WTO Will Take a Look at New U.S. Export Tax Law

By Kerry Gildea, Contributing WriterThe World Trade Organization early next year is slated to review whether legislation passed by Congress in November complies with WTO rules governing export tax provisions.The information technology industry has a large stake in the outcome of the WTO review. Members of the European Union have warned they will fine U.S. businesses up to $4 billion in penalties for not complying with WTO rules.President Clinton Nov. 15 signed into law new Foreign Sales Corporation legislation replacing current FSC tax provisions for U.S. companies exporting to Europe with alternative tax rules that the Congress, White House and IT industry deem compliant with WTO rules. The next step in the process is for the WTO to hold a dispute council meeting to review the new U.S. legislation. If the WTO rejects this latest attempt to resolve the dispute, new legislation could surface in the 107th Congress.The WTO has argued that the former FSC tax provisions violated international trade agreements by giving U.S. corporations an advantage over their European competitors. The old FSC provisions allowed U.S. companies to export their products through a foreign sales corporation, an offshore separate entity, which allowed U.S. companies to qualify for lower tax rates for exports. The European Union contends this is an export subsidy for U.S. companies and therefore illegal. It also has charged that the United States owes its members $4 billion, which it said is the amount of tax benefits the U.S. exporting companies have derived from the FSC provisions.U.S. companies contend the FSC legislation merely helps to level the competitive playing field with foreign corporations."The reason the United States has these provisions in the tax code is because we are always at a tax disadvantage, because ... our rules say you tax corporations globally," said Caroline Graves Hurley, tax counsel and director of tax policy for the American Electronics Association, now officially known as simply AEA.The new FSC legislation does away with the concept of offshore FSC law, but still allows U.S. companies to obtain a lower tax rate."The new legislation is a very good thing, because the high-tech industry is a large exporter, and it has much more to lose should a trade war result," Hurley said. "The United States has done its part to meet its obligation under the WTO rule. The U.S. followed the letter of the WTO ruling, and the U.S. will defend that."AEA President Bill Archey said in a Nov. 14 statement that the new legislation will help the United States avert a trade war. "As the largest U.S. exporting sector, the high-tech industry potentially had the most to lose in a US-EU trade war had the House not passed the Foreign Sales Corporation legislation," Archey said. "This legislation will bring the United States into compliance with its WTO obligations and will help keep U.S. exporters internationally competitive."House Ways and Means Committee Chairman Bill Archer, R-Texas, who is retiring and won't return to Congress in January, and Ranking Member Charles Rangel, D-N.Y., were key supporters of the legislation and pushed its passage before the House left for a recess in mid-November.Archer said he sponsored the legislation because he hopes it will end the long-standing challenge by the European Union to the U.S. tax system. Continued U.S. competitiveness in the global marketplace depends on the legislation, according to Archer, who said that 4.8 million American jobs are directly related to the manufacture of products that benefit from the FSC provisions in the tax code.The approach in the new bill "is the best way to comply with the decision, continue to honor our trade agreements consistent with the obligations they impart, and maintain our global competitiveness," Archer said in a Nov. 14 floor speech.Treasury Secretary Lawrence Summers, in a Nov. 2 letter to House Speaker Dennis Hastert, R-Ill., said the approach in the new bill "is essential to avoiding the potential imposition by the European Union of significant sanctions on American industries and to satisfying the United States' obligations in the WTO."This bill needed to pass Congress so the WTO will review the new replacement legislation before any decision may be made authorizing retaliation against U.S. firms, Summers said. A number of trade and high-tech associations are keeping a close eye the WTO review of the legislation, which is not expected to conclude until late spring or summer. Initial talks began with the first round Dec. 4, in which the U.S. Trade Representative will defend the U.S. position. The Washington-based National Foreign Trade Council is one association assisting the trade representative with its presentations on FSC talks in Geneva this month. Officials with the foreign trade council and AEA said it is very difficult to predict the outcome of the WTO review. While the European Union cannot dictate how the United States should change its own legislation, it can impose sanctions, they said.The foreign trade council "will continue to support the U.S. [trade representative] in its defense of the replacement regime before the WTO," said Greg Nickerson, tax counsel for the council. While the new legislation will not put U.S. companies on a completely level playing field, association officials believe it will give the companies more of a competitive edge.Fred Murray, vice president of the foreign trade council, said Sept. 14 the legislation accords companies that pay U.S. taxes treatment similar to that afforded by European governments. "These new rules are analogous to similar European tax systems," Murray said.