Foreign Sales Corporation (FSC)

What Is a Foreign Sales Corporation?

A foreign sales corporation (FSC) is a defunct provision in the U.S. federal income tax code which considered a reduction in taxes on income derived from sales of exported goods. The code required the utilization of a subsidiary entity in a foreign country which existed for the reasons for selling the exported goods.

Figuring out Foreign Sales Corporation (FSC)

A foreign sales corporation (FSC) would be set up by a U.S. exporter to profit itself of certain exemptions from U.S. federal and income taxes. A FSC needed to meet a number of requirements, primarily that the overseas subsidiary of the U.S. company needed to keep up with its offices and books in a country that had an exchange of information agreement with the U.S.; something like one director of the company needed to live in the country the subsidiary was laid out in; and it needed to get revenue from the sale of U.S. exports in that country. It additionally needed to file as a FSC with the Internal Revenue Service (IRS). FSCs could be set up by manufacturers, export mediators, or gatherings of exporters.

The formation of a FSC gave an exporter a method of shifting what might somehow be taxable export profit to the FSC, where just a portion of the FSC's profit was taxed (as certain income of the FSC would be tax-exempt as per the tax code provisions). This would then effectively reduce the exporter's overall tax rate since the exporter was the shareholder of the FSC. The tax exemption could be just about as high as 15% to 30% of the gross revenue from exports.

History of Foreign Sales Corporations

The FSC, laid out in 1984, was one in a series of measures intended to support U.S. exporters. It followed on from domestic international sales corporations (Disks) and was prevailed by the Extraterritorial Income Exclusion Act (ETI) in 2000. These were progressively tested in — and found rebellious by — the General Agreement on Tariffs and Trade (GATT) and its replacement the World Trade Organization (WTO) as comprising denied export sponsorships.

The U.S. had contended that these measures effectively leveled the playing field with countries, for example, those in Europe which made border tax changes by eliminating value added tax (VAT) from goods prices before they are exported on the grounds that the U.S. doesn't have a quantifiable indirect tax like VAT. It had contended that diminishing the effect of corporate income taxes would accomplish a similar effect.