The Foreign Sales Corporations ("FSCs") regime was created by the United States Congress in 1984 to provide U.S. exporters some relief from federal taxes. The laws creating FSCs are codified in the Sections 921 to 927 of the Internal Revenue Service Code. FSCs are the successor to the Domestic International Sales Corporations ("DISCs"), which were established in 1971. Intensive use of DISCs and FSCs has significantly reduced the tax burden faced by U.S. exporters.

The European Union ("EU") has recently taken a series of steps in the World Trade Organization ("WTO") which may affect the future use of FSCs. On July 1, 1998, the EU formally requested the formation of a WTO dispute settlement panel to examine the issue of FSCs.

FSCs, like their predecessor DISCs, provide a tax benefit under the U.S. federal system of taxation to U.S. exporters. Companies seeking FSC tax benefits must take certain actions and follow certain rules. These companies are required to incorporate an exporting subsidiary in a U.S. territory or foreign country designated by statute. The most common locations have been the U.S. Virgin Islands, Guam and Barbados. An important FSC requirement is that the money the exporting subsidiary takes in as receipts be kept in banks located in one of these statutorily designated jurisdictions.

In 1992, the gross receipts of all FSCs exceeded $2.3 billion, and the six most common FSCs locations had gross receipts that varied considerably in size: the United States Virgin Islands $1.4B, Guam $321M, Barbados $313M, Netherlands Antilles $124M, Jamaica $71M, and Bermuda $19M.

The EU claims that FSCs are an export subsidy banned by Article XVI of the General Agreement on Tariffs and Trade ("GATT") and Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures ("ASCM"). Article XVI(B)(4) of GATT prohibits the use of any subsidy that results in export goods being sold for less than they are sold domestically. Article 3.1(a) of the ASCM prohibits subsidies that are contingent upon export performance.

In November 1997, the EU formally requested consultations regarding FSCs, and in March 1998 amended its request to include Article 9 of the Agreement on Agriculture, which outlines agreements to reduce agricultural subsidies. In May 1998, the U.S. requested FSC consultations regarding tax-based export subsidy policies with France, Greece, Ireland, Belgium, and the Netherlands.

Under the rules in effect during the earlier DISC dispute, deadlines were often unclear. The new Dispute Settlement Understanding ("DSU") emphasizes prompt resolution and creates a definite timetable for DSU proceedings. The new rules allow for some flexibility in the timetable, however, there are set time limits to the proceedings. The EU now has the ability to facilitate a complete resolution of the dispute concerning FSCs within two years after requesting formation of a panel. This two year period includes time for delays, appeals, and WTO authorization of retaliatory actions.

Due to its formal request for the formation of a WTO dispute settlement panel, control over the dispute resolution timetable has now been put in the hands of the EU. The EU could potentially compel a complete resolution of the dispute concerning FSCs by July 1, 2000. The EU’s request for the formation of a WTO dispute settlement panel to examine the FSC question has moved the dispute into a crucial stage. The EU may settle for allowing FSCs to be formed in any EU country. Such a solution would be an extension of the solution to the previous conflict over DISCs. The U.S. Trade Representative has stated that the U.S. will continue its support of FSCs.