The Extraterritorial Income Exclusion Act could be expansive Bananas

MA-Thesis / Master von Jan Neugebauer

Introduction:

About 28 billon dollars – is the value of the latest trade disputes between the EC and the US. The EC has battled the US export tax regime since the 1970s, requesting in its latest action before the Dispute Settlement Body (DSB) $4 billion of countervailing measures.

The World Trade Organization (WTO) has become the main battle field for the growing tensions between the United States and European Union in their trade relations. One of the longest and most expensive disputes has been the tax treatment of the exporting businesses by the US. From the very beginning the EC has alleged that these schemes violated the General Agreement on Tariffs and Trade (GATT) and since the foundation of the WTO in 1994 also the Agreement on Subsidies and Countervailing Measures (SCM). On January, 14th 2002 the Appellate Body (AB) affirmed in most parts the decision of the DSB that the Extraterritorial Income Exclusion Act (ETI) violated World Trade Law. I will try to show why this is the case, how the US can change the current taxation system, and why she should try to involve herself more in the ongoing reform of the WTO in the Doha Development Agenda.

In Part I I will therefore briefly outline the ongoing trade war between the US and the EC, outline the two major taxation systems, and put a special emphasis on the history of the Extraterritorial Income Exclusion Act dispute. In Part II I will explain the basics of the ETI tax scheme, summarize basic principles of the WTO’s Law of Subsidy, and finally try to explain why the DSB and the AB of the WTO found the ETI-regime violated WTO-Law. In Part III I will evaluate the possibilities the US now has with regard to the ETI as well as to stop the ongoing trade war and strengthening of the WTO in the Doha-Round.

Zusammenfassung:

Im Rahmen der transatlantischen Handelsbeziehungen kam und kommt es zwischen den Vereinigten Staaten und der Europäischen Gemeinschaft seit den 70 er Jahren in regelmäßigen Abständen zu Handelsstreitigkeiten vor den Streitbeilegungsorganen des GATT und der WTO. Als einer der langwierigsten Streitigkeiten zwischen den beiden Akteuren stellen sich die amerikanischen Einkommensteuerregeln für die einheimische exportierende Industrie dar.

Ein Schwerpunkt der Arbeit liegt darin aufzuzeigen, wie der amerikanische Gesetzgeber versuchte eine Schlechterstellung der amerikanischen Industrie durch verschiedenartige Ausgestaltungen des Steuerrechts zu überwinden. Es wird dargelegt unter welchen Voraussetzungen im Rahmen des DISC, FSC und ETI man diese Steuervergünstigungen in Anspruch nehmen konnte.

Weiterhin stellt die Arbeit dar, wieso diese Gesetze gegen das WTO Subventionsrecht verstoßen. Dabei wird noch einmal kurz in das Subventionsabkommen eingewiesen, bevor dann die Entscheidung des DSB – Bodies (WT/DS108/AB/RW) genauer untersucht wird.

Letztlich wird versucht Lösungsansätze darzustellen, wie eine WTO konforme Ausgestaltung aussehen könnte und wie man das Streitbeilegungssystem der WTO effektiver ausgestalten könnte.

Table of Contents:

	Extraterritorial Income Exclusion Act could be expensive Bananas - the latest WTO decision regarding ETI revisited	3
	Introduction	3
	Part I	5
I.	The Trade War	5
II.	Rules of taxation	7
1.)	General	7
2.)	Territorial Exemption System of Taxation and CIN	8
3.)	Worldwide System of taxation and CEN	9
III.	Legal history of the ETI-Act	11
1.)	DISC	11
a.	Pre-DISC	11
b.	Generally and Formation	12
c.	The EC, the GATT-Panel, and the 1981 Understanding	13
2.)	Foreign Sales Corporations Act (FSC)	15
a.	What is a FSC & Statutory Requirements of Formation	15
b.	Benefits conferred upon the FSC and the Parent Company	18
3.)	The WTO-Decisions & the FSC Repeal and Extraterritorial Income Exclusion Act of 2000	21
	Part II	22
I.	Foreign Sales Corporations Repeals and Extraterritorial Income Exclusion Act 2002	22
1.)	Specific Transactions	24
2.)	Qualifying Foreign Trade Property (QFTP)	24
3.)	Foreign Economic Process	25
II.	Law of Subsidies under the WTO-Agreements	25
1.)	Background	25
2.)	System of the Law of Subsidies	26
a.	Dualism	27
b.	Traffic-lights principle	27
III.	The Report of the Appellate Body WT/DS108/AB/RW	28
1.)	Foregoing Revenue that is otherwise due	29
a.	Foregoing of Revenue	30
b.	Normative Benchmark of Comparison	30
c.	ETI and gross income	31
2.)	Export Contingency	33
a.	General	33
b.	Basic & Extended Subsidy	34
3.)	Avoiding Double-Taxation & Foreign Source Income	35
a.	Burden of proof	35
b.	Foreign Source Income	36
c.	Scope of Rules	37
d.	Design, Structure and Architecture of the ETI-Scheme	38
4.)	Fair Market Value Rule and the GATT	41
a.	„Affecting“	42
b.	Fair market value Rule „Affecting“ internal market?	43
c.	Less Favourable Treatment to like Imported Products	43
	Part III	44
I.	Possibilities	45
II.	New Tax Measure	46
1.)	Changes to ETI	47
2.)	Reform tax code	49
III.	The WTO-Agreements	52
1.)	The Doha-Round	52
2.)	Direct Effect of WTO-Agreements	54
	Conclusion	57
	Tables and Graphics	58
1.)	US Complaints (in million US$)	58
2.)	EU Complaints (in million US$)	58
3.)	Chart I: Jobs related to export	59
4.)	Procedural Scheme Dispute Settlement within the WTO	60
5.)	Time Line FSC - ETI Dispute	60
6.)	The Temple or Three Pillars Model of the EU	61