THE WORLD TRADE ORGANIZATION said legislation the United States enacted late last year to replace the “foreign sales corporation” regime is an illegal export subsidy.

The decision is expected to be made public on August 13.  The United States will have 60 days to decide whether to appeal.  The Bush administration is consulting with Congress.  However, Rep.  Bill Thomas (R.-California), chairman of the House Ways and Means Committee, said “Dragging out the process through extensive appeals or cosmetic changes to our tax system will not solve the problem.” Thomas called the US tax system antiquated and said the decision by the World Trade Organization should serve as a catalyst next year for Congress to overhaul US foreign tax rules.

The United States has had rules since the 1970’s that allow US companies to reduce taxes on income from exports of US-made goods by as much as 21% by running the sales through an offshore subsidiary.  The provisions have also been used to reduce US taxes on rent under outbound leases of US-made equipment like aircraft and turbines.

The World Trade Organization declared the foreign sales corporation regime illegal last year.  Congress then tinkered with the provision in a way that US businesses hoped would meet WTO objections.

The latest decision by the WTO gives the European Union the right to impose 100% ad valorem duties on up to $4.043 billion a year in US exports to Europe.  Retaliation is not expected before next year.  The European Union issued a list in November 2000 of US goods that may be subject to retaliation.  The US will try to negotiate a settlement with the Europeans.

An estimated 6,000 US corporations have benefited from FSC tax breaks.  US airplane manufacturer Boeing alone saved an estimated $130 million in taxes in 1998, or about 12% of its earnings for the year.

Keith Martin