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The Bureau of National Affairs

No. 10
Tuesday January 15, 2002 Page GG-4
ISSN 1523-567X
Lead Tax Report

Extraterritorial Income
U.S. Resolved to Comply With WTO,
Protect Multinational Corporations

The European Commission and the United States already have an initiative in place to cooperatively develop a timetable by which the United States will fashion a permanent solution to the World Trade Organization's final rejection of the U.S. Extraterritorial Income Tax Act, Ken Kies of PricewaterhouseCoopers, Washington, D.C., told BNA Jan. 14 from Brussels.

Noting that the United States already has a team of U.S. negotiators in Brussels, Kies said, "We came because we expected this decision and want to talk about the next steps ... to fashion a permanent solution, not another stopgap attempt like last year's."

The Europeans "should be realistic to how long it may take," Kies said, estimating that the process could last between three to four years.

The entire issue of FSC reform is particularly sensitive and far-reaching, as it will affect billions of dollars in trade and taxes plus millions of jobs, Kies said, adding that the debate has been further complicated by a highly political environment due to pending elections.


Anticipated Results

U.S. Trade Representative Robert B. Zoellick concurred with Kies that the Appellate Body's findings were anticipated.

Although a disappointment, the WTO's findings were expected, Zoellick said.

"Given prior decisions [by the WTO], we knew this would be an uphill struggle, but we believed it was important to make our case for a level playing field on tax rules," Zoellick said. "The United States respects its WTO obligations, which serve America's interests, and we intend to continue to seek to cooperate with the EU in order to manage and resolve this dispute."

The dispute was "especially sensitive" and "at its core, raises questions of a level playing field with regard to tax policy," Zoellick said in a written statement.

The administration will consult closely with Congress and affected U.S. interests regarding the next steps, Zoellick said.


U.S. Industry Disappointed

Various industry groups in the United States expressed disappointment over the WTO decision and called for negotiating new tax rules in the context of the new round of global trade talks, due to begin this year.

"The WTO rules clearly favor the territorial tax systems used by many European countries over the worldwide tax system employed by the United States," National Association of Manufacturers Executive Vice President Michael Baroody said. "Those discrepancies need to be addressed in the context of the new WTO round in order to truly and permanently solve the problem that led to this case in the first place. ... We need to fully renegotiate the rules to ensure that our companies will continue to be competitive."

Baroody said in a written statement that sanctions imposed by the EU affecting some $4 billion in U.S. trade a year would be particularly damaging to U.S. companies as the United States struggles to recover from a recession.

The National Foreign Trade Council in Washington, D.C., also urged the United States and the European Commission to exercise caution and deliberation in the treatment of this matter. "This is not a good time for the world's two largest economies to allow trade frictions to escalate," NFTC President William Reinsch said.


Territorial System Debated

Andrew Quinlan, president of the Center for Freedom and Prosperity in Alexandria, Va., said he thinks the United States "should scrap the worldwide tax system we have for corporate income and move to a territorial tax system" as "territorial taxation is WTO-compliant and many EU countries already use this approach."

The issue is not that simple, Kimberly Pinter of NAM told BNA. Several aspects of U.S. international tax law operate similarly to the territorial systems applied by the European Union. In fact, the ETI Act was drafted so that its system would parallel theirs, she said.

Pinter said she thinks it unlikely the EU will retaliate in with $4 billion in trade sanctions against the United States.

"The amount ... is enormous and with the economies of the United States and the European Union being so interdependent, sanctions would not be in anyone's best interest," she said.


Grassley Cites Need for Trade Promotion Authority

Sen. Charles Grassley (R-Iowa), ranking Republican on the Finance Committee, said the ruling underscores the need for the Senate to act on pending legislation (H.R. 3005) to renew the administration's so-called trade promotion authority.

"The TPA bill passed by the Finance Committee [Dec. 18] includes a provision that calls for the next round of the World Trade Organization to comprehensively address these international tax issues," Grassley said in a news release. "So today's ruling is yet another reason why the Senate should vote by the end of February on the bipartisan trade legislation that's pending."


2002 Corporate Income Tax Filing

Meanwhile, practitioners and corporations that had speculated that the WTO ruling would impact less negatively on the United States continued to look for a silver lining in the decision.

"While we're disappointed with the outcome, we were pleased to see that the Appellate Body narrowed the panel's reasoning in a number of key respects," NFTC's Judy Scarabello said in prepared comments.

"The risk remains, though, that if the case is not properly managed by the parties, the decision could have far-reaching, unsettling effect on international tax practices for many countries or could even end up favoring one tax system over another," she said.

"Now that the final decision is out, companies may continue to use the ETI as long as it is in place as valid U.S. law," Pinter said. "In the meantime, the governments need to negotiate some kind of solution."

"The best solution would be to address the WTO rules so that they would be equitable in the first place," she said.

Other practitioners, who hoped to see the ETI issue folded into discussions at Doja, Qatar (153 DTR G-1, 8/9/01), now hope for negotiations during the penalty phase of the WTO proceedings.

A possible reduction of U.S. tariffs on such European imports as steel, remains among the topics for potential negotiations, practitioners said.

Although in the WTO's findings and conclusions, the Appellate Body recommended that the Dispute Settlement Body request the United States to bring the ETI measure into conformity with its obligations, practitioners said the lack of a date also offers a glimmer of hope.

What remains certain is that corporate taxpayers need to treat the income tax filings for the 2001-2002 period in compliance with U.S. tax law and await the impact that the WTO's decision will have on their international position.

Text of the WTO Appellate Body's report is in Section L.  

By Myrna Zelaya-Quesada and Gary G. Yerkey

Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.


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