Posted on 29-1-2002

EU v USA
From Associated Press, January 14, 2002, by Paul Geitner

BRUSSELS, Belgium-A World Trade Organization appeals panel ruled Monday
against a U.S. law granting multibillion-dollar tax breaks to businesses
operating overseas.

The case, brought by the European Union, is by far the largest the United
States has ever lost before the WTO.
As the ruling was announced, the EU called on the United States to quickly
bring itself into compliance with WTO rules. But the union signaled it
would hold off on imposing penalties, which could reach $4 billion a year.

U.S. Trade Representative Robert Zoellick said the United States intended
to cooperate with the European Union "to manage and resolve this dispute,"
which dates back to at least November 1997. However, Zoellick stopped short
of saying whether the Bush administration would pursue new legislation in
Congress to come into compliance with WTO rules. The law at the center of
the case allows a company paying U.S. taxes to exclude income that is
considered to be "extraterritorial" because it comes from goods or services
primarily for sale or use outside the United States.

Thousands of American companies, ranging from Microsoft and Boeing to
smaller firms, benefit from the tax break, which was originally created in
1984. Washington claims that this is a measure to avoid the double taxation
of income from foreign sources, but the WTO found it to be a prohibited
export subsidy. It had ruled against the law three times already. "This is
an especially sensitive dispute that, at its core, raises questions of a
level playing field with regard to tax policy," Zoellick said in a
statement. "We will be consulting closely with Congress and affected U.S.
interests regarding next steps." Monday's ruling, released by the WTO in
Geneva, opens the way for Brussels to impose up to $4 billion of punitive
tariffs annually on U.S. imports.

But under an EU-U.S. agreement reached in September 2000, the dispute now
will go back to a WTO arbitrator to decide on the exact amount of possible
countermeasures. The arbitrator's report is expected by the end of March,
according to an EU statement. "Of course I am pleased that the WTO has
confirmed what we have always believed," said EU Trade Commissioner Pascal
Lamy. "Now it is up to the United States to comply with the WTO's findings
to settle this matter once and for all." He added he hoped to see "rapid
proposals" from Washington.
When the WTO first ruled against the law, in 2000, Congress passed a
replacement that tried to address EU objections, but Brussels said the new
legislation still contravened trade rules and the WTO agreed.
U.S. officials had threatened to challenge the tax codes of other countries
if the law was ruled illegal this time. Monday's is a final ruling that
cannot be appealed.

Although the European Union could have asked the WTO for permission to
start imposing sanctions almost immediately, trade experts believe the two
sides will find another solution. "No one wants to start a major trade
conflict. I'm pretty sure that they'll do a deal," said Keith Hendry,
director of the trade law department of Clifford Chance Puender in
Brussels. Lamy said his office "stands ready to engage in meaningful
discussions with the United States on how it intends to comply with these
rulings."