Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial Replacement Provisions Page: 3 of 6
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CRS-3
the dispute settlement process established under the new WTO.5 The United States and
the EU held consultations without reaching a solution, and in July, 1998, the EU took the
next step in the WTO-prescribed dispute-resolution process by requesting a panel to
examine the issue. The panel made its findings public on October 8, 1999.
The panel generally supported the EU, holding that FSC was indeed a prohibited
export subsidy, and that FSC violated subsidy obligations under the WTO Agreement on
Subsidies and Countervailing Measures. In particular, Articles 3.1 and 1.1 of the
Subsidies and Countervailing Measures (SCM) Agreement prohibit subsidies "contingent
on export performance" and provide that a subsidy exists if "government revenue that is
otherwise due is forgone or not collected ... and a benefit is thereby conferred." The panel
found that the FSC provisions carved out particular exceptions to various parts of U.S. tax
law that would otherwise have generally resulted in taxation of the FSC export income.6
The WTO's Appellate Body essentially upheld the initial finding on appeal by the United
States. In the United States, replacement legislation was developed to head off retaliatory
measures; its basic provisions received bipartisan support in Congress and were supported
by the Administration. The final version of legislation revamping the tax benefit was
passed by Congress in November 2000 as H.R. 4986, the FSC Repeal and Extraterritorial
Income Exclusion Act. The President signed the bill, and it became P.L. 106-519.
Even before the ETI provisions were passed, the EU made known that it was
skeptical of their WTO-compatibility, and maintained that, like FSC, they provide a tax
subsidy that is contingent on exporting.7 Shortly after enactment of the new ETI
provisions, the EU asked the WTO to authorize imposition of $4 billion in tariffs on U.S.
products, and asked the WTO to rule on whether the ETI provisions are WTO-compliant.
On August 20, 2001, a WTO panel issued a report concluding that the ETI provisions
contravene the WTO agreements. The WTO Appellate Body denied an appeal by the
United States on January 14, 2002; an arbitration panel subsequently began consideration
of an acceptable level of tariffs. On August 30, the panel issued a report authorizing the
EU to impose up to $4 billion of tariffs on U.S. imports. However, U.S. Deputy Treasury
Secretary Kenneth Dam stated that he expects the authorization to become moot by the
United States enacting legislation bringing it into WTO-compliance.
In the meantime, Chairman William Thomas of the House Ways and Means
Committee introduced H.R. 5095, which proposed both repeal of ETI and a range of tax
reductions for the overseas business operations of U.S. firms. However, the bill was not
considered by the full House before the 107th Congress adjourned. In the Senate, SenatorsBaucus and Grassley in September announced the formation of what they termed a
"legislative-executive, bicameral, bipartisan working group" designed to produce
recommendations for solving the ETI dispute."8 The working group was initially
' For information on the WTO's dispute settlement process, see CRS Report RS20088, Dispute
Settlement in the World Trade Organization: An Overview, by Jeanne J. Grimmett.
6 World Trade Organization, United States - Tax Treatmentfor "Foreign Sales Corporations":
Report of the Panel, WT/DS108/R (n.p., 8 October, 1999), p. 275.
7 BNA Daily Tax Report, November 24, 2000, p. G-1.
8 Letter by Sens. Max Baucus and Charles E. Grassley to U.S. Trade Representative Robert B.
Zoellick and Deputy Secretary of the Treasury Kenneth W. Dam, dated Aug. 12, 2002. Reprinted
in BNA TaxCore, Aug. 13, 2002.
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Brumbaugh, David L. Export Tax Benefits and the WTO: Foreign Sales Corporations and the Extraterritorial Replacement Provisions, report, May 15, 2003; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs5593/m1/3/?q=%22international%20affairs%22: accessed May 2, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.