San Diego International Law Journal


Brenda O'Leary

Library of Congress Authority File


Document Type



Most major trading nations have features in their income tax laws that favor exports. The United States has adopted such a scheme of preferential treatment of foreign income in order to provide incentives for the export of U.S.-produced goods. However, such devices that reduce income taxes for U.S. exporters have been openly criticized by the international community as illegal export subsidies which are incompatible with the General Agreement on Tariffs and Trade (GATT). In fact, the U.S. enacted its current Foreign Sales Corporation (FSC) legislation in the Tax Reform Act of 1984 to conform the Domestic International Sales Corporation (DISC) (the predecessor to the FSC) to the GATT understanding of export tax incentives. The latest pronouncement on this issue came on October 8, 1999, when the World Trade Organization (WTO) issued a report condemning the U.S. FSC tax regime and calling for its abolition by October 1, 2000. The Dispute Settlement Panel's investigation originated with a complaint by the European Communities (EC) that the U.S. statutory scheme violated provisions of WTO agreements, including GATT, the Agreement on Subsidies and Countervailing Measures (SCM Agreement), and the Agreement on Agriculture (AA). The Panel's final report backed the EC complaint, and both the United States and the European Communities appealed. However, on February 24, 2000, the Appellate Body upheld the Panel's decision, concluding that the FSC provisions did constitute an illegal export subsidy. Part II of this Comment will discuss the evolution of U.S. FSC legislation as well as the current organizational requirements for FSC status. Part III will analyze the WTO's decision declaring the U.S. FSC provisions incompatible with GATT. Finally, Part IV will address the problems with the current U.S. system as well as the potential options available to the United States in light of the WTO decision.