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The Extraterritorial Income Exclusion Act could be expansive Bananas

The latest WTO decision regarding ETI revisted

Masterarbeit 2002 54 Seiten

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Extraterritorial Income Exclusion could be expensive Bananas – the latest WTO decision regarding ETI revisited


Part I
I. The Trade War
II. Rules of taxation
1.) General
2.) Territorial Exemption System of Taxation and CIN
3.) Worldwide System of taxation and CEN
III. Legal history of the ETI-Act
1.) DISC
a. Pre-DISC
b. Generally and Formation
c. The EC, the GATT-Panel, and the 198l Understanding
2.) Foreign Sales Corporations Act (FSC)
a. What is a FSC & Statutory Requirements of Formation
b. Benefits conferred upon the FSC and the Parent Company
3.) The WTO-Decisions & the FSC Repeal and Extraterritorial Income Exclusion Act of 2000

Part II
I. Foreign Sales Corporations Repeals and Extraterritorial Income Exclusion Act 2002
1.) Specific Transactions
2.) Qualifying Foreign Trade Property (QFTP)
3.) Foreign Economic Process
II. Law of Subsidies under the WTO-Agreements
1.) Background
2.) System of the Law of Subsidies
a. Dualism
b. Traffic-lights principle
III. The Report of the Appellate Body WT/DS108/AB/RW
1.) Foregoing Revenue that is otherwise due
a. Foregoing of Revenue
b. Normative Benchmark of Comparison
c. ETI and gross income
2.) Export Contingency
a. General
b. Basic & Extended Subsidy
3.) Avoiding Double-Taxation & Foreign Source Income
a. Burden of proof
b. Foreign Source Income
c. Scope of Rules
d. Design, Structure and Architecture of the ETI-Scheme
4.) Fair Market Value Rule and the GATT
a. “Affecting”
b. Fair market value Rule “Affecting” internal market?
c. Less Favourable Treatment to like Imported Products

Part III
I. Possibilities
II. New Tax Measure
1.) Changes to ETI
2.) Reform tax code
III. The WTO-Agreements
1.) The Doha-Round
2.) Direct Effect of WTO-Agreements


Tables and Graphics

1.) US Complaints (in million US$)
2.) EU Complaints (in million US$)
3.) Chart I: Jobs related to export
4.) Procedural Scheme Dispute Settlement within the WTO
5.) Time Line FSC – ETI Dispute
6.) The Temple or Three Pillars Model of the EU

The Extraterritorial Income Exclusion Act could become expensive Bananas – the latest WTO decision regarding ETI revisited


About 28 billon dollars – is the value of the latest trade disputes between the EC and the US.[1] 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)[2] has become the main battle field for the growing tensions between the United States and European Union[3] 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)[4] and since the foundation of the WTO in 1994 also the Agreement on Subsidies and Countervailing Measures (SCM).[5] On January, 14th 2002 the Appellate Body (AB) affirmed in most parts the decision of the DSB that the Extraterritorial Income Exclusion Act (ETI)[6] 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[7].

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.

Part I

I. The Trade War

Even though[8] the battle around the FSC might seem an isolated instance in the history between the US and the EC – it is not. To the contrary these two allies have battled each other fiercely in the field of international trade.

In 1994 the WTO was founded, incorporating the General Agreement on Tariffs and Trades of 1947, and perhaps the greatest achievement of the Uruguay Round was the creation of a dispute settlement procedure.[9] For more than a quarter century even before the WTO was founded the European Community and the United States have had major disputes regarding trade – starting out with the US tax regime in the late 70’s regarding the tax treatment of export companies[10] continuing with disputes over Banana imports to Europe[11] until most recently the US regime on import of certain steel products.[12] Challenging the “allies” trade policies gives the EC and the U.S. on the one hand the chance to promote their individuality, cultural, and regulatory differences and on the other hand helps to cover up or retaliate for protectionism.[13]

II. Rules of taxation

1.) General

In general countries around the world use one of two[14] different kinds of systems of taxation either a pure territorial system[15] or a partial territorial system[16], or a worldwide system.[17] About half of the OECD members take advantage of the partial territorial system and the other half of the worldwide system.[18] Today no country uses solely a territorial or worldwide system.[19] Every country uses aspects of the other taxation system,[20] but the WTO has only approved the taxing systems of territorial schemes and had struck down the US’s FSC and ETI-measures, which are based on the U.S. general system of worldwide taxation.[21]

2.) Territorial Exemption System of Taxation and CIN

Primary feature of the Territorial Systems is that income should be subject to net income tax only in the jurisdiction where it was generated, i.e. in a country which taxes according to the territorial system only domestic income would be subject to its tax (=taxation on a “source basis”).[22] [23] Income is only taxable in the country where it was actually earned, in the so-called “source country”.[24] Territorial systems therefore recognize the source countries right to tax and exempts the foreign income from it’s owns taxing power.[25] For the territorial system to function properly each country has to enter into multi- or bilateral income taxation agreements, in which the standards of taxing powers are described.[26]

This pure form of the exemption method embraces the economic theory[27] of Capital Import Neutrality (CIN).[28] CIN aims to achieve equal fiscal treatment of income received by domestic and foreign investors. Thus all companies in the same industry in a particular country, whether foreign or domestic are taxed equally.[29] This approach is also called “competitive neutrality” because it enhances the competitiveness of foreign investors, as they stand at least from a taxation viewpoint on equal footing with the local enterprises.[30]

3.) Worldwide System of taxation and CEN

In contrast to the territorial system, the worldwide taxation system is based upon the principle of “Capital Export Neutrality” (CEN) and tax deferral.[31] CEN basically taxes all income equally, no matter where it was actually earned. A U.S. corporation would therefore be subject to the same income tax indifferently, where the company actually made the profit. An investment decision would therefore not be affected by tax issues, because no matter where the US Corporation invests, it would always be subject to the US income tax. Pure CEN systems would thus need a scheme of deferral tax credits, which reimburses the company for exceeding taxes, which would have to be paid in the US, but were already paid in a foreign territorial system.[32] In a perfect tax competition CEN would lead to the most international allocation of capital.[33]

Differentiating between foreign active income[34] and foreign passive income[35], active income is generally only taxed when it is repatriated, passive income is taxed currently.[36] As the territorial systems were approved by the WTO,[37] the worldwide system in the US was since the 70’s regarded suspiciously by the EC and examined later by the GATT-Panel and the WTO.

III. Legal history of the ETI-Act

The newest decision of the DSB is no surprise to the legal and tax community. All of the precedent laws of the ETI-Act were contested by the European Union and Third-Parties. It is therefore essential to review briefly the preceding tax exemptions.

1.) DISC

In 1972 the US enacted the Domestic International Sales Corporations Act (DISC).[38] Intended as incentive for increasing exports Congress tried to abolish discrimination against those who export through U.S. corporations.[39]

a. Pre-DISC

In contrast to many European countries[40] the U.S. in general applied and still applies a system that taxes worldwide income of U.S. citizens and corporations.[41] Therefore U.S. corporations were taxed on their revenue derived from their exports, in contrast to foreign subsidiaries of U.S. corporations, which were not involved in U.S. trade, which were not taxed by the U.S until the assets or revenue were repatriated.[42] Before DISC U.S. based corporations involved in export would thus form foreign subsidiaries in low tax countries[43] to minimize their U.S. tax liability.[44] To avoid these artificial constructions[45] and to better control the foreign investments Congress passed Subpart F of the 1954 Internal Revenue Code.[46] Even worsening the position of U.S. corporations and further increasing the trade deficit,[47] Congress finally created DISC.

b. Generally and Formation

Once recognized as a DISC, the DISC itself was exempted from taxes on the one hand,[48] and on the other hand the DISC’s shareholders’[49] income was considered to be either previously taxed income and could generally be transferred to the shareholders without negative tax results or was so called accumulated DISC income, which was not taxed until it was distributed.[50]

A domestic corporation could qualify as a DISC, when at least 95% of the company’s receipts were “qualified export receipts”[51] and 95% of the total assets were so called “qualified exports assets”[52]. Usually just a shell of the parent company, without any facilities, employees and inventories, the DISC acted as “a paper broker of its parent corporation’s export products”.[53] By stripping the DISC of the assets through producer loans or by selling its trade receivables, an actual distribution of the DISC’s accumulated income was rarely seen and the tax on the DISC’s export profit could be indefinitely circumvented.[54]

c. The EC, the GATT-Panel, and the 198l Understanding

In 1982 the European Community and Canada[55], relying on a GATT Panel Decision[56], asked the GATT Panel to: (a) demand from the US to bring the DISC legislation in accordance with the GATT, (b) declare that the DISC legislation was a subsidy, and (c) that the GATT Panel would in case of non-compliance by the US permit the EC retaliatory actions.[57] The GATT Panel held in 1976 that especially the indefinite postponing of taxes constituted not a mere legal “tax deferral” but rather a “tax exemption” which constituted an illegal export subsidy and violated Art. XVI GATT 1947.[58] Even though the US never conceded that the DISC legislation actually constituted an export subsidy, the GATT Council adopted the “Understanding”-Agreement in consent with the parties.[59]

Although the Reagan Administration asserted that the DISC legislation complied with the Understanding and with the GATT 1947, out of fear for possible trade retaliations and to remove this issue, which irritated substantially the US trade relations,[60] the US government decided to address these issues by introducing the FSC scheme and limit DISC’s to relatively small companies with a maximum of $10 millions of qualified export receipts.[61]

2.) Foreign Sales Corporations Act (FSC)

After being rejected in 1982 [62] by the Senate the “Foreign Sales Corporations Act” was revived by the 98th Congress and was incorporated in the Tax Reform Act of 1984.[63] Contested from the very beginning by the EC[64] and being the basis for the latter Extraterritorial Income Exclusion Act[65] it is essential to outline the FSC basic taxing principles, its economic impact, and to summarize the WTO decisions[66].

a. What is a FSC& Statutory Requirements of Formation

aa.) In contrast to DISCs,[67] [68] the FSC are no longer domestic US corporations, but are foreign corporations incorporated in foreign countries or in any US possessions – except Puerto Rico.[69] The corporation could only be created in a foreign country,[70] which had an exchange of information agreement or certified income tax treaty with the US.[71] To qualify as an FSC the corporation needed to be involved and generate at least part of its earnings by the sale and lease of “export property”.[72] Export property defined the same way as for a DISC,[73] was any goods produced within the US by a third party for the export outside the US[74] and the FSC could sell and buy them for its own account or only on a commission basis.[75]

bb.) FSCs were only allowed to have a maximum number of 25 shareholders, which could either be held by one parent or several manufacturing companies or be totally independent.[76] The FSCs needed to have at least a leased permanent foreign office, but which could be shared with any number of FSCs.[77] Additionally to these “Foreign Presence Requirements”, the FSC needed to comply with “Foreign Management Requirements”[78] and was eligible for certain exemptions on exports in which it performs the required “Foreign Economic Process”,[79] which would result in foreign trade gross receipts.[80]


[1] See infra Table #1&2 at 60

[2] The world trading system was born in 1948 with the General Agreement on Tariffs and Trade. Members of the system have obligations and duties on the one hand and certain rights on the other hand. Balancing these rights is usually achieved in so called “Negotiation Rounds”. There has been eight negotiation rounds this far. The Uruguay-Round in 1994 created the World Trade Organization, including agreements on special trade areas as e.g. Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, [hereinafter TRIPS] 33 I.L.M. 81 (1994), The Practioners Deskbook Series: WTO, 1995, 663 and the General Agreement on Trade in Services, Apr. 15, 1994 [hereinafter GATS], The Practioners Deskbook Series: WTO, 1995, 613. Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Apr. 15, 1994, The Practioners Deskbook Series: WTO, 1995, 175, 33. I.L.M. 1125 (1994) All of the final texts of the WTO including the separate agreements are available at (last visited July 24, 2002) On January 1, 2002 the WTO had 144 members and another 28 are currently negotiating their terms of membership. The WTO’s multi-lateral trade system covers now more than 97% of total global trade. . For a history of the WTO and the changes it brought to World Trade Law see generally Trading into the Future – Roots: From Havana to Marrakesh available at (Last visited: July 24, 2002)

[3] The European Coal and Steel Community, Treaty Establishing the European Coal and Steel Community, Apr. 18 1951, 261 U.N.T.S. 140, the European Atomic Energy Community, Treaty establishing the European Atomic Energy Community, Mar, 25, 1957, 298 U.N.T.S. 167, the European Economic Community, Treaty establishing the European Economic Community Mar. 25 1957, 298 U.N.T.S. 11, [hereinafter EC-Treaty] were combined to the European Union in the Treaty of Maastricht, Treaty on the European Union, Feb. 7, 1992, 31 I.L.L. 247. Since Jan. 1 1999 the European Union has 15 members. For a history of the EU see generally Paolo Mengozzi, European Community Law : From The Treaty Of Rome To The Treaty Of Amsterdam (Patrick Del Duca trans., Kluwer Law International 2d ed. 1999) (1992) See also “The Temple or Three Pillars Model of the EU” at

Even though the Procedure to ratify International Treatises and Agreements is regulated in Art.300 EC-Treaty, one of the biggest internal issues in the EU during the Uruguay-Round was the question if the EU had the power to ratify and negotiate in the name of the member states. In an Opinion the ECJ concluded, that the EU’s power depended on the internal powers the members transferred to the ECs. ECJ Opinion 1/94, European Court reports 1994 Page I-05267 (Competence of the Community to conclude international agreements concerning services and the protection of intellectual property - Article 228 (6) of the EC Treaty.) Thus the EU had the exclusive power to enter into the GATT 94, as under Art. 133 EC-Treaty the member states had transferred all their power in the trade and tariff area to the EC. On the other hand the in the areas covered by TRIPS and GATS the member states had retained some legislative power. These agreements were therefore considered “mixed-agreements” and had to be ratified by the member states and the EU. European Court reports 1994 Page I-05267

[4] General Agreement on Tariffs and Trade, Oct. 20, 1947, 61 Stat. A-11, T.I.A.S 1700, 55 U.N.T.S. 194 [hereinafter GATT 47], and the General Agreement on Tariffs and Trade, Apr. 15, 1994, [hereinafter: GATT 94] available at see supra note 4, The Practioners Deskbook Series: WTO, 1995, 197

[5] Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, [hereinafter SCM] available at see supra note 4, The Practioners Deskbook Series: WTO, 1995, 529

[6] H.R. 4986, the “FSC Repeal and Extraterritorial Income Exclusion Act of 2000” (JCX-111-00), November 1, 2000, Publ. L. No. 106-519, 114 Stat. 2423(2000)(enacted) [hereinafter ETI-Act]

[7] After the failing of the “Millennium-Round” in Seattle in 1999, The World Trade Organization's fourth ministerial conference decided on 14 November 2001 in Doha, Qatar, to launch the ninth negotiation round, the so called “Doha Development Agenda” [hereinafter Doha-Round]. Ministerial Decision, Nov. 14, 2001, WT/MIN(01)/DEC/1, available at (last visited: July 26, 2002) The November 2001 declaration provides the mandate for negotiations on a range of subjects and other work, including issues concerning the implementation of the present agreements. The negotiations include those on agriculture and services, which began in early 2000. A number of other issues have been added. The declaration sets January 1, 2005 as the date for completing all but two of the negotiations. Negotiations on the Dispute Settlement Understanding are to end in May 2003; those on a multilateral register of geographical indications for wines and spirits, by the next Ministerial Conference in 2003. Progress is to be reviewed at the Fifth Ministerial Conference in 2003 (now to be held in Mexico). THE ROAD TO DOHA AND BEYOND, WTO, 2001, available at:, For the EC’s goals see generally Towards a new Trade Round, available at (last visited July 24, 2002), For the procedural background see generally, Anwarul Hoda, Tariff Negotiations And Renegotiations Under The GATT And The WTO (Cambridge University Press, 2001), 25-78

[8] Since the WTO DSB began its work in 1995, the U.S. has brought 13 actions against the EC and the EC has brought 24 actions against the US. The first action brought by one of the two parties was on July, 26th 1995, when the US contested the EC’s duties on the import of grain (WT/DS/13/1). The latest action was brought before the DSB on March, 13th 2002 by the EC against the US regarding definitive safeguard measures of imports of certain steel products (WT/DS/248/1). See generally, see also table #1&2

[9] On April 17th, 1997 Renato Ruggiero, former WTO director general, called the dispute settlement procedure the WTO’s most individual contribution to the stability of the global economy. Available at (last visited July 29, 2002). There the WTO dispute settlement procedure is also outlined. For the Panel procedure see generally Flow-Chart at 60, For problems with this procedure and eventual solutions see generally, Andreas R. Ziegler, Scope and Function of the WTO Appellate System: What Future after the Millennium Round?, 3 Max Planck UNYB, 439 (1999), James Cameron & Stephen J. Orava, Improving WTO Dispute Settlement Procedures, 195-242 (Friedl Weiss, ed., Cameron May, 2000)

[10] See infra DISC III 1.) at

[11] World Trade Organization, Report of the Appellate Body, European Communities-Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R (Sept 9, 1997) [hereinafter WT/DS27/AB/R]

Close-up on Bananas in seven stages: (See generally including the latest developments: The U.S.-EU Dispute on EU Banana Regime, by the United States Mission to the European Union, available at (last visited July 26, 2002)

July 1, 1993: The EU adopts a new bananas import regime (VO 404/93) that favors bananas from domestic producers and from former European colonies in Africa, the Caribbean and the Pacific (ACP-Countries). In 1994 a GATT-panel rules that the new regime violates GATT obligations, but the EU blocks adoption of the ruling by the full GATT. In 1996 the United States along with Ecuador, Guatemala, Honduras and Mexico, challenge the new regime under the WTO dispute-settlement mechanism. On May 22, 1997 a WTO panel concluded that the EU bananas import regime violates WTO obligations under the GATS and the Agreement on Import Licensing Procedures. On September 1997 the WTO AB upholds the panel ruling. The WTO grants the EU 15 months, until January 1, 1999, to comply with the ruling. In Jan uary 1999 the deadline for EU compliance expires. The EU implements a slightly modified regime that perpetuates earlier WTO violations. The United States seeks WTO authorization to impose retaliatory tariffs. On April 19, 1999: The DSB authorizes U.S. retaliatory tariffs amounting to $191.4 million a year, the level of damage to U.S. companies calculated by arbitrators. CHRONOLOGY : U.S. DISPUTES WITH EU OVER BANANAS, BEEF HORMONES

Available at (last visited July 26, 2002) (last updated: July 5, 2000)

[12] World Trade Organization, Request for the Establishment of a Panel by the EC, United States-Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS248/12, May 8th, 2002 [hereinafter WT/DS248/12]

[13] Rosemary F. Ford, The Beef Hormone Dispute and Carousel Sanctions: A roundabout way of forcing compliance with World Trade Organization Decisions, 27 Brook. J.Int’l L. 543, at 551 (2002) [hereinafter Ford]

[14] A third system is the so-called “remittance taxation model” under which a jurisdiction imposes tax on its residents’ foreign income when that income is later repatriated, see THE DEFERRAL OF INCOME EARNED THROUGH U.S. CONTROLLED FOREIGN CORPORATIONS- A POLICY STUDY, Office of Tax Policy, Department of the Treasury, December 2000, at x [hereinafter: CFC-Study]

[15] The pure territorial system is not common in the economically developed countries. Countries in Central and South America, Africa and the Middle and Far East use this pure territorial system. As the major participants in global trade – and the two parties of the WTO-dispute- either have a worldwide or a partial territorial system I will only outline these two systems and only refer to the pure system as basis for the partial territorial system. See CFC-Study at Fn. 9

[16] For a general overview of the French, German, and Dutch system of territorial taxation see NFTC Report. The Dutch System of taxation is more closely examined in the speech by Paul Vlaanderen, Why Exemption ?, held at Brookings/ITPF Conference on Territorial Income Taxation on April 30, 2001, [hereinafter Vlaanderen] And the German system is reviewed by Christoph Schreiber, Patrick Meiisel, Hansjoachim Köhler in German Participation Regime [hereinafter Meiisel], both are available at (last visited July 29, 2002)

[17] CFC-Study, see supra note 14, at x, Mitchelle B. Weiss, International Tax Competition: An Inefficient Phenomenon?, 16 Akron Tax J. 99, at pp. 112-18 (2001)

[18] OECD , Taxing Profits in a Global Economy: Domestic and International Issues 183 (1991).

[19] CFC-Study, see supra note 14, x

[20] Id at xi

[21] TERRITORIAL TAX STUDY REPORT, National Foreign Trade Council, Territorial Study Group, June 11, 2002, at 6 [hereinafter NFTC-Report ]

[22] See supra note 16

[23] See supra NFTC-Report at 7

[24] Id.

[25] Id. at 8

[26] In contrast to the US which only has 62 Income Tax Treatises, France has 115 and Germany 86 treatises in force. Id at 9, 11

[27] As I am not an expert in economy I will not try to evaluate the three economic theories CIN,CEN, and National Neutrality. Furthermore this would be way beyond the scope of this Paper. The major aspects of these theories are reviewed e.g. by Reuven S. Avi-Yonah in Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573, 1604-1611

[28] Vlaanderen, supra note 16

[29] Charles H. Gustafson et al., Taxation Of International Transactions: Materials, Text and Problems (West Group, 2d ed. 2001) at 17 par. 1090

[30] Id.

[31] Id.

[32] Id.

[33] CFC-Study, supra note 14 at 53

[34] Foreign active income is revenue from manufacturing, foreign direct investment, etc Harry Grubert, Enacting Dividend Exemption and Tax Revenue, NTJ, Vol. LIV, No. 4, 811, at 812 [hereinafter Grubert ]

[35] Foreign passive income is revenue from dividends, bond interests, and portfolio investments, etc, id.

[36] Id. at 813

[37] In 1976 a GATT-panel concluded that three European Systems of taxation provided impermissible export subsidy; they are deemed to comply with Footnote 59 and the 1981 Understanding and thus justified. (see infra at note 60), NFTC-Report, supra note 21 at 20, BISD 23S/114 23S/127, 23S/137

[38] See 26 U.S.C. §§ 991-997 (1982), as enacted by Revenue Act of 1971, Pub. L. No. 92-178, 85 Stat. 535 (1971) [hereinafter Internal Revenue Code cited as I.R.C.]

[39] SENATE FINANCE COMM., REVENUE ACT OF 1971, S. REP. NO. 437, 92d Cong., 1st Sess. 90 (1971)

[40] See supra Territorial System of Taxation, at

[41] See supra Worldwide System of Taxation, at

[42] Phillip L. Jelsma, The making of a subsidy, 1984: The tax and international trade implications of the foreign sales corporation legislation, 38 Stan. L.Rev. 1327, 1331 (1986) [hereinafter: Jelsma ]

[43] For Tax havens see generally Richard A. Gordon, Tax havens and their use by United States taxpayers : an overview : a report to the Commissioner of Internal Revenue, the Assistant Attorney General (Tax Division) and the Assistant Secretary of the Treasury (Tax Policy) (1981), Harold S. Peckron, Uniform Rules of Engagement: The New Tax Regime for Foreign Sales, 25 Hastings Int’l & Comp.L.Rev. 1, 4 [hereinafter Peckron ]

[44] Peckron, id. at 5

[45] Office of Tax Policy, Dep't of the Treasury, The Deferral of Income Earned Through U.S. Controlled Foreign Corporations: A Policy Study 8-9 (2000), reprinted in Tax Notes Today (Jan. 2, 2001) (LEXIS, FEDTAX lib., TNT file, elec. cit., 2001 TNT 1-1)

[46] Revenue Act of 1962, Publ. L. No. 87-834, § 12(a), 76 Stat. 960 (1962) – For a history and the motivation behind Subpart F see generally Megan McLaughlin, Truly A Wolf, Or Just A Sheep In Wolf's Clothing? The Active Financing Exception To Subpart F, 21 Va. Tax Rev. 649

[47] See House Comm. on Ways and Means, 91st Cong, 2d Sess., Proposal of the U.S. Treasury Department (Comm. Print 1970)

[48] I.R.C. § 991 (1982)

[49] Usually big multi-national U.S. enterprises. See generally President Carters Message to Congress, President’s Message to Congress on Tax Reduction and Reform, Pub. Papers 172, 173 (January 21, 1978)

[50] I.R.C. § 995 (b)(1)(A)-995(b)(1)(C)

[51] I.R.C. § 992(a)(1)(A) (1982): The DISC’s qualified export receipts consists of amounts acquired either from the sale or lease of qualified export property or from services related to or subsidiary to the sale or lease f qualified export property § 993 (a)(1) (1982)

[52] I.R.C. § 992(a)(1)(B) (1982) : The DISC’s qualified export assets include inventories of products manufactured, produced grown, or extracted in the U.S., which were usually supplied by the DISC’s parent on commission or a buy-sell basis, see generally Jelsma, supra note 42, at 1333

[53] Jelsma, supra note 42 at 1333

[54] I.R.C. § 993(d)(1) (1985)

[55] Contracting Parties to the General Agreement on Tariffs and Trade, United States Tax Legislation (DISC), 23 Basic Instruments And Selected Documents 45 (Suppl. 1977) at 45 [hereinafter: BISD]

[56] For an explanation of the GATT-procedure see generally Jackson, The Jurisprudence of International Trade: The DISC Case in GATT, 72 Am. J. Int’l L. 747, 753-57 (1978)

[57] Jelsma, supra notes 34, 46-50 an accompanying text

[58] BISD 112-114 (1977) Further factors, which lead to the Panel’s Decision where e.g. that the DISCs were usually mere shells of their parent companies, without real assets and offices, id at 112-14, and a factual issue that the US exports during the fiscal year 1974 was about $ 4.6 billion higher than without the DISC legislation, id. at 102-12

[59] “The Council adopts these reports on the understanding that with respect to these cases, and in general, economic processes (including transactions involving exported goods) located outside the territorial limits of the exporting country need not be subject to taxation by the exporting country and should not be regarded as export activities in terms of Article XVI:4 of the General Agreement. It is further understood that Article XVI:4 requires that arm's-length pricing be observed, i.e., prices for goods in transactions between exporting enterprises and foreign buyers under their or the same control should for tax purposes be the prices which would be charged between independent enterprises acting at arm's length. Furthermore, Article XVI:4 does not prohibit the adoption of measures to avoid double taxation of foreign source income.” BISD 28/ 114

[60] WTO, Report of the Panel, United States - Tax Treatment for Foreign Sales Corporations, WT/DS108/R (Oct. 8, 1999) at 39 [hereinafter: WT/DS108/R]


[62] THE DEFICIT REDUCTION ACT OF 1984, Publ. L. No. 98-369, 98 Stat. 494 (1984)

[63] Originally introduced in Congress in 1982 as the “Export Sales Corporations Act of 1982”, the bill was reintroduced in 1983 as the “Foreign Sales Corporations Act of 1983” and finally became a part of the Tax Reform Act of 1984. Jelsma, supra note 42, at pp. 1334f..

[64] Already on November, 8th 1984 the EC had addressed the United States Trade Representative about their view point. see WTO WT/DS108/R at 39 especially Fn 98

[65] See infra 3.)

[66] WT/DS108/R, supra note 60, and WTO, Report of the Appellate Body, Tax Treatment for Foreign Sales Corporations, WT/DS108/AB/R (Feb. 14,2000) [hereinafter WT/DS108/AB/R]

[67] For Small FSC see generally Richard M. Lipton, The transition from DISC to FSCS, 66-MAR Chi. B. Rec. 276, 286ff (1985) [hereinafter: Lipton ]

[68] See supra at pp. 13,14

[69] I.R.C. § 922(a) (1984), see also Lipton, supra note 67, at 282

[70] 24 countries Lipton, supra note 67 at 282, Candace Carmichael, Foreign Sales Corporations-Subsidies, Sanctions and Trade Wars, 35 Vand. J. Transnat’l L. 151 at note 60 [hereinafter Carmichael ]

[71] I.R.C. § 274 (h)(6)(C) (Supp. 1985)

[72] I.R.C. § 927 (a) (1984)

[73] See supra at pp. 13,14

[74] I.R.C. § 927 (a) (1984)

[75] WT/DS108/R, supra note 60, at

[76] Lipton, supra note 67, at 282

[77] Treas. Reg. § 1.922-1T(g), T.D.7993 (1985)-4 I.R.B. 16 – There are two sets of FSC secondary legislation published by the US Federal Register on December, 12 1984. Treas. Reg. 1.922 illustrates the “foreign presence requirement”. These regulations were not part of the WTO decisions, because the EC alleged, that the primary legislation violated WTO-Agreements. (WTO WT/DS108/R at 39) Therefore I will also outline only those requirements set forth in the primary legislation.

[78] I.R.C. § 924(c) (1984), see also Treas. Reg. § 1.924(c)-1T(b), T.D. 7994, 1985-4 I.R.B. 23.

[79] I.R.C. § 924(d) (1984), see also Treas. Reg. § 1.924(d)-1T(c), T.D. 7994, 1985-4 I.R.B. 25.

[80] Lipton, supra note 67, at 284


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Titel: The Extraterritorial Income Exclusion Act could be expansive Bananas