The United States has until October 1 to change tax break laws given to selected U.S. corporations or face a possible $4 billion sanction by the European Union (EU). Last week the World Trade Organization (WTO) gave the European Commission the go-head to impose the sanctions if the US fails to comply with international trade treaties.

The EU is asking for the end to illegal export subsidies. At the heart of the dispute is a system of tax breaks for major companies known as the foreign sales corporations (FSC) program. The EU has targeted a number of products receiving these special breaks including nuclear reactors, iron and steel, aluminum, electrical machinery, textiles and clothing, fruit, and grains.

US lawmakers are willing to repeal the tax breaks but are unsure if it can be done within the timeframe imposed by the EU. Key Congressional leaders disagree about what to do with the expected $50 million in additional tax revenue that changes will bring over the next ten years.

The EU says it is willing to work with the US but warns that its patience is not “infinite.” If Congress does not act in a timely manner the EU could start imposing countermeasures in January 2004. The $4 billion retaliation is the largest sanction imposed by the WTO.

The FSC issue is not the only trade concern between the United States and the EU. Last Tuesday European Ministers approved a plan that will require US companies to collect taxes on digital downloads in the EU starting in July. Under the new proposal, digital goods, such as software and music downloads, will be taxed at the point of consumption for international sales. The law does not apply to digital sales to business customers.