WASHINGTON — A World Trade Organization ruling against a key U.S. tax break for exporters has some processors worried about losing an income-tax incentive and has resin makers worried about retaliatory tariffs. The ruling applies to U.S. companies that set up foreign sales corporations, which allow them to reduce U.S. corporate income taxes on export earnings by about 15 percent.
WTO ruled Feb. 24 that FSCs are an unfair government subsidy of exports. The United States has until Oct. 1 to change tax laws or the European Union can raise tariffs in retaliation. WTO rules also give the Clinton administration 30 days to negotiate a settlement with the EU.
Some larger, export-oriented plastics processors say they will be hurt by the loss of the tax break.
The Arlington, Va.-based Chemical Manufacturers Association said FSCs save its members about $100 million a year in taxes.
CMA said the industry is an obvious target for EU retaliation since chemicals account for one-tenth of U.S. exports.
Custom injection molder Nypro Inc. saves in the low six figures each year in taxes, said Al Cotton, spokesman for the Clinton, Mass.-based company.
Injection molder and extruder Bemis Manufacturing Co. said it has an FSC, and will notice losing the tax break because it exports 10-20 percent of its sales, said John Howell, general counsel for the Sheboygan Falls, Wis., firm. Plastics News estimated Bemis had $200 million in sales in 1998.
"Labor and other costs in the U.S. are higher and make it more difficult to compete against people in the other parts of the world," Howell said.
FSCs started in 1984 as a way to equalize export taxes for U.S. companies, since many other countries do not levy a value-added tax on exports or do not tax foreign earnings. The U.S. government maintains that FSCs level the playing field with European tax systems.
But the WTO ruled that FSCs are an export subsidy. EU spokeswoman Ella Krucoff said value-added taxes are basic consumption taxes, while the FSC directly subsidizes exports.
The United States does not put consumption taxes like sales taxes on its exports either, Krucoff said.
The ruling stems from an EU complaint, and only would apply immediately to trade with Europe. But other countries could choose to take advantage of the ruling.
The Washington-based Society of the Plastics Industry Inc. said it will work with coalitions fighting for the tax break.
Robert Kittredge, chairman of extruder Fabri-Kal Corp. in Kalamazoo, Mich., said his company does not have enough exports to justify the trouble of maintaining an FSC.
"To a minor extent it does level the playing field," he said. "Are they essential to the competitiveness of the U.S. economy? No. Are they abused? Not by everybody, but probably by some."
The chemical industry is urging the Clinton administration to negotiate a settlement.
"I think this is a very difficult issue for both the EU and the U.S., but I think they both understand this is a very significant trade matter," said Greg Riddle, director of international trade relations in Eastman Chemical Co.'s Washington office.
Both EU and Treasury Department officials said March 3 that there are no settlement talks under way, but officials in the United States said privately they see strong momentum for a settlement.