Barbados Anxious Over EU Decision On Foreign Sales Corporations

Lisa Ugur, Tax-news.com, London

11 August 2000

The debate over foreign sales corporations (FSCs), which earn offshore financial centres such as Barbados, Bermuda and the US Virgin Islands millions of dollars in fees from US corporations, has been raging for some time now, and only in July did the US put forward a plan to change its FSC legislation radically enough to conform to WTO rules and gain acceptance from the EU. Barbados is clearly worried that these latest moves could signal the death knell for FSCs and it is anxiously awaiting the outcome of discussions in Brussels and in Washinton by the US House of Representatives and the Senate.

The EU is currently deciding whether the plan now being considered by Congress is satisfactory and whether attributing a tax break (equivalent to 15%) to all US exporters, including the parents of foreign subsidiary exporters, really will bring the operation of the scheme much closer to that of the VAT system in Europe.

For Barbados, and indeed several other jurisdictions, FSC's are an important part of the offshore financial services sector. They save US corporations from vast amounts of federal taxes, but the plan endorsed by the US Treasury and the House of Representatives would mean that benefits are provided directly rather than being channelled into subsidiaries in Barbados. The crisis facing this Caribbean nation is whether US companies will actually bother to sustain subsidiaries offshore under new legislation.

It's an agonising wait for Barbados and its Caribbean counterparts. Whilst Barbados clearly knows the WTO line - the WTO has categorically stated that FSCs constitute an illegal export subsidy - the EU is not letting on how it is going to react to Washington's revised plan. An EU official said: 'We have a copy of the bill now before Congress to change the law. We have received it, but not through official United States channels. We haven’t been given a text by the United States side this time. It makes you wonder whether they are interested in knowing what we think.'

Barbados sees the reaction of the Europeans as crucial to the future existence of the FSC scheme or its replacement because the United States has until October 1 to comply with the WTO ruling . If Washington fails to act Europe can either seek compensation for the tax breaks or it can impose harsh sanctions on certain US exports.

Deputy US Treasury Secretary Stuart Eisenstat, who went to Brussels three months ago to talk to the EU about changes to the FSC legislation, has described the new plan as being “consistent” with WTO rules and he wants the US to endorse it. He has warned that a trade war could break out between the US and the EU if the latter fails to accept it. Eizenstat said: 'I have heard that extraordinarily high levels of retaliation have been threatened if a satisfactory conclusion to this dispute isn’t reached. This would risk escalating our dispute with the EU into a major trade war. I cannot state strongly enough how unnecessary and unwise such an escalation of this conflict would be.'

The EU has said that a satisfactory conclusion should be reached and that there should be an end to sanctions and retaliation. However, Barbados takes no comfort from this and believes that the EU will take some kind of action if it doesn't accept the latest US proposals, the most likely scenario being an EU demand for compensation.

.

Recommended

Write a comment