The Patriot Employers Act under WTO Rules

There has been a lot of criticism of the Patriot Employers Act proposed by Barack Obama and several others (see, e.g., here).  A few days ago, I was asked in a comment whether the Act would be consistent with the SCM Agreement.  My short answer was that there was no clear cut violation.  But that assessment was based merely on a summary of the Act, so I thought it would be worth tracking down the actual text.

The key portions for trade purposes seem to be the following conditions (there are others) for receiving a tax credit of 1% of taxable income: 

• the company must "maintain[] its headquarters in the United States if the taxpayer has ever been headquartered in the United States"
• and if the company employs at least 50 employees on average during the taxable year, it must "maintain[] or increase[] the number of full-time workers in the United States relative to the number of full-time workers outside of the United States"

So do these conditions violate WTO rules?  Very quickly, the SCM Agreement is an obvious place to start.  It's clear that there is a subsidy.  It's also pretty clear that this is not an export subsidy under Article 3.1(a).  Could it be a subsidy that is contingent on the use of domestic over imported goods under Article 3.1(b)?  There's an argument that providing an incentive to maintain headquarters and high U.S. employment levels leads indirectly to the use of domestic goods, but it's kind of a stretch.  Because the prohibited subsidies claims would likely fail, that puts the subsidy in the "actionable" category, and thus we need to see if it is "specific."  My sense is that it would be found specific under Article 2.1(a) and that 2.1(b) would not get it off the hook (in particular because of footnote 2).  However, even if specificity is demonstrated, there is the difficult matter of proving "adverse effects."  That won't be easy.

What about the GATT?  The same sorts of arguments can be raised under GATT Article III:4 as would be made in the context of subsidies contingent on the use of domestic over imported goods.  I think this would be a hard claim to make.

Finally, a wild card: the Agriculture Agreement.  If these subsidies were used by companies involved in agriculture, any subsidies paid out in excess of commitments might violate WTO rules.

That was a pretty quick and rough analysis!  If anyone has any criticisms or additional insights, feel free to offer them.

(Also, let me offer the usual disclaimer that none of this constitutes legal advice!)

Here's the full text of the Act:

SECTION 1. SHORT TITLE.

This Act may be cited as the `Patriot Employers Act'.

SEC. 2. REDUCED TAXES FOR PATRIOT EMPLOYERS.

(a) In General- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

`SEC. 45O. REDUCTION IN TAX OF PATRIOT EMPLOYERS.

`(a) In General- In the case of any taxable year with respect to which a taxpayer is certified by the Secretary as a Patriot employer, the Patriot employer credit determined under this section for purposes of section 38 shall be equal to 1 percent of the taxable income of the taxpayer which is properly allocable to all trades or businesses with respect to which the taxpayer is certified as a Patriot employer for the taxable year.

`(b) Patriot Employer- For purposes of subsection (a), the term `Patriot employer' means, with respect to any taxable year, any taxpayer which--

`(1) maintains its headquarters in the United States if the taxpayer has ever been headquartered in the United States,

`(2) pays at least 60 percent of each employee's health care premiums,

`(3) has in effect, and operates in accordance with, a policy requiring neutrality in employee organizing drives,

`(4) if such taxpayer employs at least 50 employees on average during the taxable year--

`(A) maintains or increases the number of full-time workers in the United States relative to the number of full-time workers outside of the United States,

`(B) compensates each employee of the taxpayer at an hourly rate (or equivalent thereof) not less than an amount equal to the Federal poverty level for a family of three for the calendar year in which the taxable year begins divided by 2,080,

`(C) provides either--

`(i) a defined contribution plan which for any plan year--

`(I) requires the employer to make nonelective contributions of at least 5 percent of compensation for each employee who is not a highly compensated employee, or

`(II) requires the employer to make matching contributions of 100 percent of the elective contributions of each employee who is not a highly compensated employee to the extent such contributions do not exceed the percentage specified by the plan (not less than 5 percent) of the employee's compensation, or

`(ii) a defined benefit plan which for any plan year requires the employer to make contributions on behalf of each employee who is not a highly compensated employee in an amount which will provide an accrued benefit under the plan for the plan year which is not less than 5 percent of the employee's compensation, and

`(D) provides full differential salary and insurance benefits for all National Guard and Reserve employees who are called for active duty, and

`(5) if such taxpayer employs less than 50 employees on average during the taxable year, either--

`(A) compensates each employee of the taxpayer at an hourly rate (or equivalent thereof) not less than an amount equal to the Federal poverty level for a family of 3 for the calendar year in which the taxable year begins divided by 2,080, or

`(B) provides either--

`(i) a defined contribution plan which for any plan year--

`(I) requires the employer to make nonelective contributions of at least 5 percent of compensation for each employee who is not a highly compensated employee, or

`(II) requires the employer to make matching contributions of 100 percent of the elective contributions of each employee who is not a highly compensated employee to the extent such contributions do not exceed the percentage specified by the plan (not less than 5 percent) of the employee's compensation, or

`(ii) a defined benefit plan which for any plan year requires the employer to make contributions on behalf of each employee who is not a highly compensated employee in an amount which will provide an accrued benefit under the plan for the plan year which is not less than 5 percent of the employee's compensation.'.

(b) Allowance as General Business Credit- Section 38(b) of the Internal Revenue Code or 1986 is amended by striking `plus' at the end of paragraph (30), by striking the period at the end of paragraph (31) and inserting `, plus', and by adding at the end the following:

`(32) the Patriot employer credit determined under section 45O.'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

Comments

[Reynaldo Vasquez]

De facto discrimination as this legislation is mainly applicable to u.s. firms only?

[anon]

Simon --

Interesting as always. This sounds like a good exam question.

I tend to think that footnote 2 favours a finding that this particular subsidy is not actionable. It seems like the conditions in the act are "criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise."

Setting aside the circularity of the reference in footnote 2 to "favouring certain enterprises over others" (that is, after all, part of the question that this standard is trying to answer), it seems like the criteria set forth in the proposed legislation are "economic in nature" and apply to companies in all industries on a "horizontal" basis. Moreover, the companies that would be eligible for this credit are unlikely to constitute "certain enterprises", as they are likely to be spread across industries that are substantially unrelated to each other. (In this regard, see the formulation of the "certain enterprises" issue in US -- Cotton and US -- Lumber CVD.)

[Simon Lester]

Reynaldo,

There is definitely discrimination, but is it against products? Indirectly, maybe, but the direct impact is only on companies or workers. Trying to tie the discrimination to goods is the challenging part of a GATT/SCM 3.1(b) claim.

Anon,

The part of footnote 2 that I thought might exclude 2.1(b) from applying was the "neutral" requirement. Given the nationality-based conditions noted above, can the subsidy really be said to be neutral?

[Anon99]

Claims based on the WTO agreements relating to trade in goods (SCM, GATT, AG) seem like a bit of a stretch. Claims based on the GATS (and, outside of the WTO context, investment treaties) seem like less of a stretch. More specifically, there may be de facto discrimination under applicable GATS (and investment treaty) national treatment obligations, insofar as the "headquarters" requirement would by definition exclude all foreign service suppliers (and all foreign investors/investments) from the more favourable tax treatment.

[Anuradha]

I agree with 'Anon99', and would look at this more as a GATS issue. There is no clear prohibition of subsidies for services yet: (Art.XV GATS). GATS schedules of several members include limitations on national treatment that apply horizontally to services subsidies. I’m not sure about the US though, and couldn’t open their schedule of commitments from the WTO site.

The GATS working party on subsidies seems to have made very little progress in developing disciplines on subsidies.

[Simon Lester]

Following up on Anuradha's point about GATS Article XV, note that para. 2 of that article states:

"Any Member which considers that it is adversely affected by a subsidy of another Member may request consultations with that Member on such matters. Such requests shall be accorded sympathetic consideration."

Could this provision be taken to mean that the only remedy available in relation to subsidies on services is consultations, with the normal, full panel process not allowed?

[Anuradha]

Simon- I would think so; unless its a national treatment violation that has not been scheduled.