U.S. officials fear that an international trade tribunal may next month declare illegal a 10-year-old section of the tax code that now saves U.S. exporting companies about $1.6 billion a year.
The major beneficiaries of the tax break are such large and well-known firms as General Electric, FMC, Boeing, Monsanto Chemical, TRW, Caterpillar Tractor and other high-volume exporters. Their gain--and the Treasury's loss--under the provision is expected to grow to $1.8 billion next year. Also at stake in the dispute are unpaid taxes on at least $9 billion in exporting profits from preceding years.
Anticipating an adverse decision, the Reagan administration and the affected companies are busily exploring alternative tax provisions. But there is also some disagreement within the administration, where some officials privately say that the tax break cannot be justified in a time of budget austerity and after the large general tax cut earlier this year; this minority group says the export provision should be allowed to die.
The provision in question allows U.S. corporations to set up paper subsidiaries called Domestic International Sales Corporations. The parent companies are then allowed to defer U.S. taxes on about 25 percent of the profits from the subsidiaries' overseas sales.
DISC was sold to the Congress in 1971 as a way to stimulate U.S. exports, help the balance of trade and shore up the dollar. But the provision has been under almost constant fire from tax revisionists and certain unions on grounds it is merely an unneeded subsidy for exporting companies and an incentive to move manufacturing operations from this country abroad.
The question now is whether DISC is also, as European countries contend, a violation of GATT, the General Agreement on Tariffs and Trade, which is in effect the rulebook for world trade.
Although a decision on the tax provision has been avoided for the past decade, complex forces, both European and American, have sharply increased the likelihood that the international tribunal, the GATT Council, will take formal action at a meeting in Geneva Nov. 3. If the issue comes to a head, nearly everyone involved agrees that the tax provision is in trouble.
GATT prohibits countries from using their tax codes directly to subsidize exports. The challenging European countries say DISC does just that.
The prospect that the DISC tax break may be ruled a violation has alarmed major exporters. Some of these firms and their trade associations are now scurrying to develop alternative tax breaks.
One proposal would be to replace the DISCs with what are known in the arcane world of international trade and taxation as FISCs: Foreign International Sales Corporations. These paper corporations would require a major alteration of the U.S. tax system on foreign income. They would be based in tax-haven countries whose own corporate income taxes are low or nonexistent.
In one of the more unusual twists in the controversy over DISCs, however, there is among corporate exporters considerable wariness, if not downright distrust, of the Reagan administration, despite the strong ties between the administration and the business community.
A paper put out by the National Association of Manufacturers, for example, cited commitments by former Carter administration officials to protect the DISC provisions and then went on to say:
"Notwithstanding this history, officials of the Reagan administration have intimated on several occasions that DISC will have to be repealed in order to bring our laws into conformity with our international obligations."
The NAM paper noted that David Macdonald, deputy U.S. trade representative, has guaranteed that the administration would not support repeal unless it was replaced by equally beneficial provisions, but "at a time . . . when the administration's perceived need for additional revenue is unusually acute, their ability to keep such a promise cannot be taken for granted," the paper said.
Another organization made up entirely of DISC users, the Special Committee on U.S. Exports, told its members: "Even though the exporting community was reassured by Carter administration negotiator Robert Strauss that DISC could be grandfathered in the new subsidies code . . . the Reagan administration has found itself already on the defensive."
In its paper, the manufacturers' association acknowledged that the GATT subsidies code "outlaws export subsidies per se and clearly includes DISC-like tax schemes within the definition of such subsidies." Only an effort to "grandfather" the DISC provisions would protect the subsidy under terms of the new GATT code, according to the association.
Other industry sources asserted that the administration has two other motives for getting rid of DISC: to raise more revenues and consequently reduce the deficit, and to clear the issue up so that the United States can begin to bring its own GATT charges to the effect that European countries are violating the trade agreements in their agricultural practices.
One lawyer actively involved in the debate said U.S. trade officials "are constantly getting hit with DISC every time they try to raise questions about the pricing and export practices of other countries. They U.S. trade representatives want to get DISC off their backs."