On July 27, a Congressional committee acted to repeal the embattled foreign sales corporation provisions and put in their place new rules replicating the benefits for US exporters. US businesses are relieved, but what does this mean for service providers in Bermuda that advise and run FASCs? FSCs are special purposes corporations located outside the US that yield the equivalent of a 15 percent exclusion from income. Something like 65 percent of all US exports travel through FSCs. There are a total of approximately 5,000 active FSCs; the number grows by about 400 each year. In total, they hold assets of around US $27 billion. Annually they handle exports totaling almost US$300 billion.

Bermuda has not been in the front rank of FSC players on a total dollar or per capita basis. But it is the home of the "chunkiest'' FSCs. Based on most recent data, it has 118 FSCs with a total of US$5,465 billion in assets -- average size over US $46 million. Compare this with the average size for the most popular jurisdiction, the USVI, of US$3.2 million and the next most popular place, Barbados, of US$5 million. Source: US Treasury Department, 1996 figures.

Bermuda has again been plying its "carriage trade'', frequently its FSCs are highly-tailored structures for large leasing transactions.

Action by the US was necessary because of a World Trade Organisation determination that the FSC rules are a prohibited export subsidy under international trade and agriculture agreements. The European Union brought a complaint against the US, and that complaint evolved into an adverse decision in March of this year. The US was given until October 1, 2000 to remove the offending laws.

In a move that surprised many, the US acted quickly to do just that. But it remains to be seen whether the EU and others, like Canada and Japan, will be satisfied or will renew their challenges.

Before the committee, Deputy Secretary of the Treasury Stuart Eizenstat said the new rules are clearly WTO-compatible because they do not represent a subsidy, rather they create a new rule of general application, and they do not apply only to exporters. IT is true that they are radically different from the current FSC rules; yet they generally replicate the tax savings.

A number of Congressmen expressed disappointment -- their eyes expressed something beyond disappointment -- at the actions of the EU and the hope that this controversy does not escalate into a "major trade war''. With sanctions of US$24-26 billion per annum being talked about, the stakes are quite high.

In fact, this is the largest trade dispute in recent history.

In changing the shape of its rules, however, the US may cause non-US service providers, like those in Bermuda, in some ways to fade into the background.

First, there would be no need for separate entities located in a low-tax jurisdiction. The benefit is drafted as a relatively simple exclusion for extra territorial income, to make it function more like the territorial tax rules of other nations.

Second, large exporters might be influenced to perform required activities, called foreign economic processes, for themselves, using affiliates in any non-US locations; this could be England, or The Netherlands, or Belgium. Since it's just activities that are being performed, there is not the exposure to taxation of large amounts of income.

Smaller exporters, ones having not more than US$5 million in exports, as they have been in the past, are not required to perform these activities. Now, however, they would not even need a corporation in a foreign locale.

Some good news is that liberal transition rules will keep all existing FSCs alive and well until January 1, 2002, and existing FSC leasing transactions can live on beyond that.

Under the FSC regime, the US Virgin Islands and Barbados host most of the FSCs. Barbados has been attracting more and more of the large ones, because the USVI has an unattractive franchise tax schedule. Bermuda, as noted, had the cream at the top.

As disclosed for the first time in the last few days, one of the things said to the US by the EU was it (the US) should formulate its rules so as not to encourage "tax havens''; and the US Treasury Department is admitting that this was one of its goals.

Some have observed that so far as they are concerned, Bermuda is the US's long-time friend and partner, not a "tax haven'' to be lumped with the likes of the Cook Islands or Vanuatu. (In Vanuatu, the men chew berries and spit in a bowl to concoct a special brew. Bankers in Bermuda haven't done this for years now!) It's probably not entirely accurate to say the EU or the OECD pushed the anti-"tax haven'' features of the bill, since many of the staffers and consultants working for these institutions are either products of the US Treasury Department and IRS or they learned at the knee of US tax policy makers. The US Treasury Department, like all of us, sometimes likes to say "the devil made me do it.'' If the big exporter business largely goes away, and the small exporters stop coming, what's left? The answer is medium-size and smaller exporters and shared FSCs. In fact, the latter, which group exporters so as to achieve economics of scale, may play an increasingly important role. Bermuda, while not having many shared FSCs, has one or two of the best, including the Western Growers Association Shared FSC, which acts for agricultural exporters in California and Arizona.

The new law, thanks to the efforts of the groups like the Western Growers Association, the National Association of Manufacturers, and the Development Offices of Delaware Pennsylvania, and Chase Trade, Inc., contains specific provisions preserving benefits for shared entities.

Charles Bruce is a tax attorney and chairman of MTI Services, Inc., a shared FSC service provider. He is also chairman of the American Bar Association Subcommittee on FSCs and a frequent visitor to Bermuda. Karen Pettifer, Grosvenor Trust Company, assisted with his article.