Industrial Subsidies: Tax Treatment of 'Foreign Sales Corporations'

Abstract

During its first five years, the WTO dispute settlement procedure has experienced only one significant US-EC dispute over industrial subsidies: the celebrated EU complaint charging that the US income-tax exemption for Foreign Sales Corporations (FSCs) constituted an export subsidy in violation of Article 3.1 (a) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). This chapter examines the FSC case and its aftermath up to the time of publication. Part I examines the origins of the dispute in the 1972 domestic international sales corporation (DISC) cases, and the legal situation resulting from those cases. Part II considers the FSC case itself, looking into the reasons for bringing the case, the legal outcome of the case, the analysis that produced this outcome, and questions left unanswered after that initial ruling. Part III examines the outcome of the 21.5 review of the extra-territorial income (ETI) statute, concentrating on the evolution of the legal definition of 'subsidy' and the contribution this phase of the case did or did not make to answering the questions left after the first decision. Part IV considers the lessons taught by DISC-FSC-ETI cases for the functioning of US- EC dispute settlement.