US Senate Finance Committee Wants US To Appeal WTO Ruling

by Mike Godfrey, Tax-News.com, New York

03 September 2001

Us Department of Commerce Commerce Undersecretary for International Trade Grant Aldonas said on Friday that the Bush administration is still considering how to respond to the WTO ruling which found that the US Foreign Sales Tax regime violates global trade rules. The European Union has estimated the economic damage at $4bn - $6bn; if the US does not appeal then the WTO's arbitration panel will pronounce on the level of permitted trade sanctions which the Europeans can place on the US.

"Appeal is not off the table, I want to be clear about that. I mean this is one of those things where we are going through all the options to weigh the alternatives," Aldonas told reporters in a press briefing at the Commerce Department, while acknowledging that the Bush administration is hoping an appeal will not be necessary. "To the extent that there is some way to resolve this in a way that doesn't undermine the competitiveness of American firms, certainly we'd be interested in doing that," he said.

The previous day, 10 of the 20 members of the Senate Finance Committee, which is responsible for tax and trade policies, wrote a letter to US Trade Representative Robert Zoellick urging the administration to appeal the WTO's deicison after they learned the Bush administration had come to believe an appeal was not necessary.

The US loss "should not be allowed to stand without appellate body review," the committee's nine Democrats and top Republican Charles Grassley wrote to Zoellick. Independent James Jeffords of Vermont and the nine other committee Republicans did not sign the letter.

The WTO ruling came after the US passed legislation last November, known as the Extraterritorial Income Exclusion Act (ETI), designed to bring the US into compliance with the WTO after an Oct 1999 panel decision which found against the tax breaks provided under the scheme. The US had already modified the scheme after a previous adverse ruling by the WTO.

The 2000 legislation, which was rushed through Congress literally days before it was suspended for elections, effectively repatriated the tax break, amounting to about 15% of applicable income taxes, which had previously operated through offshore sales subsidiaries, and extended it to a wider range of exporters, in an attempt to make it appear less discriminatory. But the WTO didn't agree.

The US maintains that the subsidy is an equivalent to rebates from the Value Added Tax (VAT) given to European companies for products exported outside Europe, which gives an advantage between 15% and 27% to EU exporters, depending on the country of origin.

If the US were to lose on appeal, the Bush administration could file a complaint against European tax code in the WTO, the two sides could reach a compromise solution in a deal linked to the launch of a new trade round, or Congress could overhaul the US tax system, congressional sources said.

A decision on whether to appeal is due by Sept 23, when the WTO holds its next meeting on trade disputes. The arbitration panel then has 60 days to deliver its findings, and the EU would then have to decide whether to impose the sanctions. At that point, which more or less coincides with the WTO meeting due to be held in Qatar in November, the US and the EU reach a moment of crisis in their trading relationship - and anything could happen.

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