In U.S.-EU dispute over whether U.S. Foreign Sales Corporations (FSCs) and similar arrangements constitute improper subsidies, World Trade Organization permits EU to suspend tariff concessions and to impose additional duties on U.S. products adding up to $4 billions as sanctions against U.S. unless it repeals FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI Act)
On May 7, 2003, the Dispute Settlement Body of the World Trade Organization (WTO) granted the European Union authorization to increase its import tariffs on U.S. goods by $4 billion, based on the arbitration report WT/DS108/ARB of August 2002.
This dispute goes back to 1971 when the U.S. established the Domestic International Sales Corporation (DISC) scheme which granted U.S. exports indirect tax benefits. In 1976, a GATT Panel declared that the DISC scheme constituted an illegal export subsidy. The U.S. then replaced the DISC arrangement with "Foreign Sales Corporations"� (FSCs) in 1984.
In October 1999, a WTO dispute settlement panel declared "Foreign Sales Corporations"� an illegal export subsidy that breached Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (SCM) and Article 3.3 of the Agreement on Agriculture. After the WTO Appellate Body confirmed the panel opinion in February 2000, the U.S. had until November 1, 2000, to end the FSC program.
On November 15, 2000, President Clinton signed into law the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI Act) [Pub.L. No. 106-519]. The EU then complained that the ETI Act did not substantially change the nature of these export subsidies. On November 17, 2000, it asked for permission to impose $4.043 billion in countermeasures through additional duties on specified U.S. goods (see WT/DS108/26). After another WTO review of the dispute and findings that the ETI Act did contravene the SCM Agreement and other trading rules, the arbitrator's report issued on August 30, 2002.
In its submission WT/DS108/26 of April 25, 2003, the EU listed the goods and their product codes for which the EU is planning to suspend tariff concessions and related obligations under GATT 1994 and to impose up to 100% custom duties.
An EU press release reports that the EU is waiting for the U.S. to repeal the ETI Act and that the EU Commission will review the matter in the Fall of 2003. Thus, any countermeasures would apply from January 1, 2004, on.
Citation: United States - Tax Treatment of “Foreign Sales Corporations” - Recourse by European Communities to Article 4.10 of SCM Agreement and Article 22.7 of DSU (WT/DS108/26); WTO News of 7 May 2003; European Union in US, News Release No. 34/03 (May 7, 2003).
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