WTO Concludes AJCA Still Violates DSB's FSC/ETI Rulings

September 30, 2005. A panel of the World Trade Organization (WTO) released its report [34 pages in PDF] that concludes that certain provisions of the American Jobs Creation Act of 2004 (which is also known as the Jobs Act and AJCA) still constitute illegal export subsidies in violation of the US's WTO obligations.

Previously, a WTO dispute settlement body (DSB) found fault with the FSC and ETI tax regimes. While the AJCA repealed the FSC/ETI provisions of US law, it also included transitional language, and some grandfathering. The EU again complained to the WTO.

The just released WTO report concludes that "to the extent that the United States, by enacting Section 101 of the Jobs Act, maintains prohibited FSC and ETI subsidies through the transition and grandfathering measures at issue, it continues to fail to implement fully the operative DSB recommendations and rulings to withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under the relevant covered agreements."

Peter Mandelson, EU Commissioner for Trade, wrote in a release that "The EU welcomes the WTO's clear language and conclusions. It has been confirmed that the US has yet to comply with previous WTO rulings. The EU appreciates that the US Congress has repealed the original FSC tax scheme. However, despite European opposition, the US Congress chose to perpetuate the prohibited tax subsidies through a transition period and the permanent `grandfathering´ of existing contracts. These provisions, which are now contained in the American Jobs Creation Act, are unacceptable in view of the large benefits involved."

Peter MandelsonMandelson (at right) added that "We estimate these advantages, for example, to add up to over $750 million for Boeing alone. This is striking because the US is asking European companies to abide by the WTO definition of subsidies regarding grants to Europe's civil aircraft sector. I hope that the US authorities will choose to act consistently in this matter."

The 108th Congress enacted, and the President signed, HR 4520, the "American Jobs Creation Act of 2004", late last year.

The original purpose of this bill was to repeal the extraterritorial income (ETI) tax regime, which in turn replaced the foreign sales corporation (FSC) tax regime. To compensate for this, the Jobs Act also reduced the top corporate tax rate from 35% to 32%, over several years, for domestic manufacturers, producers, farmers, and small corporations. The bill also became the vehicle for numerous unrelated provisions.

The impetus for repealing FSC/ETI was that the WTO ruled that the FSC/ETI tax regime constituted illegal export subsidies, and authorized the EU to impose up to $4 Billion in retaliatory tariffs. See also, story titled "EU Imposes FSC/ETI Sanctions" in TLJ Daily E-Mail Alert No. 847, March 2, 2004.

For some recent stories about the US EU FSC/ETI dispute, see stories titled "EU Adopts Regulation Regarding FSC/ETI Duties" in TLJ Daily E-Mail Alert No. 1,070, February 4, 2005; "House and Senate Approve Tax Bill That Repeals FSC/ETI" in TLJ Daily E-Mail Alert No. 995, October 13, 2004; "House Ways and Means Committee Approves Tax Bill that Repeals ETI" in TLJ Daily E-Mail Alert No. 918, June 15, 2004; and "EU Imposes FSC/ETI Sanctions" in TLJ Daily E-Mail Alert No. 847, March 2, 2004.

For further earlier coverage of this topic, see stories titled "Grassley and Baucus Organize Meeting on FSC/ETI Issue" in TLJ Daily E-Mail Alert No. 511, September 18, 2002; "Deputy Treasury Secretary Addresses FSC/ETI and WTO Rulings" in TLJ Daily E-Mail Alert No. 526, October 9, 2002; "Rep. Thomas Writes Colleagues Re FSC Dispute" in TLJ Daily E-Mail Alert No. 622, March 13, 2003; "WTO Authorizes FSC/ETI Related Tariffs" in TLJ Daily E-Mail Alert No. 657, May 8, 2003; "Legislators Introduce Bills to Repeal ETI Regime and Extend R&D Tax Credit" in TLJ Daily E-Mail Alert No. 715, August 11, 2003; "Senate Finance Committee Approves FSC/ETI Replacement Bill" in TLJ Daily E-Mail Alert No. 753, October 6, 2003; and "Sen. Grassley Meets with Lamy Re FSC/ETI" in TLJ Daily E-Mail Alert No. 771, November 4, 2003.

See also, TLJ news analysis titled "The FSC Tax Bill and Technology Exporters", November 17, 2000.