European Union slaps retaliatory tariffs on US

[nolabels]

http://www.latimes.com/business/la-fi-trade2mar02,1,7755092.story?coll=la-home-business
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EU Imposes 1st Tariff Penalties on U.S. Goods
At issue is a law that allows American firms to exclude a portion of their foreign sales from corporate income tax.


By Warren Vieth, Times Staff Writer

WASHINGTON — The European Union slapped retaliatory tariffs Monday on a wide range of U.S. agricultural and manufactured goods, increasing pressure on Congress to make significant changes in the way U.S. corporations are taxed.

The EU sanctions start small — $17 million this month — but will gradually increase to a level of about $670 million a year unless Congress repeals an export tax break declared illegal by the World Trade Organization.

The sanctions are the largest authorized by the WTO since its creation in 1995 and the first imposed by the EU against the U.S. They apply to some 1,600 products, from California produce, toys and electrical machinery to Carolina textiles.

"This is big," said University of Maryland trade economist Peter Morici. "You cannot get rid of this tax break without rejiggering the entire corporate tax. Once you get involved in that, it becomes a major piece of legislation."
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[Flagg]

1. payback's a bitch

[Fovea]

2. I wondered what was taking them so long

And now it seems like they were building the resolve to absolutely wipe American products away from the European market.

Hey George, does your policy to get rust belt votes seem as clever now?

[andyjackson1828]

3. This isn't about the steel tariffs....

Those have been rolled back. The violation here was of the Subsidies and Countervailing Measures agreement (SCM). The tax issues are really complicated, but the basic issue is that the US uses a worldwide system of taxation while the EU and almost every other country uses a nationally based system. This means that the US taxes US corporations on all earnings, whether they are earned in the US or not, while Europe only taxes their domestic corporatioons on income earned in the country. The US tax provisions at issue was first the Foreign Sales Corporation Act (FSC) and then the Extraterritorial Income Exclusion Act (ETI). The FSC essentially allowed corporations to exclude the income for certain foreign sales when calculating their profits. When the FSC was found to violation SCM by the WTO, Congress passed the ETI, which was almos the same thing in slightly different form. The WTO has found that since the US claims the right to tax on all income and then excludes some foreign income, that is equivalent to a subsidy. The EU's system has essentially the same outcome, but the difference is that conceptually the EU never claims a right to tax on all income.

[nolabels]

4. Thanks for background, found this with a FSC search

http://www.state.gov/e/eb/rls/othr/13210.htm
WTO Panel Sets Amount of Foreign Sales Corporation (FSC) Sanctions

Press release issued by Office of the U.S. Trade Representative
Executive Office of the President
Washington, DC
August 30, 2002

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."
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http://www.ncseonline.org/nle/crsreports/international/inter-61.cfm?&CFID=12789021&CFTOKEN=24396828
RS20571: The Foreign Sales Corporation (FSC)
Tax Benefit for Exporting and the WTO
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FSC's Predecessor (DISC) and the General Agreement on Tariffs and Trade

The FSC controversy has its roots in the legislative antecedent of FSC: the U.S. tax code's Domestic International Sales Corporation (DISC) provisions, enacted as part of the Revenue Act of 1971 (P.L. 92-178). Like FSC, DISC provided a tax incentive to export, although its design was different in certain respects. It was thought that a tax incentive for exports was desirable to stimulate the U.S. economy; to offset the tax code's "deferral" benefit, which posed an incentive for U.S. firms serving foreign markets to establish foreign operations; and to offset export benefits other countries gave their firms. (1)

DISC soon encountered difficulties with the General Agreement on Tariffs and Trade (GATT), a trade agreement to which the United States and most of its trading partners were signatories. Members of the European Community (EC) submitted a complaint to the GATT Council arguing that DISC was an export subsidy and therefore contravened article XVI of the GATT. The United States, however, filed a counter-claim, holding that the "territorial" tax systems of France, the Netherlands, and Belgium themselves conferred export subsidies. Under a territorial tax system, a nation does not tax the income of its corporations if that income is earned by a branch located abroad.
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[Fovea]

5. If it is about subsidies for export

Why should the EU see this policy as more objectionable than their own? I think the EU has taken this stance as a punitive, rather than normative measure because if we adopted the French system verbatim in regard foreign sales, it would be a greater subsidy than even what GATT has its panties in a twist about.

In essence, if we said we were only going to tax domestic sales income, they would slap us over that. This lacks any logical goal other than punishing the US. Other than our foreign policy in general, the steel tariff seems to be a likely reason for that punishment.

[leesa]

6. Free Trade! Free Trade!! Of course, when other countries do what

we routinely do to them, it's 'unfair trading practices'. Good for the EU, I hope they stick to their guns.