The WTO Approves Proposed EU Sanctions Against US

by Ulrika Lomas, Tax-News.com, Brussels

02 September 2002

On Friday, international trade regulator the World Trade Organization gave the green light to the European Union to impose more than $4 billion in duties on US exports as compensation for legislation which gives tax breaks to US exporters and which the WTO had previously ruled illegal.

In the long-running saga, the WTO has ruled against the US on a number of occasions. The original 'Foreign Sales Corporation' legislation which rebated 15% of corporation taxes on profits made by offshore export subsidiaries was replaced last year with a broader scheme known as the Extraterritorial Income (ETI) regime, but this in turn was outlawed by the WTO.

The EU had asked the WTO for permission to impose sanctions equivalent in value to the tax breaks, which are estimated to hand US companies (including the subsidiaries of many EU companies) up to US$6bn a year.

The EU is not likely to make use of its new weapon for the time being, since it is just one component of a highly complex trade situation between the two powers, and the US administration has repeatedly said that it would comply with its WTO obligations. In July, Bill Thomas, Chairman of the US House of Representatives Ways and Means Committee, introduced a bill, the American Competitiveness Act of 2002, which would repeal the ETI legislation, along with a number of other major tax initiatives to correct perceived imbalances in the tax treatment of US and foreign companies.

Says Mr Thomas: 'The current Extraterritorial Income (ETI) regime was designed to level the playing field between US companies and their foreign competitors. Both ETI and its predecessor, the Foreign Sales Corporation (FSC), have been repeatedly ruled to be “export subsidies” that violate our treaty obligations. If we repeal ETI, US businesses will be placed at an even greater competitive disadvantage relative to their foreign competitors. If we don’t repeal ETI, US companies may be hit with billions of dollars of retaliatory trade sanctions.'

The bill is so complex, however, and so ambitious, that many have dismissed it as a neat piece of electioneering, unlikely to pass through Congress in anything resembling its current form. However, it may just be enough to get the United States off the hook with the European Union, which may accept the move to repeal tax breaks for US giants such as Boeing, Microsoft, and Kodak, as enough of a good will gesture. The companies themselves, predictably, are up in arms about it.

After the news broke on Friday, the European Commission said it had no immediate plans to impose the tariffs. The EU trade commissioner, Pascal Lamy, said "the path is now clear" for the European Union to adopt sanctions if the United States did not repeal the illegal tax system, but he added: "Before any countermeasures are taken, we will carefully evaluate progress made on U.S. implementation."

Lamy's US equivalent, Robert Zoellick, US trade representative, said he was "disappointed" but that Washington would comply with its WTO obligations. "I believe that today's findings will ultimately be rendered moot by US compliance with the WTO's recommendations and rulings in this dispute," he said.

The WTO's departing leader, Mike Moore, issued a cautionary statement: "The European Union and the United States are among the most important members of this organization, and both hold a special responsibility to ensure the continued health and soundness of WTO and global trading system," he said. But with Congressional elections set for November, it is unlikely that any progress will be made on the issue in coming weeks.

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