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US buckles on export subsidies to MS et al, but ups them $1.5bn

All's well in the world of trade negotiations, then...

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The US is retreating in the latest skirmish of the trade war with the EU, and will revise the controversial foreign sales corporation system that, according to World Trade Organisation rules, gave illegal export subsidies to the likes of Microsoft and other major US exporters. More than half of US exports go through FSCs, and it is estimated that in 2001, the export subsidies under the scheme would have amounted to $4.1 billion.

Faced with the prospect of a $26 billion import tax retaliation by the EU from 1 October if the US didn't repeal the FSC legislation, the House Ways and Means Committee voted 34-1 yesterday on a new bill. In May, the EU said that US proposals at that time "did not meet basic WTO requirements". It is expected that the new bill will pass the House and Senate by the WTO deadline.

US Deputy Treasury Secretary Stuart Eizenstat said he hoped that the EU would endorse the proposal in the bill. No longer would it be necessary for US corporations to set up subsidiaries in tax havens to get FSC tax credits: instead, the subsidies would be received directly, which looks like a rather similar fiddle to us. The new system would also give partial US tax exemption to more companies than the present system, and would cost an additional $1.5 billion over five years. The new program would also apply to non-US corporations having US operations. The US IT industry will be holding its breath, hoping that the proposal is accepted by the EU.

Net tax wars still raging

Eizenstat has also been letting off steam about EU proposals to tax digital commerce by requiring value added tax to be added to consumer transactions, even if the product is sold by a non-EU vendor. US vendors would be required to register in an EU country, to collect the tax and remit it to the proper authority. Eizenstat said this violated "the bedrock principle of tax neutrality", and that electronically delivered products like books, newspapers and software would attract a higher rate than their physical equivalents. Well of course, he's not quite right there: in the UK but not in most of Europe, there's no tax on knowledge in the shape of printed publications, but there is a silly anomaly that if there is a floppy disk in the back of the book (or microfiche come to that), the whole item is subject to VAT.

Eizenstat also ranted that the EU VAT proposal could result in e-commerce suppliers having to reveal the addresses and purchasing habits of their customers. He should have looked at the paperwork required to send goods to the US before he tried this one. But there was more to come: he was concerned that "there could be a shift on the part of [EU] consumers to seek out sites that have not yet registered and do not collect taxes". Shock horror. Eizenstat favoured resolving complex, multi-jurisdictional questions through the OECD, as does the EU, but the OECD is still studying the matter and will not report until next year.

The US has decided for the time being to allow state and local taxes to be waived on inter-state commerce via the Internet, while retail shops have to charge the taxes. With an increasing amount of purchasing likely to be done online, it is a situation that is unlikely to last since states and cities significantly rely on income from sales tax. Not much attention has yet been given to imports to the US from overseas, but problems are beginning to arise.

What about phone companies then?
For its part, the EU has threatened the US that there would be retaliation if Deutsche Telekom were not allowed to complete its $50.5 billion purchase of VoiceSteam Wireless, since a refusal would contravene the 1997 WTO telecommunications accord. There is US concern that DT is still part-owned by the German government. The 1934 US legislation that prevented non-US companies acquiring US telecoms carriers was not repealed when the US signed the WTO telecoms accord. The US Committee on Foreign Investment in the United States would have to approve any deal, as would the FCC and the DoJ.

Well, bananas?
It would seem that the banana wars between the US and the EU (which the US won, but was smacked by the WTO for jumping the gun on enforcement) were just the opening skirmish in a trade war, and that escalation is more likely than a peace treaty. But with the WTO being more powerful than either the EU or the US in international trade matters, let us hope that sanity prevails and there are no new taxes. As for the future of the trade war, a bizarre provision in the US FSC replacement proposal will allow US arms makers a double tax deduction on exports. That's a hard one to rationalise. ®

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