US Plays Down Cost To EU Of Banned Tax Breaks

by Mike Godfrey, Tax-News.com, New York

12 February 2002

Grant Aldonas, US Under Secretary of Commerce for International Trade told reporters yesterday in a telephone press conference that the EU's estimate of $4bn for the damage it suffers from the now-banned US export tax breaks has no basis in reality. "The four billion dollar number wasn't going to have any real significance at the end of the day," said Aldonas.

The WTO announced last month that it upheld an earlier ruling that export tax breaks for US companies violate global trading rules. The banned legislation, known as the Extraterritorial Income Exclusion Act, was passed hurriedly in November 2000 after a previous WTO ruling struck out a scheme known as the Foreign Sales Corporation (FSC) regime.

The US will make a formal submission to the global trade body on Thursday, outlining its reasons for proposing a smaller figure. Aldonas said the $4bn estimate did not take into account the decision by the appellate body to calculate compensation based on the tax rate applicable to foreign-sourced income. The EU used its domestic tax rates instead to compute the figure.

"Most foreign-sourced income ....(has) no current tax," Aldonas said, "so it really does alter the equation potentially in terms of how (the WTO panel) would look at the amount."

While the US manouevres to try to reduce the impact of any trade sanctions, EU and US trade representatives have been meeting in Washington to discuss a way forward, and the administration is trying to assemble a legislative solution that would be passed by Congress - but it will be no easy task to get any kind of a deal through the Congress that will be acceptable to the Europeans.

Chief US Trade Representative Robert Zoellick said recently that US negotiators would rely heavily on consultations with members of Congress, tax officials at the US Treasury, and US business groups. He indicated that he had begun preliminary conversations with members of Congress, including Bill Thomas, the chairman of the House Ways and Means Committee, which has considerable influence over tax legislation in Congress.

"This is obviously a very difficult and complex issue. Domestic tax systems are particularly sensitive," Mr Zoellick told reporters at a press briefing.

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