US, EU Agree To Delay Next Round Of FSC Contest Until November

Tax-news.com, Mike Godfrey in New York and Ulrika Lomas in Brussels.

02 October 2000

Sunday, October 1st, was the deadline given to the US by the WTO to adjust its Foreign Sales Corporation (FSC) legislation to bring it into compliance with international trading rules. Although a bipartisan working group had come up with new proposals which had the full support of the administration, and the House had passed new legislation without a vote, some Senators want to amend the legislation, which has therefore failed to meet the deadline.

Under WTO rules, the European Union is thereupon entitled to plan trade sanctions to the supposed value of the illegitimate tax break (about $4bn), and there had been a fear that the EU, which is fighting off US attacks on bananas and beef, would take the opportunity to escalate the FSC conflict.

Last-minute talks on Saturday have averted a crisis, giving the US until November 1st to get the legislation on the statute book. Senate Finance Committee Chairman William Roth (R, Delaware) said he was hopeful Congress would approve the legislation very shortly.

US Trade Representative Charlene Barshevsky commented in a statement: 'The United States and European Union today demonstrated a commitment to avoid escalating trans-Atlantic trade tensions and managing this WTO trade dispute responsibly.'

Her EU counterpart, Pascal Lamy, said: 'Our priority is to resolve disputes, not exacerbate them.'

Not that the EU has said it will accept the new US legislation. Lamy repeated the EU position that the legislation would still violate international trade laws.

The USA's position at the WTO has been that the FSC program does no more than compensate for the EU's VAT rebate given to all exports, which is worth far more than the FSC's $4bn - but neither the EU nor the WTO has ever accepted this argument.

The EU's willingness to compromise at this point is probably due to an agreement reached last month by President Clinton and UK Premier Tony Blair to delay imposing sanctions on EU products in the banana and beef cases. The administration had already imposed import penalties on a number of up-market EU products, and was planning to rotate the penalties onto a new set of products, including cashmere.

Now that the EU has given an extra month, and as long as the Congress passes the legislation in time, the EU cannot impose immediate penalties, but would have to go back to the WTO to attack the new legislation. Allowing for an appeal, this would take the best part of a year - so penalties are unlikely to hit before this time next year. Nonetheless, the EU is expected to publish a list of its chosen targets this year - just to keep up the pressure!

It's difficult to see how these disputes work to the benefit of taxpayers or consumers. The EU's banana regime has been a disgrace to a supposedly free-trading single market for 20 years, and succeeds only in keeping the price of bananas in Europe far higher than it needs to be, while its objections to US hormone-treated beef are naked protectionism wearing a fig-leaf of righteousness. Now that the WTO has ruled against the EU, it should accept the rulings.

For its part, the US is doing what all countries try to do, which is to subsidise export-dependent jobs with a tax-break. The argument about VAT is feeble: does the US propose to impose sales taxes on foreign consumers of US products? The reality is that no country can succeed in imposing sales taxes or VAT on its foreign customers. If the US can do without the $4bn it is giving away to exporters, it would benefit citizens more by reducing corporate taxes across the board. The attempt to shore up exporters' jobs will simply weaken those exporters vis a vis their competitors. Think about Boeing v. Airbus Industrie.

But taking away tax breaks is worse than pulling teeth, which as everyone knows is far more painful just before an election.

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