[Congressional Record Volume 146, Number 112 (Wednesday, September 20, 2000)]
[Extensions of Remarks]
[Pages E1535-E1536]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E1535]]



     FSC REPEAL AND EXTRA-TERRITORIAL INCOME EXCLUSION ACT OF 2000

                                 ______
                                 

                               speech of

                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                      Tuesday, September 12, 2000

  Mr. STARK. Mr. Speaker, please submit the following report from the 
August 14, 2000 edition of Tax Notes into the Record.

Tax Analysts Special Report: Foreign Sales Corporation Beneficiaries: A 
                                Profile

                            (By Jose Oyola)

       A World Trade Organization (WTO) panel concluded in 1999 
     that the tax benefits of foreign sales corporations (FSC) 
     constitute a prohibited export subsidy. According to the WTO 
     panel, the United States cannot establish a regime of direct 
     taxation and claim that it is entitled to provide an export 
     subsidy because it is necessary to eliminate a disadvantage 
     to exporters created by the U.S. tax system itself. In 
     negotiations during the course of this year, U.S. Treasury 
     representatives presented an alternative tax scheme to the 
     European Union (EU), but it was promptly rejected by EU 
     officials. Negotiations are continuing, and must result in 
     legislative changes by the beginning of FY 2001 to avoid 
     costly sanctions.
       In searching for export incentives that meet WTO standards, 
     policymakers already have a wide range of government 
     incentives that enhance the international competitiveness of 
     U.S.-based companies. Some benefits are directly related to 
     exports, like the Export-Import (Ex-Im) Bank loans and 
     guarantees. Other incentives, like the research and 
     experimentation tax credit, strengthen the overall 
     competitiveness of U.S.-based corporations.
       This article provides a profile of 250 companies that 
     reported $1.2 billion in FSC tax benefits in their 1998 
     filings with the Securities and Exchange Commission (SEC). 
     The article shows, for the first time, how FSC beneficiaries 
     combine several tax benefits and government programs that do 
     not run afoul of WTO standards. The article also presents the 
     contribution to corporate profits from several tax 
     incentives, and the 1991-1998 accumulated FSC tax benefits 
     for 18 large FSC beneficiaries.


                            Profile Summary

       The profile of the 250 companies that reported $1.2 billion 
     FSC tax benefits in 1998 is as follows:
       The top 20 percent of the U.S. companies in the sample 
     claimed 87 percent of the FSC tax benefits.
       Almost 30 percent of the FSC recipients reported other tax 
     benefits, such as Research & Experimentation (R&E) tax 
     benefits.
       The cumulative 1991-1998 FSC benefits of the top 18 FSC 
     beneficiaries were almost $3.7 billion. FSC benefits 
     represented about 3.4 percent of the net income for this 
     group. One of the top beneficiaries received FSC benefits 
     equal to 10 percent of its net income.


       The U.S. government operated other export-promotion 
     programs, mainly through the Department of Agriculture and 
     the Ex-Im Bank. The aircraft industry had almost 45 percent 
     of the Ex-Im Bank loan guarantees outstanding at the end of 
     FY 1999.


                  Distribution of the FSC Tax Benefits

       The distribution of FSC benefits is shown in table 1. The 
     top 20 percent of FSC beneficiaries (ranked by size of 
     reported FSC benefit in 1998) obtained 87 percent of the FSC 
     benefits. The high concentration of FSC benefits in the top 
     50 companies in the sample is partly caused by the dominant 
     role of large corporations in U.S. exports.


             Combining FSC Benefits With Other Tax Benefits

       Seventy-one companies (28 percent of the sample) reported 
     $1.7 billion in tax benefits from the following sources: $1.2 
     billion FSC benefits, $353 million Research & Experimentation 
     tax benefits, $123 million in benefits related to exempt 
     investment income, and $32 million in tax benefits of Puerto 
     Rican operations, as shown in table 2.
       Table 3 shows 10 of the top FSC beneficiaries that received 
     multiple tax benefits. The largest company in this group was 
     Boeing Company, which received $130 million in FSC tax 
     benefits and almost the same amount ($127 million) in 
     Research & Experimentation tax benefits.


                  FSC Cumulative Benefits in 1991-1998

       Table 4 provides the cumulative 1991-1998 FSC benefits of 
     18 top FSC beneficiaries. The two largest FSC beneficiaries, 
     General Electric Company and Boeing Company, received almost 
     $750 million and $686 million FSC benefits in eight years, 
     respectively. The FSC benefits obtained by Boeing Company 
     were almost 10 percent of its 1991-1998 cumulative net 
     income.


                   Other Government Export Incentives

       The U.S. government has 10 agencies that spent almost $2.0 
     billion in appropriations for export promotion activities in 
     1999. Two agencies that provide direct financial support to 
     U.S. exporters, the Ex-Im Bank and the Department of 
     Agriculture, received $1.5 billion or almost 80 percent of 
     the total federal budget resources spent on export promotion. 
     The Ex-Im Bank, in particular, provides direct loans and loan 
     guarantees against political and commercial risk.
       Ex-Im Bank's largest commitments at the end of fiscal year 
     1999 were in the air transportation industry, with $15.1 
     billion or 45 percent of its total outstanding guarantees. 
     Table 5 shows the 1996-1999 annual Ex-Im Bank guarantees 
     linked to aircraft exports of one of the largest FSC 
     beneficiaries, Boeing Company. Government guarantees linked 
     to Boeing exports increased from $1.1 billion in 1996 to $5.7 
     billion in 1999. The guarantees given to Boeing Company 
     increased from 22 percent in 1996 to 78 percent of the annual 
     Ex-Im Bank guarantees in 1999.


                               Conclusion

       Many U.S.-based companies already receive a combination of 
     direct tax incentives and export-related benefits, in 
     addition to the FSC tax benefits. Most of the benefits are 
     received by a small number of large corporations that account 
     for most U.S. exports. Policymakers have available a number 
     of tax and other government incentives that meet WTO 
     standards, and that could be expanded to replace the 
     prohibited direct tax subsidy provided by the FSC tax regime.



          TABLE 1.--CORPORATIONS RANKED BY SIZE OF FSC BENEFIT
                          [Dollars in millions]
------------------------------------------------------------------------
                                     FSC              Average   Standard
                                   benefit   Percent  benefit  deviation
------------------------------------------------------------------------
Top 50 companies................   $1,057.5     86.8    $21.1     $30.6
51-100..........................      101.2      8.3      2.0       0.7
101-150.........................       39.2      3.2      0.8       0.2
151-200.........................       16.0      1.3      0.3       0.1
201-250.........................        5.0      0.4      0.1       0.1
                                 ---------------------------------------
    Total 250 corps.............    1,218.8      100      4.9    $16.0
------------------------------------------------------------------------
Source: Author's calculations based on corporations' financial
  statements.


      TABLE 2.--TAX SAVINGS BY RECIPIENTS OF MULTIPLE TAX BENEFITS
                               [Millions]
------------------------------------------------------------------------
                                             13 firms out   58 firms out
Top benefits of firms that reported two or  of the top 50   of next 200
             more tax benefits                   FSC            FSC
                                            beneficiaries  beneficiaries
------------------------------------------------------------------------
FSC Benefits..............................        $1,058           $161
R&E Tax Credit............................           275             78
Exempt Investment Income..................            91             32
Possessions Tax Credit....................            19             13
                                           -----------------------------
    Total.................................         1,442           284
------------------------------------------------------------------------
Source: Author's calculations based on corporations' financial
  statements.




                           TABLE 3.--FSC BENEFICIARIES REPORTING SEVERAL TAX BENEFITS
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                              FSC       R&E      Exempt    Possessions
                    FSC Beneficiaries                      exemption   credit  investment   tax credit    Total
                                                            benefit   benefit    income      benefit
----------------------------------------------------------------------------------------------------------------
Boeing Company...........................................     $130.0   $127.0          0           0       257.0
Cisco Systems, Inc.......................................       55.3     32.2       36.8           0       124.3
Allied-Signal, Inc.......................................       50.5        0       11.7           0        62.2
PACCAR, Inc..............................................       20.9        0       28.1           0        49.0
Monsanto Company.........................................       29.0      3.0          0        16.0        48.0
Guidant Corp.............................................        8.9      6.3          0         2.2        17.4
Cabletron Systems, Inc...................................        4.7      1.9        3.6           0        10.2
Owens-Illinois, Inc......................................        3.0      3.1          0         3.0         9.1
Stryker Corp.............................................        3.1        0          0         4.1         7.2
St. Jude Medical, Inc....................................        5.7        0          0         0.1         5.8
                                                          ------------------------------------------------------
    Subtotal.............................................      311.1    173.5       80.2        25.4       590.2
                                                          ======================================================
240 Other corporations...................................      907.7    179.5       42.5         6.8     1,136.5
    Total, 250 corporations..............................    1,218.8    353.0      122.7        32.2     1,726.7
                                                          ------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Source: Author's calculations based on corporations' financial statements.
Note: Owens-Illinois reported a combined $6 million in FSC and possessions tax benefits.




   TABLE 4.--1991-1998 FSC BENEFITS FOR 18 OF THE TOP 50 BENEFICIARIES
                          [Dollars in millions]
------------------------------------------------------------------------
                                                               Ratio of
                                       Total FSC                  FSC
                                          tax      Total net  benefit to
                                        benefit     income    net income
                                                               (percent)
------------------------------------------------------------------------
General Electric Company............      $746.0   $47,754.0         1.6
Boeing Company......................       685.5     6,943.0         9.9
Motorola, Inc.......................       378.0     6,642.0         5.7
Caterpillar Inc.....................       312.0     4,443.0         7.0
Allied-Signal Inc...................       221.2     4,933.0         4.5
Cisco Systems, Inc..................       203.4     4,391.1         4.6
Monsanto Company....................       172.7     2,668.0         6.5
Archer Daniels Midland Company......       165.3     4,094.1         4.0
Oracle Systems Corp.................       129.8     4,413.2         2.9
Raytheon Company....................       118.1     5,460.7         2.2
RJR Nabisco, Inc....................        95.0     1,664.0         5.7
International Paper Co..............        87.0     2,457.0         3.5
Applied Materials, Inc..............        86.1     2,169.1         4.0
ConAgra, Inc........................        85.8     3,282.5         2.6
Dover Corporation...................        72.3     2,071.4         3.5
Parker Hannifin Corp................        44.2     1,485.9         3.0
Compuware Corp......................        31.1       824.6         3.8
St. Jude Medical, Inc...............        20.9       741.7         2.8
                                     -----------------------------------
    Total, 18 FSC beneficiaries.....     3,655.0   106,438.0        3.4
------------------------------------------------------------------------
 Source: Author's calculations based on corporation's financial
  statements.

[[Page E1536]]

 


           TABLE 5.--EX-IM BANK GUARANTEES FOR BOEING COMPANY
                          [Dollars in millions]
------------------------------------------------------------------------
                                                 Guarantees   Percent of
                                                 for Boeing   annual Ex-
                     Year                        aircraft &    Im Bank
                                                   parts      guarantees
------------------------------------------------------------------------
1996..........................................       $1,154           22
1997..........................................        1,779           26
1998..........................................        2,541           50
1999..........................................        5,651          78
------------------------------------------------------------------------
Source: Export-Import Bank of the United States annual reports.




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