Dr. Dobb's Journal April 1997
In spite of its best efforts, Congress sometimes comes close to doing something right. A case in point is the Software Export Equity Act (SEEA) -- a fair, decent, and unobtrusive bill that deserves to be voted into law.
In an effort to save jobs, Congress in 1984 passed the Foreign Sales Corporation (FSC) statute, which provided tax incentives for U.S. businesses producing products for export. In essence, the law levels the playing field for U.S. companies competing with international rivals that receive tax breaks from their governments. By setting up FSCs, U.S. companies qualify for tax exemptions of up to 15 percent on income generated by exports. FSCs can be set up by just about every U.S. company -- except, amazingly, those that produce software. The SEEA (H.R. 143), sponsored by Congresswoman Jennifer Dunn (R-Washington), addresses this inequity by giving the software industry the same rights and benefits as other U.S. industries.
One way in which the SEEA will aid software companies is by allowing vendors to license software masters for offshore duplication, yet enjoy the tax benefits as if the copies were actually manufactured at home. Currently, the Treasury Department and Internal Revenue Service only allow tax breaks for exported shrink-wrapped software, not master copies. Ironically, "master copy" FSC benefits do apply to "films, tapes, records or similar reproductions for commercial or home use." This exemption was specifically put in place for the entertainment and music industries which, like the software industry, routinely license master copies for overseas duplication and distribution. Because they don't enjoy FSC benefits, however, U.S. software companies usually end up establishing offshore manufacturing subsidiaries, taking jobs out of the U.S. in the process.
As you might guess, the software industry has challenged this exclusion. Microsoft, for one, has sued the U.S. government to recover approximately $19 million in export-related taxes for 1990-91 alone. Software companies and organizations are also lobbying Congress to change the current FSC law. (It's probably only coincidental that Dunn's 8th District in Washington state is Microsoft's home turf.)
The SEEA, which cropped up in Robert Dole's 1996 election economic plan, and is also included in President Clinton's 1997 budget, is nothing more than an amendment to the Internal Revenue Code of 1986 that simply adds the phrase "and software, whether or not patented" after "for commercial or home use." (The "patent" issue was introduced to keep software in sync with existing FSC language and to counter any IRS attempt to exclude patented software. Patents by themselves are excluded from FSC benefits.)
While Representative Dunn insists that SEEA is crafted to help small and medium-sized software publishers who can't afford offshore facilities, it is clear that big companies will reap the most benefits. After all, how many small developers routinely export 100,000 copies of a word-processing program?
If Congress is serious about keeping U.S. programming jobs at home, it better get busy, and the SEEA is as good a place as any to start. According to the American Alliance for Software Exports, the U.S. currently has more than 2 million software developers fueling an export business of $26.5 billion. Other countries, however, see this as plums ready to be picked, and have worked harder at taking programming jobs out of the U.S. than the U.S. has at keeping them. With a 10 percent corporate tax rate, Ireland, for instance, provides generous incentives for software companies and numerous U.S. software companies (including Microsoft) have established Irish manufacturing plants.
Likewise, Malaysia's Prime Minister Mahathir Mohamad recently pitched to U.S. high-tech leaders plans for a "multimedia supercorridor" that includes new cities (one to be named "Cyberjava") linked by high-speed computer networks. In addition to generous tax and financial incentives, Mahathir promised legal structures to facilitate electronic commerce, intellectual-property protection, and the like.
The SEEA is a no-brainer, even for the likes of Capitol Hill. It doesn't ask for any special treatment or seek any new or special tax benefits. The proposal has strong bipartisan support in Congress, and as long as representatives don't tag on any special-interest riders, it deserves to win approval.
--Jonathan Erickson