BRUSSELS (Reuters) - The European Union and the United States moved closer to an explosive trade row on Friday when the EU said U.S. proposals to overhaul a multi-billion- dollar tax break scheme for exporters broke global trade rules.
The EU's rejection of proposals going through the U.S. Congress raises the prospect Brussels could seek World Trade Organization (WTO) permission later this year to impose sanctions on U.S. exports that could run to billions of dollars.
EU Trade Commissioner Pascal Lamy told Deputy U.S. Treasury Secretary Stuart Eizenstat in a letter on Thursday the proposed changes to the Foreign Sales Corporation (FSC) scheme ``fail to render it compatible with international trade rules.''
The WTO ruled earlier this year, on a case filed by the Europeans, that the FSC scheme was an illegal export subsidy. It gave the United States until October 1 to change it.
The existing scheme covers hundreds of billions of dollars of exports and provides U.S. companies, including many leading multinationals such as Boeing and Microsoft, with up to $4 billion a year in tax breaks.
The EU said Lamy had given Eizenstat guidelines on how to solve the dispute and stressed it wanted to keep the door open for a ``mutually agreed solution compatible with the WTO.''
If the United States presses ahead with the current proposals, EU sources said the EU could return to the WTO after October 1 to seek a ruling against the reformed scheme.
If the WTO agreed with Brussels, the EU could then seek permission to impose trade sanctions on U.S. goods potentially totaling billions of dollars.
That could spark a damaging confrontation between the world's leading trade powers around the time that Americans go to the polls to elect a new president in November.
TRADE WAR WARNING
The sanctions that could potentially be imposed dwarf the $308 million in sanctions on EU goods imposed by Washington last year after winning WTO cases against the EU's banana import policies and its ban on the import of hormone-treated beef.
Eizenstat said in July that the U.S. reform plan, which would exempt some corporate income generated abroad from U.S. taxation, was consistent with WTO rules. He urged the EU then to accept Washington's approach, warning that a ``major trade war'' could break out if the stalemate persisted.
The EU said the main difference between the new U.S. proposals and the scheme slammed by the WTO in February was the removal of a requirement to create a ``paper'' company in a tax haven in order to benefit from the tax break.
``However, the proposed FSC regime continues to be export contingent, in clear violation of WTO rules,'' the EU's executive Commission said in a statement.
``The only way for a U.S.-based manufacturer to benefit from the new regime is by exporting. In addition, the new proposals maintain the obligation to use more than 50 percent of U.S. inputs in order to benefit from the tax break,'' it added.
The U.S. proposal also included some ``transitional'' provisions that extended the application of the FSC well beyond the WTO's October 1 deadline for it to be withdrawn, the Commission said, adding that this was ``a clear violation of the U.S. international obligations.''
``As long as the U.S. continues to provide a preferential treatment to their exports, any FSC replacement system would remain incompatible with the WTO,'' it added.:
