WTO Ruling Revives Transatlantic Trade Dispute on US Export Tax Exemptions

Strategic Insights -

The WTO has maintained that the US's Foreign Sales Corporations (FSC) tax exemptions, designed to promote export trade, violate international trade rules by subsidizing American companies through tax benefits. A September 30 ruling rejected the US's claims that the tax breaks no longer existed, citing loopholes in the American Jobs Creation Act that allowed some companies to temporarily keep their tax breaks. This outcome could have significant implications for another trade dispute between the US and EU over subsidies to Boeing and Airbus. The WTO's decision means that Congress must change the tax code again or face renewed duties on US goods, estimated to be worth $750 million annually.

Key Takeaways:

  • The WTO ruled that the US continued to fail to withdraw prohibited subsidies and bring its measures into conformity with earlier rulings, despite Congress repealing the original FSC tax scheme.
  • The US export tax exemption system, known as Foreign Sales Corporations (FSC), allows American exporters to exclude from tax on their gross income that portion of their receipts that relates to foreign trade.
  • The EU challenged the original FSC regime in 1998, claiming that the federal government's failure to collect tax revenue on exports was an illegal subsidy. The WTO found in the EU's favour in both 1999 and 2000.
  • The WTO authorized the EU to retaliate by imposing sanctions in the form of duties of up to $4 billion on US exports in 2003.
  • The sanctions were introduced in March 2004 on a range of agricultural, textile, and industrial products, starting at 5% and reaching 14% by December, when they were suspended.
  • The September 30 ruling means that Congress must change the tax code again or face renewed duties on US goods, estimated to be worth $750 million annually.
  • EU Trade Commissioner Peter Mandelson praised the WTO's "clear language and conclusions" and stated that Boeing had benefited from the loopholes in the October 2004 tax law revision, citing benefits worth $750 million over the next 10 years.
  • US Trade Representative's office stated it was studying the decision, with an appeal likely to be filed, which usually takes several months.

Statistics:

  • Up to $4 billion: The amount authorized by the WTO for the EU to impose sanctions on US exports in 2003.
  • 5-14%: The duties imposed on US products, starting at 5% in March 2004 and reaching 14% in December 2004.
  • 60 days: The timeframe for the EU to reimpose sanctions if the US fails to comply with the WTO's decision.
  • $750 million: The estimated annual benefit for Boeing from the loopholes in the October 2004 tax law revision.
  • $1.6 billion: The amount Boeing has already received in benefits from the tax law revision.
  • 10 years: The timeframe over which Boeing is expected to receive $750 million in benefits from the loopholes.

Sources:

  • "US urged to drop tax breaks after WTO ruling," The Financial Times, September 30, 2005
  • "WTO Ruling," Reuters, September 30, 2005
  • "European Union Challenges U.S. Export Subsidies," World Trade Organization, 1998
  • "WTO Disputes," World Trade Organization, 1999-2000
  • "WTO Authorizes EU to Retaliate Against US Subsidies," World Trade Organization, 2003
  • Written statement by EU Trade Commissioner Peter Mandelson.