EU delays subsidy fines

Associated Press

WASHINGTON — A last-minute agreement Saturday with the European Union gives the United States until Nov. 1 to replace a $4 billion annual tax break for American companies that sell goods abroad, from giants Boeing and Microsoft to small businesses.

The Clinton administration was negotiating against a deadline toSday for bringing U.S. tax laws into compliance with an adverse ruling from the World Trade Organization. The dispute involves the biggest case the United States has lost before the Geneva-based arbiter of world trade rules.

Congress now has until Nov. 1 to pass the legislation. The EU agreed not to impose any economic penalties until a WTO panel determines whether the new tax system complies with WTO rules.

A top Senate Republican, Finance Committee Chairman William Roth of Delaware, said he was hopeful Congress would approve the legislation "in very short order."

At issue is a U.S. tax program that grants $4.1 billion in annual tax breaks to 6,000 American companies that set up export subsidiaries in offshore tax havens such as the Virgin Islands and Barbados.

The WTO in February ruled that it was an illegal export subsidy.

"The United States and European Union today demonstrated a commitment to avoid escalating trans-Atlantic trade tensions and managing this WTO trade dispute responsibly," U.S. Trade Representative Charlene Barshefsky said in a statement.

In a separate statement, Pascal Lamy, Europe’s top trade negotiator, said, "Our priority is to resolve disputes, not exacerbate them."

The Foreign Sales Corporation program was created in 1984 to enable U.S. companies, including Boeing, Microsoft, General Motors and United Technologies, to reduce U.S. corporate income taxes by 15 percent by creating export subsidiaries.

The program was intended to offset an EU tax rebate given to European companies for products sold overseas. The replacement legislation would create new tax breaks that would apply equally to U.S. exports and to products the companies manufacture in their overseas plants.

The extension gives Congress more time to complete work on the replacement legislation and helps to defuse trade tensions between the United States and the EU, the world’s two largest trading partners.

A senior U.S. trade official expressed optimism that Congress would approve the legislation by the new deadline.

A challenge by the EU would take at least six months. If the EU were to win its case against replacement legislation, only then could it push for clearance to file for penalties.

That would mean that any penalties on U.S. imports would not appear until next summer at the earliest. The EU, however, is expected to publish a preliminary target list by late November.