- The Washington Times - Saturday, January 26, 2002

The United States and Europe are trying to negotiate a solution to a multibillion-dollar dispute over tax rules and avoid a tit-for-tat round of economic sanctions, top officials from both sides said yesterday.

But the European Union wants to see a "good faith" effort from the United States that it will comply with the rules of the World Trade Organization (WTO), Pascal Lamy, the European trade commissioner, told reporters in Washington. He stressed that Europe, which will soon receive WTO authorization to impose trade penalties on the United States, may yet retaliate against U.S. exports.

"We want the United States to comply and we want this problem to end," Mr. Lamy said. "We will use the leverage the WTO gives us."

The dispute concerns Foreign Sales Corporations, legal entities owned by U.S.-based corporations like General Electric and Boeing. Companies set up FSCs in tax havens such as the U.S. Virgin Islands and funnel their export earnings through them, saving an estimated $4 billion each year.

The Geneva-based WTO has ruled four times that this scheme violates treaties that bar subsidies for exports, which the United States has signed. Within three months, Europe will get WTO permission to impose up to $4 billion in sanctions on American products.

Mr. Lamy avoided specifics on how long Europe would wait before retaliating, but cautioned that it could not stomach an "endless process" of debating how or if the United States should repeal or otherwise change the FSC system.

The most straightforward solution to the FSC dispute would be to take it off the books, a step that a broad range of major corporations have steadfastly opposed.

Rep. Bill Thomas, the California Republican who heads the House Committee on Ways and Means, has suggested changing the FSC system as part of a broad overhaul of corporate taxation.

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