XII. FOREIGN INCOME EXCLUSION AND REPEAL OF FSC REGULATIONS

US exporters could elect FSC (foreign sales corporation), under which part of the income earned was exempt from US tax and part was be taxed on a current basis or deferred depending on the pricing rules and the source of income of the FSC. 

With effect from September 30, 2000 the FSC regulations have been repealed and replaced with an exclusion for extraterritorial income.

Gross income for U.S. tax purposes excludes extraterritorial income, but related expenses are also excluded and no foreign tax credit is available for such income. Only qualifying foreign trade income is available for exclusion, which is defined as the amount of gross income that, if excluded, would result in a reduction of taxable income by the greatest of::

1. 1.2% of the foreign trading gross receipts
2. 15% of the foreign trade income
3. 30% of the foreign sale and leasing income

Foreign trading gross receipts means gross receipts from foreign trade property which are:

1. Sale, exchange or disposition
2. Lease or rental outside the US
3. Services related to the above
4. Engineering and architectural services 
             for construction sites outside the US
5.  Managerial services related to items 1. to 3.

Qualifying foreign trade property means property:

1. Manufactured, produced, grown or extracted in/outside the US
2. Held mainly for sale, consumption, lease or rental outside the US
3. Not more than 50% of the fair market value is attributable to:
      3.1. Articles manufactured, produced, grown or 
                    extracted outside the US
      3.2. Direct cost for labor performed outside the US

There are other rules related to the above.

Essentially the provision allows an exclusion from gross income of goods and some services, where more than 50% is derived from the USA. This is why manufactured good such as cars now are labeled with the percentage of US content.

These rules may affect US corporations, self-employed individuals and foreign businesses owned by American taxpayers. Easy to overlook a beneficial provision. However, this exclusion is under attack internationally and thus could be repealed or modified in the future.