WTO To Rule Against Foreign Sales Corporations

Mike Godfrey, Tax-news.com, Washington

25 February 2000

The World Trade Organisation's appeals body will today announce its decision against the US appeal on Foreign Sales Corporations, probably giving the US six months to adjust its Tax Code to remove the tax break.

(Foreign Sales Corporations are tax-privileged subsidiaries of US corporations set up usually in Caribbean IOFCs to route export sales towards their eventual customers overseas. The EU was successful in attacking them before the WTO.)

This week both US and EU top trade officials Lawrence Summers and Pascal Lamy maintained their opposing positions on the issue. However, with a presidential election in the offing, it is thought unlikely that the US will do anything to weaken a popular tax break in the immediate future. It has always been the US view that the legislation does no more than compensate for other types of advantage given to exporters by EU countries, for example exemption from VAT.

The WTO's decision will exacerbate the fraught trade negotiating situation between the US and the EU, with rows already in progress over GM foods and air travel, among other issues. On a previous occasion the US did adjust its tax law to conform with a WTO ruling on FSCs, but this time it will be much harder to find a way around the ruling without doing serious damage to export sales, not to mention the Caribbean economies some of which depend heavily on income from the corporations involved. It would be unworthy to suggest that the EU is partly motivated in this affair by its campaign against tax havens, wouldn't it?

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