What were Foreign Sales Corporations (FSC's)
A FSC was a foreign corporation (i.e., incorporated abroad) created by "parent" shareholders (mostly corporations). Almost all FSCs were owned by domestic corporations (i.e., incorporated in the United States); however, owners of a FSC were generally referred to as "shareholders" or “related suppliers’, since a FSC may have also been owned by an individual, a partnership, or a trust or estate.
Generally, the FSC mechanism exempted a portion of income derived from export of U.S. manufactured merchandise and certain services from U.S. income taxation. In March 2000, the World Trade Organization (WTO) found the FSC exemption of income to be an illegal export subsidy. In November 2000, the United States Congress adopted the Extraterritorial Income Exclusion Act, eliminating the FSC exemption of income and the FSC entity. Hence, the Tax Year 2000 FSC study was the last FSC study conducted by SOI.
An overall measure of FSCs economic activity and earnings was the “gross receipts of FSCs and related suppliers”. Gross receipts of FSCs and their related suppliers included all receipts FSCs and related suppliers earned from export transactions with foreign parties, prior to any deductions. After subtraction of costs of goods sold, and allocations of receipts using pricing rules to FSCs and their related suppliers, FSCs generated “total income.” A certain amount of total income was subject to U.S. tax as “nonexempt income,” while another amount was exempt from regular U.S. income taxation. Total deductions were allocated to nonexempt income. Following other adjustments, taxable income, and total U.S. income tax were calculated.
In order to calculate net exempt income, FSCs first had to select administrative or non-administrative inter-company pricing methods (methods used to allocate receipts between the FSC and its related suppliers, defined later). The applicable income exemption percentage varied depending on which inter-company pricing methods the taxpayer selected and whether or not the shareholder of the FSC was a C corporation.
Distributions to parent shareholders reflected current and accumulated (i.e., from prior year) earnings and profits. The majority of these distributions were in the form of cash as opposed to stock or physical property. In general, distributions made by FSCs to their parent corporations were eligible for a 100-percent dividends-received deduction and therefore not subject to U.S. income tax, provided they were derived from earnings and profits attributable to foreign trade income.
Please visit SOI Tax Stats - FSC's/IC-DISC's Statistics for data tables and articles from this study.