Passage of tax bill should end EU tariffs against jewelry manufacturers

Congress has passed a $136 billion tax bill that is expected to end sanctions on U.S. jewelry manufacturers who trade with Europe by removing export subsidies that the World Trade Organization (WTO) had ruled illegal.

The U.S. Senate approved the bill, known as “American Jobs Creation Act of 2004,” with a 69-17 vote on Monday. The U. S. House of Representatives approved the bill last Thursday. It now goes to President Bush, who is expected to sign it, according to media reports.

The Senate vote ends a two-year effort to repeal the Foreign Sales Corporation (FSC) and “Extraterritorial Income” (ETI) programs, which provide a $5 billion annual subsidy for a select group of manufacturers who export to Europe. The WTO said both programs violated international trade rules and allowed the EU to impose retaliatory tariffs.

The European Union’s retaliatory tariffs cover several U.S. industries (including toys, textiles, and paper), but jewelry was the hardest hit. Though jewelry represents only 2.1% of all U.S. exports to Europe, it’s targeted with 30% of the tariffs, and could ultimately pay up to $1.43 billion of the annual $4 billion the EU can ultimately impose, according to a previous report by CNN.

Congress replaced the export subsidy with an across-the-board $77 billion corporate tax cut for manufacturers and a targeted $43 billion reduction for companies operating overseas. The bill lowers the corporate tax rate for manufacturers from 35% to 32%, The Los Angeles Times reports.

The Manufacturing Jewelers & Suppliers of America was pleased with the passage of the bill, MJSA president and CEO James F. Marquart told JCK.

“We worked exceptionally hard in getting this proposal passed and we are extremely pleased it finally got done,” he said.

After the bill is signed by the President, the final hurdle will be EU approval. Marquart says he is confident that the bill meets international trade law requirements and therefore should win approval.

“From looking at the bill it certainly meets the WTO requirements,” he said. “I would think that if the EU doesn’t rescind the tariff, we would have to go back to the WTO [to appeal]. … We lost a lot of business and hopefully it will be fulfilled if the EU meets its obligation.”

According to a published report, the EU has welcomed the bill’s passage.

“I am pleased that Congress has finally taken this step towards US compliance with the WTO ruling. It vindicates the EU’s patient but firm approach,” EU Trade Commissioner Pascal Lamy reportedly said. “Our objective throughout has been to obtain the withdrawal of these illegal subsidies by introducing progressively rising countermeasures.”

He added that he will “carefully study the details in the final compromise” legislation.

Small jewelry businesses also could receive tax benefits from other provisions in the bill. For example, The Providence (R.I.) Journal reports that the bill will allow small businesses to continue to “expense” up to $100,000 for items, such as new machinery, equipment, and off-the-shelf computer software.

This provision, which was first included in the 2003 tax law, was set to drop back down to $25,000 next year. However, the new law extends the $100,000 limit until 2008, the Providence newspaper reports. (When the impact of inflation is considered, the limit is really $102,000 for this year—and inflation indexing will continue through 2007, according to a report from CCH Inc., of Riverwoods, Ill., a publisher of tax information for accountants and others.)

The bill became the vehicle for the most significant overhaul of corporate tax law in nearly two decades, the Associated Press reports. It includes $76.5 billion in tax relief for the manufacturing sector, which was broadly defined to include oil and gas producers, architectural and engineering firms, and film and music companies.

The package also provides benefits for a wide range of groups, from native Alaskan whalers, importers of Chinese ceiling fans, NASCAR race track owners, and residents of states without state income taxes, who would be able to deduct state and local sales taxes from their federal tax returns, the AP reports.

The measure includes a $10.1 billion buyout for tobacco farmers, the AP reports.

In addition to the tax relief for manufacturing, the tax measure has $42.6 billion in tax relief for multinational companies, the AP reports. All of the tax breaks are paid for by $136 billion in measures intended to close corporate loopholes and tax shelters.