Foreign Sales Corporations - Subsidies, Sanctions, and Trade Wars

By Carmichael, Candace | Vanderbilt Journal of Transnational Law, January 2002 | Go to article overview

Foreign Sales Corporations - Subsidies, Sanctions, and Trade Wars


Carmichael, Candace, Vanderbilt Journal of Transnational Law


ABSTRACT

The largest sanctions in the history of the World Trade Organization, the need to stabilize an ailing economy, and the need to maintain strong alliances in the face of a new global war on terrorism are all issues the United States currently faces in deciding how to resolve its dispute with the European Union regarding U.S. tax policy. In 1997, the European Union filed a complaint with the WTO claiming that the then-current U.S. tax regime violated U.S. international trade agreements. The European Union contended that the U.S. tax system gave rise to export-contingent subsidies, in violation of U.S. trade obligations.

Ultimately, the WTO found that the U.S. tax regime provided export-contingent subsidies and thus violated U.S. trade agreements. Although the United States appealed the decision, the European Union prevailed on appeal. This Note examines these WTO opinions and the bases for their findings.

After the U.S. tax framework was found to be in violation of international trade obligations, the United States drafted the Extraterritorial Income Exclusion Act of 2000, which replaced the U.S. tax laws found to be in violation of U.S. trade obligations. This Note describes the replacement law and how it differs from the past tax system.

Although Congress hoped the replacement law would resolve the tax dispute, the European Union was not satisfied that the replacement law remedied the trade violations. The European Union filed a claim with the WTO alleging that the replacement law continued to violate U.S. trade obligations. The WTO ultimately decided that the replacement law violated U.S. trade obligations. This Note examines the latest decision.

The United States filed a notification of appeal in response to the latest WTO decision. This Note concludes by addressing issues that the United States must consider in deciding how to resolve this dispute and possible solutions to the problem.

I. INTRODUCTION

For the first time in its history, the United States has statutorily amended its domestic laws (1) in an attempt to comply with international trade obligations. In addition, the United States potentially faces sanctions for trade violations that would dwarf any sanctions previously imposed by the World Trade Organization. (2) Although the European Union (3) has complained about U.S. international tax laws for years, the European Union took official action in 1997 by filing a complaint against the United States with the WTO. The European Union claimed that the U.S. foreign sales corporation (FSC) tax structure was a breach of U.S. obligations under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) (4) and the Agreement on Agriculture (AA) (5)

The European Union challenged the U.S. laws regarding FSC taxation, claiming that the laws were export-contingent subsidies that placed the United States in violation of its international trade obligations. (6) Barbados, Canada, and Japan joined the European Union in the dispute as third parties to the disagreement. (7) On October 8, 1999, the WTO dispute settlement panel (DSP) ruled that the FSC tax regime did not comply with WTO obligations. (8) Both the United States and the European Union challenged certain aspects of the DSP's findings in the WTO Appellate Body. (9) Canada and Japan joined the European Union as third parties on appeal. (10) On February 24, 2000, the WTO Appellate Body essentially affirmed the DSP ruling. (11) In an attempt to comply with the WTO rulings, President Bill Clinton signed into law the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (EIEA or replacement law) on November 15, 2000. (12)

After the enactment of the replacement law, the European Union continued to argue that the replacement law violated international trade obligations under the SCM Agreement and the AA, and challenged the replacement law. (13) The European Union again filed a petition with the WTO challenging the replacement law's compliance with U. …

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