U.S. Congress Failed at Tax Break Repeal, WTO Says (Update2)
July 23 (Bloomberg) -- The U.S. Congress failed in its attempt to repeal an export tax break and bring its laws in line with global trade rules, the World Trade Organization ruled.
The WTO backed a European Union complaint that the U.S. gives unfair tax breaks to companies, reviving the possibility that the EU may re-impose $4 billion in sanctions against American goods, people familiar with the decision said yesterday.
The Geneva-based WTO said the U.S. is failing to comply with a January 2002 ruling that outlawed tax breaks to exporters, said the people, who declined to be identified. The WTO found that the U.S. is still in violation because companies such as Microsoft Corp. and Boeing Co. continue to get breaks even after Congress passed new tax legislation in October, according to the people.
The EU argued that the tax package -- the biggest rewrite of U.S. corporate tax legislation since 1986 -- contains transition periods that extend the illegal breaks through at least 2006.
``Congress is just going to shrug this off and say you've got to be kidding me,'' said Scott McCandless, manager for Washington National Tax Services at Pricewaterhouse Coopers. ``I am sure Congress will be aggravated, but they're not going to do anything.''
Yesterday's confidential ruling, set to be published Aug. 12, threatens to escalate tensions between the world's two biggest economies. The $750 billion trans-Atlantic trade relationship is already strained because of dueling WTO complaints over aircraft subsidies and disagreements about gene-engineered seeds and hormone-treated beef.
Tax Law
Congress voted in October to replace the $50 billion export tax break ruled illegal by the WTO with $145 billion in tax cuts for manufacturers and companies with overseas operations. The vote was part of a two-year effort to repeal the benefit and avoid further EU sanctions.
The EU duties, on imports including wood, paper, jewelry and clothing, started at 5 percent in March 2004 and reached 14 percent in December.
The changes initially satisfied the EU, which removed the tariffs at the beginning of this year. A month later, trade representatives in Europe asked WTO arbitrators to examine the tax rewrite to make sure U.S. companies were no longer illegally benefiting, zeroing in on the transition period written into the new law.
U.S. Position
The U.S. has said the transition period is consistent with practice from previous WTO cases and is necessary to provide a consistent tax load to U.S. companies.
Boeing and General Electric Co. headed a list of 15 companies that claimed $6.2 billion from the original export tax break between 1997 and 2002, according to a study in Tax Notes magazine in 2003. Other top beneficiaries included Honeywell International Inc., Motorola Inc. and Cisco Systems Inc.
The EU's latest WTO victory may force the U.S. to rework the tax package that gives breaks to thousands of companies including General Electric, Exxon Mobil Corp. and Citigroup Inc.
European Commission spokeswoman Claude Veron-Reville said in December that the EU may re-impose a new round of the sanctions to the value of ``around 60 percent'' of the previous ones should the WTO find that the U.S. law still doesn't comply with its rules. She wouldn't discuss yesterday's decision, saying only that it is a ``supplementary step in the compliance panel.''
Richard Mills, a spokesman for the U.S. trade representative's office in Washington, declined to comment.
Eight-Year Spat
The EU's challenge prolonged an eight-year-old dispute. The WTO first judged the U.S. tax breaks illegal after the EU filed a complaint in 1997. American lawmakers overhauled the law in 2000, and again last year after the WTO agreed with a second EU complaint that the changes were inadequate and then authorized the bloc to impose tariffs.
General Electric, which runs its world operations from Fairfield, Connecticut, may save more than $8 billion over the next decade from the changes by avoiding U.S. taxes on the foreign profits of its financing businesses, according to an analysis by Democrats on the House Ways and Means Committee after Congress approved the new law.
To contact the reporter on this story:
Warren Giles in Geneva
[email protected]
