Bridges Weekly Trade News Digest • Volume 8 • Number 22 • 23rd June 2004

End Of Long-Standing Dispute Between EC And Us Drawing Closer?


On 17 June, the US House of Representatives adopted a bill known as the JOBS Act, which would repeal the Foreign Sales Corporation and Extraterritorial Income Exclusion Act of 2000 (FSC/ETI ). If this bill becomes law, it could end a long-standing dispute between the EC and US over alleged WTO inconsistent tax exemptions that the US grants to certain corporations outside its territory (the so called foreign sales corporations, FSCs). EC Trade Commissioner Pascal Lamy indicated that the EC immediately would repeal the WTO-authorised countermeasures it had taken against the effect of the FSC/ETI.

On 30 August 2002, WTO arbitrators gave the EC permission to apply sanctions (in the form of duties) on US goods valued at more than USD$4 billion until the US changed its tax policy to comply with the ‘Foreign Sales Corporations’ case ruling (see BRIDGES Weekly, 13 September 2002). The arbitrator’s award was adopted by the WTO Dispute Settlement Body (DSB) on 7 May 2003.

The US Senate adopted its version of the FCS/ETI repeal bill on 11 May. The Senate and House versions of this bill differ in some respects. The two versions will have to be reconciled into a final text before it can be adopted and signed by the US president. Only after this happens will it enter into force.

Background

The FSC case dates back to 1998 when the EC first requested a WTO panel to determine the WTO compatibility of special tax treatment for FSCs. In its panel request, the EC alleged that the US exempted a portion of FSC income related to exports from direct income taxes. According to the EC, this exemption, including dividends distributed to US parent companies, constituted export subsidies prohibited by the WTO Agreement on Subsidies and Countervailing Measures (SCM). The EC also argued that the FSC scheme violated the WTO Agreement on Agriculture (AoA), as it granted export subsidies to agricultural goods in excess of US reduction commitments. The WTO panel (and on appeal, the Appellate Body), agreed with the EC and found the US FSC scheme in contravention with the SCM Agreement and the AoA.

On 15 November 2000 the US passed the FSC /ETI Act to comply with the panel and Appellate Body recommendations. When the EC challenged the US compliance measures under the FSC/ETI, the compliance panel found in favour of the EC. The US further appealed this ruling, which it lost. An arbitration process followed this appeal; the process confirmed the EC’s planned countermeasures.

All panel and Appellate Body reports on this case, WT/DS108, are available at http://docsonline.wto.org

ICTSD reporting; "USA-Foreign Sales Corporation - Pascal Lamy welcomes US Senate vote," EC RELEASE, 12 May 2004; "US-Foreign Sales Corporation(FSC) - EU Trade Commissioner Pascal Lamy Welcomes US House of Representatives Vote," EU PRESS RELEASE, 17 June 2004; "Grassley Says Key Differences Remain on ETI Bills, Predicts Tough Conference," WTO REPORTER, 9 June 2004.