Sales Corporations (FSC) are providing for unfair competition from US organisations.

But the trade dispute between the US and the European Union (EU) is beginning to heat up, with offshore beneficiaries of FSC business, such as Bermuda, watching from the sidelines.

Bank of Bermuda vice president and director of corporate relationships and corporate banking, Clement Talbot, said:, "European exporting companies also have tax incentives for their exports to the US. That is what prompted the US exporting companies to develop a counter-measure. That is why FSCs came about.'' Bermuda has not been as successful as previously hoped in attracting FSC (pronounced `Fisc') business since the US/Bermuda Tax Treaty 1986 that allowed Foreign Sales Corporations to be incorporated here.

Some believe Bermuda was already "behind the eight ball'' at that time in an extremely competitive market for the offshore FSC business.

Mr. Talbot said: "Bermuda has obtained more of this business, after Government recently acquiesced to calls for more competitive regulations. The licensing costs have been reduced and the turn-around time for the incorporating of FSCs is now greatly reduced. We're more in line with competing offshore jurisdictions.

"But the FSC business is very thinly margined. Bermuda is used to international business that can garner a reasonably good margin. We've been spoiled in some respects.

"So it is difficult for service providers here to put in the required energy and resources to get more FSC business here. But we haven't given up on it.'' The biggest offshore players in the FSC market are the US Virgin Islands (USVI) and Barbados, in that order, who together may control some 80 percent of the US FSC business. Bermuda, it is thought, may be trailing a distant third.

Said Mark Moffat, president and director of the Quail Street Group in Bermuda and chairman of the Bermuda FSC Association: "This is a very competitive business, with very fierce competition. The USVI were the first to start offering these services. We weren't allowed to participate until the 1986 Bermuda Tax Treaty.

"It is a big money earner for the USVI, and they do a very hard sell. We don't. We promote it in conjunction with the other services provided for other types of international business.'' Mr. Moffatt, who is also part of the advisory board representing the Bermuda industry to the US FSC/Disc Association, noted: "Most FSC associations are not too worried by the European complaint because FSCs were created with the approval of the World Trade Organisation.

"It may be more political than anything else. FSCs help to increase international trade, and all Western governments do what they can to improve their export trade.

"The truth is that many European countries have some kind of subsidy programme in place. They may not call it a subsidy, but they do help in terms of commodities. Agricultural products are an obvious example.

"The criticism against FSCs is misplaced. Some of the largest players in Europe have export FSCs in the US, because they have wholly owned subsidiaries manufacturing products in the US. Their home governments are behind a complaint that may have a credibility problem.'' Last month, vice president of the European Commission, Sir Leon Brittan, asked the World Trade Organisation to hear an EU complaint against FSC, related to the US Internal Revenue Code's favourable tax treatment for FSCs.

They said that the exemptions from US direct taxes of a portion of FSC income related to exports, and of dividends distributed to US parent companies, constitutes export subsidies which are prohibited by the World Trade Organisation.

US Trade Representative Charlene Barshefsky reacted that she was extremely disappointed that the EU would re-open a matter she considered to be long settled, especially since they had failed to respond to a request for hard evidence that showed European business was being disadvantaged.

She stated: "We will vigorously defend our WTO-consistent system of taxation against this unwarranted attack.''