U.S. rule violates trade with EU
By Blair Pethel and Warren Giles
Bloomberg News Service
GENEVA — A U.S. tax break that saves Boeing Co., Caterpillar Inc. and other exporters billions of dollars a year is illegal, a World Trade Organization panel ruled in the United States' biggest defeat in a trade dispute.
The appellate panel's ruling sets the stage for the European Union to seek a record $4 billion in annual sanctions unless the United States complies with WTO rules. The panel upheld an August decision by the Geneva-based group that backed an EU claim the tax break is an export subsidy, outlawed by the WTO.
The EU must decide how hard to press the issue, which affects hundreds of major U.S. companies, from Microsoft Corp. and Eastman Kodak Co. to Archer Daniels Midland Co. and General Electric Co. A WTO arbitration panel will decide by the end of March the size of damages unless the two sides reach a compromise.
"It would hurt both parties enormously to engage in the sanctions process, particularly looking at the level requested by the EU," said Kimberly Pinter, director of corporate tax at the National Association of Manufacturers, lobbyist for 14,000 U.S. companies.
The threat of European sanctions adds to trade tensions at a time when economies on both sides of the Atlantic are slowing. The EU also is seeking to head off U.S. quotas and tariffs on steel imports, while the United States is considering pressing a WTO complaint against European restrictions on genetically modified foods.
"We have made a point of handling this dispute in a very reasonable manner," said EU Trade Commissioner Pascal Lamy in a statement. "Now it is up to the U.S. to comply."
The $4.04 billion penalty the EU is seeking is more than 20 times greater than the second-biggest tariff allowed by the WTO, the $191 million the United States imposed on Europe in a banana dispute, according to Wilfried Schneider, a spokesman for the European Commission in Washington.
Kenneth Dam, deputy U.S. Treasury secretary, argued that the request was excessive, saying it represented the size of the tax law's application to U.S. exports worldwide, not just those that go to Europe.
U.S. Trade Representative Robert Zoellick, who last year said the proposed EU penalties would be like a "nuclear bomb" on the trade relationship, said he's "disappointed."
Zoellick said the United States "respects its WTO obligations" and will "seek to cooperate with the EU in order to manage and resolve this dispute," according to a statement.
To comply with the ruling, the United States will have to repeal the tax break, which would amount to a $4 billion annual levy on the largest U.S. companies, said Kenneth Kies, a managing partner for PricewaterhouseCoopers LLP and a former staff director of Congress's Joint Committee on Taxation.
Kies said that while he did not expect Europe to retaliate even if given permission to do so, the United States must show it is serious about bringing its tax laws into compliance with the trade arbiter.
"We need to get an impression from the EU and from the member states how willing they are to be a bit patient here," he said.
Kies said it was "unrealistic" to expect the United States to revise its law easily in a congressional election year.
John Weekes, Canada's former WTO ambassador who now heads the trade practice of APCO, a public affairs company, urged both sides to settle.
"Going down the road of retaliation is in no one's interests," Weekes said. "It's incumbent on them both to find a solution."
Retaliation would cut both ways, as European companies have U.S. units that also take advantage of the tax system.
Stuart Schorr, a Washington lobbyist for Germany's DaimlerChrysler AG, said sanctions would be the worst possible outcome and that the United States and EU should negotiate a settlement.
"We're a European company, but in many ways we're an American company," Schorr said, adding that the automaker had used the tax break in past years. "We hope they can work together to avoid ... an escalating trade war."
A WTO dispute panel found last August that even after an overhaul, the U.S. law that allows companies to shield income from taxes on a range of sales is an illegal subsidy.
All companies in the United States are eligible for tax breaks under the existing law, allowing them to protect much of their income earned outside the country from U.S. tax as long as they have paid tax overseas.
The United States employs a "global" tax system, in theory subjecting company earnings all over the world to tax. U.S. law then excludes some categories of earnings, a policy the WTO said was illegal.
