UK: World Trade Organisation Rules Against US Foreign Sales Corporations

Last Updated: 14 March 2000

On 24 February the Appellate Body of the World Trade Organisation (WTO) affirmed the earlier finding of the Dispute Settlement Panel on a complaint made by the European Union that the US Foreign Sales Corporation (FSC) régime constitutes an illegal export subsidy under the Agreement on Subsidies and Countervailing Measures and the Agreement on Agriculture. It also recommended that the WTO require the US to comply with its obligations under those agreements by 1 October 2000.

If the US fails to act by this deadline the EU could seek to impose countervailing sanctions on the US; but whether it would in fact do so is uncertain.

Under the current régime an FSC set up by a US corporation obtains the benefit of a partial exemption from US tax on income from exports. The FSC provisions were enacted in 1984 in response to a similar series of actions under the General Agreement on Tariffs and Trade (GATT) that challenged the legality of the predecessors to FSCs, Domestic International Sales Corporations (DISCs).

Now it seems that the US may once again be faced with the prospect of creating a new régime for the taxation of exports. It may well attempt to negotiate the terms of any replacement régime with the EU, but a number of other outstanding trade disputes between the US and the EU may add further tension to negotiations.

Double tax relief - will the Budget help the UK's international competitiveness?

Relief from double taxation ensures that the profits of overseas subsidiaries, taxed once in the country in which profits are generated, are not also taxed a second time in the UK; eg, when dividends are paid back to the UK parent company.

On 17 March 1998 the Chancellor announced that the Inland Revenue would be consulting business on opportunities to modernise the system of double tax relief for companies. Following a period of preliminary discussions, a consultative paper was published on 12 March 1999, with comments invited by 30 September 1999.

UK multinationals are now expecting two years' worth of consultation to bear fruit in the forthcoming Budget, resulting in a simplification of the way in which UK companies obtain relief for foreign taxes.

The Inland Revenue has indicated that it does not favour an exemption from UK tax for overseas dividends - a system used by many EU countries such as Germany. It is likely therefore that the existing system, giving credit for withholding taxes and for 'underlying tax' on the profits of the overseas company, will be maintained but modified to remove some of the traps and pitfalls which can currently prevent companies gaining the expected benefit.

Joy Svasti-Salee, partner in charge of KPMG's International Tax Group, said: 'It is also likely that the Inland Revenue will want to tighten up some areas where it perceives the current system to be open to abuse. If past experience is anything to go by, multinationals will need to beware that they do not fall foul of detailed provisions which can easily penalise legitimate transactions.

As smaller companies become more involved in international trade the pressure is on the Inland Revenue to provide a simple method for obtaining relief from double taxation for smaller companies, so that they can have the relief without the need to maintain complex group structures. However the Inland Revenue has indicated that a price may have to be paid for any such simplification. This may take the form of the disallowance of losses incurred in overseas branches, thus increasing the costs of overseas investment for entrepreneurial companies. We would view such a measure as a retrograde step.'

Multinationals will also be expecting to see measures to improve the operation of the single market from a corporation tax perspective. Some significant changes are expected to deal with the ramifications of the landmark ICI v Colmer case (which ruled that the UK law on group relief discriminated against non-UK companies) and with other European Court of Justice rulings - the long reach of EU law may well be seen throughout the Budget. The danger for the Government is that if it does not go far enough it will place UK companies at a competitive disadvantage in the EU and risk an avalanche of litigation.

David Evans, a Director in KPMG's International Tax Group, said: 'One change we do expect as a result of the ICI case concerns the transfer of losses between members of a group of companies. Legislation currently covers the situation when a group has a UK parent but not when the parent is an EU (non-UK) company. The Inland Revenue has already announced that the relief will be extended to cover this situation. However, EU banks which operate through branches in the UK are at a disadvantage because the relief does not extend to the transfer of losses between a branch and a subsidiary. The Inland Revenue is under great pressure in this area and may face litigation if it does not change its view.

Another area concerns the capital gains review for companies. We consider that current UK law, which can result in tax charges on transfers of assets within a UK/EU group, is contrary to EU law. We hope that legislation is introduced in this area to pre-empt litigation and ensure that UK companies can benefit more from the single market and not be at a competitive disadvantage.'

Feedback on this newsletter

We are always interested in any views that readers have about Weekly Tax Briefing. If you have any comments on the format or content, or if there are features which you find particularly useful, please let us know, by fax to ‘Weekly Tax Briefing’ on 0171 311 3882.

Press releases

28 February 2000 - Inland Revenue - Tax treatment of compensation for mis-sold Free-Standing Additional Voluntary Contribution Schemes (FSAVCS)

Lump sum compensation for mis-sold FSAVCS under the current review ordered by the Financial Services Authority and the Personal Investment Authority will be exempt from tax under an extra-statutory concession.

29 February 2000 - Customs & Excise - Advertising ban on overseas bookmakers

The Court of Appeal has held in the Victor Chandler case that advertising in the UK of offshore betting, using electronic media such as teletext, is illegal.

29 February 2000 - Inland Revenue - Double contributions conventions: Japan

Under a new Double Contributions Convention (not yet in force) individuals going to work in Japan from the UK, or coming to the UK from Japan, will only be liable to social security contributions in their home country.

29 February 2000 - Inland Revenue - Inland Revenue making tax law clearer

The Tax Law Rewrite Project has published its ninth exposure draft, dealing with capital allowances. For further details, see last week's Weekly Tax Briefing.

3 March 2000 - Inland Revenue - New practitioners' booklets published

New editions of IR1 'Extra-Statutory Concessions' and IR131 'Statements of Practice' have been issued. Certain concessions relating to loan and money societies and to holiday clubs and thrift funds are being withdrawn from April 2001.

The next Weekly Tax Briefing will be issued on 17 March 2000

For further information about any of the items mentioned, please get in touch with your usual KPMG Tax Advisers contact.

This Briefing is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax or determining investment strategy in specific circumstances. In such instances separate advice should be taken.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.