Washington (July 9, 2003) -- The Bush Administration sent its big guns to Congress this week to urge legislators to fix part of the tax code to avoid a U.S.-European Union trade war.

"I suspect that if by the end of the session we have not shown serious progress in passing legislation to replace [the tax laws that violate international trade rules], I think next January we face a very high likelihood of retaliation," said John Veroneau, general counsel in the Office of the U.S. Trade Representative, in testimony before the Senate Finance Committee, according to a report on CBSMarketwatch.com

The World Trade Organization has authorized the European Union to impose $4 billion in sanctions on U.S. goods and services. Veroneau said the European Union has held off due to a promise from the U.S. to fix the tax code problem and because it realizes such sanctions would also hurt its own consumers.

But Veroneau warned that if Congress doesn’t act by the end of the year, EU officials may lose patience and apply the sanctions anyway.

The sticking point in the code is the "foreign sales corporation" tax program, which allows U.S. companies that do business overseas to shield between 15 percent and 30 percent of their export income from U.S. taxes. This adds up to an annual tax break of nearly $5 billion for U.S. firms. The WTO ruled in 2001 that the measure was an illegal subsidy.

-- WebCPA staff

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