WRITTEN QUESTION P-3113/00

by Gerhard Hager (NI) to the Commission

(27 September 2000)

Subject: Proposed reaction to reform of the new Foreign Sales Corporations bill

Reform by Congress of the US legislation on Foreign Sales Corporations is imminent. Under this reform, taxation of income from sales generated abroad would be abolished. According to US Deputy Treasury Secretary Stuart Eizenstat, the WTO Appellate Body found that it was entirely a matter for member countries to decide whether or not the income was taxed. The Commissioner takes the view that the new arrangements also violate WTO rules.

Against this background:

1. In the event of the new US export rules actually entering into force, does the Commission intend to initiate retaliatory trade measures in accordance with Article 133 of the EC Treaty within the 30-day period laid down under the WTO procedure?

2. If so, by what means does the Commission propose to defend the EU's interests?

3. What goods, or firms, would be affected by these measures?

4. What alternatives to measures to protect trade within the meaning of Article 133 of the EC Treaty would the Commission consider implementing?

5. Does the Commission take the view that individual EU Member States are empowered to regulate taxation of the income themselves?

6. If not, how, in legal terms, does the Commission justify its view?

Answer given by Mr Lamy on behalf of the Commission

(7 November 2000)

The World Trade Organisation (WTO) panel and appellate body reports adopted by the dispute settlement body of the WTO have found that the current foreign sales corporations (FSC) legislation provides to American exporters an export subsidy prohibited by the WTO agreements.

In July 2000, the US Administration submitted to Congress draft legislation to replace the FSC provisions, but this draft legislation maintains the main elements of the WTO-incompatible legislation, in particular the export contingency. Indeed, the only way that American companies could benefit from the subsidy (the tax exemption) as provided under this new draft legislation would be to export. However, Congress could not adopt the relevant legislation within the deadline of 1 October 2000 set by the WTO to withdraw this prohibited subsidy. A one-month extension of this deadline has therefore been requested.

In this context of non-respect by the United States of their international obligations, the Community has to take a number of formal steps to protect its rights and interests. However, in order not to increase the tension, the Community and the United States concluded on 29 September 2000 an agreement on the next steps of the dispute settlement procedure.

1. and 2. The WTO agreement on subsidies and countervailing measures and the WTO understanding on rules and procedures governing the settlement of disputes (the DSU) states that when a WTO member fails to bring the measure found to be inconsistent with a WTO agreement into compliance therewith or

otherwise comply with the recommendations and rulings within the timeframe set by the WTO, then the party which suffers from the non-compliance (here the Community) is authorised to ask an authorisation from the WTO to apply countermeasures. However, such authorisation is indisputable only if granted within 30 days after the deadline for compliance.

Therefore, in order to protect its rights under the WTO agreements, the Community is obliged from a procedural point of view to request the authorisation to apply countermeasures early in the procedure. Authorisation will be given unless the United States request arbitration on the amount of the countermeasures. In that case the authorisation of countermeasures is delayed until the ruling of the arbitrators.

3. The purpose of the countermeasures is to induce the losing party to remove the prohibited export subsidy. The list of American exports which could be subject to increased customs duties has not yet been finalised.

4. Not at this stage.

5. and 6. In the Community, direct taxation is mainly the remit of Member States, which have however to act in conformity with their obligations under the Treaty (for example, the principle of non-discrimination) and existing secondary legislation (for example, the directive on intra-company payment of dividends). However, the issue raised by the Honourable Member is different, as it concerns the respect by a WTO Member of its obligation not to provide an export subsidy. Indeed, the measure at stake in the FSC dispute is a subsidy to promote US exports, which is prohibited by the WTO agreements. The fact that the subsidy takes the form of an income tax exemption or, for example, a grant to companies is irrelevant from a WTO perspective.

The appellate body has confirmed that a Member of the WTO may choose any kind of tax system it wishes, so long as, in so choosing, that Member applies that system in a way that is consistent with its WTO obligations. Whatever kind of tax system a Member chooses, that Member will not be in compliance with its WTO obligations if it provides, through its tax system, subsidies contingent upon export performance that are not permitted under the covered agreements.