*EPF412 07/27/00
House Advances Bill to Resolve WTO Ruling Against FSC Tax Breaks
(Eizenstat warns EU against retaliation) (630)
By Bruce Odessey
Washington File Staff Writer

Washington -- A U.S. congressional committee has advanced legislation aimed at complying with a World Trade Organization (WTO) ruling against a U.S. law that exempts from income taxes certain income from foreign subsidiaries of U.S. corporations.

At issue is the law on Foreign Sales Corporation (FSC) tax rules, which the European Union (EU) successfully challenged in the WTO. The United States has until October 1 to comply with the final ruling made in February.

The House of Representatives Ways and Means Committee voted 34-1 July 27 to approve the legislation, which was negotiated over months among House and Senate leaders and Clinton administration officials led by Treasury Deputy Secretary Stuart Eizenstat.

Representative William Archer, Republican chairman of the committee, said he intends to press House leaders to schedule a vote on the bill early in September soon after Congress' summer recess. The Senate has not yet acted on the bill, which was formally introduced only late July 26.

The FSC program excludes from U.S. income taxes certain income earned by foreign subsidiaries of U.S. companies on exports. The WTO found that these rules amounted to an export subsidy in violation of WTO agreements on subsidies and agriculture.

One goal of the group that negotiated the bill was to avoid leaving the EU with an export tax advantage. U.S. officials contend that EU export subsidies escape WTO scrutiny only because they employ a value-added tax scheme instead of an income tax scheme as the United States does.

The bill would repeal the existing FSC provisions. In place of FSC, it would create a new tax regime, effective October 1, modeled in part after the EU's own laws.

Certain categories of U.S. corporations' foreign income would be excluded from U.S. taxes altogether -- not only income earned from exports, but also income from the far broader category of foreign sales, whether the goods are manufactured in the United States or abroad.

The bill would also aim to satisfy certain EU complaints not resolved in the WTO case, including allegations that present FSC pricing rules also violate the WTO subsidies agreement.

At the committee meeting, Eizenstat complained that the EU had failed to enter "serious negotiations" with the United States after the WTO ruling to work out a mutually acceptable resolution. The Clinton administration and Congress have therefore worked out their own resolution in an attempt to beat the October 1 deadline, he said.

According to the European American Business Council, the EU is reportedly preparing a list of U.S. goods for retaliatory tariffs, amounting to $26,000 million a year, in case the United States misses its October 1 deadline.

"I have heard that extraordinarily high levels of retaliation have been threatened if a satisfactory conclusion to this dispute is not reached," Eizenstat said.

"This would risk escalating our dispute with the EU into a major trade war," he said. "I cannot state strongly enough how unnecessary and unwise such an escalation of this conflict would be."

Chairman Archer said that many details of the bill need to be completed before a vote in the full House, including tax rules for the transition from FSC to the new regime.

Eizenstat and committee leaders, Republicans and Democrats, opposed any amendments to the bill; they feared any changes would jeopardize the compromises negotiated among many parties. Accordingly, the committee rejected proposed amendments that would have denied tax benefits under the bill to pharmaceuticals, tobacco products and arms exports.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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