The World Trade Organization (WTO) ruled last Friday that the European Union (EU) has the right to impose trade sanctions amounting to $4.043 billion on the U.S. to make up for tax breaks given to U.S. corporations that export products to European countries.

The issue at task is a situation that occurs when a U.S. corporation creates an offshore subsidiary called a Foreign Sales Corporation (FSC), then exports American-made products through the FSC which is exempt from U.S. taxes. The EU claims the system equates to a subsidy to U.S. corporations that amounts to over $4 billion. The WTO agrees and has issued its ruling.

Lawmakers in Washington have passed previous legislation aimed at appeasing the WTO. The FSC Repeal and Extraterritorial Act, passed in the Fall of 2000, provides a deduction for taxes based on overseas sales. The U.S. contends that the tax benefit allows U.S. exporters to sell internationally at a price competitive with that of international competitors. The WTO ruled last February that the law was not satisfactory.

Companies likely to be hurt the most should the U.S. cease offering tax breaks to exporters are Boeing, General Electric, Microsoft, Caterpillar, Motorola, Honeywell, and Cisco Systems.

The WTO has indicated it will allow the U.S. time to change its law and will not impose penalties immediately. Some analysts feel the penalties will become moot should the U.S. find a way to reach an acceptable level of compliance with the WTO requests. The $4 billion in sanctions is the highest amount ever awarded by the WTO. The next two highest awards were ultimately never imposed.