Europe may get US to alter touchy export tax breaks
The European Community, pointing an accusatory finger across the Atlantic, claims that DISCs are illegal.
The United States says they're not - but may change them anyway, to defuse one acrimonious issue now driving a wedge between the EC and the US.
DISCs - domestic international sales corporations - are tax shelters for American exporters. Legalized by Congress in 1971 to improve US business competitiveness overseas, they allow American companies to defer taxes indefinitely on an average of 20 percent of their export earnings. This tax break cost the US Treasury about $2 billion in lost revenues for 1981.
Many other countries have similar programs. To the US business community and government officials, DISCs are just fair competition.
But the EC feels there are crucial differences between DISCs and similar systems overseas. It says the program is a blatant domestic subsidy, and therefore illegal under GATT, the General Agreement on Tariffs and Trade.
The two Western trading partners have had many arcane arguments before the GATT council on the legality of DISCs. Earlier this year, however, the Europeans seemed to mute their objections, and the issue became relatively quiescent.
Then the US Department of Commerce ruled that European steelmakers were dumping subsidized steel on the US market, and the stillness was shattered. The EC, searching for rotten tomatoes it could hurl in retaliation, again brought up the DISC issue before GATT. No action was taken at the GATT council's last meeting at the end of July. But at its next convening, in October, the US could be ordered to alter DISCs, if the program is found to be illegal under the tariff agreement.
As far as the US government is concerned, America's hands are clean.
''We'll fight this head to head, like we always have,'' Deputy US Trade Representative David Macdonald said when the issue was resurrected.
But the US - or, to be more specific, the office of the US Trade Representative - has taken the first step toward defusing the DISC issue before it explodes. On July 27, Mr. Macdonald proposed a substitute for DISC which he claims would essentially leave the tax breaks untouched, yet ''absolutely'' bring the program into conformity with GATT regulations.
Instead of deferring a portion of taxes on export earnings, the new, revised DISC would grant equivalent tax relief on foreign-source income - money earned (for the most part) by selling goods manufactured in overseas plants.
Before becoming law, the proposal would have to be passed by Congress.
''This is really just a concept. A lot of the details haven't been worked out yet,'' a trade official says.
The trial balloon is not an administration-authorized proposal. Even the Treasury Department was apparently surprised by the Macdonald announcement.
And reaction from the business community has been, at best, guarded.
The new tax shelter ''might not be as useful as the DISC for the majority of exporters,'' agrees Robert McNeill, executive vice-chairman of the Emergency Committee for American Trade, a group representing large-volume exporters such as the Boeing Company.
Mr. McNeill points out that many exporters have no foreign plants, and thus have no foreign-source income. Complications involving foreign income tax liability may also cause problems, he says.
Representatives from the major business trade groups met with Macdonald Tuesday in an effort to learn more about the proposed program. There is likely to be strong pressure from the business community to leave DISC untouched, notes John Sarpa, an international tax policy expert at the US Chamber of Commerce.
But, with US-EC relations near the boiling point, it seems equally likely that Congress will take some action on DISC. A proposal introduced by Sen. David L. Boren (D) of Oklahoma would simply take DISC and move it offshore - allowing DISCs to be chartered in such tax havens as the Virgin Islands.
''This would preserve the benefits of DISC,'' an aide to Senator Boren says. ''As long as it (technically) resolves the issue, who cares what the Europeans say?''
The complete elimination of DISC is also possible, although not probable. A recent Joint Committee on Taxation study points out that ''Treasury reports have indicated that (DISC's) overall impact in stimulating exports has been small in comparison to its annual revenue cost.''