Associated Press | By Paul Geitner, AP Business Writer | January 14, 2002
BRUSSELS, Belgium -- A World Trade Organization appeals panel ruled Monday against a U.S. law granting multibillion-dollar tax breaks to businesses operating overseas.
The case, brought by the European Union, is by far the largest the United States has ever lost before the WTO.
As the ruling was announced, the EU called on the United States to quickly bring itself into compliance with WTO rules. But the union signaled it would hold off on imposing penalties, which could reach $4 billion a year.
The law at the center of the case allows a company paying U.S. taxes to exclude income that is considered to be "extraterritorial" because it comes from goods or services primarily for sale or use outside the United States.
Thousands of American companies, ranging from Microsoft and Boeing to smaller firms, benefit from the tax break, which was originally created in 1984.
Washington claims that this is a measure to avoid the double taxation of income from foreign sources, but the WTO found it to be a prohibited export subsidy. It had ruled against the law three times already.
Monday's ruling, released by the WTO in Geneva, opens the way for Brussels to impose up to $4 billion of punitive tariffs annually on U.S. imports.
But under an EU-U.S. agreement reached in September 2000, the dispute now will go back to a WTO arbitrator to decide on the exact amount of possible countermeasures.
The arbitrator's report is expected by the end of March, according to an EU statement.
"Of course I am pleased that the WTO has confirmed what we have always believed," said EU Trade Commissioner Pascal Lamy. "Now it is up to the United States to comply with the WTO's findings to settle this matter once and for all."
He added he hoped to see "rapid proposals" from Washington.
When the WTO first ruled against the law, in 2000, Congress passed a replacement that tried to address EU objections, but Brussels said the new legislation still contravened trade rules and the WTO agreed.
U.S. officials had threatened to challenge the tax codes of other countries if the law was ruled illegal this time. Monday's is a final ruling that cannot be appealed.
Although the European Union could have asked the WTO for permission to start imposing sanctions almost immediately, trade experts believe the two sides will find another solution.
"No one wants to start a major trade conflict. I'm pretty sure that they'll do a deal," said Keith Hendry, director of the trade law department of Clifford Chance Puender in Brussels.
Lamy said his office "stands ready to engage in meaningful discussions with the United States on how it intends to comply with these rulings."
c 2002 The Associated PressAssociated Press:
