United States tax subsidies under domestic international sales corporation, foreign sales corporation and extraterritorial income exclusion act legislation within the framework of the world trade organization

Journal of World Trade

Volumn 36, Issue 5, 2002, Pages 979-992

  Qureshi, Asif H ^a   Grynberg, Roman ^b  

^a UNIVERSITY OF MANCHESTER   (United Kingdom)

^b Commonwealth Secretariat ^*  (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

TAX INCENTIVE; WORLD TRADE ORGANIZATION;

NORTH AMERICA; UNITED STATES; WESTERN HEMISPHERE; WORLD;

EID: 26044445599     PISSN: 10116702     EISSN: None     Source Type: Journal    
DOI: 10.1023/A:1021237011754     Document Type: Review

References (54)

1. See, e.g., United States - Tax Treatment for "Foreign Sales Corporations", Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement [WT/DS108/ARB] para. 3.1.
2. See FSC Panel Report, p. 39, paras 4.211, 4.212.
3. Note that the savings are comparable under the three regimes, see FSC panel report where it is noted that "the FSC Legislation was designed to be functionally equivalent to the DISC while being easier to defend under the GATT", p. 34, paras 4.176 and 4.267.
4. The tax savings would depend which administrative rule the taxpayer chooses to apply. The determination of the exempt foreign trading income can be arrived at by way of the application of two distinct administrative rules: (i) [23 percent × Export Sales] × 15/23 or (ii) [1.83 percent × Export Sales] × 15/23. The choice of the formulas would generally depend on the taxpayers' profit margin. Alternatively, taxpayers are allowed to use normal transfer pricing rules as laid down in Section 482 IRC.
5. E.g., transfer pricing policies and export expense deductions.
6. GATT Panel reports [1976]: Income Tax Practices Maintained by France, Belgium, Netherlands, BISD, 23rd Supplement.
7. The destination principle does not apply to direct taxes.
8. For example, in the DISC case the GATT Panel held that the provision in the DISC regime allowing 10 percent of export promotion expenses assigned as a deductible expense to a DISC amounted to an additional pecuniary benefit. See GATT Panel report on the DISC case BISD, 23rd Supplement.
9. See note 2 above.
10. Incorporated in Sections 991-997 IRC.
11. Similar to those mentioned in note 4, above.
12. Incorporated in Sections 921-927 IRC.
13. Section 114 IRC.
14. United States Tax Legislation [DISC] Panel report, 12 November 1976, L/4422 BISD, 23rd Supplement.
15. BISD 28S/114. The 1981 GATT Council action represents the adoption by the GATT Contracting Parties of four controversial panel reports regarding tax measures of France, Belgium, the Netherlands and the US.
16. The legal status of the 1981 Understanding was subsequently successfully challenged by the EU. See below.
17. Income Tax Reform Act 1984, incorporated in Sections 921-927 IRC
18. The EU sought consultation under Article 4 DSU, Article XXIII. 1 GATT 1994 and Article 4 of the Agreement on Subsidies and Countervailing Measures, 18 November 1997, WT/DS108/1, 28 November 1997.
19. WTO Panel Report, United States - Tax Treatment for "Foreign Sales Corporations", WT/DS108/R, 1999;
20. WTO Appellate Body Report, United States - Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, 2000.
21. Ibid. Panel Report, paras 7.41-7.85 and 7.86-7.119.
22. Ibid. paras 7.12-7.22.
23. Ibid. para. 7.85.
24. US - Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, 2000. The deadline was later extended to November 1 then to November 17 with the consent of the European Union.
25. WTO Panel Report, United States - Tax Treatment for "Foreign Sales Corporations" Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW, 2000;
26. WTO Appellate Body Report, United States - Tax Treatment for "Foreign Sales Corporations" Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, 2000.
27. Ibid. The transition rules preclude the establishment of FSCs after 30 September 2000.
28. Ibid.
29. See note 2 above, para. 8.1.
30. Ibid. para. 5.5.
31. Ibid. para. 5.12.
32. Ibid. para. 5.15.
33. Ibid. para. 5.22.
34. Ibid. 5.23.
35. Ibid, paras 5.30 and 5.60.
36. Ibid, paras 6.33 and 84.
37. Ibid. para. 6.20.
38. Ibid. para. 6.15.
39. Ibid. para. 6.10.
40. Ibid. para. 6.27.
41. Ibid. para. 6.29.
42. Ibid.
43. Appellate Body Report, as note 24 above, paras 138-186.
44. See statements made in US Congress in the context of repeal of the US FSC legislation and in particular statements by Mr Stark (106th Congress, 2nd Session, 146 Cong Rec H 7416, vol.146, No.106).
45. According to one set of statistics for 1992 found on the US IRS website some 74 percent of FSCs were incorporated in US possessions. See Sarah E. Nutter "Statistics of Income Studies of International Income and Taxes", at 〈www.irs.ustreas.gov〉.
46. In the case of Barbados at the end of 2000, the total number of FSCs was 2,975 (WTO Trade Policy Review Barbados 2002: Report of Barbados). Following the WTO Panel and Appellate Body rulings on the FSC the number of new FSCs declined to 118 in 2000, down from 384 licensed during 1997. As a consequence the Barbados authorities estimated a decline in income from licensing fees. For about 2,500 FSCs in 1999, the contribution to government revenue in terms of licence fees was about BDS$ 3.6 million (see WTO Trade Policy Review Barbados 2002: Report of the Secretariat).
47. Op cit footnote 2.
48. See European Communities - Regime for the Importation, Sale and Distribution of Bananas (EC-Bananas), WT/DS27/AB/R;
49. European Communities - Measures Concerning Meat and Meat Products (Hormones), WT/DS26, 48/AB/R.
50. See, e.g., European Communities - Measures Concerning Meat and Meat Products (Hormones). Recourse, to Arbitration by the European Communities under Article 22.6 of the DSU.
51. See, e.g., D. Hughes, T. King and T. Barrett, "Bush: Politics before Economics", The Business, 10 March 2002.
52. See, e.g., H. Stewart and I. Black, The Guardian, 15 January 2002.
53. See para. 28 Doha Ministerial Declaration, adopted 14 November 2001. See also Zoellick in Inside United States Trade where he said in 2000 that renegotiation of the ASCM would become necessary.
54. See Article 3.1(a) of the WTO Agreement on Subsidies and Countervailing Measures.