European Trade Retaliation: The FSC-ETI Case

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Trade

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Abstract:

The European Union (EU) on March 1, 2004, began imposing retaliatory duties of 5% on selected U.S. exports in the dispute over U.S. compliance with a World Trade Organization (WTO) ruling involving the Foreign Sales Corporation (FSC) and its successor Extraterritorial Income Exclusion (ETI) export tax regime. Despite final passage on October 11, 2004, of legislation (H.R. 4520) that repeals the ETI-FSC tax benefit, the EU did not act to end the sanctions until January 21, 2005. On that day EU member states approved a new regulation to end the tariffs retroactively from January 1, 2005, but also to re-impose the sanctions on $2.4 billion of U.S. goods if the WTO should rule later this year that the new U.S. tax law, the American Jobs Creation Act (P.L. 108-357), also contains provisions that are violative of WTO rules. Specifically, the EU is challenging provisions under Section 101 of the Jobs Act. This section allows U.S. exporters to continue to benefit from FSC/ETI tax breaks through the end of 2006 for all export transactions and "grandfathers" export breaks for some existing contracts, in particular leasing arrangements, that the EU claims will benefit companies such as Boeing, Microsoft, and Catepillar. Both the Bush Administration and a number of members of Congress have argued that this EU challenge is needlessly prolonging the dispute. This report describes the EU action within the context of the WTO, evaluates the EU retaliation list, and assesses possible consequences of EU retaliation. The report will not be updated.