Microsoft has benefited by what could be several billion dollars from export subsidies on profits that have now been declared illegal by the World Trade Organisation, at the request of the European Union. The US government has allowed Foreign Sales Corporations (FSCs) to benefit from what the EU says amounts to export subsidies not allowed by WTO obligations, which are binding on the US. Sir Leon Brittan, acting European Trade Commissioner, said: "This export subsidy has created a major distortion of international trade by granting a very substantial unfair advantage to US products." The main beneficiaries have been Microsoft and Boeing. The US government describes the FSCs as "a tax incentive for US exports", and allows reduced tax on profits from foreign subsidiaries. Microsoft's financial reports have been notably silent about this dispute and the potential effect on profits, which may prove upsetting to shareholders. More than half of Microsoft's income is from outside the US. Microsoft's hard man in international tax matters is Mike Boyle, who apart from being chairman of the International Tax Committee of TEI, which arranges courses on what is now seen to be an illegal tax evasion scheme, also came to notice in January because of his involvement in the case of Charles Pancerzewski. It was Boyle who had the "resign or be fired" lunch with Pancerzewski after he blew the whistle (under the 1997 Whistleblowers Protection Act) on Microsoft's accounting practices, as a result of which Microsoft showed steadily increasing profits that exceeded Wall Street expectations, because of, er, allegedly illegal practices. Pancerzewski is believed to have received a $4 million settlement after suing Microsoft. Coincidentally, the SEC at last decided to investigate Microsoft's business practices. It's hard to assess the extent to which Microsoft has benefited from this FSC subsidy, but the US has been given until October next year to change its law. It may also appeal when the final adjudication is available in September. The EU complaint is not a tit-for-tat for the US success in enforcing sanctions on $191 million of EU goods as a result of the dispute over banana import rules, because the Microsoft FSC case has been the subject of arbitration since the original complaint in November 1997. Besides, the US is the main complainer to the FTO anyway. Banana pickers in countries where the bananas are owned by American companies get $2 per day for their labour, while in other countries (like the Windward Islands) that mostly produce small bananas, the pickers get $8 per day. In its eagerness to extract its pound of flesh (more about the hormones in it in a moment), the US started a punitive tax on Scottish jumpers before the WTO had formally ruled on the matter, thereby causing itself further problems. It is particularly appropriate that the preliminary decision on FSCs comes in the same week that the Italian tomatoes, Danish ham, German soup and French pate will have 100 per cent punitive duties imposed in the US as a consequence of these countries not importing hormone-treated beef. Parenthetically, we should note that it is now scientifically recognised, if not politically, that the British BSE scare was completely unfounded, the politicians were just naturally bonkers, and that we should all go back to Aberdeen Angus T-bone steaks. The cost to the EU of the US punitive moves on what were essentially development aid and public health issues will be a very small fraction of what the FSC tax rule change will cost the US. But that's not the end of the matter. Microsoft had evidently seen the writing on the wall about the WTO threat to its FSC profits, because for no then-apparent reason, Bill Gates himself gave a speech to the Washington Council on International Trade in February that referred to the need for "fair taxation systems". In his talk, Gates said: "We need to make sure that there are not taxes that discriminate against this type of trade." Of course, from a Microsoft perspective, the EU complaint to the ITO was "discrimination" against Microsoft. At the end of November, there will be a WTO ministerial conference in Seattle. It should come as no surprise that Gates and Philip Condit of Boeing are the co-chairmen, that Gates' father's law firm is the legal advisor, and that Microsoft is providing the media and public relations. That Microsoft gave money for a teacher seminar on trade to raise awareness, and that the WTO now uses Microsoft software is just a minor development. Anybody thinking this all amounts to world domination is, well, right. ®