One of the more rewarding undertakings by my office involves economic development efforts. This state has made a firm commitment to a vibrant economy, one in which jobs can flourish. A key component to that objective is international trade.

I am having the opportunity to address the issue of international trade as it relates to Illinois through three primary roles. Those are: as Illinois' International Trade and Tourism Representative; as chairman of the Illinois Export Development Authority; and as chairman of the Illinois Export Council.

Through all three roles, there has been increased attention to the specific goal of increased participation by small and medium sized businesses in export activities — rather than continuing to allow it to be the domain only of larger companies.

An innovative step was taken recently by the Illinois Export Council and the Illinois Export Development Authority to assist smaller businesses in taking advantage of export opportunities. That is, the state is attempting to launch greater participation by smaller enterprises in the world marketplace by making available a federal tax benefit previously available only to larger exporters. This benefit can amount to a 15 percent federal income tax exemption for export profits. The mechanism for this tax exemption is called a Shared Foreign Sales Corporation. Put into the Internal Revenue Code in 1984, the Shared Foreign Sales Corporation (SFSC) has been implemented by various states, with Illinois at the forefront.

The Illinois model SFSC is designed to share costs and maximize federal tax benefits. There is no disruption of existing customer relationships, nor is there a loss of commercial privacy. In addition, one shareholder is not liable for another's actions, contracts, or debts. The state's role is limited to showing exporters how it works, and helping them initiate their SFSC. This development stands to be of particular interest to exporters, would-be exporters, banks, accounting firms, and export management companies.

But how exactly does it work? A SFSC is a foreign corporation established in one of several U.S. possessions or a qualifying jurisdiction — such as Barbados or Jamaica. When used to export goods, including manufactured items, related services, coal, agricultural products of all types, and software, the SFSC yields a federal income tax benefit on profits.

A SFSC is "shared" by 25 or few shareholders to ease costs and therefore increase the tax benefits. It should be pointed out that each shareholder owns a separate class of stock and each runs its own export business as usual.

Generally, the shareholder pays a commission on export sales to the SFSC, which immediately distributes this back to the supporter. Because these commission payments from the shareholder to the SFSC and dividend distributions are on a "business use" basis, there is no co-mingling of profits. A professional management team handles the day-to-day operations of a SFSC.

The forerunner of the SFSC was called DISC — through which some 72 percent of U.S. exports travelled. However, DISC'S were found to be in violation of international treaty and so no new DISC'S are allowed to be created. Today, large exporters tend to use Foreign Sales Corporations instead. And while smaller exporters may initially feel intimidated by the newness, complexity, and "foreign-ness" of SFSC's, the state is working to alleviate that reluctance to participate.

Tremendous benefits stand to be harvested through more exporting activities. When you consider that every $1 billion in export transactions translates into 22,000 jobs, it is clear that the global marketplace must be investigated further. And, in light of the fact that as much as 80 percent of all new jobs in the future are expected to come from smaller enterprises, it is evident that the two — small businesses and exporting — must be "wed".

SFSC's do that. Through this innovative measure, more businesses will export, more jobs will be created, and Illinois will be able to enjoy a more robust economy. Our commitment to economic development will have been furthered. •

Page 4 / Illinois Municipal Review / September 1987