Uh-oh! "According to the EU, FSCs account for an estimated annual turnover of $152 billion and gross profits of around $10 billion, exempt from normal U.S. taxation. The plan was extended to the U.S. software industry in 1997."
(Full story)
WTO backs EU case against US tax breaks -EU source
By Adrian Croft
Sunday July 25, 5:59 pm Eastern Time
BRUSSELS, July 25 (Reuters) - A preliminary report by a World Trade Organisation (WTO) dispute panel largely backs European Union complaints against a U.S. plan that grants tax breaks to exporters, an EU source said on Sunday.
The source said the interim report -- recently sent to Brussels and Washington -- backed the EU's arguments in all significant respects. He said the panel's final report would not be published until after the summer, but it looked as if ''the case is going the EU's way.''
The United States could appeal if the panel's final ruling goes against it.
The case, of great significance for U.S. companies, involves the Foreign Sales Corporation (FSC) scheme which the EU says amounts to a $2 billion a year export subsidy to U.S. companies.
The interim ruling in the case follows a series of reverses for the 15-nation EU in high-profile trade battles with the United States at the Geneva-based WTO.
The United States announced last week it would impose punitive 100 percent duties on $116.8 million of EU exports, including Danish hams, French pate, Italian tomatoes and German soups, from July 29 because of the EU's failure to comply with a WTO ruling against its ban on imports of hormone-treated beef.
In April, Washington won WTO approval to impose sanctions on another $191 million of EU goods in a row over the EU's banana import rules.
The EU said in July 1998 it had asked for a WTO dispute settlement panel to probe the FSC scheme after three rounds of formal consultations with Washington failed to find a solution.
The EU maintains that tax exemptions granted to U.S. companies exporting through FSCs violate WTO rules barring tax codes which favour exports in comparison with similar products sold for domestic use.
The EU says the scheme is a clear subsidy from the U.S. taxpayer to industry and that it distorts international trade by granting an unfair advantage to U.S. products in highly competitive markets.
U.S. officials insist the arrangement is consistent with WTO rules.
FSCs are usually subsidiaries of U.S. corporations located in tax havens such as the Virgin Islands, Barbados or Guam. U.S. firms exporting through them qualify for income tax relief on condition that a large part of their product is manufactured in the United States. Payments by FSCs to their U.S. parent companies are not subject to U.S. taxes, the EU says.
According to the EU, FSCs account for an estimated annual turnover of $152 billion and gross profits of around $10 billion, exempt from normal U.S. taxation.
The plan was extended to the U.S. software industry in 1997. The arrangement also covers exports of grains and soybeans worth an annual $4.4 billion, the EU says.
In May last year, the United States launched WTO proceedings against five EU countries -- Belgium, France, Greece, Ireland and the Netherlands -- for what it said were prohibited tax subsidies used to help export sales.
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