EU to Repeal Sanctions on U.S. Dairy Exports

The European Union cancelled its plans to reintroduce sanctions on hundreds of U.S. exports, including dairy products, when the United States agreed to repeal tax breaks ruled illegal by the World Trade Organization (WTO). The sanctions, which were scheduled to go into effect May 16, would have targeted milk powders, yogurt, whey, various types of cheese and ice cream.

Last week, members of the U.S. Senate and U.S. House of Representatives approved H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005, which included a provision to repeal the offending tax breaks.

Appeased by the congressional action, the EU agreed to withdraw its plan for sanctions. According to a European Commission press release, "The EU, which had been authorized by the WTO to enforce retaliatory measures if the tax benefits were not removed, will now withdraw the reintroduction of sanctions foreseen for May 16."

"We are pleased that Congress took steps to fully comply with the World Trade Organization's ruling on the tax treatment for foreign sales corporations," said Clay Hough, IDFA senior vice president and general counsel.

The EU has argued against the U.S. tax breaks since 1999, when it brought a case to WTO regarding export credits allowed in the Foreign Sales Corporation Act (FSC). When WTO ruled against FSC, the United States enacted the Extraterritorial Income Exclusion Act (known as ETI), which the EU successfully argued against; the WTO ruled that the ETI also was not in compliance.

In 2003, Congress repealed nearly all of the tax credits over a two-year transition period that would end in 2006, but grandfathered the remaining export credits included in binding contracts made before September 17, 2003. Two years later, in yet another challenge brought by the EU, WTO ruled that both the two-year transition period and the grandfathered credits were not in compliance with its earlier decision. The provision in the tax bill approved last week will not alter the two-year transition period but will repeal the exclusions for binding contracts.

For more information, contact Helen Medina at hmedina@idfa.org or 202-220-3507.

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Posted May 15, 2006