USTR Admits WTO's Adverse Ruling on FSC Provisions

July 27,1999

The U.S. trade representative's office has confirmed that a World Trade Organization panel has ruled against the United States for allowing part of foreign-source income earned by Foreign Sales Corporations (FSCs) to be exempt from U.S. income taxes. The case was brought to the WTO by the European Union. The EU contends the FSC provisions violate U.S. obligations under the WTO subsidies and agriculture agreements.

In the adverse ruling, the dispute settlement panel "appears to have systematically disregarded the history of this issue, the applicable WTO legal rules concerning income tax measures and the facts of record before it," said USTR Charlene Barshefsky.

The panel ruled that the FSC tax exemption constitutes a prohibited export subsidy under the WTO agreement and that the FSC tax exemption constitutes an illegal export subsidy.

From Brussels, REUTERS reported that Acting European Trade Commissioner Sir Leon Brittan urged the United States to bring the tax scheme in line with the WTO ruling. "This export subsidy has created a major distortion of international trade by granting a very substantial unfair advantage to U.S. products," Brittan said in a statement. "I call on the United States to change its law to comply with these findings according to the time scale specified by the panel."