WTO body finds that U.S. continues to violate international trading rules by maintaining prohibited indirect subsidies through Foreign Sales Corporation and Extraterritorial Income Exclusions
The Appellate Body of the World Trade Organization (WTO) has held that the U.S. still has failed to carry out its recommendations regarding Foreign Sales Corporations (FACS) and Extraterritorial Income Exclusions (EGIS). The original Panel decision in United States - Tax Treatment for "Foreign Sales Corporations concluded that the "F.C. measure" (Sections 921 to 927 of the U.S. Internal Revenue Code) and related measures provided special tax treatment, and thus violated the Agreement on Subsidies and Countervailing Measures (the S.M. Agreement).
The Appellate Body upheld the Panel's finding of inconsistency with the S.M. Agreement, but modified the findings based on the Agreement on Agriculture. In November 2000, the U.S. purportedly complied by enacting the F.C. Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI Act) [Pub.L. No 106-519, 114 Stat. 2423 (2000)].
The European Union (EU) disagreed, claiming that the new Act still fails to comply with the S.M. Agreement, the Agreement on Agriculture, and GATT 1994. Thus, the EU sought recourse to Article 21.5 of the Dispute Settlement Understanding (DSU) for the first time. The Panel concluded that the ETI Act was in fact inconsistent with trading rules, and that by making the F.C. tax benefit available indefinitely for certain transactions under Section 5(c)(1)(B) of the ETI Act, the U.S. "ha[d] not fully withdrawn the F.C. subsidies found to be prohibited export subsidies [in the original proceedings] and ha[d] therefore failed to implement the recommendations and rulings of the [Dispute Settlement Body (DSB)] [in the original proceedings] made pursuant to Article 4.7 [of the] S.M. Agreement. The Appellate Body upheld those findings.
In October 2004, the U.S. implemented the American Jobs Creation Act of 2004 (Jobs Act) [Pub.L. 108-357], which repealed the ETI Act's tax exclusion. Section 101 of the Jobs Act, called "Repeal of exclusion for extraterritorial income," purports to repeal ETI. Nevertheless, Section 101(d) does allow for a transition period and does contain a "grandfathering" provision which permits the indefinite use of ETI for certain transactions.
After the U.S. had arguably failed to comply, the EU brought a Second Recourse to Article 21.5 of the DSU, alleging that the Jobs Act does not comply with the WTO recommendations.
In particular, the Appellate Body finds that the Panel below (1)correctly found that Section 5(c)(1)(B) of the F.C. Repeal and Extraterritorial Income Exclusion Act of 2000, grandfathering prohibited F.C. subsidies, was within its terms of reference; and (2) that the Panel correctly held that "to the extent that the United States, by enacting Section 101 of the American Jobs Creation Act of 2004, maintains prohibited F.C. and ETI subsidies through [the] transitional and grandfathering measures, it continues to fail to implement fully the operative DSB recommendations and rulings to withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under the relevant covered agreements." (See¶¶ 7.65 and 8.1 of the Panel Report).
The Washington Post comments that this decision affects the tax benefits to major U.S. corporations, including Caterpillar, Inc., Microsoft Corporation, and Boeing Co., and may result in up to $4 billion per year in EU sanctions on U.S. products.
Citation: United States - Tax Treatment for “Foreign Sales Corporations,” Second Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108/AB/RW2) (AB-2005-9) (13 February 2006). See also 2001 International Law Update 141; 2002 International Law Update 29; 2003 International Law Update 78; 2004 International Law Update 15. The full Report is available on WTO website www.wto.org; CCH Tax Briefing: American Jobs Creation Act of 2004 (Updated October 11, 2004); “Latest U.S. Export Tax Break Illegal, World Trade Organization Rules,” The Washington Post, Tuesday, February 14, 2006 at section D, page 5.
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