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Foreign Sales Corporation Case.

Foreign Sales Corporation Case. Andy Karellas David Goldenberg Heitham Ghariani. US Foreign Sales Corporation. FSC: A FSC obtains a US tax exemption on a portion of its earnings “foreign trade income” Manufactured, produced, grown or extracted in the U.S.

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Foreign Sales Corporation Case.

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  1. Foreign Sales Corporation Case. • Andy Karellas • David Goldenberg • Heitham Ghariani

  2. US Foreign Sales Corporation • FSC: A FSC obtains a US tax exemption on a portion of its earnings “foreign trade income” • Manufactured, produced, grown or extracted in the U.S. • Sold, leased, rented, consumed outside the U.S. • No more than 50% market value attributed to imports. • Must retain an office outside of the U.S. • 15%-30% exemption on total combined taxable income mathematically possible

  3. Sequence of Events • Request for Consultation 11/18/1997 • Third Parties: Australia, Barbados, Brazil, Canada, China, India, Jamaica, Japan • Panel Report 10/8/1999 • Appellate Body Report 8/24/2000 • Compliance Panel Report 8/20/2001 • U.S. Appeal Response by Appellate body 1/29/2002 • Panel Concludes non-compliance 9/30/2005

  4. Consultation - 11/18/1997 • European Community and United States • GATT 1994 and the ASCM [ Agreement on Subsidies and Countervailing Measures ]. • -the exemptions from the United States direct (income) taxes of a portion of FSC income related to exports and of dividends distributed to United States parent companies constitute export subsidies contrary to Article XVI GATT 1994 and Article 3.1(a) of the ASCM; • -the requirement that the tax exemption under the FSC scheme is limited to receipts from the export of products having at least 50% United States origin by market value provides treatment less favourable to imported products than is accorded to like United States products contrary to Article III:4 GATT 1994 and also constitutes a subsidy contingent upon the use of domestic over imported goods contrary to Article 3.1(b) of the ASCM.

  5. Panel Report - 10/8/1999 • EC invoked article 3.1(a) and (b) of ASCM , Articles 3,8,9 of Agriculture agreement and dropped GATT 1994. • Panel report agreed with Article 3.1(a) of Subsidies agreement and Article 3.3 and 8 of agriculture agreement. • US Cited Article 59 of the ASCM which promoted non WTO/DSB settlements for tax related arguments. – Denied by Panel

  6. ASCM Article 3.1(a) • PART III: ACTIONABLE SUBSIDIES • Article 5: Adverse Effects • No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of • Article 1, adverse effects to the interests of other Members, i.e.: • (a) injury to the domestic industry of another Member11; • (b) nullification or impairment of benefits accruing directly or indirectly to other Members • under GATT 1994 in particular the benefits of concessions bound under Article II of • GATT 199412; • (c) serious prejudice to the interests of another Member.13

  7. Article 3.3 of Agriculture Agreement • Article 3: Incorporation of Concessions and Commitments • 3.3. • Subject to the provisions of paragraphs 2(b) and of Article 9, a Member shall not provide • export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of • products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity • commitment levels specified therein and shall not provide such subsidies in respect of any agricultural • product not specified in that Section of its Schedule.

  8. Article 8 of Agriculture Agreement • Article 8: Export Competition Commitments • Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in that Member's Schedule.

  9. Article 9 of Agriculture Agreement • Article 9: Export Subsidy Commitments • Provides Exceptions to Subsidy Rules from Article 8.

  10. Appellate Body - 8/24/2000 • Upheld the Panels decision on Article 3.1 (a) on the ASCM. • Reversed some of the Panels Agriculture agreement decisions but concluded Articles 10.1 and 8 of the Agriculture agreement were not being met and circumvention of export subsidies in with respect to Agriculture. • Emphasized that the ruling wasn’t a mandate to force members to choose one tax system over another.

  11. Compliance Panel Report - 8/20/2001 • FSC Repeal and Extraterritoral Income Exclusion Act of 2000 was still inconsistent with Articles 3.1(a) and 3.2 of the ASCM and Article 10.1 and 8 of the Agreement on Agriculture and Article 4 of the GATT.

  12. Appeal and Enforcement • U.S. Appeal Response by Appellate body 1/29/2002 • Argue the interpretation of law • Panel Concludes non-compliance 9/30/2005 • EC pushes for compliance followup. • Reinforces the original ruling of the appellate body

  13. A little history…If at first you don’t succeed, try, try again. • Revenue Act of 1971: Congress establishes Domestic International Sales Corporation (DISC). • 1981: GATT Council calls for dispute settlement but does not rule against DISC. • Post-1981: U.S. Treasury proposes and establishes Foreign Sales Corporation (FSC) provisions to avoid dispute settlement process with Europeans. • 1998: EU-U.S. consultations (1997) break down and EU requests a WTO panel to review FSC. • October 1999: WTO Appellate rules in favor of the EU and says that the FSC provides an unfair subsidy to U.S. companies.

  14. November 2000: The FSC Repeal and Extraterritorial Income (ETI) Exclusion Act is signed into law. EU warns U.S. • August 2001: WTO rules that U.S. Extraterritorial Income (ETI) provisions are inconsistent with U.S. obligations and grants EU request to impose retaliatory tariffs. • October 2004:American Jobs Creation Act is signed into law, revising FSC-ETI laws. • EU files complaint with WTO that “grandfathering” provisions of the law are in violation of WTO rules. • August 2005: WTO rules in favor of the EU. U.S. appeals, but is ruled against in February 2006. • EU adopts resolution in January 2006 to reinstate tariffs against U.S. by May ’06. • May 2006:Tax Increase Prevention and Reconciliation Act repeals grandfathered FSC-ETI tax provisions.

  15. What they were saying… “The recent World Trade Organization ruling against the U.S. requires a renewal of our prior bipartisan efforts… If even a fraction of these announced sanctions were put in place, it would devastate not only U.S. businesses and consumers but EU businesses and consumers as well… “…[O]ur nation much comply with the WTO rules… through changes in our tax law and/or changes to trade rules negotiated within the new round of negotiations that was launched in Doha, Qatar… [I]f changes to our tax laws are necessary, the revenue from repeal of the FSC-ETI should be devoted to enhancing the competitiveness of companies operating within the U.S.” Rep. Philip Crane, Chairman, House Subcommittee on Trade and Rep. Charles Rangel, Ranking Democrat, House Ways and Means Committee Financial Times, September 16, 2002

  16. What was wrong with the FSC? • The FSC was being used as a prohibited export subsidy. • If the FSC did not exist, U.S. tax revenue based on export performance of U.S. firms would increase. • Agriculture: The U.S. was using the FSC as an export subsidy. What was wrong with the ETI? • The EU maintained (and the WTO agreed) that the law grandfathered/ protected sales contracts and leases. • Specifically, the JOBS Act does not eliminate the FSC-ETI • “in the years 2005 and 2006 with respect to all export transactions” and • “for an infinite period with respect to certain binding contracts, thus failing to withdraw the subsidy and implement the… recommendations and rulings.”

  17. 3 Congressional Plans • Thomas Plan: • Eliminate FSC-ETI. • Replace it with tax incentive that is not export performance-based. • Create tax credit for research and development in industries losing FSC-ETI and reduce tax rates for U.S.-owned subsidiaries abroad. • Crane-Rangel Plan: • Eliminate FSC-ETI. • Reduce taxes for domestic manufacturers and lower the basic corporate tax rate. • 5 year phase out plan. • Third Proposal: • Reduce corporate tax rate to offset $4-5 billion increase in tax liability caused by elimination of FSC-ETI. • This would not be subject to WTO criticism because it would not be export performance-based.

  18. A New Hope for Cooperation Recap • WTO panel rules the EU can implement retaliatory tariffs on U.S. products in October 1999 • EU negotiators do not impose the tariffs while U.S. Congress begin deliberation on ETI legislation • U.S. Congress Legislation: 2000 – 2006 • EU implements tariff • Tax Increase Prevention and Reconciliation Act of 2006

  19. The EU Strikes Back EU Tariff • August 30, 2001 WTO authorizes $4 billion on tariffs of U.S. products • EU set deadline of implementing tariffs on March 2004 • EU began tariff implementation March 1st 2004 • October 2004 EU files complaint with WTO that “grandfathering” provisions of the law (American Jobs Creation Act of 2004) are in violation of WTO rules. • Initial tariff rate started at 5%, and were scheduled to increase by 1% each month for a year, with a tariff cap of 17% by March 2005

  20. Return of the Negotiations • EU lifted tariff in January 2005, because of U.S. legislation to repeal ETI; • However EU lodged another complaint regarding the ‘2- year phasing out’ of ETI, versus the immediate repeal. • The U.S. appeals the WTO’s decision on the resent EU ‘phasing out’ complaint, but loses in February 2006. • EU threatens to reinstate tariffs beginning May 16, 2006 due to 2006 WTO appellate body decision on U.S. ETI two-year phase out plan • May 9, 2006 the U.S. and EU reach a conference agreement on the budget reconciliation, therefore ending the long-term negotiations (Tax Increase Prevention and Reconciliation Act of 2006 )

  21. "I want to thank lawmakers in the House and Senate for their work on this legislation, and especially for including the repeal of the grandfathering provisions on the foreign sales corporation/extraterritorial income regimes. It means the U.S. has taken the steps necessary to comply with its WTO obligations in this matter." --USTR Ambassador Portman

  22. Conclusions/Observations • Crazy game of poker between EU and US • U.S. Congressional and Economic Climate • 2004 Presidential Election • Post 9-11 economic conditions • Record trade deficit • 109th Congress Free Trade Agenda (CAFTA, Bahrain, Peru, Oman, etc…) • Manufacturing sector’s attitude: ‘Export America’

  23. Impacts on Future 110th Congress Agenda Relevant Trade Legislation: • Trade Promotion Authority Extension and Enhancement Act of 2007 (Introduced in House)[H.R.1042.IH] • Balancing Trade Act of 2007 (Introduced in House)[H.R.169.IH] • To establish a Congressional Trade Office. (Introduced in House)[H.R.548.IH] • Fair Currency Act of 2007 (Introduced in House)[H.R.782.IH]

  24. Questions?

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