by Chakravarthi Raghavan

Geneva, 30 May 2000 -- The 'compromise' proposals of the United States on changes to its Foreign Sales Corporation system to comply with the WTO ruling against the FSC has in effect been turned down by the European Commission in Brussels.

While the EC has expressed its readiness to further consult with the US to find a solution to the issue, WTO compatibility was the key to any solution, the EC Commission has said, in a press release and background posted on its internet website.

A ruling by a WTO dispute settlement panel and the Appellate Body, adopted by the WTO Dispute Settlement Body in March, had held the US law provides prohibited subsidies to its corporations for their exports and thus violates the US obligations under the WTO.

The panel ruling, adopted by the DSB, gave the US time till 1 October (the commencement of a new budget fiscal year in the US) to withdraw the subsidies and bring its law into conformity with WTO obligations.

The EC has estimated that the subsidy aids $250 billion of annual US exports, with some of its major corporations as beneficiaries, and at a 3-4 billion dollar cost to US taxpayers.

The panel/Appellate Body ruling adopted by the WTO said:

* that the FSC measure constitutes a prohibited export subsidy under Art.3.1(a) of the SCM Agreement;

* that the US acted inconsistently with its obligations under Art.10.1 and 8 of the AOA by applying export subsidies, through the FSC measure, in a manner which results in, or threatens to lead to, circumvention of its export subsidy commitments for both scheduled and unscheduled agricultural products.

Some US corporate giants like Microsoft, Boeing, General Motors and General Electric have been benefiting from this largesse.

And while much of the export subsidy benefits have gone to the US industrial sector, the ruling also said that the FSC law provided export subsidies violating the Agreement on Agriculture.

The US corporate giants benefiting from the FSC handouts include those who hold dominant market positions (as oligopolies or virtual monopolies), and whose intellectual property rights protected by the WTO's TRIPs agreement, prevent any competition, and thus don't even need any subsidy to break into markets.

Under the US FSC law, US companies established offshore shell corporations (mostly incorporated in Virgin Islands, Guam and Barbados), which at best had a room and a fax machine to receive and send out messages. Such offshore corporations can be set up for as little as an annual fee of $2000 and are so advertised on the internet.

Under the FSC laws and its Special Administrative Pricing Rules (SAPR), these offshore corporations, wholly owned by the US corporations, get more favourable tax treatment for products exported and containing no more than 50% in value of imports. And unlike the US tax code's 'arms length' relationship requirements for such parent-subsidiary transactions, the FSC law companies can have administrative pricing. The favourable tax treatments give benefits of between 15 to 30 percent of the foreign trade income to the parent.

US Treasury Under-Secretary Stuart Eizenstat had presented to the EC Commission on 2 May, the US proposals to replace the FSC system with a new system that would extend the scheme to products manufactured by US subsidiaries and plants abroad.

The EC Commissioner Pascal Lamy has advised Eizenstat of the EC's concerns regarding the WTO compatibility of the compromise proposal. Lamy complained that the export contingency element of the FSC, declared illegal by the WTO, remained despite the fact that the new regime extended the eligibility to certain US branches and subsidiaries abroad. By requiring that the sales take place outside the US, the new system maintained the export obligation to benefit from the system to those corporations located within the US. The EC also maintained that the proposed new US regime contained two elements that the EC had challenged before the WTO, and which the EC still considers WTO incompatible -- the requirement that for eligibility, the exports should have at least 50% US content, as well as the SAPR.

Lamy's briefing in Brussels, posted on the internet, said that for 'judicial economy' the WTO panel and Appellate Body had not pronounced themselves on these two elements. But, contended Lamy, this was in view of the recommendation that the US "withdraw the FSC subsidies", and hence the assumption that the FSC subsidies would not exist and the issues raised by the EC were moot.

The US contention, in its presentation to the EC, was that by expanding the scope of beneficiaries to companies that did not need to export (as they based outside the US, and thus access the market through investment and not trade across borders), the export contingent element of the FSC law found to breach the Subsidies agreement could be considered to be removed.

After an assessment of the proposed compromise, the EU Commission has reached the view that the new scheme would continue to be export contingent in law for those companies established within the US, since exportation would be a sine que non to benefit from the new regime.

That the new regime would allow US companies with manufcturing facilities outside the US to benefit from it would not change the WTO incompatibility, according to the EC. To argue that the new regime would not be export contingent because a company based on the US would have two alternatives in order to benefit from the new FSCs regime -- to export from the US, thereby violating the WTO rules, or move its production facilities outside the US, "is simply a theoretical proposition," the EC said.

The new regime would not provide an option for those companies established within the US in order to obtain the subsidy. "The new regime simply establishes different conditions when inside the US or when outside the US. If an enterprise is based inside the US, it needs to export to benefit. If based outside the US, the enterprise need not export."

"It goes without saying," the EC posting said, "that a company can decide whether to be inside or outside the US (in the same way it makes all types of decisions on how to do business). But if the company is in the US, it has only one possibility to benefit from the new regime."

As an illustration, said the EC, an international treaty provides that elephants could not be hunted, a national law could not be said to be in compliance if it provides that giraffes also could be hunted. Those hunting elephants for ivory, in any event, won't hunt giraffes.

Other than being export contingent in law, said the EC, it was also sceptical about the number of US companies, whose branches and subsidiaries manufacture abroad, that would benefit from the new regime. These companies would be subject to the tax law of their host, and a break in the US tax would have a negligible effect on their tax liabillity.

And the companies opting for the new regime, would have to forego their "tax deferral" -- the exception in the US general tax law which requires US parent companies to pay taxes on undistributed dividends of the worldwide subsidiaries. By using 'tax deferral', taxes are only paid when the dividends are repatriated, if repatriated, and hence the US subsidiaries could avoid or delay paying billions of dollars of tax back in the US every year. The new regime would also maintain two aspects of the FSC regime -- the 50% US content rule and the SAPR. The EC believes these two are still violative of the Subsidies agreement.

The EC has said that if a satisfactory compliance regime is not in place by 1 October, the EC would take the dispute back to the WTO -- and in effect seek a ruling on compliance from the original panel. (SUNS4619)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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