A World Trade Organization (WTO) appeals body Monday ruled against a U.S. law giving big tax breaks to businesses operating overseas. The ruling opens the way for as much as $4 billion in possible retaliatory duties from the European Union.
The U.S. Foreign Sales Corporation program allows companies paying U-S taxes to exclude income that comes from goods or services primarily for sale or use outside the United States.
Many American companies - from Microsoft to aircraft maker Boeing and smaller firms - benefit from the tax break.
Washington says the measure is intended to avoid double taxation of income from foreign sources however the WTO found it to be a prohibited export subsidy. It has already ruled several times against the measure.
The European Union welcomes the latest ruling, which clears the way for Brussels to impose up to $4 billion in annual tariffs on U.S. imports.
The matter now goes back to a WTO arbitrator to decide on the exact amount. A decision is expected by the end of March.
In a statement, EU Trade Commissioner Pascal Lamy said it is up to the United States to comply with the WTO's findings and settle the matter once and for all. He said he hoped to see rapid proposals from Washington.
Mr. Lamy also said he is ready to engage in meaningful discussions with the United States on how it intends to comply with the rulings.
Analysts say no one wants to see a trade war and the EU may hesitate before hitting hard at American goods.
The ruling comes as both sides are facing a new potential dispute with their steel industries. The outlook for profits from the world steel industry is at the lowest in decades and Washington is considering whether to give import protection to American companies.
Major European steel makers have suggested the United States should restructure its industry instead as Europe has restructured its steel companies in previous decades.
Brussels has dismissed the idea that there is a linkage between the matters, but industry analysts are watching closely.