U.S. Senate Passes Tax Break Bill

WASHINGTON - May 13/04 - SNS -- The U.S. Senate passed a bill which seeks to close a tax loophole deemed illegal under the World Trade Organization (WTO) rules and which allowed the European Union to establish ecalating ountive duties on a wide range of U.S. products.

The bill (S. 1637) would repeal the foreign sales corporation/extraterritorial income (FSC/ETI) export tax break. In ruling against the U.S. tax provision, the WTO authorized the EU to impose $4 billion in sanctions, which began as a 5% tariff on March 1 and is scheduled to increase 1% per month - currently it stands at 7% - until fully being phased in at 17% in March 2005 unless Congress repeals the FSC/ETI tax break.

The move has won wide praise from the National Grain and Feed Association (NGFA) and other commodity groups in the United States which had urged the Senate to resolve the problem as quickly as possible. "These retaliatory tariffs are hurting U.S. exports to Europe at a time when they are just beginning to rebound and the global economy is showing signs of renewed growth," the NGFA and a diverse array of more than 155 other trade associations and companies wrote in a letter to Congress.

Upon hearing the news EU Trade Commissioner Pascal Lamy stated "I have repeatedly stated that our objective remains the withdrawal of the US illegal subsidy. Today, thanks to the efforts of Senators Frist, Grassley, Baucus and many others, the US Senate has taken a very important step in that direction. I very much hope that the House will soon follow so that an FSC/ETI repeal bill is rapidly adopted and signed into law by President Bush.

"It goes without saying that the moment WTO-compliant legislation becomes law, the EU will immediately repeal the countermeasures. That will be good news for all involved in transatlantic trade. Let's hope the time has come to put this long standing dispute behind us once and for all".

On 15 November 2000, President Clinton signed the Extra Territorial Income Act (ETI), to replace the FSC. The ETI Act, however, did not modify the substance of the export subsidy scheme and as a result the EU challenged it before the WTO. In January 2002, the WTO confirmed that the ETI Act also constituted a prohibited export subsidy and that the US had not, therefore, complied with its previous ruling.

On 7 May 2003 the WTO endorsed the EU request for countermeasures for a level roughly equal to the estimated annual US subsidy, i.e. US$ 4 billion. The EU had, however, avoided any immediate recourse to retaliation so as to give a reasonable time for the US Administration and Congress to adopt the necessary legislation for the repeal of FSC.

On 1 March 2004 the EU imposed countermeasures consisting of an additional customs duty of 5% on a list of US products, followed by automatic, monthly increases by 1% up to a ceiling of 17% to be reached on 1 March 2005, if compliance has not happened in-between.

In order to become US law, a FSC/ETI repeal bill also needs to be taken up and passed in the House of Representatives, reconciled, if necessary, with the Senate-passed bill and signed by the US President.