Export Tax Benefits and the WTO

1
Export Tax Benefitsand the WTO

• Case Study
• Foreign Sales Corporations

2
Overview

• Rob Historical Background
• Tax Benefits on exports
• Vercie Iconic Case FSAs/ETIs
• WTOs Dispute Settlement Process
• Mike Implementation and Implications
• Aftermath
• Broader Issues

3
Growing Trade Deficit
4
Different in Tax Systems

• Territorial Basis income taxed within
  territorial boundaries
• Worldwide Basis tax on income of business unit
  regardless of global location
• Double Taxation foreign subsidiary taxed by
  domestic and foreign government

5
Birth of DISCs

• 1971 legislation established Domestic
  International Sales Corporation entities
• Dummy corps allowing indefinite tax deferrals
• DISCs had more lax requirements than similar
  European entities

6
Whats Your Beef?

• Article XVI of GATT calls for an end of direct
  and indirect subsidies
• Subsidies lower cost of production vis a vis
  unsubsidized foreign producers
• Direct vs. indirect subsidies

7
Six of One, ½ Dozen of the Other

• Early response to DISC legislation was
  unfavorable
• GATT panel characterized DISC benefits as tax
  remissions or exemptions
• EC seeks 10-12 billion countervailing duties
• 12 years later US dumps DISC in favor Foreign
  Sales Corporations

8
35 Years of Sparring with EU

• 1971 DISC legislation
• 1976 GATT panel report concludes that DISC
  represents illegal subsidies
• 1981 GATT Council members urged the US to amend
  DISC legislation
• 1984 Tax Reform Act replaced DISCs with FSC
• 1997 EU brings new tax subsidy complaint
  against U.S.

9
Dispute Settlement Body

• European Union vs United States

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The Dispute Settlement Body

• November 18, 1997 The European Union (EU)
  requested Consultation with the United States
  (US) in respects to the Foreign Sales Corporation
  (FSC) regime
• -Foreign Sales Corporation provide US companies
  with tax incentives for their exports
• July 1, 1998 The EU requests a Panel to
  examine the issue of the FSCs inconsistencies
  with the General Agreement on Tariff and Trade
  1994, Agreement of Agriculture, and Agreement on
  Subsidies and Countervailing Measures (SCM)
• October 8, 1999 The panel ruled that the FSC
  was inconsistent with the SCM Agreement and the
  Agreement of Agriculture

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The Dispute Settlement Body

• November 26, 1999 The US Appealed the panel
  ruling on the basis of law and legal
  interpretation
• The Appellate Body agreed with the panel findings
  that the FSC measure was inconsistent with the
  obligations of the Agriculture Agreement by
  applying export subsidies
• The Appellate body also ruled that Tax systems
  must be consistent with the WTOs obligations and
  gave October 1, 2000 as a deadline to conform
• October 12, 2000 US requested and was granted
  an extension to November 1, 2000 to conform to
  the WTOs obligations

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The Dispute Settlement Body

• November 15, 2000 The US comes forth with the
  adoption of the ETI Act to comply with the DSB
  Appellate Body recommendations
• -The Extraterritorial Income Exclusion Act of
  2000 allowed tax payers to elect an exclusion
  from gross income for qualifying foreign trade
  income
• November 17, 2000 The EU requested
  authorization from the DSB to suspend the ETI Act
  according to the SCM Agreement of the Dispute
  Settlement Understanding (DSU)

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EU Challenges the ETI Act

• European Union vs United States - ETI

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EU Challenges the ETI Act

• EU and the US enter into Consultation
• December 7, 2000 The EU notified the DSB that
  consultations have failed to settle the dispute
  and request a panel
• December 20, 2000 The DSB agreed to refer the
  matter to the original panel

15
EU Challenges the ETI Act

• January 5, 2001 The panel was composed
• August 20, 2001 the panel concluded that the ETI
  Exclusion Act 2000 was inconsistent with the SCM
  Agreement, Agriculture Agreement, and GATT 1994.
  
• - As a result the EU felt the US did not meet
  their deadline to implement the WTO
  recommendation and therefore request to impose 4
  billion dollars of retaliatory tariffs on the US

16
EU Challenges the ETI Act

• October 15, 2001 The US notified its decision to
  appeal the panel report
• January 14, 2002 The Appellate Board circulated
  its report. The Appellate Board upheld the panel
  findings that the US ETI act is inconsistent with
  its obligations under the SCM Agreement,
  Agriculture Agreement, and GATT
• The Appellate Body recommends that the US make
  revisions the ETI Act to make it conform with the
  WTO Agreements.

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Implementation

• US concedes and they live happily ever after?
• Not.

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False Start...or Stalling

• US takes legislative action...maybe not...
• (2002) HR 5095 Introduced...not taken up
• (2003) Introduced 2 sets...not taken up
• EU (2003) Sets Deadline to phase in tariffs
• US (2004) takes legislation action...
• sort of...

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Déjà vu all over again...

• EU Jan 2005
• lifts tariffs
• Lodged complaint objecting to grandfathering
  (transition provisions)

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• WTO Aug 2005 Panel supports the EU
• US appeals
• WTO Feb 2006 AB upholds decision
• EU states intention to re-impose tariffs by May
  16, 2006
• US May 9 repeal the contentious part of ETI
  transition rules.
• EU indicates this is an acceptable solution

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Broader Issue

• Tax Benefits as Barriers to free trade
• Constitute a subsidy
• Territorial vs. Extraterritorial tax
• Increasing complexity
• Achieve WTO-legality vs. maintain economic
  competitiveness (veiled but empty threat)

22
Interests Involved

• Who Gains for the Grandfather Clause?
• (BNA) favors large capital goods long delivery
  times
• Microsoft, Intel, Motorola, Caterpillar,
  and...Boeing
• EU competing industries Airbus?
• DISC/FSC/ETI benefit very few concentrated
  organized

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Implication for WTO

• US Pawn?
• Hegemonic Dismissal?
• GATT vs. WTO
• Improved Legitimacy
• Developed DSU w/ Appellate Body
• SCM (Uruguay round) teeth
• Inverted Consensus for Panel decisions
• Underlying belief in usefulness of an
  International Trade Organization

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GATT (Agreement) vs WTO (Formal Org)

• Improved Legitimacy
• Developed DSU w/ Appellate Body
• SCM (Uruguay round) teeth
• Inverted Consensus for Panel decisions
• Underlying belief in usefulness of an
  International Trade Organization

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Questions or Comments?