WASHINGTON-With the United States facing $4 billion in retaliatory tariffs from the European Union by month’s end, telecom and high-tech firms find themselves split on competing legislation to repeal tax breaks for U.S. exporters.
The export subsidy issue directly impacts Motorola Inc., the nation’s top mobile-phone manufacturer, and other wireless vendors that sell abroad. Telecom carriers, software producers and Internet firms are also affected.
This week, telecom and high-tech companies could be treated to yet another option if Senate Finance Committee Chairman Charles Grassley (R-Iowa) weighs in with a new bill as many expect. It would make the second Senate bill on the combustible issue. Senate Judiciary Committee Chairman Orrin Hatch (R-Utah) dropped a bill in late July.
The big fight, however, is on the House side, where telecom and high-tech firms have lined up behind two different bills. There are strong feelings on each side, putting industry trade groups in a precarious position.
“Given the importance of foreign markets to the U.S. high-tech industry, there is a critical need to update the U.S. tax code to recognize the new realities of the international marketplace,” said the American Electronics Association.
The issue for U.S. telecom and high-tech companies is not so much avoiding EU trade sanctions-which tend to target food, toys, textiles and machinery-but rather how to cut the best deal on Capitol Hill in a way that offsets the loss of a tax break deemed improper by the World Trade Organization with one that passes muster with the 146-member trade body.
It is not a small matter for battered telecom and tech sectors, which can ill afford to lose a generous tax benefit.
On the surface, the controversy has all the trappings of a trade war in the making. EU Trade Commissioner Pascal Lamy was recently quoted as saying, “We will move ahead with retaliation if there is not progress by the end of September.”
In reality, the EU would rather the U.S. fix corporate tax laws to spare them both a trade fight that could easily spin out of control and badly hurt companies on both sides of the Atlantic.
Until now, the EU-U.S. trade spat has been overshadowed by growing unrest with the U.S.-China trade imbalance and rich country farm subsidies that were the highlight of last week’s WTO meeting in Cancun, Mexico.
In 2000, the WTO sided with the 15-nation EU in ruling the absence of U.S. taxation on foreign sales by American firms broke trade rules. In response, U.S. lawmakers repealed the regime known as the Foreign Sales Corp. and replaced it with one called the Extraterritorial Income Exclusion.
But that did not satisfy the EU, which promptly challenged the new structure. The WTO again agreed with the EU in a January 2002 decision. Later that year, the WTO said the EU could impose $4.04 billion in tariffs against the United States.
The initial list of products that were to be targeted was shortened in March, but the $4.04 billion figure remained intact.
That put the ball in Congress’ court. While losing a tax break hurts American exporters, the United States on paper should net an estimated $50 billion as a result of repealing the law that exempts taxation of U.S. foreign sales. How that money is reallocated is a matter of dispute. One option is to use the money to help struggling U.S. manufacturers.
There is also the possibility that a new tax bill could easily eat up the $50 billion in new, bigger tax breaks for U.S. exporters. That could prove problematic for a Congress that already faces a $480 billion budget deficit and must act on a request by President Bush for $87 billion to fund military operations and reconstruction in Iraq and Afghanistan.
In May, Reps. Philip Crane (R-Ill.) and Charles Rangel (D-N.Y.) introduced a bill to repeal the FSC/ETI tax program and in its place enact a corporate rate deduction. The Crane-Rangel bill has 144 co-sponsors.
The legislation is supported by Motorola, Microsoft Corp. Boeing Co., Applied Materials, United Technologies and Northrop Grumman.
But an alternative plan-penned by House Ways and Means Committee Chairman William Thomas (R-Calif.) and costing about $190 billion-has far more corporate backers. They include Agilent Technologies Inc., AOL Time Warner, AT&T Corp., BellSouth Corp., Cisco Systems Inc., Dell Computer Corp., EDS, Hewlett-Packard Co., IBM Corp., SBC Communications Inc., Sun Microsystems Inc., Telcordia Technologies and Verizon Communications.
Motorola could not be reached for comment. Lucent Technologies Inc. declined to comment, and Qualcomm Inc. did not respond to a request for comment.
The only agreement seems to be that Congress needs to act fast if U.S. firms are to escape $4 billion in retaliatory trade tariffs.
“The FSC law and its successor are relics of a bygone era … U.S. multinational companies do not need subsidies or tax exemptions to compete in the global economy,” stated Daniel Griswold, associate director of trade policy studies at the Cato Institute in a paper published in May.
