Copyright 1999 The New York Times Company
The New
York Times
October 30, 1999, Saturday, Late Edition -
Final
SECTION: Section C; Page 2; Column
1; Business/Financial Desk
LENGTH: 589 words
HEADLINE: INTERNATIONAL BUSINESS;
U.S. AppealsTrade
Ruling on Tax Breaks
BYLINE: By
ELIZABETH OLSON
DATELINE: GENEVA, Oct. 29
BODY:
The United States filed an appeal today
against a World Trade Organization ruling that invalidated $2.5 billion in
tax breaks to American companies with overseas subsidiaries.
The Foreign Sales Corporation provisions of the United
States tax code, which give income tax relief
to corporations that export through offshore subsidiaries, were challenged by
the European Union as illegal subsidies to American companies. Trade officials
of the 15-nation European Union were jubilant over the victory, partly because
of reverses they suffered when the United States successfully challenged
Europe's banana import limits and its ban on hormone-fed beef, which have led to
punitive tariffs on $300 million of European products.
The stakes are
much higher in the tax case both because of the amount of money involved and
because, if upheld, the ruling, which was made on Oct. 8, opens up a new area of
conflict -- a country's control over its domestic tax laws.
The tax
provisions at issue benefit major corporations like Boeing, Microsoft and
General Motors.
In filing an appeal, the United States trade
representative, Charlene Barshefsky, said in a statement that the trade panel
"committed multiple legal errors on both substantive and procedural issues."
Current United States law allows domestic companies to establish
corporations in offshore tax havens, allowing manufacturers to get the tax
exemption on products that generally are made in the United States. There are
3,600 such companies in the United States Virgin Islands.
The European
Union argued that this law violates trade rules that goods sold for export may
not be treated differently from those sold on the domestic market. Such
distinctions are considered export subsidies, which are illegal under World
Trade Organization rules.
In a 294-page ruling, the trade panel agreed.
Such subsidies "are prohibited," concluded the panel, made up of Crawford
Falconer of New Zealand, Didier Chambovey of Switzerland and Prof. Seung Wha
Chang of South Korea.
The trade body's appellate review will take up to
90 days, delaying enforcement of the ruling until at least the end of January.
Under the ruling, the trade panel had given the United States until Oct.
1, 2000, to change its law, concluding that was adequate time for Congress to
act. It agreed with American arguments that global trade agreements were not
meant to dictate member-country tax systems but said that "certain W.T.O. rules
do have implications for specific tax practices of members."
This is the
second time such United States tax provisions have been challenged in the global
trading system. Similar provisions were found to be an illegal subsidy under the
trade organization's predecessor body, the General Agreement on Tariffs and
Trade, in 1981. They were replaced by the Foreign Sales Corporation rules in the
early 1980's to comply with the objections.
The European Union argued
that the economic effects of the new provisions remained the same.
Ms.
Barshefsky maintained that existing tax breaks do not give United States
companies an unfair advantage. "A careful review of the history of this issue,
the fact of record and the applicable W.T.O. legal rules concerning income tax
measures should result in a reversal of the panel's decision," she said.
To qualify for tax relief under the provisions, an American company must
meet a number of criteria, including a minimum level of direct costs abroad for
certain sales activities, including advertising and order processing.
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