Sanctions, the USA we dont just impose them, now we receive them

WTO Rules U.S. Tax Breaks Illegal; EU to Retaliate (Update4)
Feb. 13 (Bloomberg) — The European Union plans to impose new sanctions on as much as $4 billion a year in American goods after the World Trade Organization said the U.S. failed to end illegal tax breaks to exporters such as Boeing Co.

A three-judge panel rejected a U.S. appeal because Congress ignored a WTO order to scrap the tax breaks. The EU challenged the U.S. law because it phases out the 10-year export benefits over 12 months rather than halting them immediately.

The U.S. has three months to act to avoid the re- imposition of retaliatory measures,'' EU Trade Commissioner Peter Mandelson said in a statement from Brussels.The EU will not accept a system of tax benefits which give U.S. exporters including Boeing an unfair advantage. We are seeking nothing more than the re-establishment of a level playing field.’’

At stake in the eight-year-old spat are annual tax breaks worth billions of dollars to companies including Microsoft Corp., the world’s largest software maker and Caterpillar Inc., the world’s biggest manufacturer of earthmoving equipment, as well as Boeing, the main beneficiary of the subsidies.

The U.S. plans to continue lobbying the EU to hold off on resuming the sanctions, said Neena Moorjani, a spokeswoman for the U.S. Trade Representative’s office in Washington.

Trade Ties

Prolonging this dispute will not serve to foster harmonious trans-Atlantic relations,'' she said.This is especially true given the fact that the general transition provision expires at the end of this year.’’

The EU argued that under WTO aid rules, the U.S. had to eliminate the breaks immediately because they were classified as prohibited.'' EU retaliation against U.S. goods ranging from paper and wood to jewelry and clothing started with an extra 5 percent duty in March 2004 and reached 14 percent nine months later, when the 25-nation bloc suspended the penalties. Sanctions will resume at 14 percent, rising 1 percent a month to a maximum of 17 percent, the EU said. The sanctions were the biggest ever permitted by the Geneva-based trade body. To appease the EU, Congress voted in October 2004 to replace the $50 billion export tax break with $145 billion in tax cuts for manufacturers and companies with overseas operations. Still, the U.S.continues to fail to implement fully’’ arbitrators’ recommendation to withdraw the prohibited subsidies,'' the three judges said in their 47-page report. Mood in Congress That probably won't happen even because Congress passed the revised law only after more than three years of negotiations, said Pamela Olson, who helped craft the 2004 law as the U.S. Treasury Department's assistant secretary for tax policy.It will fall to the USTR to see if they can negotiate another resolution,’’ said Olson, now a partner with Washington law firm Skadden Arps. ``Given the current mood on trade in Congress, this is not a good time to take the issue back.’’

After WTO judges ruled against the U.S. four months ago, the EU linked the tax dispute for the first time to a separate clash over development subsidies to rival aircraft makers Boeing and Airbus SAS that’s also before the WTO.

Boeing pocketed $168 million in 2004 because of the law, one of several rebates that allowed the aircraft maker to reduce its tax burden to $140 million from $686 million, its annual report shows. Its rebate was $115 million in 2003 and $195 million in 2002. The company stands to gain $750 million over the next decade, the EU has said.

The EU first filed a case against the U.S. tax breaks in 1997. After a first WTO decision, American lawmakers overhauled the law in 2000, and the WTO then backed a second EU complaint that the changes were inadequate and authorized retaliation.

A provision of the rewritten law allows exporters to continue receiving the tax benefit beyond 2006 if a binding contract was entered into a year ago that includes a future purchase option, or renewal option. The phase-out will reduce the amount of the benefit by $1.4 billion this year, according to estimates prepared by the independent congressional Joint Committee on Taxation.

To contact the reporter on this story:
Warren Giles in Geneva wgiles@bloomberg.net
Last Updated: February 13, 2006 11:35 EST