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Congress passes bill ending WTO export tax break dispute with EU

WASHINGTON, DC - 05/13/06 - The US Senate has given final passage to a tax-cut bill that includes repeal of corporate tax breaks that the World Trade Organization (WTO) has ruled are illegal export subsidies.

Passage of the provision ends a long-standing trade dispute, and a European Union (EU) official has indicated pending retaliatory trade sanctions against the US would be suspended.

The Senate passed the five-year, $70 billion tax bill 54-44 late Thursday, a day after the House of Representatives passed it 244-185. 

President Bush has indicated he will sign the bill, which includes tax cuts he long has sought.

At issue are remnant tax breaks from the Foreign Sales Corporation (FSC) and the successor Extraterritorial Income Exclusion Act (ETI). 

After the WTO ruled in cases brought by the EU that those credits violated a subsidies agreement, Congress repealed nearly all of them over a two-year transition ending in 2006.

Congress, however, left in place a few tax breaks that were included in binding contracts made before September 17, 2003, including contracts made by US aircraft manufacturer Boeing.

In yet another challenge brought by the EU, the WTO ruled that both the two-year transition and the excluded credits were not in compliance with the earlier dispute-settlement decisions.  The provision in the tax bill would not alter the two-year transition but would repeal the exclusions for the binding contracts.

US Trade Representative Rob Portman thanked both houses of Congress for abolishing the so-called Foreign Sales Corporation and Extra-Territorial Income provisions.

"It means the US has taken the steps necessary to comply with its WTO obligations in this matter," he said.

According to published reports, EU Trade Commissioner Peter Mandelson announced May 11 that the EU would suspend the sanctions - $2.4 billion additional duties on selected US exports - that were scheduled to take effect May 16.

In a statement released in Brussels, Mandelson "warmly welcomed" the repeal, which he said set the stage for a "positive atmosphere" for an EU-US summit in Vienna next month.

"The EU, which had been authorized by the WTO to enforce retaliatory measures if the tax benefits were not removed, will now withdraw the re-introduction of sanctions…," he said.

The US decision "contributes to a positive atmosphere in the EU-US trade relationship to coincide with the transition to incoming USTR Susan Schwab and as the EU and US prepare for the EU-US Summit in June," said Mandelson.

In May 2003, the World Trade Organization granted the EU the right to impose up to four billion dollars in punitive duties on US imports after ruling that the FSC and its successor arrangement violated trade rules.

The EU applied the duties in March 2004, but put them on ice in January 2005 pending another WTO decision on whether newly revised US tax breaks complied with the original ruling.

The Geneva-based WTO found that they did not.

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