BRUSSELS, Oct. 25 -- The European Union today said it would lift tariffs on U.S. goods in response to the repeal last week of a U.S. law that gave tax breaks to American companies manufacturing abroad. The World Trade Organization will consider possible loopholes in the new law, however, and could reinstate action against the U.S. if it is found to be in violation of international trade agreements.

The Extraterritorial Income (ETI) Act tax regime repealed Friday gave U.S. companies tax breaks on manufacturing income earned overseas. ETI was repealed by the passage of the dubiously named American Jobs Creation Act, which offers a 9%, phased-in deduction for domestic manufacturing income. Also included are a temporary tax break for repatriated income, reforms of various foreign tax credit rules and a number of other tax cuts targeted at businesses and individuals. 

Yet the Associated Press today reported a warning from EU Trade Commissioner Pascal Lamy that sanctions -- which added up to more than $300 million in 2004 -- could potentially return next year if the WTO confirms EU "doubts" about the new law. "Legally speaking, we will suspend the sanctions and we will keep our options open," Lamy said.

A spokesman for the U.S. trade representative's office told the AP the U.S. is now in compliance with WTO rules.

An IPC spokesman said that while the ETI had little effect on most domestic manufacturers, its repeal could have sparked higher taxes had the American Jobs Creation Act not been passed. "The bulk of domestic manufacturers don't export and so they weren't affected, but they would have received a tax increase," John Kania, director of IPC government relations, told Circuits Assembly. Come January 2005, those companies will receive a tax deduction on a portion of their manufacturing income.

Not everyone agrees that the new U.S. law is legal, however. The EU trade commissioner is petitioning the WTO for another ruling to determine whether the new law fully complies with global trade rules. A ruling is expected within 90 days.

"There is the possibility of (renewed) sanctions," Lamy told the AP. "We'll see what WTO says."

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