united states – tax treatment for

"foreign sales corporations"

Request for the Establishment of a Panel  by the European Communities

            The following communication, dated 1 July 1998, from the Permanent Delegation of the European Commission to the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

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            I have the honour to request the establishment of a Panel pursuant to Article 6 of the Understanding on Rules and Procedures Governing the Settlement of Disputes, Article 4 of the Agreement on Subsidies and Countervailing Measures (ASCM), Article 19 of the Agreement on Agriculture (AA) and Article XXIII of the General Agreement on Tariffs and Trade (GATT 1994) with respect to Sections 921-927 of the Internal Revenue Code and related measures establishing special tax treatment for "Foreign Sales Corporations" (FSC).

            The exemptions from United States direct (income) taxes of a portion of FSC income related to exports and of dividends distributed to United States parent companies constitute export subsidies which are prohibited by Article 3.1(a) of the ASCM.  The requirement that the tax exemption under the FSC scheme is limited to receipts from the export of products having at least 50 per cent United States origin by market value means that the subsidy is contingent upon the use of domestic over imported goods and is, therefore, prohibited by Article 3.1(b) of the ASCM.