February 24,2000

Roth Statement on the WTO Decision on Foreign Sales Corporations

WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) today released the following statement on the WTO Appellate Body's decision on Foreign Sales Corporations (FSC):

"I am extremely disappointed by the WTO Appellate Body's decision on the FSC. The panelists completely ignored economic reality. The FSC is not an export subsidy. It is a remedy for the competitive disadvantage our firms face in the marketplace due to the tax practices of other WTO members, particularly the members of the European Union.

"That said, the real problem here is not the Appellate Body's decision, but the underlying WTO rules. That, and the perverse decision by the European Commission, over the objection of many of its own firms and member countries, to reopen this trade dispute 20 years after we had reached a satisfactory settlement of these issues.

"Other WTO members, particularly in the European Union, employ a territorial-based tax system that does not tax foreign source income, including income from exports. That system affords a competitive advantage to firms operating in those jurisdictions that the U.S. tax system, based on worldwide reporting of income, does not. The WTO rules currently permit the use of territorial based tax systems, despite the competitive benefits they confer on products exported from those countries. That is what the FSC and the DISC before it were designed to offset.

"I want to be absolutely clear about my view on this. While I fully expect we will live up to our obligations, no resolution of this issue can leave our firms, our farmers, and the American worker at a permanent competitive disadvantage in the marketplace.

"Indeed, I thought we had put this issue to rest with our European counterparts 20 years ago. But, they saw fit to abrogate the agreement we had reached to resolve our prior dispute over the trade effects of their tax system and our attempts to redress those effects. That agreement included the understanding that, in the future, we would take our differences over tax policy to fora that were specifically designed for that purpose, and not the GATT or the WTO.

"The reason for that understanding was simple. The GATT and the WTO are essentially agreements to reduce trade barriers and avoid other discriminatory trade practices. Nothing in those rules was intended to force a member country to choose between competing tax systems. Yet, that is the net effect of the current ruling.

"The Europeans' action raises a far broader point about the conduct of their trade policy. The decision to abrogate our 20 year-old agreement and bring the FSC case, by all accounts, was not made at the behest of the EU member countries. Nor was it made at the insistence of EU firms complaining that the FSC somehow put them at a commercial disadvantage. That is because European firms understand that they already benefit from the territorial-based tax systems and the FSC was simply a way of providing equivalent treatment under our system of taxation. In fact, a number of those European-based firms have U.S. subsidiaries that take advantage of the FSC as well.

"The decision to bring the FSC case was made at the European Commission without consideration either for its political impact here or for its impact on the trading system. In that sense, the decision to bring the FSC case fits with the Commission's attitude on our disputes on bananas and beef and on other WTO disputes. The Commission seems to have forgotten that the European Union member countries are, along with the United States, among the principal beneficiaries of the WTO system and that the Commission bears the responsibility to shore the system up, rather than engaging in tactics designed to weaken it.

"Both the Commission's decision to flout the WTO rules in the beef and bananas disputes and the reckless decision to bring the FSC case are deeply inconsistent with that responsibility. This case was brought, not for any European constituency, but for the Commission's own petty political interest in balancing its losses before the WTO with a few wins, regardless of the larger consequences for the trading system.

"This issue must be made a top priority in discussions at the upcoming G-8 summit. President Clinton must make the political point to his European counterparts that they, not the Commission, are responsible for setting the course of the European Union's trade policy and that this issue needs to be resolved in terms that ensure a level-playing field for American workers, farmers, and firms. As Chairman of the Finance Committee, I am committed to making that happen."