Tax assessment comes before Commission lifts US sanctions

by Stewart Fleming

Date: 14/10/04

THE European Commission is to carry out a detailed assessment of tax legislation which cleared the US Congress on Monday (11 October) before deciding whether to dismantle the trade sanctions it imposed following a World Trade Organization's ruling against illegal US export subsidies.

The 650-page US tax bill repeals the Foreign Sales Corporation/Extraterritorial Income Exclusion Act (FSC/ETI) which the WTO said gave US exporters illegal subsidies worth around &036;4 billion (3.3bn euro) per year.

In March of this year the EU began progressively imposing tariffs covering a wide variety of products including steel, textiles, paper and jewellery in an effort to put pressure on the US to remove the subsidies.

On Monday, in one of its last acts before adjourning for the election campaign season, Congress approved a ten year &036;143bn (116.6bn euro) tax-reduction bill, dubbed the American Jobs Creation Act of 2004. Parts of this were designed to compensate the 1,800 firms which will lose out because of the removal of the WTO-illegal tax breaks. But it also provides new tax breaks for an estimated 200,000 US companies, most of whom are unaffected by the export subsidy issue.

President George W. Bush has yet to sign the legislation, which he cannot modify, but this is widely seen as a foregone conclusion. In the run up to 2 November's election, the president is expected to present the tax bill as part of his plans to revive US employment, especially in the troubled manufacturing sector of the US economy.

Unlike the ETI Act of 2000, which was presented as a way of resolving the illegality of the FSC law but which the WTO also found to be an illegal export subsidy, EU officials see the new legislation as a genuine attempt to bring US tax law into compliance with WTO rules.

They welcome the fact that the US Congress finally seems to have acted to remove WTO-illegal tax breaks.

Nevertheless, Trade Commissioner Pascal Lamy gave a guarded reaction to the passage of the US tax bill. He said that it vindicated "the EU's patient but firm approach" to trying to resolve what had been one of the most protracted EU-US trade disputes, but cautiously described the bill itself as "a step towards compliance".

Behind this cautious response lies a concern to examine in detail the small print of a law which allows lengthy transition periods before some of the WTO-illegal tax breaks actually come to an end and allows others to continue under so-called grandfathering provisions.

The first question which the EU will have to resolve is whether in principle the new law, unlike the ETI Act, does indeed comply with WTO rules against illegal export subsidies. Assuming the answer is affirmative, the Commission will have to decide how and when to start removing the current sanctions.

UNICE, the pan-European employers group, is pressing for a short transition period and the swift ratcheting down of sanctions in order to ease the trade tensions surrounding the FSC/ETI case.

• Stewart Fleming is a Brussels-based freelance journalist.

The European Commission said that it would carry out a detailed assessment of tax legislation which cleared the US Congress on 11 October 2004 before deciding whether to dismantle the trade sanctions it had imposed following a World Trade Organization's ruling against illegal US export subsidies. The 650-page US tax bill repealed the Foreign Sales Corporation/Extraterritorial Income Exclusion Act (FSC/ETI) which the WTO said gave US exporters illegal subsidies worth around &036;4 billion (3.3bn euro) per year.