Microsoft Corporation - Page 19




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         from Federal income tax a portion of its profits from qualifying             
         export sales.3                                                               
              Both the DISC and the FSC provisions reallocate a portion of            
         a U.S. company’s profits attributable to its export of American-made         
         products.  The proper amount of the reallocation for 1990 and 1991           
         is in controversy.                                                           
              Only activities that generate FTGR’s qualify for FSC benefits.          
         FTGR’s are the gross receipts of an FSC that are:                            
                   (1) from the sale, exchange, or other disposition                  
              of export property,                                                     
                   (2) from the lease or rental of export property for                
              use by the lessee outside the United States,                            
                   (3) for services which are related and subsidiary                  
              to–-                                                                    





               3    On Feb. 24, 2000, the World Trade Organization (WTO)              
          appellate body upheld an October 1999 WTO panel ruling that the             
          U.S. foreign sales corporation (FSC) tax regime is essentially an           
          export subsidy in contravention of WTO rules.  The panel                    
          recommended that the United States comply with the WTO ruling by            
          Oct. 1, 2000, or face the prospect of European Union retaliation.           
               In May 2000, the United States proposed to the European                
          Union an FSC replacement system, with tax benefits generally                
          applying to foreign income from all foreign sales, rentals, and             
          leases, regardless of whether goods are manufactured in the                 
          United States or abroad.  The European Union rejected this                  
          proposal, maintaining that the system would continue to make tax            
          benefits contingent upon exports.                                           
               As of the release date of this Opinion, H.R. 4986, 106th               
          Cong., 2d Sess. (2000), the FSC Repeal and Extraterritorial                 
          Income Exclusion Act of 2000, is under consideration in order to            
          bring the U.S. export tax regime into conformity with the WTO               
          ruling.                                                                     





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