Tax Loophole with EU Closed by Controversial Bill

The Senate has taken action to finally close a loophole that has resulted in a tax dispute with the European Union in a bill that cleared the U.S. Senate Monday with a 69-17 vote. It is expected that President Bush will sign “The American Jobs Creation Act of 2004” into law, Dow Jones Newswires reported.


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"This legislation will help to create jobs in America," Sen. Max Baucus (D., Mont.) told reporters. Baucus and Senate Finance Chairman Charles Grassley (R., Iowa) are the bill's main Senate sponsors.

The bill settles a long-running dispute between the U.S. and the European Union over a tax benefit for U.S. exporters known as foreign sales corporations, or the extraterritorial income exclusion act. The World Trade Organization declared the tax break-worth about $5 billion a year to companies such as Boeing Co. and Microsoft Corp.-to be an illegal trade subsidy, Dow Jones reported.

The legislation was controversial, with opponents focused on the corporate tax cuts for manufacturers and other benefits for businesses included in the bill. The House passed the bill late on Thursday with a vote of 280-141. It would be the fifth tax cut enacted during the Bush presidency.

Sen. John McCain (R., Ariz.), a long-time critic of special interest "pork barrel" spending and tax bills, told Dow Jones that this tax measure is in a class by itself. "It's the worst example of the influence of special interests that I have ever seen."

In addition to closing the loophole, the bill:

  • simplifies foreign tax credits to reduce double taxation levied on foreign companies;
  • contains a $10.1 billion industry-financed buyout of the federal tobacco subsidy program.
  • lets taxpayers in states such as Florida, Texas and South Dakota deduct sales taxes from their federal income tax returns for two years; and
  • benefits specific companies, such as tax breaks for building a new natural gas pipeline in Alaska and suspension of a customs duty for imported ceiling fans, Dow Jones reported.

"It's a lobbyist dream and a middle-class nightmare," Sen. Edward Kennedy (D., Mass.), told Dow Jones. "It's an embarrassment to a representative Democracy."

There was little question that the problem with the EU needed to be rectified. "I am pleased that Congress has finally taken this step towards U.S. compliance with the WTO ruling," EU Trade Commissioner Pascal Lamy told Dow Jones. "We will now carefully study the details in the final compromise."

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