury, the publication Inside U.S. Trade recently
reported that supporters of this bill have admitted that companies
could qualify for the tax preference now even if little or no physical
production actually occurs outside the United States. For example, a
bluejean company could relocate its operations and American jobs
abroad, produce an entirely foreign-manufactured product and still
receive this subsidy financed by American taxes simply by slapping its
American brand name on the tag.
Since this tax break was originally written with the expressed
purpose of keeping jobs here in the United States, such an expansion of
the provision would appear to be the product of corporation pandering
at its very worst.
Congress is proposing to expand it by another $1.5 billion over the
next 5 years, on top of the $15.6 billion the loophole has already cost
taxpayers. As the gentleman from Texas (Mr. Doggett), my colleague,
pointed out, this bill amounts to a $100 million subsidy to the tobacco
industry to market their products to children around the world, a
practice that they are rightfully forbidden from doing here in the
United States.
And as the gentleman from California (Mr. Stark), my colleague,
argues correctly, this bill actually subsidizes pharmaceutical
companies to charge less for prescription drugs.
With all due respect, this is not an argument about us against them,
it is an argument about the workers in this country and setting things
straight and not pandering to corporate interests.
Mr. STARK. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I include for the Record my dissenting views on the
bill.
Mr. Speaker, today, in an effort to comply--unsuccessfully, it
appears--with a February ruling by the WTO, the majority is suspending
its usual rules to expedite a vote on H.R. 4986, a bill that purports
to repeal a corporate tax subsidy called the ``Foreign Sales
Corporation'' (FSC).
Wide ranging agreement exists that FSCs have long been a tax windfall
to companies like Boeing, GM, Big Tobacco, many in the pharmaceutical
industry, and other corporate giants, as exporting companies need only
set up an offshore paper subsidiary to receive the tax benefit. And
what a benefit it is: in the 1990's alone, this single loophole cost
taxpayers more than $10 billion, with $8 billion of that flowing to the
very largest corporations, all for simply funneling sales through an
offshore office.
In an effort to comply with the WTO ruling last February deeming FSCs
to be an illegal export subsidy, H.R. 4986 would replace FSCs with an
even worse tax boondoggle, this time without the paper subsidiary.
Adding insult to injury, the publication ``Inside U.S. Trade''
recently reported that supporters of the bill have admitted that
companies could qualify for the tax preference even if little or no
physical production actually occurs in the U.S. For example, a blue-
jean company could relocate its operations--and American jobs--abroad,
produce a entirely foreign-manufactured product, and still receive this
subsidy financed by American taxpayers, simply by slapping its American
brand-name on the tag. Since this tax break was originally written with
the express purpose of keeping jobs here in the United States, such an
expansion of the provision would appear to be the product of corporate
pandering at its very worst.
Now Congress is proposing to expand it by another $1.5 billion over
the next five years, on top of $15.6 billion the loophole already will
cost taxpayers.
As my colleague from Texas, Mr. Doggett has argued, this bill also
amounts to a $100 million subsidy to the Tobacco Industry to market
their products to children around the world, a practice they are
rightfully forbidden to do here in the U.S. And, as my colleague from
California, Mr. Stark correctly argues, this bill actually subsidizes
pharmaceutical companies to charge less for prescription drugs overseas
than they do here in the U.S., where such drugs prices have skyrocketed
out of the range of what many Americans seniors can afford.
As the EU rejected the terms of H.R. 4986 last month (with the WTO
likely soon to follow), it sends the wrong message to WTO, implying
that we do not wish to seriously negotiate terms of compliance. It
subsidizes corporations that do not need subsidizing. It subsidizes
corporations that should not be subsidized. And perhaps more
importantly, were Congress to approve this bill, it would represent
exactly the sort of behavior which so often leaves voters cynical with
regard to political process, further giving evidence to the argument
that it is corporations, not the people, whose interests Congress
represents.
Second, while exports are, indeed, increased, such a subsidy actually
triggers international exchange-rate adjustments, which has the effect
of increasing U.S. imports as well, leaving the impact on the trade
deficit negligible at best, as witnessed by the recent news that the
trade deficit had hit an all-time high.
Lastly, the entire legislative process regarding H.R. 4986 has been
the worst sort of backroom dealing with industry virtually writing the
bill and many House Members of the committee of jurisdiction, Ways and
Means, shut
[[Page H7426]]
out of the process. Additionally, leadership in both parties, with the
blessing of the Administration, hoped to expedite the process by
shuttling the bill through Congress with limited debate and no
amendments.
While the U.S. should conform to WTO guidelines by the October 2000
date the organization has set, this corporate welfare bill is certainly
not the right approach, substantively or tactically.
Not only is the argument that FSCs are not a subsidy not credible,
but the arguments that VATs are, verges on laughable. VATs are
equivalent to an added sales tax that European countries rebate to
companies when such goods are exported. Since the U.S. doesn't apply a
sales tax to exports in the first place, the argument is effectively
moot.
The rationale behind tax policy such as FSC is that it encourages
other countries to buy our exports by bringing prices down (for
foreigners) and thus reduces the trade deficit. But here, too, its
defenders' argument is not supported by the facts. In the first place,
to the extent that export prices actually fall, this is a transfer of
benefits from U.S. taxpayers to foreign consumers.
Mr. Speaker, I yield such time as he may consume to the gentleman
from Texas (Mr. Doggett).
(Mr. DOGGETT asked and was given permission to revise and extend his
remarks.)
Mr. DOGGETT. Mr. Speaker, I include for the Record additional views
that I offered individually to the Committee on Ways and Means report
on H.R. 4986 and the additional views that I offered on behalf of
myself, the gentleman from Georgia (Mr. Lewis), and the gentleman from
California (Mr. Stark) to the same report.
Mr. Speaker, I also include for the Record a copy of the story in
today's Washington Post entitled ``Tobacco Exports Get Aid in Bill Set
for House Vote.''
Additional Views by Mr. Doggett
In what is hardly a model of the way the democratic process
should operate, this legislation has involved no public
participation, no hearings, and no involvement of any but a
handful of Committee members. This bill is basically a
product of meetings between the Treasury Department and
groups that will benefit from preferential tax treatment. The
Chairman even went so far as to attempt to preclude the
Committee members from making comments or offering
amendments. The members were even denied the right to
question Secretary Eizenstat, the principal Administration
official responsible for this bill.
The cost of this legislation to the Treasury, which must be
paid for by American taxpayers, is between $4 billion and $6
billion per year, and growing. In response to the European
community's criticism that tax advantages to American
businesses are illegal, this legislation seeks to generously
increase those advantages by $300 million a year.
With this legislation, the Committee has basically made a
public policy statement that local stores, which sell
groceries or clothing to customers within our country, should
pay higher taxes than multinational corporations, which sell
cigarettes or machine guns abroad. Contrary to proponents'
arguments that small and medium sized businesses share
significantly in this tax break, the Internal Revenue Service
Statistics of Income Division reports that 78% of FSC tax
benefits go to companies with assets exceeding $1 billion.
Another study based on a sample of corporate financial
statements published in Tax Notes, August 14, 2000, indicates
that, ``the top 20% of FSC beneficiaries (ranked by size of
reported FSC benefit in 1998) obtained 87% of the FSC
benefits.''
Moreover, there is substantial question as to the benefits
that Americans truly will receive from this legislation. The
Congressional Research Service summarized the most recent
Treasury analysis of the Foreign Sales Corporation tax
benefit by concluding that ``[r]epealing this provision would
have a negligible effect on the trade balance.'' Treasury
determined that such a repeal would reduce U.S. exports by
\3/10\ of one percent and U.S. imports by \2/10\ of one
percent.
Encouraging Foreign Armaments Sales
Because the benefits to ordinary Americans of this costly
tax advantage are at best remote, every aspect of this law
deserves the type of scrutiny that was wholly lacking during
committee consideration. One glaring example of both what is
wrong with this legislation and what is wrong with the
process that produced it is the generosity shown to arms
manufacturers. Their tax savings are doubled by this bill.
The supposed justification for such largesse to those who
promote arms sales abroad was previously rejected by the
Treasury Department in August 1999:
We have seen no evidence that granting full FSC benefits
would significantly affect the level of defense exports, and
indeed, we are given to understand that other factors, such
as the quality of the product and the quality and level of
support services, tend to dominate a buyer's decision whether
to buy a U.S. defense product.
Ironically, in 1997, the Congressional Budget Office, whose
director was appointed by Republican leaders had reached a
similar conclusion:
U.S. defense industries have significant advantages over
their foreign competitors and thus should not need additional
subsidies to attract sales. Because the U.S. defense
procurement budget is nearly twice that of all Western
European countries combined, U.S. industries can realize
economics of scale not available to other competitors. The
U.S. defense research and development budget is five times
that of all Western European countries combined, which
ensures that U.S. weapon systems are and will remain
technologically superior to those of other suppliers.
Even the Department of Defense conceded the same in 1994:
The forecasts support a continuing strong defense trade
performance for U.S. defense products through the end of the
decade and beyond. 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.
In 1999, without the bonanza provided by this bill, US
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.
A paper prepared for the Cato Institute in August 1999 by
William D. Hartung, President's Fellow at the World Policy
Institute, highlights the bad judgment shown here: ``If the
government wanted to level the playing field between the
weapons industry and other sectors, it would have to reduce
weapons subsidies, not increase them.'' (These subsidies
include thousands of federal employees at the Pentagon and
other agencies whose very purpose is to increase arms sales.)
He continued, ``Considering those massive subsidies to weapon
manufacturers, granting additional tax breaks to an industry
that is being so pampered by the U.S. government makes no
sense.''
With no evidence to warrant its action, the Committee
rejected fiscal responsibility in favor of wholly unjustified
preferential tax treatment that means millions in savings to
defense contractors. This costly decision is also bad for our
country's true security interests. Instead of subsidizing
arms promotion, our nation should be encouraging arms
control. American armaments too often contribute to one arms
race after another around the globe.
Doubling this subsidy only encourages the sales of more
arms overseas and creates more challenges to the maintenance
of our own ``military superiority''--and, of course, more
pressure for additional costly increases in the defense
budget. As Lawrence Korb, President Reagan's Assistant
Secretary for Defense for Manpower, Reserve Affairs,
Installations and Logistics, has said:
It has become a money game: an absurd spiral in which we
export arms only to have to develop more sophisticated ones
to counter those spread out all over the world . . . It is
very hard for us to tell other people--the Russians, the
Chinese, the French--not to sell arms, when we are out there
peddling and fighting to control the market.
Former Costa Rican President and 1987 Nobel Peace Prize
winner, Oscar Arias offers another reason for rejecting the
Committee's decision to increase the arms subsidy:
By selling advanced weaponry throughout the world, wealthy
military contractors not only weaken national security and
squeeze taxpayers at home but also strengthen dictators and
human misery abroad.
____
Additional views by Messrs. Doggett, Lewis and Stark
Promoting Tobacco Related Disease and Death
The way in which this legislation was rushed through the
Committee avoided any explanation as to why American
taxpayers should continue to subsidize the tobacco industry,
whose product actually kills one-third of the people who use
it. The Committee ignored the pleas of the American Medical
Association, the American Cancer Society, the American Heart
Association, Campaign for Tobacco-Free Kids, and other public
health groups that tobacco should be denied a tax benefit. It
also rejected the written request of 97 Members of Congress
that tobacco be excluded.
Nicotine addiction represents a public health crisis.
Within 20 years, almost 10 million people are expected to die
annually from tobacco-related illnesses. Seventy percent of
these deaths will occur in the developing countries that are
being targeted by big tobacco's continued addiction to making
money at the expense of human lives. In fact, tobacco will
soon become the leading cause of disease and premature death
worldwide--bypassing communicable diseases such as AIDS,
malaria and tuberculosis.
Instead of being accountable for its deadly products, the
tobacco industry has responded by conspiring to undermine the
efforts of the World Health Organization to cope with this
global pandemic. During recent litigation, Philip Morris was
forced to produce documents, which can be found at the
Minnesota Tobacco Document Depository, stating that the
company sought to ``discredit key individuals'' and
``allocate the resources to stop [WHO] in their tracks.'' An
August 2000 WHO report entitled, Tobacco Company Strategies
to Undermine Tobacco Control Activities at the World Health
Organization states:
The [industry] documents also show that tobacco company
strategies to undermine
[[Page H7427]]
WHO relied heavily on international and scientific experts
with hidden financial ties to the industry. Perhaps most
disturbing, the documents show that tobacco companies quietly
influenced other U.N. agencies and representatives of
developing countries to resist WHO's tobacco control
initiatives.
Geoffrey C. Bible, Chairman of Philip Morris, a company
that has often hidden its malicious tobacco influence through
its holdings in Kraft Foods, even wrote in 1988 of the ``need
to think through how we can use our food companies [to help
governments] with their food problems and give us a more
balanced profile with the government than we now have against
WHO's powerful influence.''
The tobacco industry certainly cannot justify the public
subsidy offered through this proposed legislation. Philip
Morris, R.J. Reynolds, and Brown and Williamson have acquired
tremendous marketing expertise from decades of success in
targeting American children. This offers them tremendous
advantage over foreign competitors in addicting children
around the world; they hardly need help from the American
taxpayer in order to spread death and disease to children in
developing countries.
Philip Morris spends millions in American television
advertising to contend that it no longer markets to youth. It
finally claims to have abandoned tobacco company billboards,
transit ads, cartoon characters, cigarette-branded apparel
and merchandise, paid placement of its products in movies and
television shows, and most brand sponsorship of team sports
and entertainment events. But, it has steadfastly declined to
apply these modest safeguards in its international
operations; indeed, it relies heavily on these and other
tactics to target the world's children.
Both petroleum and unprocessed timber are excluded from
this legislation. Yet tobacco, the single largest public
health menace, will continue to be subsidized at a cost to
American taxpayers of about $100 million per year. This
legislation constitutes just another way of forcing American
taxpayers to be partners in this export of death and disease.
Little wonder that there was so much eagerness to silence
discussion of this disgrace.
____
[From the Washington Post, Sept. 12, 2000]
Tobacco Exports Get Aid in Bill Set for House Vote
(By Marc Kaufman)
The Clinton administration has never been shy about trying
to cut smoking in the United States. But in a move that has
confounded its usual allies, the administration is backing an
export subsidy bill this year that would give American
tobacco companies about $100 million in tax breaks yearly for
tobacco products they sell abroad.
The bill, which is scheduled for a full House vote today,
would continue subsidies for many American industries at a
cost of between $4 and $6 billion annually. While these tax
incentives have generally sparked little opposition in
Congress, the willingness to continue export subsidies for
tobacco has sparked criticism from public health advocates
and other industry critics.
``I think it's a very difficult position for the
administration to explain,'' said Rep. Lloyd Doggett (D-
Tex.), who tried unsuccessfully to deny the subsidy to
tobacco companies in the Ways and Means Committee. ``What
we're doing here is promoting and subsidizing the sale of
cigarettes to people abroad, and I find it unacceptable for
that to be American policy.''
Doggett said that during the White House lobbying for the
China trade bill earlier this year, President Clinton had
told him that he generally supported the amendment to remove
tobacco from the export subsidy list.
But a House Democratic aide familiar with the matter said
White House officials did not attempt to dismantle the
program's tobacco subsidy for fear of jeopardizing bipartisan
accord on the legislation. ``The administration is caught a
little bit between a rock and a hard place,'' the aide said.
A senior administration official said yesterday that
Doggett's amendment was ``consistent with our tobacco
policy'' but said the administration went along with House
Ways and Means Committee Chairman Bill Archer (R-Tex.) in the
position ``that no amendments be added to the legislation to
ensure it be passed on a timely basis.''
Trent Duffy, spokesman for Archer, said Democrats and
Republicans alike agreed to preserve the general subsidy
program to compensate for European countries' favorable tax
treatment of their companies' activities abroad. Duffy said
the provisions in the bill ``are the only way we can stay
competitive with our competitors overseas. . . . Once you
start changing who receives the benefit of this regime, then
you get into rewriting United States tax law, and that's not
what this is about.''
The export bill deals with a long-standing trade dispute
with the European Union. The Europeans have complained that
the corporate tax breaks now offered to American exporters
constitute an illegal export subsidy, and the World Trade
Organization agreed with this position. The bill before the
House today would address those concerns, though EU officials
say little has changed.
When the bill came before the Ways and Means Committee in
July, the American Medical Association, the Campaign for
Tobacco-Free Kids and other public health organizations
lobbied to remove tobacco from the subsidy list, but the bill
passed unchanged with little public debate.
Democratic Ways and Means Committee members Doggett, John
Lewis (Ga.) and Fortney ``Pete'' Stark (Calif.) published a
sharp critique of the bill's handling as part of the
committee report on the legislation. They pointed out that
both petroleum and unprocessed timber do not qualify for the
export tax incentives although tobacco does.
``This legislation constitutes just another way of forcing
American taxpayers to be partners in this export of death and
disease,'' they wrote. Critics of the subsidies said they
would try to remove them when the bill comes up for
consideration in the Senate.
Sales of cigarettes have been stable or declining in the
U.S. market for some time, but rose dramatically abroad until
last year. Tobacco is now a $6 billion export industry.
Today's administration support of the export bill with
tobacco subsidies contrasts sharply with earlier efforts to
reduce government support for tobacco sales abroad. The
administration sent cables to all American embassies last
year directing them not to promote cigarette sales because of
public health concerns.
Doggett plans to denounce the tobacco subsidy in today's
House debate, and said he may vote against the entire export
subsidy bill because of its inclusion. His earlier amendment
eliminating the tobacco subsidy had won the support of 96
other representatives, mostly Democrats.
But Democrats are unlikely to have a chance to change the
bill once it reaches the House floor. It is slated to be
brought up under suspension of the rules, which requires a
two-thirds vote for approval with no amendments allowed.
Mr. STARK. Mr. Speaker, I yield 1 minute to the gentleman from Texas
(Mr. Doggett), noting that it is now the 1-hour anniversary since this
bill was printed, at 4:09 this afternoon, to celebrate that momentous
occasion to close debate on this in opposition.
Mr. DOGGETT. Mr. Speaker, to those who say it is not significant, nor
should it be debated today that the American taxpayers will be asked to
be unwilling accomplices to the tobacco industry at a cost of $100
million per year; that the pharmaceutical industry will get about $123
million per year as a reward for selling pharmaceuticals at lower
prices abroad than they do here at home; that military contractors will
get a doubling of their tax subsidy under this bill as they sell
machine guns and land mines and other armaments around the world to
fuel the world's arms races; that all of these things should be
ignored, because in order to protect American jobs, we have to beat the
clock before October 1, one wonders why it is that we do not even have
this bill presented until 4:09 in the afternoon on September 12, if we,
indeed, face such a crisis. In fact, we do not face such a crisis.
The United States has never asked the Europeans for an extension of
this deadline in order to explore other alternatives, and our country
has every right to make that request. An opinion article in an
authority no more extreme than Business Week on September 4 correctly
said ``it's time to call a halt to such waste by both sides . . . the
administration should drop its plan to expand FSC, get back to the
negotiating table, and start proposing some real solutions such as
eliminating export subsidies.''
Mr. ARCHER. Mr. Speaker, I yield such time as he may consume to the
gentleman from Pennsylvania (Mr. English).
Mr. ENGLISH. Mr. Speaker, I rise in strong support of this
legislation.
Mr. Speaker, the international playing field is titled against our
employers and their workers.
Without the Foreign Sales Corporation rule in our tax code, the
situation will only be made worse--to the point of being intolerable.
With the World Trade Organization's ruling disallowing FSC, we face a
double edge sword.
By refusing to repeal the FSC, the United States will be inviting
massive retaliation against U.S. export trade but if we repeal FSC
without adopting alternative legislation, our exporters and their
employees will be left high and dry.
I urge my colleagues to support the Foreign Sales Corporations
Extraterritorial Income Exclusion Act of 2000, which corrects the
problems that the WTO had with FSC while protecting American workers.
This legislation grandfathers transactions begun prior to Oct. 1 and
allows for manufacturing and/or a binding contract to continue under
current FSC law until the end of next year.
FSC was 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.
Allowing FSC to stand or abolishing it will make an already tough
global market next to
[[Page H7428]]
impossible to compete in for U.S. employers. We must act now to avoid
putting American workers onto a playing field for which they are not
equipped.
Mr. ARCHER. Mr. Speaker, I yield myself the balance of the time.
Mr. Speaker, there has been a great deal of rhetoric today on the
floor, but let us try to cut through all of it. If this bill does not
pass, the FSC provisions that have been railed against by the opponents
will continue to be in the law. None of that will change.
What they call a subsidy, which is actually a reduction of the
impediment of double taxation on our companies, will still be in the
law. Nothing will change. They act like suddenly everything will
change, but what will happen is this: American products will have
sanctions put against them between $4 billion and $40 billion a year by
the Europeans, all justified by the WTO. And who will then be hit?
Will it be the big corporations? The first sanction will be on
agriculture. Our farmers will be hit. Then they will put sanctions on
man-made staple fibers. Our textile industry will be hit. Then they
will put sanctions on cotton and yarns and woven fabrics. Then they
will put sanctions on fruits and vegetables and likely our wine, which
competes with the French wine.
They will pick the sensitive spots to apply these sanctions, but the
FSC provisions that have been railed against will still be in the code.
This is our only opportunity to protect American workers so that we can
continue to export, even in those areas which do not currently get FSC
treatment, the injury to the U.S. and the potential beginning of the
mother of all trade wars is something to be avoided and avoided by this
bill. It is the only option before us, vote yes.
Mrs. CHRISTENSEN, Mr. Speaker, I rise to speak on H.R. 4986, the
Foreign Sales Corporation Repeal and Extraterritorial Income Act of
2000 because of the effect it will have on my district, the U.S. Virgin
Islands.
Mr. Speaker, almost from the inception of the Foreign Sales
Corporation Act of 1984, the U.S. Virgin Islands positioned itself to
act as the premiere location where U.S. companies that were exporting
U.S.-made goods could locate to reduce their tax liability.
Approximately 3,900 of a total 7,000 FSC's are located in the U.S.
Virgin Islands where they provide approximately 40 direct jobs to
Virgin Islands residents and indirect employment in the thousands,
through 12 law and management firms that serve them. They provide
similar benefits on our sister territory of Guam--both of us being a
part of this country.
FSC companies in the Virgin Islands generate about $7 to $10 million
dollars annually and they have contributed almost $70 million to the
cash-strapped treasury of the Government of the Virgin Islands since
1983. Through no fault of our own, and despite our working with the
relevant agencies to mitigate the adverse effects, with passage of this
bill, we will lose an important tool of our economy at a time when we
can least afford it--when the government of the Virgin Islands is
facing a severe financial crisis. Our accumulated budget deficit, as of
January of last year was estimated to be in excess of $250 million and
the Government's debt obligations has reached an unimaginable $1.12
billion.
While Virgin Islands Governor Turnbull has made strides in addressing
this problem, the loss of revenues generated by FSC's to our Territory
will be a major blow.
I am therefore looking forward to working with Chairman Archer and
Ranking Member Rangel to find a way to assist us in replacing the loss
of revenue that this bill will mean to the Virgin Islands. I hope for
the support of all my colleagues in this effort.
Mr. PAUL. Mr. Speaker, H.R. 4986, brought up under suspension,
deserves serious consideration by all Members.
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
lower 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 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 in to 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 in to 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 have been given till October 1st to accommodate our
laws to the demands of the WTO.
That's the sole reason by this legislation is on the floor today.
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 Deutch 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 ratchening 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
[[Page H7429]]
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.
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.
U.S., EU Risk Trade War Over Export Tax Shelters--Europe Is Likely To
Seek the WTO's Permission To Levy Punitive Tariffs
(By Geoff Winestock of the Wall Street Journal)
Brussels.--After a breakdown of talks last week, a
multibillion-dollar trade war is now almost 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. elections.
European Trade Commissioner Pascal Lamy rejected on
Thursday the latest U.S. proposal for resolving a dispute
over a $4 billion-a-year tax shelter for U.S. exporters that
the World Trade Organization ruled illegal in February.
With chances now slim for an agreement on how to bring the
U.S. tax code into line with WTO rules, the EU will likely
file a new suit with the WTO in October. And this time, the
EU will seek permission to retaliate against U.S. companies
with trade sanctions. At a minimum, EU officials say, they
will ask for punitive tariffs on $4 billion of U.S. goods.
The U.S. Congress is considering a bill designed to bring
U.S. tax law into line with WTO rules. But hopes that this
would yield a quick solution disappeared last week when Mr.
Lamy sent a letter criticizing the bill to Deputy Treasury
Secretary Stuart Eizenstat. Mr. Lamy said the proposal for
amending the U.S. tax code ``failed to render it compatible
with international trade rules,'' according to an EU briefing
note. Indeed, EU officials say, the bill was marginally worse
than a White House proposal that the EU rejected in May.
Describing the EU letter as ``disappointing'' and
``unconstructive,'' a senior U.S. official says the EU's
attitude could sour trans-Atlantic trade ties. ``What we're
trying to do is avert a trade war,'' the official says.
``We're doing everything we can to avoid it. If there's to be
one, it will be in their hands, not in ours.''
The official says that the White House would continue to
support the bill, which he says would be fully WTO-compliant.
Unless the U.S. makes some change to the tax program by the
WTO's Oct. 1 deadline, the official says, the U.S. will have
no chance of avoiding a confrontation with the EU or winning
its case in the WTO. The EU will have 30 days after Oct. 1 to
lodge a complaint with the WTO, which will then take a few
months to rule on what, if any, retaliation can be taken.
At the core of the dispute is a tax-law provision that
allows U.S. companies to channel overseas sales of
domestically produced goods through so-called foreign sales
corporations--offshore subsidiaries, usually in tax havens,
whose profits on those exports are subject to lower federal
income taxes than are other profits. The FSC shelter saved
U.S. companies about $4 billion last year. Boeing Corp.,
which used the shelter to save $230 million last year,
included a warning about the trade dispute in its annual
financial reports.
The U.S. says the congressional bill would replace the WTO-
illegal tax breaks with a much broader exemption for all
foreign-source income, both from exports and from goods
manufactured abroad. The U.S. official says this is
comparable with tax exemptions offered by EU countries,
including the Netherlands and France.
But EU officials and some U.S. analysts say the analogy is
inaccurate and that the proposed revision simply repackages
the FSC program, retaining its preference for exports over
domestic sales. ``U.S. industries which are benefiting from
FSCs are being very stubborn,'' says Peter Morici, a senior
fellow at the Economic Strategy Institute, a Washington, D.C.
think tank. ``They do not want to make a real fundamental
change in the law.''
Mr. DeFAZIO. Mr. Speaker, let's briefly review why we find ourselves
here today to debate 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.
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 not 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 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 decision 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 well-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
[[Page H7430]]
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 prosed 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.
Simiarly, isn't it a bit odd that economist and U.S. policymakers
like to lecture European nation's 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 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 discernible 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 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's 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.
[[Page H7431]]
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. Microsoft 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, millions 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. UNDERWOOD. Mr. Speaker, I rise to express my concern about the
impact of H.R. 4986, The FSC Repeal and Extraterritorial Income
Exclusion Act of 2000, on the U.S. territories, particularly the U.S.
Virgin Islands and Guam.
Since the WTO decision last fall on Foreign Sales Corporations
(FSCs), I know that the Administration has 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.
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 be able to offer this incentive although I
understand that current contracts will be honored.
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 authored which would level the playing field for
foreign investors in Guam through the passage of the Guam Foreign
Direct Investment Equity Act (H.R. 2462/S. 2983).
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% 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%.
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% of Guam's commercial development is
funded by foreign investors. As an example, with Japan, the U.S. rate
for foreign investors is 10%. That means while Japanese investors are
taxed at a 10% withholding tax rate on their investments in the fifty
states, those same investors are taxed at a 30% 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.
Section 3 of H.R. 2462, which I introduced last year, and has bi-
partisan support, passed the House on July 25, 2000. Senators Akaka and
Inouye introduced a companion measure, S. 2983, on July 27, 2000.
As we consider today's measure on the repeal of FSCs, I simply ask
that my colleagues support my legislation on equal tax treaty rates for
Guam and I implore the Clinton Administration to also support such
economic relief for the people of Guam. Please include equitable tax
treatment for foreign investors in Guam during any final omnibus budget
or tax package.
{time} 1715
The SPEAKER pro tempore (Mr. Stearns). All time has expired.
The question is on the motion offered by the gentleman from Texas
(Mr. Archer) that the House suspend the rules and pass the bill, H.R.
4986, as amended.
The question was taken.
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 until tomorrow.
____________________