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Foreign Sales Corporation (FSC): Questions and Answers |
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(Source: European Commission; issued Feb. 27, 2004)
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History of the FSC case
In subsequent rulings the WTO found the FSC to constitute an illegal export subsidy under both the Subsidies Agreement and (in relation to agricultural products) the Agriculture Agreement and gave the US until 1 November 2000 to withdraw the FSC scheme.
On 15 November 2000, President Clinton signed the Extraterritorial Income Exclusion (ETI) Act into law, which meant to replace the FSC. The ETI Act, however, did not modify the substance of the export subsidy scheme and as a result the EU challenged it before the WTO. In January 2002, the WTO confirmed that the ETI Act also constituted a prohibited export subsidy and that the US had not, therefore, complied with its previous ruling to withdraw the prohibited export subsidy.
On 7 May 2003 the WTO endorsed the EU request for countermeasures for a level roughly equal to the estimated annual US subsidy (i.e. US $ 4 billion). The EU, however, avoided any immediate recourse to retaliation so as to give a reasonable time for the US Administration and Congress to adopt the necessary legislation for the repeal of ETI.
The deadline for compliance was set 1 March 2004, as a result of a unanimously approved Council Regulation 2193/2003 of 8 December, i.e. more than 2 years after the due date for compliance (January 2002), and 3.5 years beyond the original date set for US compliance in the FSC case.
EU countermeasures on US goods
EU's objective remains the withdrawal of the US illegal subsidy, therefore, the EU has opted for a response which is measured, gradual and geared towards focusing the mind of the US legislator to comply.
Countermeasures on the selected products consist of an additional customs duty of 5% to be enforced as from 1 March 2004, followed by automatic, monthly increases by 1% up to a ceiling of 17% to be reached on 1 March 2005, if compliance has not happened in-between. Thereafter, the measures should be re-examined in the light of the then applicable circumstances.
In application of the above, the EU had estimated the amount of the countermeasures at $315 million in additional customs duties in the period 1 March to 31 December 2004 and at $666 million in additional customs duties for the period 1 January 2005-31 December 2005. These amounts have been estimated by applying the above mentioned extra customs duties on the average US imports during the period 1999-2001.
For example, the monthly impact in 2004 is estimated as follows:
Countermeasures will be applicable throughout the EU (including as of 1 May the ten new Member States), but they will remain within the authorised level of US $ 4 billion.
The entire list of US goods subject to countermeasures was published in December 2003 (Official Journal L 328 p.3, 17 December 2003) and is accessible at
http://trade-info.cec.eu.int/wtodispute/show.cfm?id=152&code=1
How the list of US goods was prepared
On 30 August 2002, the WTO arbitrators established that the EU may impose up to US $ 4 billion in trade retaliation in the FSC/ETI dispute. On 13 Sept. 2002 the European Commission published a list of products that could be subject to countermeasures and invited European Industry and Member States to comment on this list(1). These products were selected from the very general custom chapters which had been notified to the WTO at the time of the original condemnation of the FSC by the WTO (2) (November 2000).
In order to minimise the negative consequences that a possible retaliation could cause to EU economic operators the European Commission had included in the list products on which dependency from the US was considered very low ie the list contained:
-- only products for which imports from the US represented maximum 20 % of total imports into the EU, and,
-- which were also exported from the EU.
Following the public consultation, Member States gave their unanimous support to the final list in March 2003. The EU notified the final list to the WTO which, on 7 May 2003, endorsed the EU request for countermeasures.
The list covers products from a great number of sectors such as agriculture (eg hams and cuts, milk powder, tomatoes, pineapples), textiles (eg anoraks, suits, trousers, bedlinen), industrial products (eg forks, handtools, drilling tools), electronical products (eg watertube boilers, steam engines, refrigerators), paper products and steel (eg ferro-nickel alloys, non-alloy ingots, flat hot rolled products).
The additional duty is to be added on top of the current customs duty; for example, the customs duties on specific products such as certain types of honey, oil cakes, skates and candles will change as follows:
For more information:
http://trade-info.cec.eu.int/wtodispute/show.cfm?id=152&code=1
NOTES:
(1) Notice Relating to the WTO Dispute Settlement proceeding concerning the US tax treatment of Foreign Sales Corporations ("FSC") - Invitation for Comments on the List of Products that could be subject to Countermeasures, OJ C 217/2 of 13 September 2002.
(2) United States Tax Treatment For "Foreign Sales Corporations", Recourse by the European Communities to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU, WT/DS108/13, 17 November 2000.
-ends-
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