- The Washington Times - Thursday, February 7, 2002

The House and Senate are at odds over how to change an American tax law that has run afoul of international trade rules, and could prompt other countries to retaliate against U.S. exports.
The World Trade Organization last month issued its final ruling against a U.S. tax rule that benefits major U.S. exporters. By the end of April, the European Union, which brought the case, will receive authorization from the WTO to slap tariffs on American products.
As a result, members of Congress and Bush administration officials are scrambling for a solution that would avoid an explosive conclusion to what has become a multibillion-dollar dispute over trans-Atlantic trade. But while the House seems ready to begin revamping U.S. tax laws to avoid a clash, the Senate appears much more reluctant, even though time is running extremely short.
U.S. Trade Representative Robert B. Zoellick yesterday urged Congress to demonstrate progress in changing the law. But the top senator for tax issues rejected this plea.
"There's too much emphasis on a tax [legislation] solution," Sen. Max Baucus, the Montana Democrat who heads the Senate Finance Committee, said at a hearing yesterday. "I don't think that's going to happen."
Mr. Baucus believes that the United States and Europe should instead negotiate changes to trade rules as part of the talks that WTO members started in November in Doha, Qatar, a Senate aide said.
At the same time, the Republican chairman of the House Ways and Means Committee, Rep. Bill Thomas of California, has called for major changes to American tax laws as a way of ending the dispute with Europe and promoting his own plans for major tax reform.
"It is now clear that we have to reform the U.S. tax code not out of desire but out of necessity to maintain international competitiveness," Mr. Thomas said in a Jan. 14 statement following the WTO ruling.
Congress and the Clinton administration rushed through a change to the tax rule in 2000 but a WTO panel objected to that law as well. As a result, Mr. Thomas sees little value in "tweaking the system," his spokesperson said.
Under the Constitution, all tax legislation must originate in the House, so Mr. Thomas will play the key role in that chamber. But Mr. Baucus, as chairman of the relevant committee in the Senate, must also sign off on any plan to resolve the tax dispute.
The House and Senate are struggling to find a solution that would prevent European action against American companies. The WTO has ruled that preferential tax treatment for major American exporters violates an international ban on export subsidies.
The U.S. system allows major corporations such as Boeing, General Electric and Microsoft to set up shell companies, called Foreign Sales Corporations in tax havens such as the U.S. Virgin Islands. They then funnel their export earnings through them, shaving about $4 billion each year off their U.S. taxes.
Europe's trade commissioner, Pascal Lamy, said during a visit to Washington last week that the 15-nation European Union would give the United States some breathing room to find a legislative fix to the FSC problem. But he cautioned that Europe may yet retaliate if it believes the United States is not acting in good faith to comply with WTO rules.
Mr. Lamy also said the United States could compensate Europe with tariff reductions on its exports, something allowed under WTO rules.
"The real problem is that we're now in a world where they retaliate, we compensate or we change the law," Mr. Zoellick told the Finance Committee. "I can't change that."
Mr. Zoellick pleaded with the senators for a "serious effort" to change the FSC system to comply with WTO rules.
If the United States appears to be "thumbing its nose" at Europe and the WTO, it would invite retaliation, he added.

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