History of the FSC Dispute

Published December 1, 2003

The U.S. first adopted Foreign Sales Corporation (FSC) legislation in 1985 to encourage the export of U.S.-manufactured goods. The legislation provided that certain income earned by a foreign subsidiary of a U.S. corporation would not be subject to taxes in the U.S.

In February 2000, the World Trade Organization’s Appellate Body issued a final ruling on a complaint against the FSC program filed in 1997 by the European Union. The WTO rejected the FSC tax break, ruling that such programs, which are contingent upon export performance, violate WTO rules against export subsidies.

The U.S. responded to the WTO decision by adopting in November 2000 the FSC Repeal and Extraterritorial Income Exclusion Act (ETI). The move satisfied neither the European Union nor the WTO, and on January 14, 2002 the WTO Appellate Body ruled the U.S. had not complied with its earlier ruling. The U.S. failed to take corrective action, leading to the May 7, 2003 decision by the WTO Dispute Settlement Body to permit the EU to impose countermeasures against the U.S.

To date, the EU has declined to implement the sanctions it has been authorized to impose, because U.S. political leaders have pledged to comply with the WTO ruling. CNSnews.com reported on November 11 that the EU plans to implement trade sanctions of $332 million starting next March, an amount that will rise by $30 million per month, and could reach $700 million per month by March 2005, unless the FSC program is halted.

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].