*EPF203 10/12/2004
Congress Approves Repeal of Disputed Export Tax Breaks
(Bush expected to sign legislation that should end EU retaliatory tariffs) (660)

By Bruce Odessey
Washington File Staff Writer

Washington -- The Senate joins the House of Representatives in passing a bill that would repeal tax breaks ruled illegal by the World Trade Organization (WTO) and should end retaliatory trade sanctions imposed on U.S. imports by the European Union (EU) since March.

A White House official has indicated President Bush will sign the bill.

The Senate passed the bill 69-17 October 11 after working through a holiday weekend to overcome objections to specific provisions. The Senate then recessed until November 16, after the U.S. elections.

Late October 7, the day before it recessed, the House of Representatives passed the bill 280-141.

The underlying goal of the legislation is resolving a longstanding dispute with the EU over U.S. tax breaks to exporters under the Foreign Sales Corporation (FSC) law, and its successor regime, the Extraterritorial Income Act (ETI).

Under the FSC/ETI provisions, the income tax on certain U.S. manufactured goods that were exported is reduced from the ordinary 35 percent rate to 27-32 percent.

The WTO has ruled repeatedly that the FSC/ETI provisions violate international trade rules on export subsidies and has authorized the EU to impose up to $4 billion in retaliatory tariffs on U.S. exports. The EU began in March to impose tariffs of 5 percent on a wide range of U.S. products and said the rate would increase by 1 percentage point a month up to 17 percent. As of October 1, the tariff rate was 12 percent.

"Our companies carry this burden because Congress has failed to act," Senator Chuck Grassley, Republican chairman of the Senate Finance Committee, said in October 11 debate. "That is why we must pass this bill before we leave Washington.

"This should be a very serious concern for all members because the sanctions are hitting commodity products, such as agricultural goods, timber, and paper, as well as manufactured products," Grassley said.

Under the final bill, ETI export tax breaks for corporations would be phased out over two years while tax rates on domestic manufacturing would be reduced in phases over five years from 35 to 32 percent. The changes would affect not only corporations, but also partnerships, sole proprietorships and other small businesses.

Unknown was whether the EU will accept the bill as satisfying U.S. obligations in the WTO. EU officials have indicated unhappiness with the two-year phase-out.

Although no serious opposition to FSC/ETI repeal emerged, controversy surrounded other provisions of the 650-page bill, which has scores of tax breaks for individual U.S. industries from ethanol producers to auto racetrack owners to manufacturers of fishing tackle boxes and bows and arrows.

Probably most controversial is the provision authorizing spending $10.1 billion to buy out decades-old quotas for U.S. farmers to grow tobacco. A provision in the earlier Senate-passed bill requiring Food and Drug Administration (FDA) regulation of tobacco products was dropped from the final bill.

Although the final bill includes some provisions opposed by the Bush administration, the administration has not threatened a veto. One measure to which the White House objected would lower the tax rate for one year only from 35 percent to 5.25 percent for revenue repatriated by U.S. multinational corporations from their foreign subsidiaries.

Supporters described the bill as revenue-neutral, offsetting tax breaks by shutting down abusive tax shelters, closing corporate tax loopholes, and extending customs and other government user fees.

One provision would eliminate a tax shelter used by many cities, including foreign cities. Under the existing law, a city could sell its subways, buses or other transportation infrastructure to private investors who could then lease them back to the cities while taking U.S. tax deductions for depreciation. Elimination of that provision is expected to raise $26 billion over 10 years.

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

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