US working on bill to end tax squabble with EU

US technology companies are anticipating passage of a bill designed to settle a dispute between the US and the European Union over the taxation of US exports.

          US technology companies are anticipating passage of a bill designed to settle a dispute between the US and the European Union over the taxation of US exports.

          Questions remain, however, about whether the legislation would bring the US fully into compliance with a World Trade Organisation (WTO) ruling.

          The US faces a November 1 deadline to enact the legislation that would amend the foreign sales corporation (FSC) provision of US tax law, which US companies use to get a tax break on exported goods.

          The US is under pressure to change the FSC provision due to a decision it lost to the European Union before the WTO earlier this year. The 15-nation EU has threatened to impose trade sanctions if the bill isn't passed and signed by President Clinton by the November 1 deadline.

          The FSC provision of US tax law is used by companies to set up overseas subsidiaries to handle exports and take a deduction on export sales. US technology companies, which now comprise the country's leading export industry, use their FSC subsidiaries to save billions of dollars in taxes each year.

          Technology companies, including Microsoft and Oracle fought hard to get the FSC benefit, granted to them in 1997, and are now fighting to keep it. Prior to 1997 they had been excluded from the tax break because of a provision that said intangible goods, such as recordings and other intellectual property, could not be defined as export property.

          In the dispute before the WTO, the US argued that the FSC helps to establish parity with European tax systems, which grant their exporters tax breaks, such as a rebate of the value-added tax (VAT) and no charges on foreign-earned income. The EU, however, argued successfully that the FSC provision was an illegal export subsidy, and the WTO gave the US until October 1 to change its tax law. Last month the Europeans agreed to a one-month extension to November 1.

          The bill is expected to be added to one of the remaining appropriations bills now being completed by Congress or drafted into a separate tax package that would include other proposed changes in US tax code, such as the elimination of the 3% federal excise tax on telecommunications.

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