[Congressional Record (Bound Edition), Volume 146 (2000), Part 18]
[House]
[Pages 26094-26112]
[From the U.S. Government Publishing Office, www.gpo.gov]



      FSC REPEAL AND EXTRATERRITORIAL INCOME EXCLUSION ACT OF 2000

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

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

     SECTION 1. SHORT TITLE.

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

     SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

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     hereby repealed.

     SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

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

     ``SEC. 114. EXTRATERRITORIAL INCOME.

       ``(a) Exclusion.--Gross income does not include 
     extraterritorial income.
       ``(b) Exception.--Subsection (a) shall not apply to 
     extraterritorial income which is not qualifying foreign trade 
     income as determined under subpart E of part III of 
     subchapter N.
       ``(c) Disallowance of Deductions.--
       ``(1) In general.--Any deduction of a taxpayer allocated 
     under paragraph (2) to extraterritorial income of the 
     taxpayer excluded from gross income under subsection (a) 
     shall not be allowed.
       ``(2) Allocation.--Any deduction of the taxpayer properly 
     apportioned and allocated to the extraterritorial income 
     derived by the taxpayer from any transaction shall be 
     allocated on a proportionate basis between--
       ``(A) the extraterritorial income derived from such 
     transaction which is excluded from gross income under 
     subsection (a), and
       ``(B) the extraterritorial income derived from such 
     transaction which is not so excluded.
       ``(d) Denial of Credits for Certain Foreign Taxes.--
     Notwithstanding any other provision of this chapter, no 
     credit shall be allowed under this chapter for any income, 
     war profits, and excess profits taxes paid or accrued to any 
     foreign country or possession of the United States with 
     respect to extraterritorial income which is excluded from 
     gross income under subsection (a).
       ``(e) Extraterritorial Income.--For purposes of this 
     section, the term `extraterritorial income' means the gross 
     income of the taxpayer attributable to foreign trading gross 
     receipts (as defined in section 942) of the taxpayer.''.
       (b) Qualifying Foreign Trade Income.--Part III of 
     subchapter N of chapter 1 is amended by inserting after 
     subpart D the following new subpart:

              ``Subpart E--Qualifying Foreign Trade Income

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

     ``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

       ``(a) Qualifying Foreign Trade Income.--For purposes of 
     this subpart and section 114--
       ``(1) In general.--The term `qualifying foreign trade 
     income' means, with respect to any transaction, the amount of 
     gross income which, if excluded, will result in a reduction 
     of the taxable income of the taxpayer from such transaction 
     equal to the greatest of--
       ``(A) 30 percent of the foreign sale and leasing income 
     derived by the taxpayer from such transaction,
       ``(B) 1.2 percent of the foreign trading gross receipts 
     derived by the taxpayer from the transaction, or
       ``(C) 15 percent of the foreign trade income derived by the 
     taxpayer from the transaction.
     In no event shall the amount determined under subparagraph 
     (B) exceed 200 percent of the amount determined under 
     subparagraph (C).
       ``(2) Alternative computation.--A taxpayer may compute its 
     qualifying foreign trade income under a subparagraph of 
     paragraph (1) other than the subparagraph which results in 
     the greatest amount of such income.

[[Page 26095]]

       ``(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.
       ``(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--

[[Page 26096]]

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

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

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

[[Page 26097]]

       ``(g) Exclusion for Patrons of Agricultural and 
     Horticultural Cooperatives.--Any amount described in 
     paragraph (1) or (3) of section 1385(a)--
       ``(1) which is received by a person from an organization to 
     which part I of subchapter T applies which is engaged in the 
     marketing of agricultural or horticultural products, and
       ``(2) which is allocable to qualifying foreign trade income 
     and designated as such by the organization in a written 
     notice mailed to its patrons during the payment period 
     described in section 1382(d),
     shall be treated as qualifying foreign trade income of such 
     person for purposes of section 114. The taxable income of the 
     organization shall not be reduced under section 1382 by 
     reason of any amount to which the preceding sentence applies.
       ``(h) Special Rule for DISCs.--Section 114 shall not apply 
     to any taxpayer for any taxable year if, at any time during 
     the taxable year, the taxpayer is a member of any controlled 
     group of corporations (as defined in section 927(d)(4), as in 
     effect before the date of the enactment of this subsection) 
     of which a DISC is a member.''

     SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

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

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

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

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

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

     SEC. 5. EFFECTIVE DATE.

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

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

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

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from 
Texas (Mr. Archer) and the gentleman from California (Mr. Stark) each 
will control 20 minutes.
  The Chair recognizes the gentleman from Texas (Mr. Archer).


                             General Leave

  Mr. ARCHER. Mr. Speaker, I ask unanimous consent that all Members may 
have 5 legislative days within which to revise and extend their remarks 
and to include extraneous material on H.R. 4986.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Texas?

[[Page 26098]]

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

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


                            i. introduction

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


      ii. overview of present-law foreign sales corporation rules

     Summary of U.S. income taxation of foreign persons
       Income earned by a foreign corporation from its foreign 
     operations generally is subject to U.S. tax only when such 
     income is distributed to a U.S. persons that hold stock in 
     such corporation. Accordingly, a U.S. person that conducts 
     foreign operations through a foreign corporation generally is 
     subject to U.S. tax on the income from those operations when 
     the income is repatriated to the United States through a 
     dividend distribution to the U.S. person. The income is 
     reported on the U.S. person's tax return for the year the 
     distribution is received, and the United States imposes tax 
     on such income at that time. An indirect foreign tax credit 
     may reduce the U.S. tax imposed on such income.
     Foreign sales corporations
       The income of an eligible foreign sales corporation 
     (``FSC'') is partially subject to U.S. income tax and 
     partially exempt from U.S. income tax. In addition, a U.S. 
     corporation generally is not subject to U.S. income tax on 
     dividends distributed from the FSC out of certain earnings.
       A FSC must be located and managed outside the United 
     States, and must perform certain economic processes outside 
     the United States. A FSC is often owned by a U.S. corporation 
     that produces goods in the United States. The U.S. 
     corporation either supplies goods to the FSC for resale 
     abroad or pays the FSC a commission in connection with such 
     sales. The income of the FSC, a portion of which is exempt 
     from U.S. income tax under the FSC rules, equals the FSC's 
     gross markup or gross commission income less the expenses 
     incurred by the FSC. The gross markup or the gross commission 
     is determined according to specified pricing rules.
       A FSC generally is not subject to U.S. income tax on its 
     exempt foreign trade income. The exempt foreign trade income 
     of a FSC is treated as foreign-source income that is not 
     effectively connected with the conduct of a trade or business 
     within the United States.
       Foreign trade income, other than exempt foreign trade 
     income, generally is treated as U.S.-source income 
     effectively connected with the conduct of a trade or business 
     conducted through a permanent establishment within the United 
     States. Thus, a FSC's income, other than exempt foreign trade 
     income, generally is subject to U.S. tax currently and is 
     treated as U.S.-source income for purposes of the foreign tax 
     credit limitation.
       Foreign trade income of a FSC is defined as the FSC's gross 
     income attributable to foreign trading gross receipts. 
     Foreign trading gross receipts generally are the gross 
     receipts attributable to the following types of transactions: 
     the sale of export property; the lease or rental of export 
     property; services related and subsidiary to such a sale or 
     lease of export property; engineering and architectural 
     services for projects outside the United States; and export 
     management services. Investment income and carrying charges 
     are excluded from the definition of foreign trading gross 
     receipts.
       The term ``export property'' generally means property (1) 
     which is manufactured, produced, grown or extracted in the 
     United States by a person other than a FSC; (2) which is held 
     primarily for sale, lease, or rental in the ordinary course 
     of a trade or business for direct use or consumption outside 
     the United States; and (3) not more than 50 percent of the 
     fair market value of which is attributable to articles 
     imported into the United States. The term ``export property'' 
     does not include property leased or rented by a FSC for use 
     by any member of a controlled group of which the FSC is a 
     member; patents, copyrights (other than films, tapes, 
     records, similar reproductions, and other than computer 
     software, whether or not patented), and other intangibles; 
     oil or gas (or any primary product thereof); unprocessed 
     softwood timber; or products the export of which is 
     prohibited or curtailed. Export property also excludes 
     property designated by the President as being in short 
     supply.
       If export property is sold to a FSC by a related person (or 
     a commission is paid by a related person to a FSC with 
     respect to export property), the income with respect to the 
     export transaction must be allocated between the FSC and the 
     related person. The taxable income of the FSC and the taxable 
     income of the related person are computed based upon a 
     transfer price determined under section 482 or under one of 
     two formulas specified in the FSC provisions.
       The portion of a FSC's foreign trade income that is treated 
     as exempt foreign trade income depends on the pricing rule 
     used to determine the income of the FSC. If the

[[Page 26099]]

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


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

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

[[Page 26100]]


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

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

[[Page 26101]]

 
    Net income.........................      3,000  .........  .........
------------------------------------------------------------------------

       Illustrated below is the computation of the amount of 
     qualifying foreign trade income that is excluded from XYZ 
     Corporation's gross income and the amount of related expenses 
     that are disallowed. In order to calculate qualifying foreign 
     trade income, the amount of foreign trade income first must 
     be determined. Foreign trade income is the taxable income 
     (determined without regard to the exclusion of qualifying 
     foreign trade income) attributable to foreign trading gross 
     receipts. In this example, XYZ Corporation's foreign trading 
     gross receipts equal $1,000. This amount of gross receipts is 
     reduced by the related cost of goods sold, the related direct 
     expenses, and a portion of the overhead expenses in order to 
     arrive at the related taxable income. Thus, XYZ Corporation's 
     foreign trade income equals $100, calculated as follows:

Foreign trading gross receipts...................................$1,000
Cost of goods sold..................................................600
                                                               ________
                                                               
    Gross income....................................................400
Direct expenses.....................................................275
Apportioned overhead expenses........................................25
                                                               ________
                                                               
    Foreign trade income............................................100

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

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

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

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

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

[[Page 26102]]

     qualifying foreign trade income (i.e., excluded 
     extraterritorial income). In determining whether foreign 
     taxes are paid or accrued with respect to qualifying foreign 
     trade income, foreign withholding taxes generally are treated 
     as not paid or accrued with respect to qualifying foreign 
     trade income. Accordingly, the Senate amendment's denial of 
     foreign tax credits would not apply to such taxes. For this 
     purpose, the term ``withholding tax'' refers to any foreign 
     tax that is imposed on a basis other than residence and that 
     is otherwise a creditable foreign tax under sections 901 or 
     903. It is intended that such taxes would be similar in 
     nature to the gross-basis taxes described in sections 871 and 
     881.
       If, however, qualifying foreign trade income is determined 
     based on 30 percent of foreign sale and leasing income, the 
     special rule for withholding taxes is not applicable. Thus, 
     in such cases foreign withholding taxes may be treated as 
     paid or accrued with respect to qualifying foreign trade 
     income and, accordingly, are not creditable under the Senate 
     amendment.
     Election to be treated as a U.S. corporation
       The Senate amendment provides that certain foreign 
     corporations may elect, on an original return, to be treated 
     as domestic corporations. The election applies to the taxable 
     year when made and all subsequent taxable years unless 
     revoked by the taxpayer or terminated for failure to qualify 
     for the election. Such election is available for a foreign 
     corporation (1) that manufactures property in the ordinary 
     course of such corporation's trade or business, or (2) if 
     substantially all of the gross receipts of such corporation 
     are foreign trading gross receipts. For this purpose, 
     ``substantially all'' is based on the relevant facts and 
     circumstances.
       In order to be eligible to make this election, the foreign 
     corporation must waive all benefits granted to such 
     corporation by the United States pursuant to a treaty. Absent 
     such a waiver, it would be unclear, for example, whether the 
     permanent establishment article of a relevant tax treaty 
     would override the electing corporation's treatment as a 
     domestic corporation under this provision. A foreign 
     corporation that elects to be treated as a domestic 
     corporation is not permitted to make an S corporation 
     election. The Secretary is granted authority to prescribe 
     rules to ensure that the electing foreign corporation pays 
     its U.S. income tax liabilities and to designate one or more 
     classes of corporations that may not make such an election. 
     If such an election is made, for purposes of section 367 the 
     foreign corporation is treated as transferring (as of the 
     first day of the first taxable year to which the election 
     applies) all of its assets to a domestic corporation in 
     connection with an exchange to which section 354 applies.
       If a corporation fails to meet the applicable requirements, 
     described above, for making the election to be treated as a 
     domestic corporation for any taxable year beginning after the 
     year of the election, the election will terminate. In 
     addition, a taxpayer, at its option and at any time, may 
     revoke the election to be treated as a domestic corporation. 
     In the case of either a termination or a revocation, the 
     electing foreign corporation will not be considered as a 
     domestic corporation effective beginning on the first day of 
     the taxable year following the year of such termination or 
     revocation. For purposes of section 367, if the election to 
     be treated as a domestic corporation is terminated or 
     revoked, such corporation is treated as a domestic 
     corporation transferring (as of the first day of the first 
     taxable year to which the election ceases to apply) all of 
     its property to a foreign corporation in connection with an 
     exchange to which section 354 applies. Moreover, once a 
     termination occurs or a revocation is made, the former 
     electing corporation may not again elect to be taxed as a 
     domestic corporation under the provisions of the Senate 
     amendment for a period of five tax years beginning with the 
     first taxable year that begins after the termination or 
     revocation.
       For example, assume a U.S. corporation owns 100 percent of 
     a foreign corporation. The foreign corporation manufactures 
     outside of the United States and sells what would be 
     qualifying foreign trade property were it manufactured by a 
     person subject to U.S. taxation. Such foreign corporation 
     could make the election under this provision to be treated as 
     a domestic corporation. As a result, its earnings no longer 
     would be deferred from U.S. taxation. However, by electing to 
     be subject to U.S. taxation, a portion of its income would be 
     qualifying foreign trade income. The requirement that the 
     foreign corporation be treated as a domestic corporation 
     (and, therefore, subject to U.S. taxation) is intended to 
     provide parity between U.S. corporations that manufacture 
     abroad in branch form and U.S. corporations that manufacture 
     abroad through foreign subsidiaries. The election, however, 
     is not limited to U.S.-owned foreign corporations. A foreign-
     owned foreign corporation that wishes to qualify for the 
     treatment provided under the Senate amendment could avail 
     itself of such election (unless otherwise precluded from 
     doing so by Treasury regulations).
     Shared partnerships
       The Senate amendment provides rules relating to allocations 
     of qualifying foreign trade income by certain shared 
     partnerships. To the extent that such a partnership (1) 
     maintains a separate account for transactions involving 
     foreign trading gross receipts with each partner, (2) makes 
     distributions to each partner based on the amounts in the 
     separate account, and (3) meets such other requirements as 
     the Treasury Secretary may prescribe by regulations, such 
     partnership then would allocate to each partner items of 
     income, gain, loss, and deduction (including qualifying 
     foreign trade income) from such transactions on the basis of 
     the separate accounts. It is intended that with respect to, 
     and only with respect to, such allocations and distributions 
     (i.e., allocations and distributions related to transactions 
     between the partner and the shared partnership generating 
     foreign trading gross receipts), these rules would apply in 
     lieu of the otherwise applicable partnership allocation rules 
     such as those in section 704(b). For this purpose, a 
     partnership is a foreign or domestic entity that is 
     considered to be a partnership for U.S. Federal income tax 
     purposes.
       Under the Senate amendment, any partner's interest in the 
     shared partnership is not taken into account in determining 
     whether such partner is a ``related person'' with respect to 
     any other partner for purposes of the Senate amendment's 
     provisions. Also, the election to exclude certain gross 
     receipts from foreign trading gross receipts must be made 
     separately by each partner with respect to any transaction 
     for which the shared partnership maintains a separate 
     account.
     Certain assets not taken into account for purposes of 
         interest expense allocation
       The Senate amendment also provides that qualifying foreign 
     trade property that is held for lease or rental, in the 
     ordinary course of a trade or business, for use by the lessee 
     outside of the United States is not taken into account for 
     interest allocation purposes.
     Distributions of qualifying foreign trade income by 
         cooperatives
       Agricultural and horticultural producers often market their 
     products through cooperatives, which are member-owned 
     corporations formed under Subchapter T of the Code. At the 
     cooperative level, the Senate amendment provides the same 
     treatment of foreign trading gross receipts derived from 
     products marketed through cooperatives as it provides for 
     foreign trading gross receipts of other taxpayers. That is, 
     the qualifying foreign trade income attributable to those 
     foreign trading gross receipts is excluded from the gross 
     income of the cooperative. Absent a special rule, however, 
     patronage dividends or per-unit retain allocations 
     attributable to qualifying foreign trade income paid to 
     members of cooperatives would be taxable in the hands of 
     those members. It is believed that this would disadvantage 
     agricultural and horticultural producers who choose to market 
     their products through cooperatives relative to those and 
     individuals who market their products directly or through 
     pass-through entities such as partnerships, limited liability 
     companies, or S corporations. Accordingly, the Senate 
     amendment provides that the amount of any patronage dividends 
     or per-unit retain allocations paid to a member of an 
     agricultural or horticultural cooperative (to which Part I of 
     Subchapter T applies), which is allocable to qualifying 
     foreign trade income of the cooperative, is treated as 
     qualifying foreign trade income of the member (and, thus, 
     excludable from such member's gross income). In order to 
     qualify, such amount must be designated by the organization 
     as allocable to qualifying foreign trade income in a written 
     notice mailed to its patrons not later than the payment 
     period described in section 1382(d). The cooperative cannot 
     reduce its income (e.g., cannot claim a ``dividends-paid 
     deduction'') under section 1382 for such amounts.
     Gap period before administrative guidance is issued
       It is recognized that there may be a gap in time between 
     the enactment of the Senate amendment and the issuance of 
     detailed administrative guidance. It is intended that during 
     this gap period before administrative guidance is issued, 
     taxpayers and the Internal Revenue Service may apply the 
     principles of present-law regulations and other 
     administrative guidance under sections 921 through 927 to 
     analogous concepts under the Senate amendment. Some examples 
     of the application of the principles of present-law 
     regulations to the Senate amendment are described below. 
     These limited examples are intended to be merely illustrative 
     and are not intended to imply any limitation regarding the 
     application of the principles of other analogous rules or 
     concepts under present law.
     Marginal costing and grouping
       Under the Senate amendment, the Secretary of the Treasury 
     is provided authority to prescribe rules for using marginal 
     costing and for grouping transactions in determining 
     qualifying foreign trade income. It is intended that similar 
     principles under present-law regulations apply for these 
     purposes.
     Excluded property
       The Senate amendment provides that qualifying foreign trade 
     property does not

[[Page 26103]]

     include property leased or rented by the taxpayer for use by 
     a related person. It is intended that similar principles 
     under present-law regulations apply for this purpose. Thus, 
     excluded property does not apply, for example, to property 
     leased by the taxpayer to a related person if the property is 
     held for sublease, or is subleased, by the related person to 
     an unrelated person and the property is ultimately used by 
     such unrelated person predominantly outside of the United 
     States. In addition, consistent with the policy adopted in 
     the Taxpayer Relief Act of 1997, computer software that is 
     licensed for reproduction outside of the United States is not 
     excluded property. Accordingly, the license of computer 
     software to a related person for reproduction outside of the 
     United States for sale, sublicense, lease, or rental to an 
     unrelated person for use outside of the United States is not 
     treated as excluded property by reason of the license to the 
     related person.
     Foreign trading gross receipts
       Under the Senate amendment, foreign trading gross receipts 
     are gross receipts from among other things, the sale, 
     exchange, or other disposition of qualifying foreign trade 
     property, and from the lease of qualifying foreign trade 
     property for use by the lessee outside of the United States. 
     It is intended that the principles of present-law regulations 
     that define foreign trading gross receipts apply for this 
     purpose. For example, a sale includes an exchange or other 
     disposition and a lease includes a rental or sublease and a 
     license or a sublicense.
     Foreign use requirement
       Under the Senate amendment, property constitutes qualifying 
     foreign trade property if, among other things, the property 
     is held primarily for lease, sale, or rental, in the ordinary 
     course of business, for direct use, consumption, or 
     disposition outside of the United States. It is intended that 
     the principles of the present-law regulations apply for 
     purposes of this foreign use requirement. For example, for 
     purposes of determining whether property is sold for use 
     outside of the United States, property that is sold to an 
     unrelated person as a component to be incorporated into a 
     second product which is produced, manufactured, or assembled 
     outside of the United States will not be considered to be 
     used in the United States (even if the second product 
     ultimately is used in the United States), provided that the 
     fair market value of such seller's components at the time of 
     delivery to the purchaser constitutes less than 20 percent of 
     the fair market value of the second product into which the 
     components are incorporated (determined at the time of 
     completion of the production, manufacture, or assembly of the 
     second product).
       In addition, for purposes of the foreign use requirement, 
     property is considered to be used by a purchaser or lesee 
     outside of the United States during a taxable year if it is 
     used predominantly outside of the United States. For this 
     purpose, property is considered to be used predominantly 
     outside of the United States for any period if, during that 
     period, the property is located outside of the United States 
     more than 50 percent of the time. An aircraft or other 
     property used for transportation purposes (e.g., railroad 
     rolling stock, a vessel, a motor vehicle, or a container) is 
     considered to be used outside of the United States for any 
     period if, for the period, either the property is located 
     outside of the United States more than 50 percent of the time 
     or more than 50 percent of the miles traveled in the use of 
     the property are traveled outside of the United States. An 
     orbiting satellite is considered to be located outside of the 
     United States for these purposes.
     Foreign economic processes
       Under the Senate amendment, gross receipts from a 
     transaction are foreign trading gross receipts eligible for 
     exclusion from the tax base only if certain economic 
     processes take place outside of the United States. The 
     foreign economic processes requirement compares foreign 
     direct costs to total direct costs. It is intended that the 
     principles of the present-law regulations apply during the 
     gap period for purposes of the foreign economic processes 
     requirement including the measurement of direct costs. It is 
     recognized that the measurement of foreign direct costs under 
     the present-law regulations often depend on activities 
     conducted by the FSC, which is a separate entity. It is 
     recognized that some of these concepts will have to be 
     modified when new guidance is promulgated as a result of the 
     Senate amendment's elimination of the requirement for a 
     separate entity.
     Effective date
     In general
       The Senate amendment is effective for transactions entered 
     into after September 30, 2000. In addition, no corporation 
     may elect to be a FSC after September 30, 2000.
       The Senate amendment also provides a rule requiring the 
     termination of a dormant FSC when the FSC has been inactive 
     for a specified period of time. Under this rule, a FSC that 
     generates no foreign trade income for any five consecutive 
     years beginning after December 31, 2001, will cease to be 
     treated as a FSC.
     Transition rules
     Winding down existing FSCs and binding contract relief
       The Senate amendment provides a transition period for 
     existing FSCs and for binding contractual agreements. The new 
     rules do not apply to transactions in the ordinary course of 
     business involving a FSC before January 1, 2002. Furthermore, 
     the new rules do not apply to transactions in the ordinary 
     course of business after December 31, 2001, if such 
     transactions are pursuant to a binding contract between a FSC 
     (or a person related to the FSC on September 30, 2000) and 
     any other person (that is not a related person) and such 
     contract is in effect on September 30, 2000, and all times 
     thereafter. For this purpose, binding contracts include 
     purchase options, renewal options, and replacement options 
     that are enforceable against a lessor or seller (provided 
     that the options are a part of a contract that is binding and 
     in effect on September 30, 2000).
     Old earnings and profits of corporations electing to be 
         treated as domestic corporations
       A transition rule also provided for certain corporations 
     electing to be treated as a domestic corporation under the 
     Senate amendment. In the case of corporation to which this 
     transition rule applies, the corporation's earnings and 
     profits accumulated in taxable years ending before October 1, 
     2000 are not included in the gross income of the shareholder 
     by reason of the deemed asset transfer for section 367 
     purposes that the Senate amendment provides. Thus, although 
     the electing corporation may be treated as transferring all 
     of its assets to a domestic corporation in a reorganization 
     described in section 368(a)(1)(F), the earnings and profits 
     amount that would otherwise be treated as a deemed dividend 
     to the U.S. shareholder under the regulations under section 
     367(b) will not include the earnings and profits accumulated 
     in taxable years ending before October 1, 2000. This 
     treatment is similar to the treatment of earnings and profits 
     of a foreign insurance company that makes the election to be 
     treated as a domestic corporation under section 953(d), which 
     election was a model for the election to be treated as a 
     domestic corporation under the Senate amendment. Under 
     section 953(d), earnings and profits accumulated in taxable 
     years beginning before January 1, 1988 were not included in 
     the earnings and profits amount that would be a deemed 
     dividend for section 367(b) purposes.
       Like the pre-1988 earnings and profits of a domesticating 
     foreign insurance company under section 953(d), the earnings 
     and profits to which this transition rule applies would 
     continue to be treated as earnings and profits of a foreign 
     corporation even after the corporation elects to be treated 
     as a domestic corporation. Thus, a distribution out of 
     earnings and profits of an electing corporation accumulated 
     in taxable years ending before October 1, 2000 would be 
     treated as a distribution made by a foreign corporation. 
     Rules similar to those applicable to corporations making the 
     section 953(d) election that prevent the repatriation of pre-
     election period earnings and profits without current U.S. 
     taxation apply for this purpose. Thus, for example, the 
     earnings and profits accumulated in taxable years beginning 
     before October 1, 2000 would continue to be taken into 
     account for section 1248 purposes.
       The earnings and profits to which the transition rule 
     applies are the earnings and profits accumulated by the 
     electing corporation in taxable years ending before October 
     1, 2000. The transition rule will not apply to earnings and 
     profits accumulated before that date that are succeeded to 
     after that date by the electing corporation in a transaction 
     to which section 381 applies unless, like the electing 
     corporation, the distributor or transferor (from whom the 
     electing corporation acquired the earnings and profits) could 
     have itself made the election under the Senate amendment to 
     be treated as a domestic corporation and would have been 
     eligible for the transition relief.
       The transition rule for old earnings and profits applies to 
     two classes of taxpayers. The first class is FSCs in 
     existence on September 30, 2000 that make an election to be 
     treated as a domestic corporation because they satisfy the 
     requirement that substantially all of their gross receipts 
     are foreign trading gross receipts. To be eligible for the 
     transition relief, the election must be made not later than 
     for the FSC's first taxable year beginning after December 31, 
     2001.
       The second class of corporations to which this transition 
     relief applies is certain controlled foreign corporations (as 
     defined in section 957). Notwithstanding other requirements 
     for making the election to be treated as a domestic 
     corporation provided under the Senate amendment's general 
     provisions, such controlled foreign corporations are eligible 
     under the transition rule to make the election to be treated 
     as a domestic corporation and will not have the resulting 
     deemed asset transfer cause a deemed inclusion of earnings 
     and profits for earnings and profits accumulated in taxable 
     years ending before October 1, 2000. To be eligible for the 
     transition relief, such a controlled foreign corporation must 
     be in existence on September 30, 2000. The controlled foreign 
     corporation must be wholly owned, directly or indirectly, by 
     a domestic corporation. The controlled foreign corporation 
     must never have made an election to be treated as a FSC and 
     must

[[Page 26104]]

     make the election to be treated as a domestic corporation not 
     later than for its first taxable year beginning after 
     December 31, 2001. In addition, the controlled foreign 
     corporation must satisfy certain tests with respect to its 
     income and activities. For administrative convenience, these 
     tests are limited to the three taxable years preceding the 
     first taxable year for which the election to be treated as a 
     domestic corporation applies. First, during that three-year 
     period, all of the controlled foreign corporation's gross 
     income must be subpart F income. Thus, the income was subject 
     to full inclusion to the U.S. shareholder and, accordingly, 
     subject to current U.S. taxation. Second, during that three-
     year period, the controlled foreign corporation must have, in 
     the ordinary course of its trade or business, entered into 
     transactions in which it regularly sold or paid commissions 
     to a related FSC (which also was in existence on September 
     30, 2000). If an electing corporation in this second class 
     ceases to be (directly or indirectly) wholly owned by the 
     domestic corporation that owns it on September 30, 2000, the 
     election to be treated as a domestic corporation is 
     terminated.
     Limitation on use of the gross receipts method
       Similar to the limitation on use of the gross receipts 
     method under the Senate amendment's operative provisions, the 
     Senate amendment provides a rule that limits the use of the 
     gross receipts method for transactions after the effective 
     date of the Senate amendment if that same property generated 
     foreign trade income to a FSC using the gross receipts 
     method. Under the rule, if any person used the gross receipts 
     method under the FSC regime, neither that person nor any 
     related person will have qualifying foreign trade income with 
     respect to any other transaction involving the same item of 
     property.
     Coordination of new regime with prior law
       Notwithstanding the transition period, FSCs (or related 
     persons) may elect to have the rules of the Senate amendment 
     apply in lieu of the rules applicable to FSCs. Thus, for 
     transactions to which the transition rules apply (i.e., 
     transactions after September 30, 2000 that occur (1) before 
     January 1, 2002 or (2) after December 31, 2001 pursuant to a 
     binding contract which is in effect on September 30, 2000), 
     taxpayers may choose to apply either the FSC rules or the 
     amendments made by this Senate amendment, but not both. In 
     addition, a taxpayer would not be able to avail itself of the 
     rules of the Senate amendment in addition to the rules 
     applicable to domestic international sales corporations 
     because the Senate amendment provides that the exclusion of 
     extraterritorial income will not apply if a taxpayer is a 
     member of any controlled group of which a domestic 
     international sales corporation is a member.

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

[[Page 26105]]

the difficult choices facing us on FSC, both parties worked in concert 
with the administration to address a looming threat to innocent United 
States exporters. Make no mistake: this bill averts a trade war that is 
poised to hit unsuspecting U.S. exporters with millions of dollars of 
retaliatory tariffs.
  Another issue we need to be very clear about, the FSC regime and its 
replacement reduced the anti-growth biases of our international tax 
system that would otherwise hamstring our companies and our workers. 
Some Members, even proponents of this legislation, sometimes have 
called the FSC replacement a subsidy. We need to be more careful with 
our language.

                              {time}  1015

  This is not a subsidy. It is a partial, repeat, partial, reduction in 
an excessive tax burden our companies, and by extension, our workers, 
face when competing in the world economy.
  By way of analogy, our current tax law is a felony. The fiscal 
replacement reduces the charge to a misdemeanor, but the net result 
still violates the economic law of neutrality that should govern all of 
our tax policies.
  The European Union is challenging us, not as Republicans or 
Democrats, not as Congress or the administration, but as a country. By 
completing the difficult work necessary to send this bill to the 
President, we have put the United States in the best possible position 
to defend our interests in the WTO.
  H.R. 4986 represents an achievement of bipartisan cooperation in the 
best interests of American businesses and workers. I urge a yes vote.
  Mr. STARK. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, there is an old rule of tax law which started with 
actually then Secretary of the Treasury Baker when we reformed the Tax 
Code under President Reagan. It was, if it quacks like a subsidy and 
walks like a subsidy and looks like a subsidy, it is a subsidy.
  The distinguished chairman of the Subcommittee on Trade would discuss 
the overburden of taxation. When the pharmaceutical companies charge 
our people, our seniors, our young people, two to four times more for 
the same drug that they charge people in Europe, and yet they have the 
lowest tax rate of any industry group in this country, why should we 
give them hundreds of millions of dollars of subsidy, gift, reduction? 
Members may call it what they want, but we are rewarding the 
pharmaceutical industry for charging less in Europe and more in this 
country.
  Tell me what it is, Mr. Speaker. I call it disgraceful, I call it 
obscene, $750 million a year to General Electric and Boeing to sell 
weapons, which they do not even sell, the State Department and the 
Defense Department arrange the sale of weapons. Yet, we give them a 
reduction of $750 million a year? That is a subsidy, pure and simple.
  Now, software was mentioned. Those poor folks in Seattle. Software? 
Do Members know how much Microsoft paid in taxes last year? Zero, Mr. 
Speaker, a goose egg. This big or this big, zero is still zero. Yet, 
they get a subsidy which gets them down to zero for all the software 
they sell overseas. Is that a gift? And this poor overtaxed Bill Gates 
is walking around, so we subsidize his sales overseas.
  Mr. Speaker, we have been doing this for generations. For 25 years, 
we have been giving $5 billion a year away in subsidies to corporations 
who would do the same thing whether or not they got this subsidy. And 
they do not set their prices based on their taxes. As any distinguished 
economist, like my friend, the gentleman from Illinois (Mr. Crane), the 
distinguished chair of the Subcommittee on Trade, knows, corporations 
do not price their products based on taxes, they price their products 
based on competitive and manufacturing costs, all the other things, as 
he so well knows.
  So all we are doing is giving a break, a tax break, a subsidy, to the 
richest corporations in this country, rewarding those corporations who 
gyp our senior citizens by overcharging in this country, by rewarding 
them.
  And my distinguished friend, the gentleman from Texas, will tell us 
about tobacco, subsidizing the sale of tobacco to hook little kids in 
other parts of the world while we are trying to spend money here at 
home. Just think, if we had some of this $5 billion a year to spend to 
train our children not to smoke, how much healthier and safer they 
would be. Think if we had some of this $5 billion a year to spend on 
education to hire teachers, which the gentleman could not find the 
money to do on the Republican side. Think if we had this $5 billion a 
year to provide a drug benefit to the senior citizens.
  No, we are going to continue this charade and give this money away in 
unconscionable subsidies to the corporations who least need it for 
doing what they would do anyway. It is the silliest kind of gift to the 
people who need it least, when we have people in this country who need 
help. We are turning our backs on the people in this country and 
helping the richest corporations in this country.
  End this charade now and vote against this bill.
  Mr. CRANE. Mr. Speaker, will the gentleman yield?
  Mr. STARK. I yield to the gentleman from Illinois.
  Mr. CRANE. Mr. Speaker, first of all, with regard to tobacco 
subsidies, that would keep people from getting to the polls, I guess, 
if we eliminated subsidies.
  But let me ask a second question. That is, do businesses pay taxes?
  Mr. STARK. Most of these do not, no.
  Mr. CRANE. No, do businesses pay taxes?
  Mr. STARK. Some businesses do. The ones getting the subsidy for the 
most part do not. They have so many loopholes and subsidies, as in 
this, that they end up paying no taxes.
  Mr. CRANE. Will the gentleman go back to Econ 101? Businesses do not 
pay taxes and never have. That is a cost, like plant and equipment and 
labor are costs.
  Mr. STARK. Mr. Speaker, this is my time and I reclaim it. That is as 
silly as supply side economics. The gentleman ought to know better.
  Mr. Speaker, I reserve the balance of my time.
  Mr. ARCHER. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I rise simply to say that the gentleman from California 
says that it is a corporate subsidy if we do not double tax all of the 
earnings overseas. We are one of the very few developed countries in 
the world that double taxes earnings overseas. So if we eliminate 
partially, only partially, the double taxation of those earnings to be 
only partially competitive with our foreign competitors, he calls it a 
subsidy. I do not believe the American people would agree with that.
  Mr. Speaker, I include for the Record a letter from Secretary Summers 
on behalf of the administration strongly supporting this legislation.
  The document referred to is as follows:


                                   Department of the Treasury,

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

[[Page 26106]]

     any decision may be made authorizing retaliation. The 
     benefits of the agreement, however, are contingent upon the 
     immediate enactment of the FSC replacement legislation.
       Therefore, I urge you in the strongest possible terms to 
     allow the House to act on H.R. 4986 as soon as possible.
           Sincerely,
                                              Lawrence H. Summers,
                                                        Secretary.

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

                   Statement of Administration Policy

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


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

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


                         pay-as-you-go scoring

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

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

                              {time}  1030

  Mr. Speaker, this bill has a whopping cost to Americans of $42 
billion in this decade. To be bipartisan about it, in the words of 
Senator John McCain, ``this legislation is an example of the costly 
corporate welfare that cripples our ability to respond to truly urgent 
social needs.'' Indeed it is.
  To make matters worse, despite all the proclamations about how urgent 
this bill is and how we will avoid a trade war and save all of these 
jobs, to make matters worse, this bill does not work. And even its 
supporters concede in private that it will not work and that we will be 
back here as soon as the World Trade Organization considers and rejects 
this bill, doing this all over again, because of the well justified 
criticism that has been levied against this very obvious straight 
subsidy.
  With good reason, the Europeans have already rejected this ill-
conceived proposal. Not only does it not work in the world forum, it 
does not work, according to even Republican sources, like the 
Republican Congressional Budget Office. It announced in March of this 
year that ``export subsidies'' such as this bill ``reduce economic 
welfare and typically even reduce the welfare of the country granting 
the subsidy.''
  The assistant director of the General Accounting Office in August of 
this year said ``most of the benefits are received by a small number of 
large corporations.'' He noted: ``Policymakers have available a number 
of tax and other government incentives that meet WTO standards, and 
that could be expanded to replace the prohibited direct tax subsidy 
provided by the FSC tax regime.''

[[Page 26107]]

  And to those who say they want more free trade, this bill does not 
provide free trade. It provides distorted trade and chooses winners and 
losers. This legislation asks local stores that sell groceries and 
clothing to customers at a mall or along Main Street across this 
country to pay higher taxes than the multinationals that sell 
cigarettes and machine guns abroad.
  Mr. Speaker, $4 of every $5 in this bill go to companies that have 
assets exceeding $1 billion. It offers no significant benefit to 
smaller companies in this country.
  Indeed, I think the Congress ought to heed the words of commentator 
Paul Magnusson in ``Business Week'' on September 4 of this year who 
wrote that ``the larger problem with subsidies is that they invite 
countersubsidies and so accomplish little besides transferring money 
from consumers and taxpayers to politically powerful producers''; and 
that is exactly what is happening today. I agree with that commentary 
that ``it's time to call a halt to such waste by both sides; getting 
rid of subsidies for exports would be a good place to start. The 
Clinton administration should drop its plans to expand FSC and get back 
to the negotiating table and start proposing some real solutions such 
as eliminating all export subsidies.''
  Indeed, the administration should have done just that. Now who is 
driving the corporate welfare Cadillacs that are lining up outside the 
Capitol to get more welfare under this proposal? Well, driver number 
one is Mr. Phillip Morris and the tobacco lobby. They get $100 million 
a year under this proposal to export death and disease to the rest of 
the world, to use the slick tactics that they developed here in America 
addicting our children to nicotine in order to encourage a global 
pandemic addicting the children of the world.
  And to my colleagues from the tobacco-producing States, the industry 
does not even have to use American tobacco. All they have to do is slip 
a little Marlboro label on the package and they can use exclusively 
foreign tobacco, and still be tax subsidized by American taxpayers to 
the tune of over $100 million a year to promote death and disease.
  The Clinton administration agreed to oppose this wrong. The 
administration were true to the last minute; and then they abandoned, 
in the face of the lobbying power of the tobacco industry, their stated 
willingness to end this promotion of death and disease.
  Who is the second big corporate welfare Cadillac driver? There has 
been the suggestion that we could not have any amendments to this bill. 
Well, there was an amendment that was done behind closed doors, and the 
effect was to double, absolutely double with an increase by $300 
million every year the amount of money that those who make weapons in 
this country will get by selling them abroad.
  We already dominate the world scene in terms of the manufacture of 
weapons being sent to every arms race in every corner of the world. But 
under this bill, American tax payers will have to subsidize and offer 
more corporate welfare to those weapon manufacturers to keep up the 
good business they have that results in death and destruction all over 
this world.
  Instead of being a leader and trying to reduce the amount of those 
arms races around the world, we are subsidizing it to the tune of $300 
million more, even though last year, the Treasury said it was not a 
good idea, and the Defense Department, in 1994, indicated it was not 
necessary. Even though Republican groups in this Congress said it was 
unwise, they could not, in an election year, resist the dominance and 
power of the arms manufacturers.
  And then another driver of this corporate welfare Cadillac is the 
pharmaceutical industry. It is an industry that today gets a reward for 
making prescriptions here in America and selling them for less abroad. 
They will get a tax subsidy, a bit of corporate welfare, for doing that 
at the same time they gouge consumers at home. This bill is wrong, that 
is why it was done behind closed doors, that is why they are fearful of 
amendments and discussion and it ought to be rejected.
  Mr. DOGGETT. Mr. Speaker, this bill has a long title, but it is quite 
simply a welfare bill. It has a huge price tag that will cost Americans 
billions of dollars. It has been prepared entirely behind closed doors 
by those who will receive the welfare benefits. With the blessing of 
both the Clinton administration and the Republican leadership here in 
Congress, a very interesting process was followed: If one was going to 
get something out of this bill, they were invited to the behind-closed-
doors negotiations. If they were left out, they were excluded from the 
negotiations to prepare this legislation.
  Once this product of all of the clandestine wheeling and dealing 
sessions was presented to this Congress, every effort was made, both 
here in the House and across the Capitol in the Senate, to ensure that 
no questions were asked and no amendments were offered. There was as 
little talk possible about all of this behind-the-scenes wheeling and 
dealing to get as much welfare for themselves, by some who wrote the 
bill, as they possibly could: ``Do not look at the details of the 
largesse, just give it to us as fast as you can.''
  This bill represents everything that is wrong with the special 
interest domination of the legislative process in America today. It 
provides ample justification for the cynicism that more and more 
Americans have that their government is not serving them, but serving 
only those who can afford to have a lobbyist and a political action 
committee located in Washington.
  The SPEAKER pro tempore (Mr. Simpson). Without objection, the 
gentleman from Illinois (Mr. Crane) will control the time for the 
majority.
  There was no objection.
  Mr. CRANE. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I have recognition of my opponents' opposition here to 
our bill. We had Smoot-Hawley in our party, and they shared many of the 
same convictions we heard here tonight. But I am happy that the 
gentleman from Missouri (Mr. Gephardt) and the gentleman from New York 
(Mr. Rangel), our ranking minority member, are supportive of this 
bipartisan legislation.
  Mr. Speaker, I yield 2\1/2\ minutes to the gentleman from 
Pennsylvania (Mr. English), our distinguished colleague.
  Mr. ENGLISH. Mr. Speaker, I am delighted to be here to urge strong 
bipartisan support for this very important legislation. Legislation 
that may be the most important action we take at the close of this 
Congress, and perhaps for years to come.
  This is critical legislation to protect the jobs of working families 
who have members who work in some of our best-paying export oriented 
jobs in America. I am surprised to hear the strange rhetoric on the 
floor of this House that is essentially rhetoric directed against their 
jobs.
  We have heard the opponents of this legislation adopt the same 
rhetoric of our European trade competitors in criticizing our tax 
system. The thing to understand and what FSC is intended to address, 
this legislation is not a welfare bill, corporate or otherwise. It is 
not a subsidy. It is an adjustment of our tax system to establish a 
level playing field, and that is what our European trade competitors 
have not wanted.
  FSC was originally created and made necessary, only because the U.S. 
maintains an archaic worldwide tax system which taxes foreign-source 
income and because the U.S. taxes export income. By refusing to reform 
FSC today, this Congress would be inviting massive retaliation against 
U.S. export trade leaving our exporters and their employees high and 
dry. Failing to reform FSC today would make an already tough global 
market next to impossible for U.S. employers to compete in.
  If we do not act today, we would impose a huge cost on the economy of 
this country, particularly on some of the industries in manufacturing 
that have the best paying jobs. If we do not act today, we would put 
our workers at a competitive disadvantage and effectively balance our 
budget on their backs.
  Mr. Speaker, if we do not act today, we will explode our already 
large trade

[[Page 26108]]

deficit and put our economy in a downward spiral because, if we do not 
act today, we will set up the dynamics for a trade war between Europe 
and the United States. We cannot afford that. They cannot afford that. 
We should not move down this slippery slope.
  Pass this legislation. It is the one responsible thing we can do 
today.
  Mr. STARK. Mr. Speaker, I am happy to yield 30 seconds to the 
gentleman from Guam (Mr. Underwood).
  Mr. UNDERWOOD. Mr. Speaker, I rise to express my concerns regarding 
H.R. 4986, the FSC Repeal and Extraterritorial Income Exclusion Act of 
2000. I urge congressional leaders and the Clinton administration to 
help the U.S. territories who will be adversely impacted by this 
legislation, particularly the U.S. Virgin Islands and Guam when the 
House reconvenes in December.
  In Guam, there are over 200 FSC licenses generating around $170,000 
to the government of Guam. However, license fees are only some of the 
direct benefits from FSC. Other direct benefits include compensation 
for the professional community. But be that as it may, I am appealing 
to the Clinton administration, particularly the Treasury Department, to 
offset the economic impact of today's legislation by allowing 
territories to promote economic self-sufficiency, including 
establishing empowerment zones for the territories and tax equity 
treatment for Guam.
  Mr. Speaker, I rise to express my concerns regarding H.R. 4986, the 
FSC Repeal and Extraterritorial Income Exclusion Act of 2000. I urge 
congressional leaders and the Clinton administration to help the U.S. 
territories who will be adversely impacted by this legislation, 
particularly the U.S. Virgin Islands and Guam, when the House 
reconvenes in December.
  Since the WTO decision last fall on Foreign Sales Corporations 
(FSCs), I know that the administration worked closely with House Ways 
and Means Committee Chairman Archer and Representative Rangel, the 
ranking member, to ensure that the United States passes legislation to 
meet the October 1, 2000, deadline set by the WTO to comply with its 
ruling. Although the deadline has passed, today's passage of H.R. 4986 
is necessary to fulfill a commitment by U.S. officials to address the 
concerns raised by the European Union.
  As many of you know, the WTO panel issued a ruling last fall that 
subsidies for Foreign Sales Corporations under U.S. tax laws violated 
the WTO Subsidies Agreement. U.S. negotiators have since worked in good 
faith on a proposal to retain many of the tax benefits of the FSC 
structure, while establishing a new structure which would be responsive 
to the European Union's challenge.
  However, I simply want to express my concern over the impact that 
H.R. 4986 would have on the U.S. territories. Under the current FSC 
system, U.S. territories have been able to benefit through tax 
exemptions for U.S. exporting industries. With the repeal of the FSC 
system, we will no longer to be able to offer this incentive although I 
understand that current contracts will be honored.
  In Guam, there are around 211 FSC licensees, generating around 
$170,000 to the Government of Guam. However, license fees are only some 
of the direct benefits from FSCs. Other direct benefits include 
compensation for Guam attorneys and other professionals, bank deposits, 
and funds generated through the hotel and restaurant industries that 
host FSC corporate meetings. Indirect benefits would be the cumulative 
effect that FSCs and other tax incentives have on attracting U.S. 
businesses to Guam.
  Be it as it may, the writing is on the wall for FSCs as we now know 
it. Therefore, I am appealing to the Clinton administration, 
particularly the Treasury Department, to offset the economic impact of 
today's legislation with the means necessary to allow the U.S. 
territories to promote economic self-sufficiency during any 
negotiations with the Congress on any final omnibus budget or tax 
package.
  Apart from H.R. 3247, which would provide empowerment zones for the 
U.S. territories, I have worked closely with my colleagues to enact 
legislation that I authorized which would level the playing field for 
foreign investors in Guam through the passage of the Guam Foreign 
Direct Investment Equity Act.
  My legislation would provide Guam with the same tax rates as the 
fifty states under international tax treaties. Since the U.S. cannot 
unilaterally amend treaties to include Guam in its definition of United 
States, my bill amends Guam's Organic Act, which has an entire tax 
section that ``mirrors'' the U.S. Internal Revenue Code.
  As background, under the U.S. Code, there is a 30 percent withholding 
tax rate for foreign investors in the United States. Since Guam's tax 
law ``mirrors'' the rate established under the U.S. Code, the standard 
rate for foreign investors in Guam is 30 percent.
  The Guam Foreign Direct Investment Equity Act provides the Government 
of Guam with the authority to tax foreign investors at the same rates 
as states under U.S. tax treaties with foreign countries since Guam 
cannot change the withholding tax rate on its own under current law. 
Under U.S. Tax treaties, it is a common feature for countries to 
negotiate lower withholding rates on investment returns. Unfortunately, 
while there are different definitions for the term ``United States'' 
under these treaties, Guam is not included. Such an omission has 
adversely impacted Guam since 75 percent of Guam's commercial 
development is funded by foreign investors. As an example, with Japan, 
the U.S. rate for foreign investors is 10 percent. That means while 
Japanese investors are taxed at a 10 percent withholding tax rate on 
their investments in the fifty states, those same investors are taxed 
at a 30 percent withholding rate on Guam.
  While the long term solution is for U.S. negotiators to include Guam 
in the definition of the term ``United States'' for all future tax 
treaties, the immediate solution is to amend the Organic Act of Guam 
and authorize the Government of Guam to tax foreign investors at the 
same rates as the fifty states. Other territories under U.S. 
jurisdiction have already remedied this problem through Delinkage, 
their unique covenant agreements with the federal government, or 
through federal statute. Guam, therefore, is the only state or 
territory in the United States which is unable to take advantage of 
this tax benefit.
  As the House considers H.R. 4986, as amended by the Senate, I implore 
my colleagues and the Clinton Administration to support the Guam 
Foreign Direct Investment Equity Act to offset the adverse impact of 
H.R. 4986 on Guam. Please include equitable tax treatment for foreign 
investors in Guam during any final omnibus budget or tax package.
  Mr. CRANE. Mr. Speaker, I yield 2 minutes to the gentlewoman from the 
Virgin Islands (Mrs. Christensen), our distinguished colleague.
  Mrs. CHRISTENSEN. Mr. Speaker, I want to thank the distinguished 
gentleman from Illinois (Mr. Crane), the chairman of the Subcommittee 
on Trade, for yielding me this time to speak on an issue that is very 
important to all of the territories, and my constituents included.
  Mr. Speaker, while H.R. 4986 is clearly necessary for our country to 
avoid having sanctions imposed on us by the European Union, for me and 
the people of the Virgin Islands, who I represent, its enactment into 
law will mean the loss of nearly $11 million to our already depressed 
local treasury.
  Through no fault of our own and despite the efforts of my colleagues 
on the Committee on Ways and Means and the administration to mitigate 
the adverse effects on us, the Virgin Islands stands to lose hundreds 
of direct and indirect jobs in the FSC industry, in addition to the 
millions in FSC franchise fees that the local government collects.
  This action by the European Union to challenge our FSC program in the 
WTO could not have come at a worse time for the Virgin Islands as our 
local economy continues to suffer from the effects of 10 years of 
devastation from several killer hurricanes.
  What I want my colleagues to understand that while this bill is 
necessary because of what it means for the country, it is a blow for 
the people of the Virgin Islands and the other territories. It is my 
intention to continue to work with my colleagues in the Congress and 
the administration to assist the Virgin Islands and the other 
territories in replacing the loss of this program and the loss of 
revenues that this bill will mean for us.
  Mr. Speaker, I thank the gentleman from Illinois once again for 
yielding me this time.
  Mr. STARK. Mr. Speaker, I yield such time as he may consume to the 
gentleman from Oregon (Mr. DeFazio).
  Mr. DeFAZIO. Mr. Speaker, I rise in strong opposition to the 
legislation.
  We again find ourselves debating replacing a rather arcane section of 
the tax code that allows corporations to avoid a portion of their tax 
bill by establishing largely paper entities in a filing cabinet in a 
tax haven like Barbados with the equally arcane tax provisions of H.R.

[[Page 26109]]

4986, the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
  And, once again, the legislation has been brought to the floor under 
suspension of the rules, which cuts off any ability to improve what is 
a truly dismal bill.
  Creating this new, expanded loophole to assist corporations in 
escaping their fair share of the tax burden in the U.S. makes a mockery 
of pleas by my colleagues to simplify the tax code and improve 
fairness.
  For nearly two decades, beginning with the Revenue Act of 1971 (P.L. 
92-178), the U.S. provided tax incentives for exports. However, our 
trading partners complained that these incentives violated our 
commitments under the General Agreement on Tariffs and Trade (GATT). 
While not conceding the violation, in 1984, Congress scrapped the 
Domestic International Sales Corporation (DISC) provisions and created 
the Foreign Sales Corporation (FSC) provisions. The differences are 
highly technical and probably only understood by international tax 
bureaucrats.
  Under the FSC provision, corporations can exempt between 15 and 30 
percent of their export income from taxation by routing a portion of 
their exports through a FSC. Our trading partners, specifically the 
European Union (EU), were not satisfied with the somewhat cosmetic 
changes made to the U.S. tax code.
  Going back on a verbal gentleman's agreement not to challenge our 
respective tax codes under global trading rules, the EU filed a 
complaint with the World Trade Organization (WTO), successor to GATT, 
essentially arguing the same thing that was argued about DISCs. Namely 
that export subsidies were illegal under global trading rules by 
conferring an unfair advantage on recipient companies.
  A secretive WTO tribunal ruled against the U.S. Dutifully, the U.S. 
appealed the decision. Earlier this year, the WTO appeals panel upheld 
the earlier decision and ordered the U.S. to repeal the FSC provision 
or risk substantial retaliatory measures.
  Specifically, the WTO appeals panel wrote, ``By entering into the WTO 
Agreement, each Member of the WTO has imposed on itself an obligation 
to comply with all terms of that Agreement. This is a ruling that the 
FSC measure does not comply with all those terms. The FSC measure 
creates a `subsidy' because it creates a `benefit' by means of a 
`financial contribution', in that government revenue is foregone that 
is `otherwise due.' This `subsidy' is a `prohibited export subsidy' 
under the SCM Agreement [Agreement on Subsidies and Countervailing 
Measures] because it is contingent on export performance. It is also an 
export subsidy that is inconsistent with the Agreement on Agriculture. 
Therefore, the FSC Measure is no consistent with the WTO obligations of 
the United States.''
  In other words, it is unfair and illegal under global trade rules for 
the U.S. tax code to provide welfare for corporations by allowing them 
to escape taxes that would otherwise be due.
  At this point, one would expect that my colleagues who, on most 
occasions eloquently defend the need for ``rules based trade'' and 
``free markets'', to adhere to the WTO directive and repeal FSC. 
Because I assumed my colleagues would want to be intellectually 
consistent, I introduced legislation shortly after the WTO ruling to 
repeal FSC.
  After all, precedent proved the U.S. was more than willing to bend to 
the will of the WTO. When the WTO ruled against a provision of the 1990 
Clean Air Act, the Environmental Protection Agency gutted its clean air 
regulations in order to allow dirtier gasoline from Venezuela to be 
sold in the U.S.
  Similarly, when Mexico threatened a WTO enforcement action on a 1991 
GATT case it had won that eviscerated the Dolphin Protection Act, the 
U.S. went along to get along. In fact, the Clinton Administration sent 
a letter to Mexican President Ernesto Zedillo declaring that weakening 
the standard by which tuna must be caught in ``dolphin-safe'' nets ``is 
a top priority for my administration and me personally.''
  The WTO also ruled against the Endangered Species Act provisions that 
required U.S. and foreign shrimpers to equip their nets with 
inexpensive turtle excluder devices if they wanted to sell shrimp in 
the U.S. market. The goal was to protect endangered sea turtles. The 
Clinton Administration agreed to comply with the ruling.
  Given this record of acquiescing to the WTO, one could be forgiven 
for assuming the Clinton Administration and Congress would behave in a 
similar manner when losing a case on tax breaks for corporations.
  Of course, sea turtles and dolphins don't make massive campaign 
contributions, or any campaign contributions for that matter. But, the 
large corporations who would be impacted by the WTO decisions against 
FSCs do.
  Apparently not bothered by the hypocrisy, immediately after the 
ruling by the WTO appeals panel, the Clinton Administration, a few 
Members of Congress, and the business community openly declared the 
need to maintain the subsidy in some form and began meeting in secret 
to work out the details on how to circumvent the WTO ruling and 
maintain these valuable, multi-billion dollar tax incentives.
  Now, it is will-known that I am not a big fan of the WTO. It is an 
unaccountable, secretive, undemocratic bureaucracy that looks out 
solely for the interests of multinational corporations and investors at 
the expense of human rights, labor standards, national sovereignty, and 
the environment.
  But, by pointing out that export subsidies like FSCs are corporate 
welfare, however, the WTO has done U.S. taxpayers a favor. 
Unfortunately, this legislation before us today only does wealthy 
corporations a favor.
  I have several problems with H.R. 4986 besides the intellectual 
inconsistency. I will touch on each of these now.
  First, and perhaps most importantly, there is little or no economic 
rationale for export subsidies like FSCs or the provisions of H.R. 
4986. In its April 1999 Maintaining Budgetary Discipline report, the 
Congressional Budget Office (CBO) noted ``Export subsidies, such as 
FSCs, reduce global economic welfare and may even reduce the welfare of 
the country granting the subsidy, even though domestic export-producing 
industries may benefit.''
  Similarly, in August 1996, CBO wrote, ``Export subsidies do not 
increase the overall level of domestic investment and domestic 
employment . . . In the long run, export subsidies increase imports as 
much as exports. As a result, investment and employment in import-
competing industries in the United States would decline about as much 
as they increased in the export industries.''
  Need further evidence? The Congressional Research Service (CRS) has 
written ``Economic analysis suggests that FSC does increase exports, 
but likely triggers exchange rate adjustments that also result in an 
increase in U.S. imports; the long run impact on the trade balance is 
probably nil. Economic theory also suggests that FSC probably reduces 
aggregate U.S. economic welfare.
  Of course, protests will be heard from supporters of H.R. 4986 that 
it gets rid of the export requirement. In testimony before the Ways and 
Means Committee, Deputy Secretary Eizenstat said the Chairman's mark is 
``not export-contingent.'' Of course, that claim is absurd. If a 
company sells products solely in the U.S., they don't qualify for the 
tax subsidy. That is, by definition, an export subsidy. Therefore, the 
criticisms of export subsidies previously mentioned would apply to this 
new legislation as well.
  President Nixon originally proposed export subsidies, which became 
the DISC and then FSC, because he was alarmed at the size of the U.S. 
trade deficit, which was $1.4 billion in 1971, a number that seems 
almost quaint by today's standards. As Paul Magnusson noted in the 
September 4, 2000, Business Week, FSC ``produced some hefty tax savings 
for big U.S. exporters, but it never did actually do much to narrow the 
trade deficit, which hit a record $339 billion last year.'' And which, 
I should add, has continued to set new records virtually every month 
this year.
  I can't understand why it makes sense to subsidize U.S. exporters to 
the tune of $5 billion or more when the economic impact is ``probably 
nil'' or worse.
  The economic rationale further deteriorates when one realizes, as the 
previous quotes suggest, that export subsidies discriminate against 
mom-and-pop stores who don't have the resources to export and against 
U.S. industries that must compete with imports. This means that export 
subsidies distort markets by pre-ordaining winners and losers. The 
winners? Large exporters and foreign consumers who get to enjoy lower 
priced U.S. products subsidized by U.S. taxpayers. The losers? Small 
businesses, U.S. taxpayers, and import-competing industries.
  I find it interesting while Treasury has spent a great deal of time 
figuring out how to combat corporate tax shelters that have no economic 
rationale, as discussed in a July 1999 report, that they would push 
this corporate welfare, which also has no economic rationale.
  So, who specifically benefits? The journal Tax Notes conducted a 
revealing study of FSCs in its August 14, 2000, edition. The article 
profiled the 250 companies that reported $1.2 billion in FSC tax 
savings in 1998. The top 20 percent of the companies in the sample 
claimed 87 percent of the benefits. The two largest FSC beneficiaries 
were the General Electric Company and Boeing, which saw their tax bills 
reduced by $750 million and $686 million, respectively from 1991-1998.
  What are some of the other top FSC corporate welfare queens? 
Motorola, Caterpillar, Allied-Signal, Cisco Systems, Monsanto, Archer 
Daniels Midland, Oracle, Raytheon, RJR

[[Page 26110]]

Nabisco, International Paper, and ConAgra. The list reads like a who's 
who of extraordinarily profitable multinational corporations. Hardly 
companies that should need to feed from the taxpayer trough.
  Furthermore, American subsidiaries of European firms take advantage 
of U.S. taxpayers through export subsidies. British Petroleum, 
Unilever, BASF, Daimler Benz, Hoescht, and Rhone-Poulenc are all FSC 
beneficiaries. The fact that foreign companies can also claim export 
benefits pokes a large hole in the argument that these tax benefits are 
needed to ensure the competitiveness of U.S. businesses.
  Similarly, isn't it a bit odd that economists and U.S. policymakers 
like to lecture European nations about their high tax burdens, but now, 
suddenly their tax burden is too low and, therefore, U.S. companies 
need subsidies in order to compete?
  Let's be clear, this legislation is not about the competitiveness of 
large, wealthy, multinational corporations based in the United States. 
It is about wealthy campaign contributors wanting to keep and expand 
their $5 billion-plus tax subsidies and elected officials willing to do 
their bidding.
  Not only does H.R. 4986 allow these companies to continue receiving 
billions in tax breaks, but it actually expands them. This legislation 
will cost U.S. taxpayers another $300 million a year or more.
  It is also unfortunate that this legislation subsidizes a number of 
industries--such as defense contractors, tobacco companies, and 
pharmaceutical firms--that have no business receiving any more taxpayer 
hand-outs.
  Take the defense industry, for example. Under the current FSC regime, 
defense contractors can only claim 50 percent of the tax benefit 
available to other industries. The legislation before us today allows 
the defense industry to claim the full benefit available to others.
  Leaving aside the fact that U.S. taxpayers are already overly 
generous to defense contractors, which no doubt they are, expanding 
this corporate welfare will have no discernable impact on overseas 
sales. The Treasury Department noted in August 1999, ``We have seen no 
evidence that granting full FSC benefits would significantly affect the 
level of defense exports.''
  In 1997, the CBO made a similar point, ``U.S. defense industries have 
significant advantages over their foreign competitors and thus should 
not need additional subsidies to attract sales.''
  Even the Pentagon has acknowledged this fact by concluding in 1994, 
``In a large number of cases, the U.S. is clearly the preferred 
provider, and there is little meaningful competition with suppliers 
from other countries. An increase in the level of support the U.S. 
government currently supplies is unlikely to shift the U.S. export 
market share outside a range of 53 to 59 percent of worldwide arms 
trade.''
  As Ways and Means Committee Member, Representative Doggett, noted in 
his dissenting views on H.R. 4986, ``In 1999, without the bonanza 
provided by this bill, U.S. defense contractors sold almost $11.8 
billion in weapons overseas--more than a third of the world's total and 
more than all European countries combined.''
  The U.S. should stop the proliferation of weapons and war, not expand 
it as this bill intends.
  The pharmaceutical industry is another industry that does not need or 
deserve additional subsidies from U.S. taxpayers. The industry already 
receives substantial research and development tax credits as well as 
the benefits flowing from discoveries by government scientists. As 
Representative Stark noted in his dissenting views, drug companies 
lowered their effective tax rate by nearly 40 percent relative to other 
industries from 1990 to 1996 and were named the most profitable 
industry in 1999 by Fortune Magazine.
  The industry sells prescription drugs at far cheaper prices abroad 
than here in the U.S. For example, seniors in the U.S. pay twice as 
much for prescriptions as those in Canada or Mexico. It is an affront 
to U.S. taxpayers to force them to further subsidize an industry that 
is already gouging them at the pharmacy as this bill would do.
  In direct contradiction of various federal policies to combat tobacco 
related disease and death in the U.S., this legislation would force 
U.S. taxpayers to subsidize the spread of big tobacco's coffin nails to 
foreign countries. This violates the American taxpayers' sense of 
decency and respect. Their money should not be used to push a product 
onto foreign countries that kills one-third of the people who use it as 
intended.
  By placing H.R. 4986 on the suspension calendar, debate is 
prematurely cut off and amendments to reduce support for drug 
companies, the defense industry or tobacco companies can not be 
considered. But, I guess that is just par for the course for a process 
that has taken place in relative secrecy between a few Members of 
Congress, the Administration, and the industries that stand to benefit 
from this legislation.
  You may not hear this in the debate much, but it is important to 
point out that the EU has already put the U.S. on notice that H.R. 4986 
does not satisfy its demands. According to the EU, H.R. 4986 still 
provides an export subsidy, maintains a requirement that a portion of a 
product contain U.S.-made components, and does not repeal FSCs by the 
October 1st deadline. Therefore, it is likely the EU will ask the WTO 
to rule on the legality of the U.S. reforms. Most independent analysts 
agree with the EU critique of H.R. 4986.
  So, it is reasonable to assume the WTO will again rule against the 
U.S. and allow the EU to impose retaliatory sanctions against U.S. 
products. According to some press accounts, the EU would be able to 
impose 100 percent tariffs on around $4 billion worth of U.S. goods. 
These would be the largest sanctions ever imposed in a trade dispute. 
In other words, this inadequate reform of export subsidies will open up 
the U.S. to retaliatory action by the EU, which will harm exports as 
much or more than any perceived benefit that would be provided by H.R. 
4986. Of course, the exporters that will be hurt by retaliatory 
sanctions probably won't be the same businesses that will enjoy the tax 
windfall provided by this legislation.
  Mr. Speaker, ADM is not suffering. Cisco Systems is not suffering. 
Raytheon is not suffering. Miscroft is not struggling mightily to keep 
its head above water. But, the American people are. Schools are 
crumbling, 45 million Americans have no health insurance, individuals 
are working longer hours for less money with the predictable stress on 
families, million of seniors do not have access to affordable 
prescription drugs, and poverty remains stubbornly high, particularly 
among children.
  Rather than debating how to preserve billions in tax subsidies for 
some of our largest corporations, we should be figuring out how to 
address some of these issues. How many times over are we going to spend 
projected, and I stress projected, surpluses. If we want to pay down 
the national debt, provide prescription drugs, shore up Social Security 
and Medicare, and increase funding for education, Congress cannot keep 
showering wealthy corporations with unjustifiable tax subsidies.
  I will end with a quote from a newspaper I'm not normally inclined to 
agree with editorially, the Washington Times. In an editorial on 
September 5, 2000, the Washington Times wrote, ``The Ways and Means 
Committee boasts that support for its revised FSC bill was bipartisan 
and near unanimous. It remains a bipartisan and near unanimous 
blunder.''
  I urge my colleagues to vote against H.R. 4986.
  Mr. STARK. Mr. Speaker, I yield 2 minutes to the gentleman from 
Massachusetts (Mr. Tierney).
  Mr. TIERNEY. Mr. Speaker, I rise today in opposition to this.
  Mr. Speaker, basically, I want to point out in response to some of 
the comments made by our colleagues on the other side, this attempt to 
replace current legislation for the Foreign Sales Corporation tax 
provision really in some instances doubles the benefit that existing 
companies are now getting, in particular those of the arms 
manufacturers and exporters.
  At the very least, we would hope we would have an opportunity to go 
through committee and deal with this on a matter where we could have 
some amendments and if not eliminate this Foreign Sales Corporation tax 
provision, at least put amendments in there that would bring it back to 
what is now, as there is no basis in fact or any argument for why we 
are doubling in some instances the benefit the corporations would get.
  In fact, passage of their particular replacement legislation is going 
to result in a rejection by the WTO. Everybody knows that in advance. 
We are going to be in a position where the United States companies are 
going to be penalized, and it is not going to be the companies 
necessarily that would be the ones benefitting from this proposed 
replacement legislation. There is going to be other small businesses, 
people that depend on financing their business operations and paying 
their help and their workers, who are going to be penalized when the 
WTO allows retribution for this.
  We are going to be exposed to penalties that we ought not to be 
exposed to. This situation is not even a close

[[Page 26111]]

call. Mr. Speaker, no one questions whether this is even good tax 
policy. The General Accounting Office, the Congressional Budget Office, 
the Congressional Research Service have all argued the foreign sales 
corporations have a negligible effect on trade.

                              {time}  1045

  In fact, the Congressional Research Service argues that one of the 
greatest beneficiaries of this tax preference is foreign consumers who 
will pay a lower price for products subsidized at our taxpayers' 
expense. As there exists no evidence that the foreign sales 
corporations actually improve United States trade or create jobs, this 
hardly seems to be a judicious use of some $5 billion.
  Given that this bill was written almost completely behind closed 
doors, one would hope that it would at least be given a full public 
debate. Instead, proponents cynically assume that the public will not 
understand the matter of tax policy; indeed, they count on the public 
not understanding it, and they permit a measly 40 minutes of debate 
time.
  Instead of actually debating the issue and letting the chips fall 
where they may, Mr. Speaker, they rush to submit something, anything to 
the WTO as soon as possible, even something they will most certainly 
reject, and have expedited the legislative process to a point of 
incoherence. We should vote against this legislation.
  Mr. CRANE. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, let me just commend our colleagues on the other side of 
the aisle who have joined in a collegial and bipartisan way in support 
of advancing a piece of legislation that is of profound significance 
and importance to the welfare of our economy and the advancement of our 
continuing role as the biggest export country on the face of this 
Earth.
  We have an opportunity here to continue to move down that positive 
path. We have always had that good bipartisan support for these kinds 
of initiatives in the post-World War II era.
  I thank Members on both sides, and I urge my colleagues to get behind 
this bill and vote aye.
  Mr. PAUL. Mr. Speaker, today we are faced with a decision to do the 
right thing for the wrong reasons or the wrong thing for the wrong 
reasons. We have heard proponents of this FSC bill argue for tax breaks 
for U.S. exporters, which, of course, should be done. Those proponents, 
however, argue that this must be done to move the United States into 
compliance with a decision by the WTO tribunal. Alternatively, 
opponents of the bill, argue that allowing firms domiciled in the 
United States to keep their own earnings results in some form of 
subsidy to the ``evil'' corporations. If we were to evaluate this 
legislation based upon the floor debated, we would be left with the 
choice of abandoning U.S. sovereignty in the name of WTO compliance or 
denying private entities freedom from excess taxation.
  Setting aside the aforementioned false choice of globalism or 
oppression by taxation, there are three reasons to consider voting 
against this bill. First, it perpetuates an international trade war. 
Second, this bill is brought to the floor as a consequence of a WTO 
ruling against the United States. Number three, this bill gives more 
authority to the President to issue Executive Orders.
  Although this legislation deals with taxes and technically actually 
lowers taxes, the reason the bill has been brought up has little to do 
with taxes per se. To the best of my knowledge there has been no 
American citizen making any request that this legislation be brought to 
the floor. It was requested by the President to keep us in good 
standing with the WTO.
  We are now witnessing trade war protectionism being administered by 
the World (Government) Trade Organization--the WTO. For two years now 
we have been involved in an ongoing trade war with Europe and this is 
just one more step in that fight. With this legislation the U.S. 
Congress capitulates to the demands of the WTO. The actual reason for 
this legislation is to answer back to the retaliation of the Europeans 
for having had a ruling against them in favor of the United States on 
meat and banana products. The WTO obviously spends more time managing 
trade wars than it does promoting free trade. This type of legislation 
demonstrates clearly the WTO is in charge of our trade policy.
  The Wall Street Journal reported on 9/5/00, ``After a breakdown of 
talks last week, a multi-billion-dollar trade war is now about certain 
to erupt between the European Union and the U.S. over export tax breaks 
for U.S. companies, and the first shot will likely be fired just weeks 
before the U.S. election.''
  Already, the European Trade Commissioner, Pascal Lamy, has rejected 
what we're attempting to do here today. What is expected is that the 
Europeans will quickly file a new suit with the WTO as soon as this 
legislation is passed. They will seek to retaliate against United 
States companies and they have already started to draw up a list of 
those products on which they plan to place punitive tariffs.
  The Europeans are expected to file suit against the United States in 
the WTO within 30 days of this legislation going into effect.
  This legislation will perpetuate the trade war and certainly support 
the policies that have created the chaos of the international trade 
negotiations as was witnessed in Seattle, Washington.
  The trade war started two years ago when the United States obtained a 
favorable WTO ruling and complained that the Europeans refused to 
import American beef and bananas from American owned companies.
  The WTO then, in its administration of the trade war, permitted the 
United States to put on punitive tariffs on over $300 million worth of 
products coming into the United States from Europe. This only generated 
more European anger who then objected by filing against the United 
States claiming the Foreign Sales Corporation tax benefit of four 
billion dollars to our corporations was ``a subsidy.''
  On this issue the WTO ruled against the United States both initially 
and on appeal. We had been given till November 1st to accommodate our 
laws to the demands of the WTO.
  H.R. 4986 will only anger the European Union and accelerate the trade 
war. Most likely within two months, the WTO will give permission for 
the Europeans to place punitive tariffs on hundreds of millions of 
dollars of U.S. exports. These trade problems will only worsen if the 
world slips into a recession when protectionist sentiments are 
strongest. Also, since currency fluctuations by their very nature 
stimulate trade wars, this problem will continue with the very 
significant weakness of the EURO.
  The United States is now rotating the goods that are to receive the 
100 to 200 percent tariff in order to spread the pain throughout the 
various corporations in Europe in an effort to get them to put pressure 
on their governments to capitulate to allow American beef and bananas 
to enter their markets. So far the products that we have placed high 
tariffs on have not caused Europeans to cave in. The threat of putting 
high tariffs on cashmere wool is something that the British now are 
certainly unhappy with.
  The Europeans are already well on their way to getting their own list 
ready to ``scare'' the American exporters once they get their 
permission in November.
  In addition to the danger of a recession and a continual problem with 
currency fluctuation, there are also other problems that will surely 
aggravate this growing trade war. The Europeans have already complained 
and have threatened to file suit in the WTO against the Americans for 
selling software products over the Internet. Europeans tax their 
Internet sales and are able to get their products much cheaper when 
bought from the United States thus penalizing European countries. Since 
the goal is to manage things in a so-called equitable manner the WTO 
very likely could rule against the United States and force a tax on our 
international Internet sales.
  Congress has also been anxious to block the Voice Stream 
Communications planned purchase by Deutsche Telekom, a German 
government-owned phone monopoly. We have not yet heard the last of this 
international trade fight.
  The British also have refused to allow any additional American 
flights into London. In the old days the British decided these 
problems, under the WTO the United States will surely file suit and try 
to get a favorable ruling in this area thus ratcheting up the trade 
war.
  Americans are especially unhappy with the French who have refused to 
eliminate their farm subsidies--like we don't have any in this country.
  The one group of Americans that seem to get little attention are 
those importers whose businesses depend on imports and thus get hit by 
huge tariffs. When 100 to 200 percent tariffs are placed on an imported 
product, this virtually puts these corporations out of business.
  The one thing for certain is this process is not free trade; this is 
international managed trade by an international governmental body. The 
odds of coming up with fair trade or free trade under WTO are zero. 
Unfortunately,

[[Page 26112]]

even in the language most commonly used in the Congress in promoting 
``free trade'' it usually involves not only international government 
managed trade but subsidies as well, such as those obtained through the 
Import/Export Bank and the Overseas Private Investment Corporation and 
various other methods such as the Foreign Aid and our military budget.
  Lastly, despite a Constitution which vests in the House authority for 
regulating foreign commerce (and raising revenue, i.e. taxation), this 
bill unconstitutionally delegates to the President the ``authority'' 
to, by Executive order, suspend the tax break by designating certain 
property ``in short supply.'' Any property so designated shall not be 
treated as qualifying foreign trade property during the period 
beginning with the date specified in the Executive order.
  Free trade should be our goal. We should trade with as many nations 
as possible. We should keep our tariffs as low as possible since 
tariffs are taxes and it is true that the people we trade with we are 
less likely to fight with. There are many good sound, economic and 
moral reasons why we should be engaged in free trade. But managed trade 
by the WTO does not qualify for that definition.
  Mr. STARK. Mr. Speaker, I rise today in adamant opposition to H.R. 
4986, the Foreign Sales Corporation replacement bill. This bill is a 
blatant form of corporate welfare, ruled illegal under international 
trade laws by the World Trade Organization (WTO). The U.S. has already 
missed two deadlines imposed by the WTO and the European Union for 
repealing the FSC. I don't know which is worse--that the current 
leadership is so incapable of governing that they can't meet an 
extended deadline, or that they have failed to comply with the WTO 
ruling by attempting to replace one export subsidy with something 
remarkably similar.
  Then the Senate Finance Committee made some minor changes to the bill 
that appears to bring the U.S. closer to WTO compliance than the House 
version without sacrificing the current tax benefit received by 
Caterpillar Inc. This version came back to the House and was voted on 
in H.R. 2614, the $240 billion GOP tax package. The House leadership 
thought they were doing their corporate constituents a favor by 
attaching the FSC to a bloated tax package. Now we're here once again 
because the majority leadership thought they could bait Clinton into 
signing a bad tax bill if they attached the FSC to it. No such luck! 
Clinton has threatened to veto the tax bill and the Senate has no 
intentions of acting on it.
  The bill before us today is nothing more than corporate welfare for 
some of the nation's most profitable industries. The European Union has 
filed a complaint with the World Trade Organization (WTO) that the FSC 
is an export tax subsidy and therefore illegal under international 
trade laws. I completely agree. Yet instead of repealing the tax 
subsidy and complying with our international trade obligations, this 
bill seeks to remedy the FSC with a near exact replacement.
  The Institute on Taxation and Economic Policy recently released a 
report that shows a rise in pretax corporate profits by a total of 23.5 
percent from 1996 through 1998. At the same time, U.S. Treasury 
corporate income tax revenues only rose by a mere 7.7 percent. In 
addition to the myriad of corporate tax deductions this Congress 
insists on expanding, programs such as the FSC can help explain the 
disparity in corporate profits and corporate income tax rates.
  The FSC helps subsidize some of the most profitable industries such 
as the pharmaceutical, tobacco and weapons export industries. Why 
should Congress help out the pharmaceutical industry if the industry 
insists on charging U.S. consumers more for prescription drugs than 
they charge in Europe? We shouldn't! The pharmaceutical industry sells 
prescription drugs in the U.S. at prices that are 190-400 percent 
higher than what they charge in Europe. The U.S. subsidizes the 
pharmaceutical industry by approximately $123 million per year through 
the FSC. This is unfair to the American taxpayer and must not be 
allowed to happen.
  The top 20 percent of FSC beneficiaries obtained 87 percent of the 
FSC benefit in 1998. The two largest FSC beneficiaries, General 
Electric and Boeing, received almost $750 million and $686 million in 
FSC benefits over 8 years, respectively. RJ Reynolds' FSC benefit 
represents nearly six percent of its net income while Boeing's FSC 
benefit represents twelve percent of its earnings!
  It is high time we stop allowing corporate interests to dictate U.S. 
spending. We didn't pass a prescription drug benefit for seniors in the 
106th Congress so we shouldn't be rushing through a piece of 
legislation that gives corporations a $5 billion per year tax break. I 
urge my colleagues to put working families, children and our seniors 
first, and oppose H.R. 4986.
  Ms. KILPATRICK. Mr. Speaker, I rise today in opposition to the 
passage of H.R. 4986, the Senate Amendments to the Foreign Sales 
Corporation (FSC) Repeal and Extraterritorial Income Exclusion Act. 
While it is important that our nation's businesses have the benefit of 
a level playing field when competing against foreign businesses, we 
should not do so on the back of the American Public or to the detriment 
of the health and welfare of those outside of our borders. Let it not 
be said that we are a nation willing to sacrifice all principles for 
the welfare of our nation's businesses.
  The measure before us, effective for transactions entered after 
September 30, 2000, will allow both individuals and companies an 
exemption from federal taxes of all income earned abroad (whether or 
not the product is manufactured in the United States or abroad). The 
measure does require that 50% of the components of the final product be 
manufactured in the United States. The measure also eliminates current 
law allowing for the creation of Foreign Sales Corporations. Although I 
supported the measure when it was originally considered in the House 
facts have come to light that have given me pause to support the 
measure.
  I believe that there are questions concerning the process used to 
move this measure. The FSC is a complicated matter that warrants the 
full and deliberate consideration of the entire House. Considering this 
measure under suspension of the rules clearly inhibits this body's 
ability to make the most informed decision about this important matter 
which will affect the people we represent.
  Policy questions concerning this matter also abound. For example, 
during consideration of the bill an amendment was pursued that would 
have exempted tobacco companies from the tax exemption provided under 
the measure. It is argued that this measure will give tobacco companies 
an estimated $100 million in taxpayer subsidies to export cigarettes. 
It is further argued that this subsidy provides incentives to tobacco 
companies to maximize and promote sales in other countries. It gives me 
pause to think that the policy Congress endorses in this measure will 
give the impression that while we care about the health risks imposed 
by tobacco use on American lives, we are not concerned about the health 
risks imposed by tobacco use on foreign lives.
  Questions have also been raised on the effect this measure will have 
on the U.S. economy. Proponents of the measure argue that the bill will 
spur domestic investment and employment through an increase in exports, 
while opponents point to studies that indicate that ``export subsidies, 
such as FSC's, reduce global economic welfare and typically even reduce 
the welfare of the country granting the subsidy .  .  . [C]ompanies in 
import-competing industries reduce domestic investment and 
employment.'' I am hesitant to support a measure that may in fact be 
detrimental to the well being of our nation's economy.
  Mr. Speaker, for these reasons I rise in opposition to H.R. 4986, and 
I recommend a nay vote on its passage.
  Mr. Crane. Mr. Speaker, I yield back the balance of my time.
  The SPEAKER pro tempore (Mr. Simpson). The question is on the motion 
offered by the gentleman from Texas (Mr. Archer) that the House suspend 
the rules and concur in the Senate amendment to the bill, H.R. 4986.
  The question was taken.
  The SPEAKER pro tempore. In the opinion of the Chair, two-thirds of 
those present have voted in the affirmative.
  Mr. STARK. Mr. Speaker, on that I demand the yeas and nays.
  The yeas and nays were ordered.
  The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the 
Chair's prior announcement, further proceedings on this motion will be 
postponed.

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