Trade Sanctions Could Trigger Tax Changes

U.S. KO'd in WTO bout. The upshot: expect sanctions from the EU -- and tax-code tinkering from Congress.
Marie LeoneMarch 20, 2002

In January, the Geneva-based World Trade Organization (WTO) ended a two-year trade subsidy dispute by striking down a U.S. appeal and crowning the European Union the victor. The potentially arduous impact of the decision is that under WTO rules, the EU has the right to choose which U.S. industries will bear the burden of trade sanctions–duties that could reach, in aggregate, $4 billion annually. The sanction ceiling was set by the original $4.04 billion trade damage claim filed by the EU in November 2000. A WTO arbitration panel is slated to announce the amount of the sanction later this month.

Trade experts don’t expect the WTO to impose the maximum sanction level, citing the strong interdependency between the U.S. and EU economies as a deterrent. However, even levying “a $100 million sanction on a weak industry could cause significant damage,” says Kimberly Pinter, director of corporate finance and tax at the National Association of Manufacturers, in Washington, D.C.

As for the industry list, “it includes everything but the kitchen sink,” quips Pinter. But she admits that she would have done “exactly the same thing” to ensure flexibility in targeting industries.

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The new ruling will likely force Congress to tinker with the tax laws, notes William B. Sherman, an international tax attorney with Holland & Knight, in Fort Lauderdale. This is the third time that the WTO, or its predecessor, the General Agreement on Tariffs and Trade, has ruled against the United States on trade subsidies, each time sparking a tax-code rewrite, he adds.

Currently, such U.S. exporters as General Electric Co., Microsoft Corp., and Boeing can avoid paying taxes on some overseas sales by directing profits through subsidiaries based in offshore tax havens. But the ruling determined that this subsidy, which is related to the Federal Sales Corporation Repeal and Extraterritorial Income Exclusion Act of 2000, violates international trade rules by providing an illegal subsidy to U.S. exporters.

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