Vanderbilt Journal of Transnational Law

First Page



On January 14, 2002, the World Trade Organization (WTO) Appellate Body affirmed that the FSC Repeal and Extraterritorial Income (ETI) Exclusion Act, a replacement for the Foreign Sales Corporation (FSC) Act, was an unlawful export subsidy under WTO agreements. Though the European Union has indicated a willingness to wait before imposing the largest trade sanctions in the history of the WTO, it insists that the United States comply with the ruling. This Note explores the history of the conflict and considers possibilities for the future of international trade taxation.

This Note first examines the background to the conflict, beginning with the General Agreement on Tariffs and Trade conflict over domestic international sales corporations (DISCs). After years of haggling, the United States replaced DISCs with FSCs in 1986. Following many years without dispute over the issue of how the United States would tax its imports, the European Union challenged the FSC system in 1997 and prevailed before the WTO Panel.

This Note then examines the two most recent decisions regarding the FSC-ETI laws. The WTO Panel and Appellate Body have both concluded that the laws are impermissible because they constitute a foregoing of revenue otherwise due to the government that was based on export performance. Both bodies also rejected the defense that the laws are permissible because they help companies avoid double taxation.

The length of the dispute and the high financial stakes have made this battle particularly bitter. Further, the impact on trade and the U.S. economy would be enormous, which has furthered the tensions between the parties. The European Union has said it may forego the sanctions altogether if the United States complies with the WTO ruling. The United States should not test the European Union by refusing to comply. Still, the United States justifiably has serious concerns about bending to the will of the WTO and changing its preference on taxation systems based on a Geneva edict. In light of these concerns, this Note concludes by exploring potential solutions for the problem and recommending one course for changing U.S. law. This option will maintain competitiveness and national sovereignty, and still meet international obligations. This Note advocates adopting an excise tax system on exported products to maintain the tax system that the United States has chosen while complying with the WTO mandate.