Trade War with European Union Heats Up

Published May 1, 2004

On March 1, the European Union imposed an estimated $300 million in trade sanctions against the United States for Congress’s failure to repeal the Foreign Sales Corporation (FSC) legislation first deemed illegal by the World Trade Organization two years ago. (See “US and EU on Collision Course over Taxes,” Budget & Tax News, December 2003.)

According to the Web site of the United States Mission to the European Union, “The United States lost successive [FSC] cases in the WTO, which determined that the tax breaks in those laws amounted to export subsidies in violation of WTO rules. The WTO ruled that the EU–which brought the formal complaints–is entitled to impose more than $4 billion in retaliatory trade sanctions. The EU began imposing 5 percent retaliatory tariffs on some U.S. products on Mar. 1 and said it would phase in higher tariffs unless the export break is repealed.”

“The name of the game is repeal. It is not retaliation, not sanctions. It is repeal, and to have a WTO-compliant legislation,” said EU Trade Commissioner Pascal Lamy while visiting Washington DC in late February to discuss FSC reform legislation pending in Congress.

But by March 1, Lamy’s mind had changed. “We are therefore left with no choices but to impose countermeasures,” he said from Brussels.

The EU has never before imposed trade sanctions on U.S. exports under the WTO, and it appears eager to drop them once Congress has acted to clear up the matter. Both houses of Congress have before them measures that would bring the U.S. export tax program, the Extraterritorial Income Exclusion, into conformity with the nation’s WTO obligations.

“The faster that they [Congress] get on [legislation], the faster we can lift the sanctions,” Lamy’s spokeswoman, Arancha Gonzalez, told AP correspondent Raf Casert in Brussels.

“We’ve urged the European Commission to refrain from imposing retaliatory tariffs, given the complexity of the [pending] legislation, and we regret that they are moving forward,” said a spokesman for the U.S. Mission in Brussels. “But we will continue to work with Congress to get the legislation moving as quickly as possible.”

Farmers Respond

With U.S. farmers facing higher tariffs on sales to Europe, the American Farm Bureau Federation (AFBF) is urging Congress to bring U.S. laws into compliance with World Trade Organization rules as quickly as possible.

“Because of the higher tariffs the EU is imposing on raw agricultural products and the products processed from them, U.S. farmers have unfortunately been drawn into the WTO dispute and will suffer unless a solution to the problem is quickly found,” said AFBF President Bob Stallman. “We urge Congress to act quickly to eliminate the threat of severe disruption that is certain to occur for U.S. exports.

“The EU sanctions could result in heavy losses to U.S. farmers and ranchers if Congress doesn’t act soon,” continued Stallman. “Not only is the U.S. agriculture industry facing higher tariffs on soybean meal and other commodities that only apply to U.S. products, we are competing with products from other countries with lower tariffs.”

Tax Reform Good for Texas

Passage of the FSC reform measure could be good not only for agriculture, but also for states in the U.S. that do not have an income tax, according to reports in the Paris [Texas] News. A March 14 article notes, “Texans could receive a federal income tax deduction on sales tax payments if a measure considered in Congress becomes a part of a Foreign Sales Corporation bill.”

U.S. Rep. Max Sandlin (D-Texas) said on March 12 that a sales tax deduction “will be included in the Democratic version of the tax bill.” Sandlin sits on the Ways and Means Committee, which has jurisdiction over all tax legislation, including the FSC reform measure. “I am gratified that we have this opportunity to promote fairness in our tax code,” Sandlin said.

Seven states, including Texas, have no income tax. Taxpayers in those states are treated unfairly by the federal government, Sandlin said, because they have no state income tax payments that can be deducted from federal income taxes. “A sales tax deduction will level the playing field for residents of Texas, Florida, South Dakota, Tennessee, Nevada, Washington state, and Wyoming,” Sandlin said. “Texans will realize over $921 million in tax savings every year.”

Under the proposed legislation, taxpayers would be permitted to deduct state income tax payments, sales tax payments, or a combination of both from their federal income taxes. To keep the sales tax deduction simple, the IRS would be directed to develop standard tables for taxpayers to use in determining an average sales tax deduction.

U.S. Rep. Ralph Hall (R-Texas) told the Paris News on March 13 that he supports the effort to allow Texans to deduct sales taxes. “We’ve been trying to get that done for the past 10 years,” Hall said. But the congressman said he is opposed to bowing down to foreign nations who continue to make demands concerning trade. “I’m against anything the European Union does,” Hall said. “We have given them way too much power.”

The sales tax deduction and FSC reform measures are included in a bill pending in the Senate and a legislative proposal in the House of Representatives. Both would make far-reaching changes to the international corporate tax system. Action on the measures was expected before Congress adjourns for its Memorial Day recess.

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].