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WTO - Tax Breaks For Exporters Illegal

In a decision which may affect New Zealand exporters the World Trade Organisation (WTO) last Monday declared that tax breaks for exporters are illegal. John Howard reports.

The WTO has found in favour of the European Union by ruling the United States illegally subsidises corporations by allowing them to use subsidiaries in offshore fiscal havens to shield export income from American taxes.

The European Commission, the executive body of the EU, argued the subsidies cost the US taxpayer more than $2 billion a year.

"We welcome the WTO panel's ruling," said ther new EU trade commissioner, Pascal Lamy. "This US export subsidy has created an important distortion of international trade by granting an unfair advantage to US products in third markets."

The commission estimates that Boeing Co. alone saved $79 million in taxes in 1997 by channeling export sales through offshore subsidiaries. Boeing and Airbus Industrie, the European aircraft consortium, are locked in global competition for sales.

An arbitration panel Friday confirmed an interim ruling reached in July and sent copies of its report to the EU and the United States for comment, WTO officials said. The United States has 60 days to accept the ruling by agreeing to bring its legislation into line with WTO subsidy rules, or lodge an appeal.

However, the panel reportedly gave Washington until Oct. 1, 2000, to change its laws, after which the EU would be authorised to take retaliatory measures. However, Hugo Paeman, head of the delegation of the commission in Washington, said he did not expect the EU to retaliate, adding, "We have trust in the WTO system."

But that may be more hope than reality. The United States has acted in the banana and beef hormone cases by imposing punitive tariffs against more than $300 million worth of European products. The inclusion of foie gras and Roquefort cheese from France, among other farm products, has touched off furious protests in France.

Current US law allows domestic companies to set up foreign sales corporations in tax havens such as the Virgin Islands, Barbados, or Guam. Manufacturers then get tax exemptions if the products sold by the sales corporations are largely made in the US.

The EU argued, and the WTO panel reportedly agreed, that this was a breach of tax rules that treat goods sold for export differently to those sold on the domestic market.

Analysts said the ruling was likely to strengthen the hand of the EU as it prepares for a new round of world trade talks in Seattle later this year.

ENDS

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