As reported in the May issue of WireLine, the WTO ruled against the US concerning the
legality of foreign sales corporations (FSC). The Clinton Administration consequently
proposed to the European Union (EU) a substitute plan to replace them. It would provide
an election under which foreign trade income allocated to a company would be taxed at
12.17%, with non-export sellers able to choose between this rate and a deferral on
production income. The rate would be 24.5% if this choice were not used. To qualify, a
manufacturer must be, or elect to be, subject to US tax and meet certain other specific
requirements.
Administration officials insisted the proposal directly addresses the WTO panel decision
and is WTO compatible. However, the EU rejected it weeks after it was submitted. They
criticized the remedy, saying it would not do away with tax breaks that the WTO ruled to
be an improper export subsidy.
US companies are unwilling to give up the current tax breaks and are applying heavy
political pressure to preserve them. The White House promises it will find a way, saying
the policies are not corporate welfare, but a crucial tool for maintaining US companies'
price competitiveness in world markets. Deputy Treasury Secretary Stuart Eizenstat
insisted the proposed changes are similar to tax laws in some European countries and that
if the EU continued its objections; the US might bring a WTO action against European
nations.
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