EU Expects U.S. to Comply with Tax Ruling

Reuters 20aug01

BRUSSELS - A World Trade Organization (WTO) ruling means the United States will have to make ``wholesale changes'' to a multibillion-dollar program of tax breaks for exporters, the European Union said on Monday.

The EU confirmed that a WTO dispute panel had found in its favor in a potentially explosive row over the U.S. tax breaks and said it expected Washington to comply with the ruling.

The EU has threatened to impose up to $4 billion of sanctions on U.S. goods if it ultimately wins the WTO case -- a step U.S. Trade Representative Robert Zoellick has likened to using a ``nuclear weapon'' on the trade system.

The 15-nation EU has taken aim at a U.S. law that it contends grants billions of dollars a year in tax breaks to major U.S. exporters such as plane-maker Boeing Co (BA.N) and software leader Microsoft Corp (MSFT.O).

The WTO experts concluded that the U.S. program -- a replacement for an earlier scheme called the Foreign Sales Corporation (FSC) act -- was an illegal export subsidy, violated an international agriculture agreement, and discriminated in favor of U.S. goods in breach of WTO rules, the EU said.

``The EU is fully satisfied with the results of the panel and expects the U.S. to comply with the ruling,'' the EU's executive Commission said in a statement.

The findings meant the United States would have to make ''wholesale changes'' to the scheme to bring it into line with world trade rules, it added.

The WTO dispute panel's report on the case, previously sent to Brussels and Washington on a confidential basis, was scheduled to be made public later on Monday in Geneva. The panel's findings have already been widely leaked.

U.S. MAY APPEAL

EU officials say the United States has until October 19 to decide if it will appeal against the panel's ruling. They said they had no information whether it would do so.

If the United States did not appeal, WTO arbitrators would begin work after October 19 on deciding what amount of sanctions the EU was entitled to impose on U.S. exports. This amount could be much lower than the $4 billion requested.

European Commission trade official Stephen Gospage said the EU would have to let the arbitration go ahead so as not to lose the right to impose sanctions. But he made clear that the EU did not have to apply the sanctions and was open to talks with the United States on how it could comply with the WTO ruling.

``We can hold off on this (sanctions) for as long as we like if we think for instance that the U.S. is making a serious effort to change its law and bring itself into compliance, even by the start of the next tax year,'' he told reporters.

He said the Commission saw no link between the dispute and attempts to launch a new round of world trade liberalization talks in Qatar in November.

After the WTO report went to the capitals last month, Zoellick said through a spokesman that the Bush administration was reviewing its options ``with affected U.S. interests and the Congress.''

``In seeking a resolution, we are focusing on how to promote America's economic interests while meeting our WTO obligations,'' he said.

The EU won a WTO case against the FSC program in 1999, when a panel found it constituted an illegal export subsidy.

The United States, then under the Clinton administration, had changes approved in Congress, but Brussels came back to the WTO last year, arguing the changes boosted the subsidies.

EU SAYS ITS ARGUMENTS UPHELD

The European Commission said on Monday that the WTO panel in the new case had ``upheld the EU's reasoning on all points.''

The panel found the scheme was an illegal export subsidy because companies established in the United States could only obtain the promised tax reduction by exporting, it said.

``A member does not eliminate an export subsidy on apples by also granting a subsidy on oranges that is not contingent upon export performance,'' it quoted the panel as saying.

The panel also found that the United States had failed to comply with the WTO ruling in the original FSC case because transitional rules of the new program kept the FSC scheme in place for at least two years beyond the deadline granted by the WTO for the United States to withdraw it, the Commission said.