THE WORLD TRADE Organization (WTO) ruled Monday that a tax break long enjoyed by Microsoft, Boeing, and other corporations is really a subsidy giving American multinationals an unfair advantage over foreign competitors. If Congress doesn't find a way to fix the law quickly, the U.S. could face up to $4 billion in penalties from the European Union alone.
The decision by a WTO appeals panel runs 65 pages, with 358 more of backup material, but the content can be reduced to one simple sentence: A subsidy by any other name is still a subsidy.
Back in March 2000, an earlier WTO panel ruled that so-called "foreign sales corporations"—offshore subsidiaries of multinationals—were nothing but a sneaky way of letting U.S. taxpayers cover part of the costs of U.S. companies doing international business.
Foreign sales corporations, or FSCs, worked by allowing Boeing, say, to let a daughter firm based outside the U.S. take care of selling planes overseas. Since these FSCs were usually located on a Caribbean island with conveniently low tax rates, the corporations avoided paying the IRS its due. The American firms' competitors say the U.S. government created this tax loophole to allow favored corporations to keep more of their cash.
In November, more than six months after the WTO gave FSCs the boot, Congress passed a bill eliminating them but creating in their place something called "Extraterritorial Income Exclusion." This week, the WTO panel said, sorry, still waddles, still quacks. Most U.S. companies' foreign earnings are taxable: Arbitrarily excluding certain income—"forgoing government revenue that is otherwise due" in WTO jargon—is just as much a "financial contribution" to a company as handing it a bundle of bills in a brown paper bag.
The U.S. can, and will, appeal, but with all the arguments on both sides chewed to rags, there's little reason to expect the WTO to change its ruling—or the EU to turn down the heat. So, given the pro-business and anti-multilateral bias of the Bush administration, the prospect for 2002 is full-scale trade war between the U.S. and Europe.
Isn't globalization fun?