Foreign Sales Corporations (FSCs) was a means formerly provided by United States taxation law for US companies to receive a reduction in US federal income taxes for profits derived from exports, through the use of an offshore subsidiary (a "Foreign Sales Corporation").
The European Union (EU) launched proceedings against these provisions in the World Trade Organization (WTO) in 1999, claiming they were an export subsidy. In March 2000, the Appellate Body of the WTO found that the FSC provisions constituted a prohibited export subsidy under the General Agreement on Tariffs and Trade (GATT) Uruguay Round code on Subsidies and Countervailing Measures (SCM). The US Congress then adopted in November 2000 the Extraterritorial Income Exclusion Act (ETI; Public Law 106-519; 114 Stat. 2423), to repeal the FSC legislation and to introduce new provisions to exclude extraterritorial income from taxation.
The European Union challenged ETI in 2001, claiming it did not properly implement the earlier WTO decision - they argued it effectively retained the export subsidy, albeit under a different name. The WTO found the ETI to be a prohibited export subsidy. The US did not meet the deadline to implement this decision, and on 30 August 2002, the WTO approved the European Union request for over USD 4 billion in retaliatory tariffs. However, most observers view it as unlikely that the European Union will implement the sanctions, since the disruption that would cause to transatlantic trade would rebound on European companies; it is likely rather than the EU will seek to use the threat of sanctions as a bargaining chip to obtain concessions from the US in other areas.
The origins of the FSC dispute date back to 1971, when the US introduced legislation providing for "Domestic international sales corporations" (DISCs). These were challenged by the European Community under the GATT. The United States then counterclaimed that European tax regulations concerning extraterritorial income were also GATT-incompatible. In 1976, a GATT panel found that both DISCs and the European tax regulations were GATT-incompatible. However, these cases were settled by the Tokyo Round Code on Subsidies and Countervailing Duties (predecessor to today's SCM), and the GATT Council decided in 1981 to adopt the panel reports subject to the understanding that the terms of the settlement would apply. However, the WTO Panel in the 1999 case would later rule that the 1981 decision did not constitute a legal instrument within the meaning of GATT-1994, and hence was not binding on the panel.
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