The World Trade Organization's latest ruling against foreign sales corporations "has severe consequences for the Virgin Islands," acting Gov. Gerard Luz James, II said in a written statement Friday.
James, who as lieutenant governor has oversight for FSCs, put their value to the V.I. government at "approximately $7 million annually" in franchise taxes.
Thursday the WTO appellate body upheld an earlier decision that the FSC represents a tax subsidy forbidden under WTO rules and that the United States must effectively dismantle the FSC by Oct. 1 of this year.
"The financial impact of such a ruling would be detrimental to the Virgin Islands economy, which is already experiencing an extremely large deficit," James said in his statement.
However, he said he was encouraged by reports that the Clinton administration continues to back the FSC program as a way to encourage U.S. exports.
"I join the National Association of Broadcasters in urging U.S. trade representative Charlene Barshefsky to initiate talks with the European Union," James said. "We (the Office of Corporations and Trademarks) are on top of the situation. We are hopeful about the negotiations and we will continue to keep you informed of the Clinton Administration's progress."
Congress established the Foreign Sales Corporation system as an alternative to a previous program to which U.S. trade partners had objected. Exporters began using FSCs, offshore subsidiaries, in 1985. A portion of the export sales run through the FSC are exempt from federal taxes.
The European Union first signaled its intention to make a formal challenge to the FSC in November 1997. There followed a series of formal and informal discussions between the EU and the US, and the two sides reportedly were negotiating with each other throughout much of the WTO process.
Many observers believe such negotiations will intensify now.
Meanwhile, several US accounting firms have been working for months to develop alternatives to the FSC which will continue to give US exporters some sort of tax relief.
