TaxPersonal TaxView from the House

View from the House

What is one to make of the latest World Trade Organisation ruling, which says that the United States must scrap a tax scheme worth $3.9bn (£2.5bn) to its exporters?

The tax scheme in question applies to those foreign sales where US companies use offshore tax havens to export goods abroad, retaining some part of the invoice price in the tax haven to cover overseas marketing costs. That part of the invoice price retained is not then subject to corporation tax. For successful exporters, such as Microsoft, this measure is deemed to reduce corporation tax from 35% to 29.75%. But the WTO ruling will come into effect on 1 October this year, even though accountants in the US do not see how their tax codes can be disentangled to comply with it in time.

Meanwhile, the European Union’s common agricultural policy, which provides subsidies of ff6bn (£3.7bn) a year, marches on, outside the rules of the WTO, and the US and EU find themselves in an incipient trade war fought through the rule book of the WTO. The EU’s banana regime is ruled out of order and the US retaliates with $300m-worth of sanctions on Euro-produce entering the US. The EU refuses to accept hormone-treated beef from the US – but the WTO rules this move is illegal too.

Now the EU can retaliate against the US if it does not modify its tax subsidies on exports, whilst the US is still waiting to see if the EU will modify its banana-importing regime.

Yet the consequences of a trade war across the Atlantic, even at this tit-for-tat level, will be that growth rates on both sides will be reduced, damaging economic prosperity everywhere.

It was just this kind of beggar-thy-neighbour policy that, in the 1930s, closed down markets and led to a worldwide recession that was only brought to an end by the Second World War.

Of course, we have not yet reached such dire straits this time, but the first shots have been fired, even if their echo has hardly been heard, as yet, by national governments, let alone the currently prosperous general public.

Stuart Bell is Labour MP for Middlesbrough and an adviser to Ernst & Young.

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