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| The EU are threatening customs duties of up to 100 p.c. on certain imports from the USA. Many of the items potentially targeted are used by Irish businesses. This could affect Irish economic performance and employment. |
Once upon a time the United States had a tax incentive to assist US companies to export. As tax incentives go, it was in the tuppence ha’penny class. It shaved a few percentage points off the effective rate of tax on the profits from exports. Compared to Ireland’s exports sales relief (no tax whatever on the exports) America didn’t seem to be trying very hard.
The original American scheme called a DISC was found to contravene international trade rules many decades ago and was replaced with something called an FSC (foreign sales corporation). This was a mechanism whereby an American exporting company could book part of its profits in an offshore company and pay a reduced rate of tax in the States on those profits.
In due course that replacement regime was also found to breach World Trade Organisation rules.
Since the vast majority of people in the whole world never heard of either American tax incentive, it might be supposed that the discovery that they were, in international trade terms, a little naughty, would not worry anyone too much. Unfortunately the EU and the USA had a number of other trade disputes, notably concerning US fruit companies having equal access to the EU compared to that provided by former UK and French colonial possessions for bananas. Most recently President Bush’s unilaterally adopted protective measures for the US steel industry caused a flurry.
Partly because of these background trade disputes, the row over the FSC has become quite serious.
The USA has been dithering about the repeal of the FSC regime and finding some legal replacement for it. The EU have obtained permission from the World Trade Organisation to accordingly levy customs duties on USA imports, to the value of $4bn per annum. An initial list of products on which such duties could be levied has been published. The list would total $15bn per annum, so the process of paring it down to the permitted $4bn level is now in progress.
On both sides of the Atlantic this process of identifying the products to be penalised has serious significance for business. American exporters are naturally concerned that their products will be wiped off the European market if they face 100 p.c. customs duty when entering the EU. European users of those products (in many instances subsidiaries of the US producers) are facing a similar unacceptable hike in the cost of the raw materials.
In some cases at least there will be no alternative source of supply, and certainly not an acceptable one where the Irish company is a subsidiary of the US company from whom they normally get component parts etc. The choice of products to be penalised is therefore of critical interest not merely to American exporters and to importers in the EU in general, but in particular for Ireland.
Ireland has one of the most open economies in the EU, importing and exporting approximately 95 p.c. of its GDP. Customs duties have the potential to hurt Ireland proportionately more than any other EU State, since no other EU State is exposed to importing and exporting to the same degree, in relation to the size of its economy.
If the costs of software and manufacturing companies in Ireland are increased by reason of these customs duties, these companies will be able to sell fewer goods, and there could be a consequent hit on Irish employment. There would also be a hit on Irish taxation revenues from those companies.
A process of consultation is now going on in an effort to select the appropriate goods which are to be the subject matter of the duties. Affected companies may make representations before November 12 to the Department of Enterprise, Trade and Employment on their situation and the likely impact on them if particular goods are selected for Customs duties. It is difficult to overstate the importance to many companies of engaging in this consultative process as it represents their best effort to avoid being penalised should this trade war continue.
In the United States lobbying is still going on with exporters likely to be affected by the customs duty demanding that Congress resolve the FSC problem, and companies currently benefiting from the FSC arrangement (eg aircraft manufacturers) pointing out the benefits to them of the retention of the regime or of something similar.
The dispute has been going on now for some years. ‘Wolf’ has been cried on a number of occasions previously, as regards the potential for a trade war. However, the threat now looks very real to companies who cannot afford to take the risk that all might be well on the day. All might not be well for them if they don’t lobby strenuously to ensure that their imports are excluded from the customs duties. |
Carol Lynch is Head of KPMG’s Trade & Customs Practice.
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| Article appeared in the October 2002 issue.
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