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United Technologies Finds EU Challenge to Foreign Sales Corp 'Deeply Flawed'

28 July 1998

United Technologies Finds EU Challenge to Foreign Sales Corporation 'Deeply Flawed'

       Sees FSC as Vital to 'Level the Tax Playing Field' with Foreign
                                  Exporters

    WASHINGTON, July 28 -- Calling the European Union's challenge
of the Foreign Sales Corporation (FSC) provisions of U.S. tax code
"misguided," the chief international trade counsel for United Technologies
Corporation defended the 1984 legislation today as "consistent with World
Trade Organization (WTO) rules, and necessary to help level the playing field
on which U.S. and foreign exporters compete."
    In testimony before the trade subcommittee of the House Ways and Means
Committee, UTC counsel Jeremy Preiss warned of "unintended, adverse
consequences for both the WTO and for tax policy" of the EU's FSC challenge
before the world trade body.  Preiss was also appearing on behalf of the
National Foreign Trade Council and the Foreign Sales Corporation Coalition, an
umbrella group of large and small companies concerned about the European
Union's WTO challenge to the U.S. Foreign Sales Corporation tax provisions.
    The EU announced on July 1 that it would request the establishment of a
WTO dispute panel to consider its claim that the FSC provisions of the U.S.
Internal Revenue Service Code violate U.S. obligations under the WTO.
    Preiss called the EU's assertion that FSC amounts to an unfair subsidy
"simply untrue," pointing out that the FSC merely applies the same principle
of territorial income taxation long enjoyed by EU companies to U.S. exporters
who choose to establish a qualifying Foreign Sales Corporation outside the
United States.  "By permitting U.S. exporters to exempt a portion of their
export-related income from taxation, the FSC neutralizes some, though not all,
of the tax advantages that European companies receive under their territorial
tax systems," he added.
    "Despite the care Congress and other U.S. officials took to ensure that
the FSC was, and still is, consistent with applicable trade rules, the EU has
decided, after more than 13 years, to challenge the program," Preiss observed.
"Curiously, it has taken the EU considerable time to acquire the view that the
FSC is inconsistent with GATT and WTO rules.  And at the same time, the EU has
not shown how their commercial interests have been disadvantaged by the FSC."
    The FSC, which has operated for 13 years without challenge by the European
Union, was established by the Congress in 1984 in conformance with a ruling by
the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO,
on the proper relationship between the different systems of taxation and
international trade rules.
    In particular, it was designed to neutralize some of the tax advantages
for exporters inherent in European territorial-type tax systems, which
generally exempt all income earned outside the country from income tax and all
exports from value-added and other consumption taxes.
    Preiss also warned that the tax policies of many member states of the EU
are vulnerable to the same trade arguments and theories the EU is advancing
against the FSC, noting that the U.S. Trade Representative has identified at
least five such states -- Belgium, France, Greece, Ireland, and the
Netherlands.
    United Technologies Corporation, one of America's top 20 exporters,
provides a broad range of high technology products and support services to the
building systems, automotive, and aerospace industries.  UTC's companies are
industry leaders and include Pratt & Whitney, Carrier, Otis, UT Automotive,
Sikorsky and Hamilton Standard.