*EPF507 10/22/2004
Bush Signs Law Repealing U.S. Tax Breaks Ruled Illegal by WTO
(Measure aims to end retaliatory tariffs imposed by EU) (380)

By Berta Gomez
Washington File Staff Writer

Washington -- President Bush signed a law repealing U.S. export tax breaks that were ruled illegal by the World Trade Organization (WTO) and have prompted retaliatory trade sanctions by the European Union (EU).

In an October 22 statement, the White House said that the president had signed into law the "American Jobs Creation Act of 2004," which repeals the disputed Extraterritorial Income Act (ETI), provides other tax breaks for business and reforms U.S. tobacco subsidies.

The WTO has ruled repeatedly that the ETI and its predecessor, the Foreign Sales Corporation (FSC) program, were de facto export subsidies that violate international trade rules.

Earlier efforts to resolve the EU/U.S. dispute failed, and the WTO authorized the EU to impose tariffs of up to $4 billion on U.S. exports. The EU began in March to impose tariffs of 5 percent on a range of U.S. products and said the rate would increase by one percentage point per month up to 17 percent. As of October 1, the tariff rate was 12 percent.

The House of Representatives voted 280-141 on October 7 to pass the measure repealing FSC/ETI provisions. The Senate voted 69-17 in favor of the bill October 11, completing congressional action and sending the measure to the president for his signature.

EU officials have said they will lift the retaliatory tariffs as soon as the United States complies with WTO rules, but it remains unclear whether they will accept the new law as fully satisfying U.S. obligations.

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

Controversy over the 650-page bill erupted because of numerous non-FSC/ETI provisions, which include tax breaks for individual U.S. industries from ethanol producers to manufacturers of fishing tackle boxes.

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

(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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