NCPA - National Center for Policy Analysis

Recent WTO Decision Invades Tax Territory

January 18, 2002

The World Trade Organization is coming under fire for its $4 billion ruling in favor of Europe's objection to a U.S. law that gives a tax break to exporters who operate through offshore facilities. Critics of the ruling say it has nothing to do with trade -- but it has everything to do with allowing Europe to protect its own high-tax policies, especially the value-added taxes (VAT) that support Europe's welfare states.

  • The U.S. offshore tax policy is designed to encourage exports in much the same way Europe promotes exports through loopholes in its VAT, the Americans argue.
  • With VAT rates as high as 25 percent on every level of production, a VAT hurts the global competitiveness of European companies.
  • So European countries let companies get a rebate on their VAT levies for exports -- which Americans returning from Europe are familiar with as a rebate of the taxes they paid on European purchases.
  • The Europeans' rebate and the Americans' offshore subsidy work out to be the same thing -- a means to enhance exports.

But critics see the issue going far beyond this particular dispute. Once tax policy is on the table, there's no end to what the WTO might meddle in, they warn.

And that may be what some Europeans -- saddled with high-tax, anti-competitive regimes -- want: to use a global bureaucracy to force Britain, the U.S. and other lower-tax countries to become just as uncompetitive.

Source: Editorial, "Pandora's Trade War," Wall Street Journal, January 17, 2002.

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