The Wall Street Journal / By JOHN D. MCKINNON / Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- At a time when U.S. officials want to present a unified front to defend an American tax break for exports, big businesses have formed separate camps.
Some business groups worry the different groups could weaken their response to last month's World Trade Organization ruling that the $4.1 billion-a-year U.S. tax program used by about 6,000 companies amounts to an illegal subsidy. The WTO, which sided with the European Union, gave the U.S. until Oct. 1 to fix its system or face sanctions.
The program lets companies steer overseas sales into offshore subsidiaries known as foreign-sales corporations that receive substantial tax breaks. The EU isn't the only one that has attacked the program. Critics include Republican Sen. John McCain of Arizona, who Thursday put on hold his presidential campaign.
Signs of Friction
The first signs of possible friction over a solution emerged last week, when former congressional aide Kenneth Kies, who represents a coalition of about 10 big businesses, including General Electric Co., Cisco Systems Inc. and Caterpillar Inc., attended a meeting between House officials and the Clinton administration. Several representatives of other business coalitions -- who weren't invited -- expressed apprehension about the meeting this week.
"I am a little concerned at the way the meeting was conducted," said Fred Murray, vice president for tax policy at the National Foreign Trade Council, a trade group that now leads the biggest coalition seeking a solution to the WTO ruling. "I'm surprised that he [Mr. Kies] was in the meeting."
Mr. Kies has unusually good access to Rep. Bill Archer, chairman of the Ways and Means Committee, with whom he worked closely in Congress. Some business representatives believe the committee invited Mr. Kies to join in the meeting.
Mr. Kies wouldn't discuss the meeting last week nor would U.S. Treasury Department officials who attended. A spokesman for Mr. Archer also declined to comment on the meeting, but said the Texas Republican "is considering holding hearings at an appropriate time" on foreign-sales corporations. "The chairman is working with members of the committee on both sides of the aisle in close coordination with the White House to explore all options available and is proceeding very carefully and cautiously," he added.
Other business representatives noted they have had meetings with senior officials over foreign-sales corporations, too, but not in such a sensitive setting, where administration and congressional officials together discussed policy.
Varying Approaches Emerge
Already, one lobbyist working on the issue said he believes different procedural approaches are emerging, with Mr. Kies's group suggesting a quick legislative solution and others advocating a negotiated settlement -- a solution the Clinton administration also favors.
Although clear legislative strategies haven't yet emerged, the potential for conflict -- particularly between big corporations and smaller businesses -- is significant. One way to preserve the foreign-sales corporation benefit might be to expand a part of the tax code that allows companies to defer taxes on some overseas income.
But if the provision were expanded to benefit foreign-sales corporation exporters, they would likely have to leave their money abroad in order to get the tax benefit. Most of the users of foreign-sales corporations, however, are smaller companies. "They need to get their money back" into the U.S., said Ernest Christian, a Washington tax lawyer.
Mr. Kies said he is hopeful President Clinton can persuade the EU to back off. But he warned the stakes are high and a legislative solution might be needed. "If you take away incentive to export," he said, "the alternative is to move manufacturing out of the U.S."
A senior U.S. trade official said it is too early to tell whether the different lobbying efforts will lead to fragmentation. But "when you implement a strategy, you don't want raging divisions that would send conflicting messages," the official said.
Major Trade Issue
Many business representatives regard the foreign-sales corporations as a major trade issue this year. But finding a new policy that will satisfy the WTO and also preserve the benefits that U.S. companies now enjoy is likely to be tricky, partly because of the number of different business interests.
At least three coalitions have emerged so far. Mr. Murray's National Foreign Trade Council is the largest with about 60 businesses, mostly U.S. companies. The group also includes about 22 other trade associations. Some observers believe its size will make it difficult to find a solution that is acceptable to all.
"Our objective is a solution that is as broad as possible, that creates as few winners and losers as possible," Mr. Murray said.
Mr. Kies's group includes about 10 of the largest companies that use the foreign-sales corporation law now. A third small group includes a mix of businesses.
Mr. Kies added he doesn't believe the different coalitions have different interests. "I think they have different talent," he said. "We don't have a mass coalition like NFTC. With 30 people in a room you don't typically reach agreement on anything. We're taking a more laserlike approach. [But] everyone has the same objective -- how to preserve the benefits of the current system."
Write to John D. McKinnon at john.mckinnon@wsj.com1
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