The market reaction to the forgiveness of deferred taxes due to the repeal of the domestic international sales corporation: expectations regarding subsequent export related tax incentives

International Journal of Business Research, Jan, 2008 by Sid Howard Credle, Sharad Maheshwari, Jacob Angima

FSC Requirements & FASB's Technical Bulletin 84-2

The 1984 DRA rules required that the FSC be organized outside the U.S, [IRC Sec. 922 (a)(1)(A)] be actively engaged in the export trade and be taxed immediately on a portion of its foreign trade income [IRC Sec. 923(a)(2)]. The FSC rules, however, granted a permanent U.S. tax exemption if the new structure required a foreign presence, foreign management, and foreign economic processes. On September 19, 1984, FASB's TB 84-2 was approved, requiring affected firms to reflect the full effect of DISC repeal in the first quarterly report or annual report issued after July 31, 1984. This requirement resulted in a no effect statement by non-providing firms and a one-time reduction of tax expense and related deferred tax payable on accumulated deferred DISC income for providing firms.

3. METHODOLOGY AND DESIGN

This study is conducted for 31 events over a three year period partitioned into three descriptive time periods. The first 27 events are the Tax Deliberations period, beginning with the initial GATT/DISC controversy and ending with the enactment of DRA. The second period is the FASB TB 84-2 deliberations period including events 28, 29 and 30. The third period, event 31 is the required firm disclosures of the DISC forgiveness made by firms.

The 31 events and 74 trading days account for nine percent of the total study trading days of 822. A chronological listing of study events is noted in Table 1 below:

TABLE 1

CHRONOLOGICAL LISTING OF STUDY EVENTS

1. 12/12/81--GATT council decision ratifies conclusion that DISC violates GARR. DISC is now prohibited by GATT.

2. 3/26/82--Canada requests notification from U.S. subsidiaries operating in Canada. The U.S. declines to provide the notification.

3. 5/10/82--The European Community requests that the GATT Council advise the U.S. to "Take appropriate action without delay to bring the DISC legislation into conformity with GATT, or face retaliatory action."

4. 6/29/82--Deputy U.S. trade representative David A. McDonald defends DISC before GATT Council.--7/10/82--Senator David L. Boren introduces S-2708-Export Sales Corporation (ESC)

Bill to floor of the Senate.--7/5/82--GATT Council reports that all parties agree DISC is in violation with GATT.

5. 7/30/82--Confidential memorandum released by the office of U.S. trade representatives. The letter stated that the Carter Administration admitted DISC was "not consistent with GATT."

6. 8/16/82--William E. Brock, U.S. Special Trade Representative, declares that the U.S. must devise a new system of tax aids for exports.

7. 9/07/82--TEFRA issued--reduced DISC benefits from 50% to 42.5% as of 1/01/83.

8. 9/30/82--Reagan Administration announces plan to develop a DISC alternative.

9. 11/29/82--Rep. B. Frenzel introduces 11R7311--International Sales and Service Corporation (ISSC).--Treasury concedes that DISC violates GATT. Treasury Secretary Donald Reagan states that legislation will be developed by FY 1984.

10. 12/06/82--In a private letter General Electric Co. recommends Foreign International Sales Corporation (FISC) to Treasury Secretary Donald Reagan. FISC would require a foreign incorporation.