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Senate Delays May Imperil New Foreign Trade Corporation Legislation

Mike Godfrey, Tax-news.com, New York

26 September 2000

The US Senate may be about to amend the revised Foreign Sales Corporation legislation which the administration was hoping would have cleared the Congress by 1st October, the WTO-imposed deadline for the US to have removed the 'illegal' tax break in its current form. Any amendments would mean that the legislation has to go back to the House, which passed it unanimously on 13th September.

'There is no doubt it will get done this year,' said John Czwartacki, spokesman for Senate Republican Leader Trent Lott of Mississippi, but the Oct. 1 deadline 'may not be possible.'

The new legislation in fact widens the range of companies eligible to receive a benefit which amounts to a 15% tax saving on export earnings, and means that companies can obtain it without the previous need to set up offshore 'pass-through' subsidiaries. The total value of the tax benefits to US business is thought to be in excess of $5bn.

The EU, which brought the case to the WTO in the first place, has said that it is not happy with the revised legislation, and could under WTO rules start to impose trade sanctions from 1st October if the legislation is not in place, or if the WTO rejects it.

The Clinton administration will try to avoid a transatlantic trade war within weeks of the US presidential election, and will ask the EU to avoid escalating the confrontation by proposing sanctions or other punitive measures if the Senate delays the legislation.

It is unclear how EU officials will respond, at a time when other trade spats over beef and bananas are unresolved. The EU desperately want the US to scrap a controversial law that requires the president to slap duties on a new set of European products every six months in response to the EU's failure to abide by WTO rulings on bananas and beef. A simple swap might seem in order, but the bananas and beef dossiers are highly political in Europe.

British Prime Minister Tony Blair has been pressing the EU to resolve the FSC dispute, so it is possible that some sort of deal will be crafted. If not, the world's two biggest trading partners may be in for a massive punch-up, to the disadvantage of all concerned, and especially the WTO, which needs three sets of failed trade negotiations like it needs a hole in the head.

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