WTO Panel Calls U.S. Tax Law a Violation

In a move expected to fuel transatlantic tensions, a World Trade Organization panel has decided that a U.S. tax law designed to help the nation’s largest exporters violated international rules governing free trade.

If the interim WTO decision is allowed to stand in next month’s final report, the European Union could impose as much as $4 billion in sanctions on U.S. exports next year.

U.S. Trade Representative Robert B. Zoellick already has warned that such a move could spark a nasty trade war and derail efforts to launch new global trade talks.

News of the report, which was confirmed late Friday by the U.S. trade representative’s office, places additional pressure on a relationship already strained by EU antitrust objections to General Electric Co.’s proposed purchase of Honeywell International Inc., a beef hormone dispute and the Bush administration’s rejection of the Kyoto treaty on global warming.

Tom Hall, an international finance expert with the Milken Institute, said the ruling was another reminder to Congress and U.S. firms that a united Europe is a force to be reckoned with in global affairs.

“Just as companies and countries around the world have had to focus on policy in the U.S., companies in the U.S. are now having to focus on the world,” said Hall, who just returned from Europe.

In the ruling, whose details were not announced, the WTO panel found that tax breaks provided to U.S. exporters such as Boeing Co. and Microsoft Corp. amounted to “illegal subsidies” and violated WTO rules and several international trade agreements.

The panel recommended that the U.S. be asked to amend its tax law immediately. U.S. and EU officials have been asked to comment on the decision, which is expected to be appealed within the WTO.

U.S. trade officials would not comment on the WTO panel decision.

John Liebman, an international trade specialist with the McKenna & Cuneo law firm in Los Angeles, said the WTO ruling is just the latest chapter in a battle over export tax subsidies that dates back at least 30 years.

He said the European tax system provides benefits to its exporters through a rebate of its value-added tax, which has put U.S. firms at a disadvantage.

“We’ve always been running as a three-legged dog in a four-legged race,” he said.

The latest dispute can be traced back to the Foreign Sales Corporation program, created in 1971 to boost ailing U.S. exporters by allowing them to ship overseas profits to offshore tax havens. In 1999, the Geneva-based WTO upheld an EU complaint that the FSC violated trade rules.

But the EU agreed to hold off on imposing $4 billion in sanctions until the complaint had worked its way through the WTO system.

Under pressure to stave off those penalties, Congress did away with the FSC last year and created an elaborate new tax system that still allowed U.S. firms to exempt most of the income earned overseas.

The EU cried foul and went back to the WTO, arguing that the U.S. had simply found a new way to circumvent its ruling.

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Times wire services were used in compiling this report.