*EPF501 08/30/2002
Texts: USTR's Zoellick Regrets WTO Sanctions Ruling in FSC Case
(Decision in EU favor will likely become moot, he argues) (1250)

U.S. Trade Representative Robert Zoellick says he regrets a World Trade Organization (WTO) ruling in favor of the European Union (EU) on the level of retaliatory trade sanctions it can impose against U.S. imports in a longstanding dispute over U.S. tax breaks for exports.

In an August 30 Office of the U.S. Trade Representative (USTR) press release, Zoellick said, however, he expects the ruling "will ultimately be rendered moot" by U.S. compliance with its WTO obligations.

At issue are the Foreign Sales Corporation (FSC) and successor legislation, the Extraterritorial Income Exclusion (ETI) Act. The United States lost successive rulings in the WTO, which determined that the tax breaks in those laws amounted to export subsidies in violation of WTO rules.

After losing on the issue, the United States argued that the EU was entitled to little more than $1,000 million annually in retaliatory trade sanctions. The WTO approved, however, the $4,043 million a year claimed by the EU.

The EU must still formally request WTO Dispute Settlement Body approval before imposing any sanctions. USTR noted that EU officials have indicated they intend to delay imposing sanctions as long as the United States is moving toward fulfilling its WTO obligations.

In the House of Representatives, Representative Bill Thomas introduced legislation aimed at reforming U.S. tax law in line with the WTO ruling after the Ways and Means Committee, which he chairs, conducted hearings on the issue. Whether Congress would pass such legislation in the few remaining weeks of its current session remains uncertain.

In a separate statement, Senator Chuck Grassley, senior Republican on the Senate Finance Committee, noted that Senator Max Baucus, the Democratic committee chairman, has supported establishing a bipartisan House-Senate working group to resolve this legislative issue.

Grassley said the WTO rulings leaves intact "the unfortunate distinction" between direct taxes on income, the U.S. system, and indirect taxes on products, the EU system.

"WTO rules should not favor one over the other," Grassley said. "At some point, we must address the competitive disadvantage this distinction creates."

Following are the texts of the USTR press release and Grassley statement:

(Note: In the texts "billion" equals 1,000 million.)

(begin USTR text)

OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE
Executive Office of the President
Washington, D.C. 20508
August 30, 2002

WTO Panel Sets Amount of FSC Sanctions

WASHINGTON -- The European Union is entitled to impose $4.043 billion in trade sanctions as a result of the Foreign Sales Corporation provisions of U.S. tax law, according to a World Trade Organization (WTO) ruling released today.

The United States contended that sanctions should have been limited to $1 billion based on the actual impact of the FSC provisions on EU commercial interests.

"I'm disappointed that the arbitrator did not accept the lower figure put forward by the United States. We believe that $1 billion is much more accurate," said United States Trade Representative Robert B. Zoellick. "Nevertheless, the key point, as the President has said, is that the Executive branch will work with Congress to fully comply with our WTO obligations. I believe that today's findings will ultimately be rendered moot by U.S. compliance with the WTO's recommendations and rulings in this dispute."

The FSC provisions have been the subject of contention between the EU and the United States for several years. The WTO found that the U.S. provision was inconsistent with WTO obligations in a March 2000 ruling. The United States passed a new law in November 2000 to comply with U.S. obligations, but the EU challenged this measure. In January this year, the WTO found that the new law still does not comply with U.S. WTO obligations.

The U.S. Congress is working on new tax legislation aimed at bringing U.S. law into compliance with WTO obligations and, at the same time, enhancing the competitiveness of U.S. firms. The House Ways & Means Committee has held several rounds of hearings on this matter, and Chairman Thomas has introduced a bill. Zoellick recently testified before the Senate Finance Committee on the FSC issue, along with Deputy Treasury Secretary Kenneth W. Dam.

"One of the ironies of this case," said Zoellick, "is that when the dust has settled, we hope to find that the competitiveness of U.S. firms has been strengthened, rather than diminished."

Under WTO rules, the WTO Dispute Settlement Body must provide its formal approval before the EU can actually impose trade sanctions. However, there is no deadline by which the EU must submit such a request, and EU officials previously have indicated that they would refrain from imposing sanctions so long as the United States is making progress on eliminating the FSC subsidy.

The U.S. submissions in this proceeding are available on USTR's Web site.

BACKGROUND

On March 20, 2000, the WTO ruled that the FSC provisions of U.S. tax law provided an export subsidy that is inconsistent with WTO obligations. In order to comply with these rulings, the United States passed the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 ("ETI Act") on Nov. 15, 2000. Two days later, the EU commenced a WTO dispute, alleging that the ETI Act failed to eliminate the problems that the WTO had found with the FSC provisions. On the same day, the EU also requested authority from the WTO to impose trade sanctions on $4.043 billion worth of U.S. exports. On Nov. 27, 2000, the United States and EU entered into a WTO arbitration proceeding, alleging that the amount of sanctions requested by the EU was excessive under WTO standards. This arbitration was suspended pending the outcome of the EU's challenge of the ETI Act under WTO rules.

On Jan. 29, 2002, the WTO ruled that the ETI Act was inconsistent with WTO obligations. As a result of an earlier agreement with the EU, the arbitration then automatically resumed.

The arbitration proceeding consisted of written submissions and an oral hearing. The United States argued that under established WTO principles, the amount of any sanctions awarded to the EU had to be based on the trade impact of the U.S. subsidy on the EU. The United States estimated that this amount is roughly $1 billion per year. The EU claimed that because it could have requested as much as $13.5 billion in sanctions, the arbitrator should accept its request for $4.043 billion.

(end USTR text)

(begin Grassley text)

Of course, I'm disappointed by the arbitrator's decision. $4 billion in trade sanctions is a huge potential liability for the United States. I'm especially concerned that our agricultural producers could bear the brunt of any trade sanctions that might be imposed. Today's announcement on the amount of trade sanctions at issue still leaves unanswered the basic question at the heart of this long dispute: the unfortunate distinction in global trade rules between direct taxes on income and indirect taxes on products. WTO rules should not favor one over the other. At some point, we must address the competitive disadvantage this distinction creates. At our recent Finance Committee hearing on FSC/ETI, I was pleased to obtain support from Chairman Baucus and the Administration for a bicameral, bipartisan working group to resolve this issue. I look forward to moving this process along.

That said, I believe it's critically important that the United States comply fully with the rule of law. Many members from both houses of Congress, Republican and Democrat, and executive branch officials have worked long and hard to resolve this dispute. We still have more work to do. The ball is in our court."

(end Grassley text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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