The administration is seeking an alternative to a controversial $1.8 billion tax break known as DISC that goes primarily to major exporting companies.
European countries have charged for years that the 10-year-old provision violates the General Agreement on Tariffs and Trade (GATT).
After a lengthy series of holding actions, U.S. officials generally concede that it does violate the international agreement, but their search for an alternative has produced a dispute, with the Treasury pitted against the Commerce Department and the U.S. trade representative.
That dispute has been anxiously observed by the corporate exporting community, which fears that once the issue is raised on Capitol Hill, not only will the tax provision be killed, but a deficit-minded Congress will do nothing to replace it.
The administration is prepared to jettison the tax provision because it has been a continuing problem for trade negotiators who, whenever they have challenged European practices on steel and agriculture, have had DISC "thrown right back in their face," one participant in the controversy noted.
Under the existing law, exporting firms are allowed to create paper subsidiaries called Domestic International Sales Corporations. The companies can then use the DISCs to defer tax on just under a quarter of their profits from new exports.
European countries say such deferral is a subsidy that violates GATT, and the United States, eager to get rid of the issue and initiate its own complaints on steel and agriculture, is preparing alternative methods of providing export supports.
"A general consensus has developed among GATT member countries that the DISC is inconsistent with the GATT and that the U.S. should bring its tax practices into compliance with these rules," Treasury Secreatary Donald T. Regan wrote. "The administration believes that the U.S. should respect the GATT consensus and attempt to comply with it."
Several members of Congress and General Electric, one of the nation's largest exporters, have proposed schemes under which DISCs would be replaced with so-called foreign international sales corporations, on the grounds that the international trade agreement does not forbid tax forgiveness on foreign transactions.
This kind of approach reportedly has the backing of Commerce and the trade representative, but strong questions, if not outright opposition, has been voiced by Treasury.
Treasury contends that for some form of foreign-based sales corporation to have value to American exporting firms, the foreign subsidiary would have to have more than a paper function so that it could legitimately earn profits that could then be legally sheltered abroad.
If the foreign subsidiary were only a paper operation, then the profits would have to be treated as taxable income by the U.S. firm under the rules of GATT requiring arms-length transactions between related firms, according to officials.
As alternatives, Treasury has reportedly suggested that the administration abandon altogether the tax subsidy approach, and instead consider such possibilities as increasing support for the Export-Import Bank, provide for a corporate tax cut or increase agricultural price supports.
Critics of the Treasury approach counter that increased financing of the Export-Import Bank would be subject to the annual threat of congressional spending cuts. In addition, the Ex-Im Bank tends to provide major loans to specific industries, particularly aircraft producers like Boeing and nuclear generator manufacturers, like Westinghouse, as opposed to DISC, which is used by a broad array of large exporters.
The issue is before the Cabinet Council on Commerce and Trade, and Regan has said that "a specific legislative proposal will be developed in the context of the 1984 budget process." The 1984 budget is to be made public in mid-January.