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US software exports illegally subsidised, rules WTO

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The World Trade Organisation has ruled against a US tax scheme designed to boost exports, and according to Brussels, US software companies have been prime beneficiaries of what the WTO now says is an illegal subsidy. Do we hear the M word? Well yes, we do. Noises coming out of the EU's Directorate General for Trade (DGT)indicate that major winners from the scheme have been Boeing and, yes, Microsoft. The total subsidies (for the whole of the scheme, not just Microsoft) are estimated by DGT at S2.5 billion. It works like this. The US allows US companies to set up Foreign Sales Corporations (FSCs). These have to be incorporated in one of a clutch of US offshore locations (e.g. Virgin Islands, Samoa or Guam) or in another qualifying country. There's quite a long list of these, but the DGT says Barbados is the second most common location (after Virgin Islands), and the list also includes Ireland, which houses Microsoft's European Operations Centre and is the hub of the company's European software distribution operations. The FSC scheme reduces tax paid on export income. The EU argued, and a WTO disputes panel agreed last week, that this constituted an illegal export subsidy. New trade commissioner Pascal Lamy welcomed the ruling, and commented that the subsidy "has created an important distortion of international trade by granting an unfair advantage to US products in third markets, and has expanded over the last decade to more sectors, including computer software and agricultural products." (Our italics) Unsurprisingly, The Register hasn't had a vast amount of success in tracking down US software company subsidiaries with FSCs established in nice places that are tax-efficient. Nor does the DGT specify precisely how much the software business benefits from the scheme. But we did find a Cirrus Logic sub in Barbados, dealing in "purchasing and billing functions." Nice. Any other bids, readers? ®

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