WTO rejects U.S. appeal on trade tax breaks By Curt Anderson Associated Press
WASHINGTON (AP) -- Billions of dollars in tax breaks for U.S. exports have been ruled an illegal subsidy by the World Trade Organization, but the issue is far from settled.
The United States believes a WTO panel was wrong in siding with the European Union in the dispute, Rita Hayes, U.S. ambassador to the trade group, said today.
``We will seek a solution that ensures that American firms and workers are not disadvantaged relative to their European counterparts,'' Hayes said.
U.S. Trade Representative Charlene Barshefsky confirmed Wednesday that the WTO panel had ruled the tax incentives, known as the Foreign Sales Corporation program, are an illegal subsidy.
``We strongly disagree with the appellate body's ruling,'' Barshefsky said. ``Our view remains that the FSC is completely consistent with U.S.-WTO obligations.''
Treasury Secretary Lawrence Summers said the United States will not abandon the program and will pursue negotiations intended to avoid retaliation from the European Union, which brought the WTO challenge.
Summers, in an interview Wednesday with The Associated Press, said the Clinton administration is ``clear in our commitment to finding a way to maintain the important incentives for U.S. exports that have been provided in the past. I'm sure we'll find a way to do that.''
The Foreign Sales Corporation program enables U.S. makers of computer software, chemicals, machinery and many other products to shield some export income from taxes. The tax breaks for companies such as Microsoft, Boeing and General Motors would be worth more than $15 billion over the next five years, according to congressional estimates.
The European Union puts the five-year price tag at $17.5 billion; the administration estimates $7 billion.
The EU trade commissioner, Pascal Lamy, welcomed the ruling. ``The FSC system and its predecessor have had a major negative effect on international trade to the detriment of European companies,'' he said in a statement from Brussels.
``Of course we think that WTO members should be free to decide on their own tax systems. But each member must do so fairly and in line with the rules,'' Lamy said
Congressional leaders are urging a negotiated deal, particularly because changes in the law stemming from the WTO decision would be tricky, costly and time-consuming. Also, opponents might seize the opportunity in an election year to attack the program as corporate welfare.
``We are concerned that if this matter is not resolved bilaterally ... this is likely to lead to a highly charged tax and trade environment that we are sure all parties would like to avoid,'' lawmakers, including Sen. William Roth, R-Del., and Rep. Bill Archer, R-Texas, said in a recent letter to the administration.
The program was created in 1984 to offset tax rebates European companies get when they sell products outside the EU. It permits U.S. companies to avoid certain income taxes by setting up export subsidiaries on offshore tax havens such as the U.S. Virgin Islands, Barbados and Guam.
The companies that enjoy this tax break fear the WTO decision could lead to another trade war with the Europeans or require a major rewrite of the U.S. tax code that would reduce the benefits.
``We stand to lose tax parity with our trading partners,'' said Steve Elkins, the top tax official at the Chemical Manufacturers Association. ``And we stand to be retaliated against through tariffs against U.S. exports.''
Martin Regalia, economist at the U.S. Chamber of Commerce, said an end to the Foreign Sales Corporation program ``puts our companies at a comparative disadvantage. We don't want to do that.''
The Europeans, on the other hand, contend the program has reached beyond its original limits, particularly in 1997 when it was extended to U.S. computer software-makers such as Microsoft.
It was not clear whether the EU would retaliate through higher tariffs if the United States does not make fundamental changes, and some European companies benefit from the tax breaks through their U.S. subsidiaries.
In the end, the program could become a bargaining chip in other U.S.-EU trade disputes over bananas, beef growth hormones and aerospace products. Some observers also believe the dispute could provide an opening for all of these issues to be resolved.
``We all want to avoid a continuing round of trade disputes,'' Elkins said. ``We are hopeful that the Europeans will realize it.'':
