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Export Tax Benefits and the WTO

Export Tax Benefits and the WTO. Case Study: Foreign Sales Corporations. Overview. Rob – Historical Background Tax Benefits on exports Vercie – Iconic Case – FSA’s/ETI’s WTO’s Dispute Settlement Process Mike – Implementation and Implications Aftermath Broader Issues.

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Export Tax Benefits and the WTO

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  1. Export Tax Benefitsand the WTO Case Study: Foreign Sales Corporations

  2. Overview • Rob – Historical Background • Tax Benefits on exports • Vercie – Iconic Case – FSA’s/ETI’s • WTO’s 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. 1971 legislation established Domestic International Sales Corporation entities Dummy corps allowing indefinite tax deferrals DISCs had more lax requirements than similar European entities Birth of DISCs

  6. 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 What’s Your Beef?

  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. 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. 35 Years of Sparring with EU

  9. Dispute Settlement Body European Union vs United States

  10. 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 FSC’s 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

  11. 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 WTO’s 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 WTO’s obligations

  12. 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)

  13. EU Challenges the ETI Act European Union vs United States - ETI

  14. 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.

  17. Implementation: US concedes and they live happily ever after? Not.

  18. 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...

  19. Déjà vu all over again... • EU – Jan 2005 • lifts tariffs • Lodged complaint – objecting to “grandfathering” (transition provisions)

  20. 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

  21. 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

  23. 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

  24. 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

  25. Questions or Comments?

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