U.S. suffers blow to trade

billions of dollars at stake

World regulatory body nullifies tax havens used by giant corporations


WASHINGTON -- The United States has suffered one of its biggest trade defeats, losing a dispute with Europe about tax policies that deals a blow to trans-Atlantic relations and could force U.S. companies to pay billions of dollars more in taxes each year.

An appeals panel of the World Trade Organization, the Geneva-based body that regulates trade, has ruled that the United States must scrap a law that lets companies avoid paying taxes on some overseas sales by channeling them through offshore subsidiaries.

The decision, which Clinton administration officials expect to be announced today by the WTO, orders the United States to rewrite its tax code by Oct. 1 to eliminate what the decision calls an illegal export subsidy or face sanctions.

The United States has lost trade cases before, but no previous loss has come close to this one in dollar terms.

Last year alone, hundreds of U.S. companies including Boeing, Microsoft and General Motors avoided paying about $4 billion in federal taxes under the provision. Boeing used the tax law to save $130 million in 1998, a crucial edge in its competition with Europe's Airbus Industrie for global aircraft sales.

Clinton administration officials said the unfavorable ruling would set off a scramble to find ways to preserve the tax breaks. One option is to alter the tax code to comply with WTO rules, though it is not clear how that would be done. The United States will also seek to reach a political settlement with the European Union, which brought the case in 1998.

If settlement talks fail, Washington also has contemplated filing a counter-suit against what it argues are equivalent European export subsidies. Retaliation of that kind would further strain economic ties between the two economic powers at a time when they are already skirmishing over beef, bananas, genetically modified goods and aircraft noise.

"The rules are widely viewed as creating a level playing field with the European tax system and are important to the business community," said Treasury Secretary Lawrence H. Summers in a statement last night. "We will work closely with our European counterparts, Congress and the business community to achieve a solution."

"This could not have come at a worse time for the U.S.," said Peter S. Watson, a trade lawyer and former head of the International Trade Commission. "It makes the U.S. a loser in a major case involving significant financial exposure."

How much financial exposure is still an open question. While the administration estimates that the tax breaks could save U.S. companies as much as $5 billion annually, a WTO panel has yet to rule on what the total damages might be.

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