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Business tax laws in US under review by lawmakers

A simmering tax feud between the US and Europe could open the door to a major overhaul of US business taxes, which critics say put American companies at a competitive disadvantage and drive some to Bermuda and other offshore tax havens.

Now that the US has lost two tax cases before the WTO, Bush administration officials and leading lawmakers agree the country no longer can defend tax breaks the EUsuccessfully challenged as illegal export subsidies.

The question is how far to go in fixing the problem.

The EU's threatened penalties of up to US$4 billion on US products could drive the debate toward fundamental tax changes rather than short-term fixes, said the chairman of the tax-writing House Ways and Means Committee.

"If we're creative, we can make change which makes us more competitive in the broad sense rather than the narrow sense," said Representative Bill Thomas. "We have a window that's opened because of the challenge. I don't now that you just put blinders on and shove some narrow tax remedy through."

The tax system that was ruled an illegal subsidy allows US companies with a foreign presence to exempt between 15 percent and 30 percent of their export income from US taxes. Congress passed this system in 2000 to replace an earlier version also ruled an illegal subsidy by the WTO.

The tax break, coupled with a second benefit not challenged by the EU, will save US companies an estimated US$4.8 billion this year.

Like the earlier system, it primarily benefits Boeing, Microsoft and other big companies. In 1996, 709 companies with more than US$1 billion in assets got 77 percent of the benefits, said William Gale, economist at the Brookings Institution think tank.

Thomas said the trick for Congress is balance repeal of these tax breaks with other changes that would minimize the impact on companies that stand to lose.

"You have to be very careful when you make changes that you don't have unintended consequences," he said.

"You don't want to do something really dumb."

There is talk about putting in place a "territorial" system used many other countries that taxes companies on their domestic earnings but excludes foreign income from tax. Unlike most countries, the US taxes corporate income worldwide.
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