Inside U.S. Trade

February 20, 2004

TWO SENATORS SEE TROUBLE FOR FSC-ETI REPEAL BILL DESPITE EU SANCTIONS

Two senators late last week expressed doubts that a bill to repeal the foreign sales corporation tax provision and its successor regime may not pass this year for several different reasons despite punitive tariffs the European Union is scheduled to impose on U.S. exports on March 1.

Sen. Richard Lugar (R-IN) said it is not clear whether the Senate would be able to pass the repeal bill because of a crowded legislative calendar and the partisan atmosphere in the Senate, where it is impossible to even convene conferences on legislation already passed. There could be a situation where the EU’s punitive tariffs on U.S. exports could go as high as eight percent, with “people getting angrier and angrier” and Congress may still be unable to pass a bill, he told the USA Engage Coalition on Feb. 13.

He pointed out that it is nearly impossible to limit a tax bill to one issue such as the FSC because there is always another constituency that wants to advance its agenda, which makes for a drawn out floor debate. “Whenever a tax bill comes to the floor of the Senate, they ought to bar the door,” Lugar said.

Separately, Sen. Gordon Smith (R-OR) said in a Feb 12 Senate Finance Committee hearing that a meeting of House and Senate Republicans in Philadelphia last month revealed that House members do not feel the need to act quickly. “We heard our House colleagues say they are not too interested in taking up this FSC/ETI issue,” Smith said. “They are not worried about the penalties that will be imposed on manufacturers.”

In the same hearing, Finance Committee chairman Charles Grassley (R-IA) said he has heard “rumors” that House members are making light of the proposed EU sanctions. “We have to take the sanctions threat seriously,” Grassley said.

The bill sponsored by House Ways and Means Committee Chairman Bill Thomas (R-CA) repealing FSC and the Extraterritorial Income Act pending in the House is controversial because it would cost $60 billion over ten years in addition to the funds generated by the repeal and it contains extensive changes to the international part of the U.S. tax code that would benefit U.S.-owned foreign subsidiaries. This could open the bill to charges that it helps move U.S. jobs overseas. In contrast, the Senate bill on FSC-ETI repeal is focused more on a cut in the tax rate of U.S. manufacturers.

Smith also urged the Administration to make specific proposals on how the funds generated from the FSC-ETI repeal should be used to rewrite the U.S. tax code. But throughout the hearing, Treasury Secretary John Snow made general statements that the Administration sees a need to act quickly to comply with a World Trade Organizations ruling against FSC and avoid EU sanctions. His most specific comment was that certain international aspects of the tax code were “a burden on American business that makes us less competitive.”

The EU plans to impose 5 percent tariffs on approximately 1,700 products valued at a total of $4 billion beginning March 1. The tariffs will increase by 1 percent every month for the next year, until the tariffs top off at 17 percent in March 2005. Those sanctions are part of legislation approved by member states that will go into effect unless member states approve new legislation revoking the sanctions.

Separately, the European Commission signaled new flexibility to consider a possible transition period in the FSC-ETI repeal bill, after the Union of Industrial and Employers’ Confederations of Europe (UNICE) urged Lamy to consider a gradual phase-out. A Commission spokesman said this week that the Commission would “reflect” on the UNICE letter as it was asked to do.

“For our part, we are ready to consider, while reluctantly, a reasonable transition period, as short as possible, for the repeal of the current legislation,” the Feb. 13 UNICE letter said. The letter does not specify but UNICE sources say that the transition period should be “less than three years, but no more than that.”

UNICE said it would appreciate if the Commission explored that idea, provided that the final bill would be compatible with the World Trade Organization, and not negatively affect EU interests.

“The UNICE letter and the Commission reaction to it should eliminate any speculation that the Senate bill wouldn’t pass muster in Brussels,” said Todd Malan, Executive Director of the Organization for International Investment (OFII), the association of U.S. subsidiaries of foreign companies. “The UNICE letter shows that foreign firms with major operations in the U.S. are willing to step up to the plate and play a constructive role in resolving disputes.”

The EU legislation does not include language on transition periods, but only on imposing sanctions for failure to comply with the WTO ruling. Some European companies had signaled that they would take pains to avoid this strict reading of the legislation by the European Commission. (Inside U.S. Trade, Jan. 23, p. 11).

Grassley also said that he has spoken to EU Trade Commissioner Pascal Lamy and urged him not to proceed to sanctions. But he told Iowa broadcasters on Feb. 17 that he had a “firm feeling” that Lamy will indeed go forward with sanctions. “I can’t have a bill to the president by March 1 the way Europe demands and I’m embarrassed about that,” Grassley continued. He said that he is only one part of the equation to get a bill passed with the other two being the House and the Bush Administration.

In the Feb. 17 press conference, Grassley also said that he would try to move a bill in late February or early March and would have done so earlier if Senate Majority Leader Bill Frist (R-TN) had scheduled floor time for it. Lamy is visiting Washington Feb. 25-27, and the FSC issue will be prominent on his agenda in meetings with members of the Administration and Congress.

Thomas said last month that he would not bring his FSC/ETI repeal bill to the floor in its “present form, ” and a committee source said this week that could mean two things. One is that he would change the content of the bill, the other is that he would change the way the measure would move, such as packaging it with other legislation that would give it momentum. Thomas is still sorting out what to do and when and on what bill, according to the source, but GOP sources have discussed placing the FSC-ETI repeal bill into the House version of the highway bill.

At press time, the House had stopped working on a six-year highway bill and is now poised to consider a four-month extension. In addition, some sources had discussed placing the FSC-ETI bill into the budget reconciliation bill, but under Senate rules that would mean the repeal would only hold for the number of years covered in the budget.