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The Wall Street Journal

April 11, 2002

Editorial Page:
Offshore Belgium

My, my. It seems Belgium's been caught being a bad European. You see, even as the European Commission was protesting at the WTO a U.S. export subsidy that it claims has cost the EU $4 billion a year, Belgium was rewriting its tax laws to benefit from the same U.S. "subsidy."

The subsidy in question is not a subsidy really, but a tax break, the Foreign Sales Corporation Act (now rechristened the ETI). The ETI provides tax concessions under some circumstances for profits earned on products exported by designated offshore subsidiaries of U.S. corporations. The WTO ruled earlier this year that this violated its strictures against export subsidies. It is in the process of evaluating the EU's claim that damages from the tax break amount to $4 billion a year, which would entitle the EU to retaliate for a like amount.

In light of this pending decision, therefore, it must be awkward for the Commission to admit, as it did Tuesday, that Belgium has actually been benefiting from the U.S. law. Not that the Commission's happy about it; it announced Tuesday it was investigating the Belgian tax law as an illegal subsidy in its own right.

If all this is starting to sound confusing, well, that's because it is. But here's the gist: In order to take advantage of the original U.S. law, American exporters would create offshore subsidiaries. Normally, these were set up in tax havens -- no point saving on U.S. taxes if you pay it back in France, say. Belgium decided it wanted a piece of that action, so it created a tax break for U.S. "foreign sales corporations" sited in Belgium to take advantage of the FSC. In this way, Belgium hoped that some American companies would set up shop in Brussels instead of the Cayman Islands or Bermuda.

Whether what Belgium did was illegal under EU rules or not, it does call into question the Commission's claim that the EU was harmed by the U.S. "subsidy." At least one EU country seems to have found a way to turn the "subsidy" to its advantage.

Part of what embarrasses the EU here is that cutting taxes to attract foreign investment inevitably puts a spotlight on the awkward truth that Europe's high taxes limit its attractiveness for foreign investment. The EU reacted similarly when Ireland cut corporate taxes on technology companies in 1990s.

To its credit, Ireland responded by lowering all its corporate taxes, giving the Celtic Tiger more ability to roar. The EU continues to grumble about Ireland's 12.5% corporate tax rate as an example of "fiscal dumping," and now some East European countries, such as Hungary, are coming under pressure not to follow the Irish example as they prepare for EU membership.

What really rankles the EU, of course, is that low-tax countries encourage capital flight from the big taxers that dominate the union. High taxes also divert investment dollars away from Europe's socialist paradises. But as the European Commission's host country has demonstrated, high taxes reward a search for loopholes. Belgium may be an embarrassment to EU mandarins, but it is only doing what comes naturally.

 

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