In October 1999, a panel created by the Dispute Settlement Body of the World Trade Organization (WTO) issued its final report concluding that the U.S. Foreign Sales Corporation (FSC) tax regime creates illegal export subsidies.
An FSC is a corporation given special tax treatment under U.S. tax laws. The purpose of FSC provisions is to promote U. S. exports in a manner compatible with the agreements negotiated between the United States and its trading partners.
The European Union, which has opposed the FSC regime since its enactment in the mid-1980s, filed a complaint against the U.S. in November 1997. In July 1998, after consultations between the E.U. and the U.S. failed to resolve differences, the E.U. requested that the WTO’s Dispute Settlement Body form a panel to rule on the issue.
In October 1999, the WTO panel released its findings in a 298-page report (“United States — Tax Treatment for “Foreign Sales Corporations;” Report of the Panel). The panel concluded that the U.S. FSC regime creates illegal export subsidies and should be abolished by Oct. 1, 2000.
E.U. complaint
The E.U. complaint alleged that the FSC regime violates certain export subsidy prohibitions of the WTO Agreement of Subsidies and Countervailing Measures by granting tax subsidies contingent upon export performance and the use of domestic over imported goods. It also alleges it violates the WTO Agreement on Agriculture by granting tax subsidies to agricultural goods in excess of the budgetary outlay and quantity commitment levels specified in negotiated schedules.
U.S. position
The U.S. position has consistently been that the FSC regime is not an illegal export subsidy. In fact, the U.S. had taken great care to meet the requirements of its trade treaties when it enacted the legislation in the mid-1980s.
The FSC regime was enacted to enable U.S. manufacturers — confronted with a harsh taxing scheme based on worldwide income — to compete with non-U.S. manufacturers that face less onerous taxing schemes, often territorial in scope. The FSC represents a partial adoption of the territorial approach to taxation, common in Europe, and intended to equalize the position of U.S. manufacturers in markets outside the United States.
The WTO ruling
The WTO found that the FSC income exemptions violate the SCM Agreement, which prohibits “subsidies” that are “contingent upon export performance.” The SCM Agreement defines subsidy as requiring both a financial contribution by a government and a conferred benefit.
Second, the panel found that the FSC regime “clearly confers a benefit, in as much as both FSCs and their parents need not pay certain taxes that would otherwise be due.” Finally, the WTO panel determined that the subsidies are “contingent upon export performance” because they are available only with respect to “foreign trade income.”
Foreign trade income arises from the sale or lease of export property, limited to goods made, produced or grown in the U.S. that are held for use or disposition outside the jurisdiction.
U.S. appeal filed
In early December 1999, the U.S. appealed the WTO’s determination. The E.U. cross-appealed, raising two issues included in the original complaint but not addressed by the panel in its report: administrative pricing and the U.S. content requirement.
The WTO Appellate Body is expected to take 60 to 90 days to rule on the appeals. Julie Elizabeth McGuire is a shareholder in Hull McGuire PC, attorney and CPA. The firm’s practice areas are limited to international corporate planning and transactions, tax law, intellectual property (trademarks, copyrights, trade secrets and licensing), complex litigation, employment practices, federal legislation, and natural resources law.
