- The Washington Times - Friday, July 28, 2000

The House Ways and Means Committee Thursday approved a major change to a business tax provision that currently saves American companies billions of dollars each year but would cost U.S. taxpayers an extra $1.5 billion over five years.

The panel hurriedly passed the bill in an effort to head off a costly trade war with the European Union. The United States has an Oct. 1 deadline under international trade rules to change the existing system.

The speed of the committee action the 39-1 vote was taken with little public debate and without hearings prompted accusations by some members of Congress that the committee was rubber-stamping legislation drafted by corporate tax lobbyists.

The legislation stems from a case that Europe brought in the Geneva-based World Trade Organization (WTO) against a tax provision that allows U.S. companies to pay lower taxes on income they earn from exports. The decision which found the tax breaks to be illegal export subsidies could allow Europe to impose $4 billion in penalties on U.S. exports, an amount that dwarfs the disruption to international trade from all previous trans-Atlantic disputes, including the beef and banana battles.

"This is an important step in making our tax system not only compliant with our obligations under WTO rules, but also in making our system relevant to the global marketplace in which our citizens and businesses must compete," said Rep. Bill Archer, Texas Republican and chairman of the Ways and Means Committee.

The new legislation stems from a case Europe brought against a provision in the U.S. tax code called foreign sales corporations. This system allows exporters to shield much of their income earned through overseas sales by routing that money through shell corporations that are set up in tax havens like Barbados and the U.S. Virgin Islands.

The system saves major U.S. corporations such as Boeing, General Electric and United Technologies $4 billion each year. But the WTO concluded in February that the law functions as an export subsidy, which international trade rules largely prohibit.

The Clinton administration responded by drafting a plan that extends tax relief to all income derived from virtually all foreign sources. Under the bill passed Thursday, exporters, as well as companies with partnerships or subsidiaries overseas, could obtain preferential treatment under the U.S. tax code.

By giving favorable tax treatment to all income, and not only export income, the administration believes the draft law would pass muster at the WTO, a senior administration official said. But the official conceded that the change raises the cost of the provision to U.S. taxpayers, a point that drew protests from some Democrats.

"It is time for Congress to wean corporate America away from the taxpayer trough," said Rep. Peter A. DeFazio, Oregon Democrat.

Mr. DeFazio has waged a guerrilla campaign to abolish the foreign sales corporations system and avoid creating any new tax breaks. Mr. DeFazio cited an analysis of the Congressional Research Service that concluded that the system does little to improve the nation's economic welfare.

The administration and House members went to considerable lengths to involve the Senate in drafting the legislation to speed its eventual passage into law, the senior official said. With the committee action, the focus now shifts to whether Europe will contend that the draft law still violates WTO rules.

If the law passes, and the European Union is not satisfied with the change, it could demand another ruling by the WTO to determine if the United States has complied with trade rules. If the United States loses again, Europe would be allowed to penalize U.S. exports.

But Deputy Treasury Secretary Stuart Eizenstat warned the European Union against provoking a showdown over an issue that could do unprecedented damage to trans-Atlantic commerce.

"This would risk escalating our dispute with the EU into a major trade war," he told the committee.

The bill passed following frenzied activity that involved not only the administration and Congress, but also a small army of tax and trade lobbyists who were determined to defend the tax benefit to its current users, which overwhelmingly are large corporations.

Reps. Lloyd Doggett, Texas Democrat, and Pete Stark, California Democrat, accused Mr. Archer of ramming the bill through without any debate. But House members and administration officials insisted that the bill was the product of work by elected officials and stressed that the panel had to act as soon as possible.

"Everybody knew we had a time problem here," said Rep. Robert T. Matsui, California Democrat.

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