The European Union (E.U.) struck back at tax breaks given to U.S. exporters Monday by slapping trade sanctions on the U.S. in a move that could potentially cost U.S. firms, including IT vendors such as Microsoft Corp., millions of dollars.

The E.U. said the sanctions come in retaliation to US$4 billion in annual subsidies enjoyed by major U.S. exporters, such as Microsoft and The Boeing Co., which the World Trade Organization (WTO) deemed illegal in January 2002.

The subsidies come in the form of tax breaks currently given under the Extraterritorial Income Exclusion Act (ETI) , which former President Bill Clinton signed into law in 2000 to replace the Foreign Sales Corporation Act, which also granted tax breaks.

Last May the WTO authorized the E.U. to take counter measures against the subsidies and the U.S. was given a Mar. 1, 2004 deadline to repeal the subsidy provision.

With no resolution in place, the E.U. retaliated Monday by imposing an additional custom duty of five per cent on certain U.S. agricultural, textile, industrial, electronic and paper exports. The duty is due to increase at a rate of one per cent a month, to a ceiling of 17 per cent a month reached by Mar. 1, 2005.

In a statement released Friday the E.U. said that its objective remains the withdrawal of the subsidy and that it has therefore opted for a “measured and gradual response.” The E.U. estimates that the new custom duties will total US$315 million from Mar. 1 to Dec. 31, 2004, and $666 million in additional duties if it is carried through 2005.

If the U.S. responds by repealing the tax breaks, major U.S. exporters, such as Microsoft, could potentially end up paying millions more in taxes.

Representatives for Microsoft in the U.K. could not immediately comment on the possible effects of the sanctions Monday.

The company’s financial statements reflect the advantage the software giant has gained from the tax break, however.

In 2002 for example, Microsoft was allowed a 2.4 per cent reduction in its statutory tax rate under ETI, according to company financial documents.



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