MARCH 01, 2004 – The European Union struck back at tax breaks given to U.S. exporters today by slapping trade sanctions on the U.S. in a move that could cost U.S. firms, including IT vendors such as Microsoft Corp., millions of dollars. The EU said the sanctions come in retaliation to $4 billion in annual subsidies enjoyed by major U.S. exporters, such as Microsoft and The Boeing Co. The World Trade Organization deemed the subsidies illegal in January 2002.
The subsidies come in the form of tax breaks currently given under the Extraterritorial Income Exclusion Act (ETI), which former President Bill Clinton signed into law in 2000 to replace the Foreign Sales Corporation Act, which also granted tax breaks.
Last May, the WTO authorized the EU to take countermeasures against the subsidies. The U.S. was given a March 1, 2004, deadline to repeal the subsidy provision.
With no resolution in place, the EU retaliated by imposing an additional custom duty of 5% on certain U.S. agricultural, textile, industrial, electronic and paper exports. The duty is due to increase at a rate of 1% a month, to a ceiling of 17% a month, by next March 1.
In a statement Friday, the EU said its objective remains the withdrawal of the subsidy and that it has therefore opted for a “measured and gradual response.” The EU estimates that the new custom duties will total $315 million from March 1 to Dec. 31, 2004, and $666 million in additional duties if carried through 2005.
If the U.S. responds by repealing the tax breaks, major U.S. exporters such as Microsoft could potentially wind up paying millions more in taxes.
Representatives for Microsoft could not immediately comment on the sanctions.
The company’s financial statements reflect the advantage the software vendor has gained from the tax break, however. In 2002 for example, Microsoft was allowed a 2.4% reduction in its statutory tax rate under the ETI, according to company financial documents.