EU And US Trade Chiefs Discuss Foreign Sales Corporations In Washington

Mike Godfrey, Tax-news.com, Washington

12 March 2001

European Trade Commissioner, Pascal Lamy, met up at the end of last week in Washington with his counterpart in the new US administration, US Trade Representative Robert B Zoellick. The meeting was part of a series taking place between the EU and the new administration. EU spokesman Anthony Gooch said the point of the meetings was to "touch base" for the first time with the Bush camp, and Mr Lamy was expected to discuss bilateral relations with the US, with a view to revolving disputes described by Gooch as "irritants", including the row over US Foreign Sales Corporation tax breaks.

Mr Lamy said the new faces in the goverment provided a good opportunity for resolving the US tax break dispute, which have for some months now placed a strain on the relationship between the world's two largest trading partners. He said he was hopeful that the changing of the administration would provide an opportune moment to "clean out the barn". He told an audience at the US Chamber of Commerce: 'We need to get back the capacity, which we have recently lost, to make a deal', although he stopped short of saying exactly what kind of deal might be on the cards.

Under the original system of tax breaks to exporters - including major corporate entities like Boeing and Microsoft - companies could shelter export earnings by channelling them through offshore Foreign Sales Corporations (FSCs) located in jurisdictions such as the Bahamas, but the World Trade Organisation (WTO) ruled that this amounted to an illegal export subsidy. The US then agreed on new legislation, but the EU was still not happy with a scheme that would do away with the 6,000 or so FSCs but extend corporate income tax breaks on export earnings, which the EU says is prohibited by world trade rules. The two sides are currently waiting for the WTO to come to a decision on the issue.

The EU is threatening to impose trade sanctions on $4 billion of US exports unless the export tax breaks are scrapped, and Mr Lamy told the US Chamber of Commerce that he was confident the WTO would rule that the changes Congress made in the export tax structure were not enough to come into compliance with WTO rules. He stated: 'I don't have much doubt what the WTO will decide. It is clear-cut. Then we will be faced with the question of how and when the United States will change its legislation to comply'.

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