WTO Rules Against US In FSC Dispute

by Ulrika Lomas, Tax-News.com, Brussels

15 January 2002

As expected, the World Trade Organisation has definitively struck down the US appeal against its ruling banning US 'foreign sales corporation' tax breaks, supporting the EU in its contention that the scheme breaks global trade rules.

"We now have a definitive legal ruling on the FSC case," said Pascal Lamy, EU trade commissioner. "Of course I'm pleased that the WTO has confirmed what we always believed. We have made a point of handling this dispute in a very reasonable manner. Now it is up to the US to comply with the WTO's findings to settle this matter once and for all. As to how, we look forward to rapid US proposals."

The EU is now expected to publish a preliminary list of products targeted for trade sanctions worth up to $4bn annually, and the WTO has until April to approve the list, and set the total value of retaliatory tariffs that may be applied. But the EU may suspend action while it seeks a solution with the US.

It is unclear, however, what the US will do. Congress may not be very receptive to any attempt by the administration to weaken the country's external trading stance. With considerable difficulty, the US had passed legislation in November 2000, known as the Extraterritorial Income Exclusion Act (ETI), designed to bring the US into compliance with 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 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.

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