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News & Views |FSC Dispute Likely to Resurface, Despite Legislative FixTuesday, November 28, 2000 Deloitte & Touche OnLine Although Congress has finally passed and President Clinton has finally signed the foreign sales corporation (FSC) replacement bill, H.R. 4986, it will by no means be the end of the dispute with the European Union over the tax treatment of FSCs. In all likelihood, the new Congress will have to revisit the issue next year. The legislation, enacted on November 15, replaces FSCs with an
“elective” regime under a single entity, with export income formerly
channeled through FSCs taxed as export income in a single foreign or
domestic company, but at a lower rate. It maintains the 50 percent U.S.
content rule, but eliminates the U.S. manufacturing requirement of the FSC
regime. The EU argues that the new law not only maintains, but may even compound, the violations found by the WTO in the FSC case. It also notes that the new law, as part of its transition procedures, retains the FSC regime at least until 2002. The EU argues that the issue is of particular importance to European companies that compete against U.S. firms in the chemical, pharmaceutical, machinery, and electrical and transport equipment sectors. The EU has asked the WTO to authorize trade sanctions worth up to $4 billion, which it figures is the yearly value of FSC subsidies. To give itself flexibility if the WTO does authorize sanctions, the EU has also submitted a very broad list of products that could be targeted for retaliation. Possible targets range from live animals to fruit, soap, glassware, and iron and steel (including aircraft, electrical machinery and nuclear reactors). It is highly unlikely that all of these products would ultimately be subject to sanctions, however. The EU might also pursue greater access to U.S. markets
for its products.
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Avoiding a Trade War
Despite these seemingly belligerent moves, both sides sought to reassure
the public that a trade war is not imminent. EU Trade Commissioner Pascal
Lamy said November 17 that the EU’s request for authority to retaliate
“is designed to protect our rights in the WTO, fully in line with the
procedural agreement reached with the U.S. in September. While wishing to
de-escalate this dispute, our aim is to see the WTO-incompatible FSC
export subsidies removed.” Likewise, Deputy Treasury
Secretary Stuart Eizenstat said on November 17 that the EU’s request for
sanction authority is consistent with the September agreement, and that
“no sanctions, if any, will be imposed until the WTO has had an
opportunity to rule on the WTO-consistency of the FSC replacement
legislation.” |
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The Agreement Stands On September 30, the U.S. and the EU reached an agreement for handling the dispute, with both sides acknowledging that a WTO panel would review the compatibility of the FSC replacement law and decide on the law’s legitimacy under WTO rules before any sanctions are imposed. The agreement provided that the EU could ask for the right to retaliate by November 17, including the value of the sanctions sought and a list of possible targets, to be authorized by November 28. The agreement also provided that the U.S. could ask for arbitration on the amount of any sanctions and that the arbitration would be suspended until after the WTO rules on the acceptability of the FSC replacement law. Even under a worst-case scenario, U.S. exports are not likely to face retaliation before late next spring. |
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