Facing pressure from European businesses, the European Commission yesterday signalled a more flexible stance in its long-running trade dispute with the US over corporate taxation.
Brussels trade officials said they would accept a transition period allowing the US to phase out the Foreign Sales Corporations (FSC) provision, which grants tax breaks to exporters such as Microsoft and Boeing.
The move is an important shift in the European Union's strategy, and offers hope that Brussels and Washington can resolve their differences without resorting to damaging trade sanctions.
The European Union has given the US until March to revoke the FSC clause or suffer punitive tariffs on US exports worth hundreds of millions of dollars.
So far, the Commission has insisted the tax breaks must end immediately and has refused to accept a phasing out period. This has made it harder to resolve the dispute, since the US Congress has refused to consider a repeal of the law unless there is a three-year transition period.
Now, however, Commission officials say Brussels could accept a phasing-out period.
"What's important is that [the US\] makes a move by March 1st. If there's legislation by then, they are safe," one official said.
It is unclear whether Brussels would accept a transition period if the Congress repealed the FSC provision after that deadline.
The shift reflects concern among European business leaders that a further escalation of the dispute could harm transatlantic relations and spark a backlash on Capitol Hill.
Yesterday, the Union of Industrial and Employers' Confederations of Europe (Unice), which claims to represent 16 million companies in the EU, called on Brussels to accept a transition phase in order to avert sanctions.
Moreover, the official added that the Commission would be looking for a transition period that was "as short as possible", leaving open the question of whether it could accept a three-year phase-out.
A spokeswoman for EU Trade Commissioner Mr Pascal Lamy would only confirm that the Commission had received the letter and that it would "reflect" on its content.
She reiterated calls on the US to comply with a ruling by the World Trade Organisation (WTO) from 2002, in which Washington was told to scrap the FSC tax break because it constituted an illegal export subsidy.
"They [the US\] have done an enormous amount of work on this and they now have a golden opportunity to sort this problem out once and for all. The credibility of the system is at stake," she said.
Brussels has been authorised to impose trade sanctions on US exports worth $4 billion (€3.1 billion) per year, by far the biggest retaliation package in WTO history. The EU has adopted a more cautious approach, however, and has said its tariffs will affect US trade worth only €290 million in the first year.
But the EU tariffs are designed to rise month by month, gradually increasing the economic pain for US corporations. - (Financial Times Service)
