WTO case opens up tax laws question

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A World Trade Organization decision is spurring a rewrite of U.S. international tax laws and heavy lobbying by companies trying to influence the way they pay billions of dollars in taxes every year.

U.S. companies face $4 billion in sanctions on exports to the European Union as a result of a 2002 WTO ruling that found tax breaks on some exports were illegal subsidies.

The Bush administration and Congress want to repeal the tax breaks this year, and U.S. companies that sell or operate abroad see the opening as a chance to reconsider a corporate tax system that goes backmore than 30 years and that many think is outdated.

"Congress is faced with an excellent opportunity to examine U.S. international tax rules and adopt a system that makes sense for our 21st-century economy," Daniel Kostenbauder, a vice president of HP, formerly Hewlett-Packard, told the Senate Finance Committee yesterday.

The tax breaks under review are a major incentive for U.S. exporters. Congressional sources estimate U.S. companies would save $50 billion over the next 10 years if the code remained unchanged.

Companies are lining up to lobby lawmakers on how to change the rules on taxing international income and divvy up that $50 billion pot.

Rep. Bill Thomas, California Republican and chairman of the House Ways and Means Committee, has backed tax measures that would support U.S.-based multinational corporations through a repeal of the rules that violate WTO obligations and new tax breaks for multinational corporations.

Mr. Thomas last week said a formal proposal would be ready soon.

Rep. Philip M. Crane, Illinois Republican, and New York Rep. Charles B. Rangel, top Democrat on the Ways and Means Committee, have proposed competing legislation that provides a tax credit for domestic manufacturers. Some 67 Republicans and 59 Democrats are co-sponsoring the legislation.

Pamela Olson, assistant Treasury secretary, yesterday signaled support for Mr. Thomas' approach, although she did not explicitly endorse or criticize either measure.

"We create jobs here at home by creating jobs abroad. The more that we make our companies able to compete in the international marketplace, the more opportunity we have for people back here in the U.S.," Mrs. Olson told lawmakers during the Senate Finance Committee hearing.

Mrs. Olson also said tax breaks for research and development would provide benefits to U.S. companies, an approach Mr. Thomas has favored in his legislation.

Said Leonard Greenberger, a spokesman for the Coalition for Fair International Taxation (C-FIT): "International tax reform is about protecting American jobs, and we feel Secretary Olson clearly articulated the connection between that fundamental goal and the ability of U.S. multinationals to compete with foreign companies at home and abroad."

HP, financial-services giant Citigroup, soft-drink maker Coca-Cola and 23 other companies lined up behind C-FIT and Mr. Thomas' bill.

On the other side, aerospace company Boeing, equipment manufacturer Caterpillar, software maker Microsoft and others are pushing for the Crane-Rangel approach. It would comply with the WTO ruling by effectively lowering taxes for companies that manufacture products in the United States.

"Mrs. Olson reiterated today the administration's position that [part of the tax code] needs to be repealed and its willingness to work with the committees of jurisdiction. The question, of course, is how best to do that," said Sara Perkins, spokeswoman for Mr. Crane.

Almost 1,900 companies received the tax benefits in 1999, the most recent year for which IRSfigures are available on the "foreign sales corporation" break.

A small number of manufacturers receive the biggest breaks. Boeing's 2002 annual report, for example, indicates that the company saved $195 million last year from the tax benefits now being debated.