*EPF411 07/27/00
Text: Eizenstat on Legislation to Remedy FSC Violation in WTO
(He warns EU retaliation would risk "major trade war") (1500)
Stuart Eizenstat, deputy secretary of the Treasury, says that legislation advanced in the U.S. House of Representatives would satisfy a World Trade Organization (WTO) ruling against tax benefits for U.S. offshore export corporations and warns the European Union (EU) against retaliating in the dispute.
In a July 27 statement delivered as the House Ways and Means Committee considered the bill, Eizenstat said the EU has failed to enter "serious negotiations" with the United States to work out a legislative resolution of the dispute over the U.S. Foreign Sales Corporation (FSC) program.
The FSC program excludes from U.S. income taxes certain income earned by foreign subsidiaries of U.S. companies on exports.
Eizenstat said EU retaliation with trade sanctions would risk escalating the longstanding dispute "into a major trade war."
"I cannot state strongly enough how unnecessary and unwise such an escalation of this conflict would be," he said.
The committee later approved the bill 34-1. Committee Chairman William Archer said he intends to press for full House passage of the bill early in September, ahead of the October 1 WTO deadline for the United States to comply with its WTO obligations. The Senate has taken no action yet on the bill, which was introduced only late July 26 after months of negotiation among House and Senate leaders and administration officials led by Eizenstat.
A WTO dispute-settlement panel, upheld by the Appellate Body, ruled that the FSC program amounted to an export subsidy in violation of WTO agreements on subsidies and agriculture.
The legislation would repeal the FSC program. It would alter the U.S. tax regime to exclude from U.S. tax a certain portion of a corporation's foreign sales income -- without regard to whether the income derived from exports.
Following is the text of Eizenstat's statement as prepared for delivery:
(begin text)
FROM THE OFFICE OF PUBLIC AFFAIRS
July 27, 2000
TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT
REMARKS AT HOUSE WAYS AND MEANS COMMITTEE FSC MARK UP
Mr. Chairman and Mr. Rangel: It is a pleasure for me to be here today before the Committee to endorse the Chairman's mark. Let me first take a moment to thank you, Mr. Chairman, for all you have done to bring us to this point. You and the members of your staff, particularly Lindy Paull and the staff of the Joint Tax Committee, have worked tirelessly to prepare this legislation in time for today's mark up. We have also worked closely throughout this process with Congressman Rangel and Senators Roth and Moynihan and their staffs, and I would like to thank each of them for their support and cooperation. This process has also engaged a wide range of agencies, including USTR [Office of the U.S. Trade Representative], the State Department, NEC [National Economic Council] and others. It has been a sterling example of how genuine bipartisan cooperation, and Legislative-Executive cooperation, should work. Throughout this process, we have also consulted closely with the business community, and we are pleased with the support they have given us in developing this proposed legislation.
Lastly, I would like to thank my own indefatigable colleagues at the Treasury Department, namely Jon Talisman, Manal Corwin, John Murphy, Mary Chaves, and Bill Fant for the hard work and long hours they have put in so that this mark up could be held before the August recess. The extraordinary efforts of all involved demonstrate how seriously this Administration takes its obligation to meet the October 1 deadline set forth by the WTO [World Trade Organization].
WTO Decision
Let me begin by briefly summarizing the activity that led us to consider this legislation today. Earlier this year, the WTO Appellate Body found over our vigorous objections that the Foreign Sales Corporation (FSC) constituted a prohibited export subsidy under the WTO Agreement on Subsidies and Countervailing Measures and under the Agreement on Agriculture. We are required to withdraw the FSC provisions no later than October 1, 2000, or face the possibility of retaliation.
In its ruling, the WTO panel raised the following objections:
-- First, the panel found that "but for" the existence of the FSC legislation, revenue that would otherwise be fully taxable under the Internal Revenue Code enjoyed a lower rate of taxation. Thus, it found the FSC to be a subsidy because partial tax exemptions accorded by the FSC provisions represented, in its view, a foregoing of "government revenue that is otherwise due."
-- Second, the panel found that the FSC provisions constituted a prohibited export subsidy because only exports receive preferential tax treatment.
We believe that the Chairman's mark addresses both of these concerns and is consistent with the WTO ruling. Further, we have listened to concerns expressed to us by the EU through our various contacts with them and have tried to take them into account, even though they were not raised in the Appellate Body decision. Among these were the allegations that the FSC administrative pricing rules violated the arms length pricing provisions of the Subsidies Agreement and their allegations that the FSC structure encouraged the use of tax havens.
In our work to formulate a legislative response to the Appellate Body decision, we have been guided by four key principles:
-- The need to respect our WTO obligations and address the issues raised by the Appellate Body.
-- The need to ensure that U.S. businesses are not disadvantaged.
-- That any alternative not allow loopholes in the Internal Revenue Code or cause other tax policy concerns.
-- The fundamental principle of fiscal discipline concerning the revenue impact of any proposed replacement.
The Single Entity Approach
Guided by these principles, we have worked with our partners in Congress and the private sector to develop a legislative proposal that is compliant with the WTO decision, and let me briefly summarize the key features of this new proposal set forth in the Chairman's mark.
In compliance with the Appellate Body decision, the FSC provisions are repealed from the Internal Revenue Code.
The new proposal embodied in the Chairman's mark represents a major departure from the FSC. Moreover, it represents a significant evolution from the proposal we submitted to the EU in May. Under this new approach, an exclusion would be provided for a certain portion of foreign sales income, referred to as qualifying foreign trade income. A separate affiliate would not be necessary for this exclusion.
The Chairman's mark addresses the issues raised by the Appellate Body and additional concerns raised by the EU:
-- The Chairman's mark provides an exclusion of tax on certain extraterritorial income. Because this would be our general rule, there is no foregone revenue that is otherwise due -- and therefore no subsidy.
-- Further, because the Chairman's mark treats foreign sales alike, whether the goods were manufactured in the U.S. or abroad, it is not export-contingent. Thus, a company would receive the same tax benefit on foreign sales regardless of whether it exports.
-- The Chairman's mark addresses EU concerns about alleged incentives to use low or no-tax jurisdictions.
-- The Chairman's mark also eliminates the administrative pricing rules that the EU alleged violated the arms length pricing provisions of the Subsidies Agreement.
The Chairman's mark ensures that the U.S. business community will not be disadvantaged by the WTO decision. Further, it greatly simplifies corporate record-keeping.
Conclusion
Let me close my remarks by again applauding you, Mr. Chairman, the Ranking Member, your staffs, and the bipartisan spirit in which you have conducted the work necessary to bring us to this point. I would also like to express my sincere hope that through this legislation we will be able to resolve this dispute with our partners across the Atlantic. Maintenance or escalation of this conflict would not be in either of our interests.
We continue to seek Europe's active engagement to help resolve this dispute and would like to move forward with a proposal that they can endorse. Yet, because the EU has failed to enter serious negotiations, we must move forward expeditiously on our own as the October 1 deadline set by the WTO approaches.
I have heard that extraordinarily high levels of retaliation have been threatened if a satisfactory conclusion to this dispute is not reached. This would risk escalating our dispute with the EU into a major trade war. U.S. and European companies would suffer the consequences of such a conflict. I cannot state strongly enough how unnecessary and unwise such an escalation of this conflict would be.
Mr. Chairman, this legislation reflects a serious effort on the part of the U.S. to address the Appellate Body's concerns and meet the October 1 deadline. We now need to move urgently toward passage of this legislation in order to meet that rapidly approaching deadline.
(end text)
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