| Abstract: | The widely‐followed ruling by the WTO's Dispute Settlement Body against the United States concerning the latter's FSC/ETI scheme, which led to the largest retaliation award ever authorised in a dispute at the WTO, confirmed (if there were ever any doubt) that, generally speaking, direct taxes, like indirect taxes (including tariffs), are subject to the multilateral rules of the WTO, notwithstanding efforts by tax authorities to secure specific exemptions for certain direct tax measures in these agreements. This ruling reconfirmed the traditional distinction under international trade rules between direct and indirect taxes, particularly with respect to how such taxes should be treated under the subsidy and border tax adjustment rules of the WTO. It prompted the US Congress finally to pass legislation in late 2004 to repeal the FSC/ETI scheme as part of a larger overhaul of the US corporate tax system. The most recent disputes between the United States and the European Communities over assistance to large civil aircraft (allegedly amounting in each case to even more than the FSC/ETI) also encompass direct tax measures. It would not be surprising if other WTO‐inconsistent direct tax measures were identified in the future, leading to further disputes among WTO Members. Multilateral WTO rules, which are agreed by consensus, can therefore be expected to continue to be an important factor in determining how Members shape their tax policies, as they will undoubtedly want to avoid having their tax policies successfully challenged in the WTO. |
