updated 5/12/2006 10:52:56 AM ET 2006-05-12T14:52:56

The European Commission said Friday plans for punitive tariffs on U.S. imports would be dropped after U.S. lawmakers voted to repeal legislation that grants tax breaks to leading exporters, including aircraft manufacturer Boeing Co.

The U.S. Senate on Thursday voted to scrap the tax breaks — ruled illegal by the World Trade Organization despite several revisions — as it approved a $70 billion package of tax cuts. President Bush is expected to sign the bill next week.

European Union Trade Commissioner Peter Mandelson said this paved the way for a positive atmosphere at the EU-US Summit in June.

The WTO had authorized the EU to reimpose a 14 percent tariff on about $2.5 billion worth of U.S. imports on May 16 if the U.S. tax breaks were not scrapped. The EU temporarily suspended punitive tariffs in late 2004 while Washington debated amendments to the law.

Sometimes called the ’foreign sales corporation’ export subsidy, the rule has been in dispute for decades in various guises.

Thousands of U.S. companies — including General Motors Corp. and Microsoft Corp. — benefited from the system by setting up offshore subsidiaries.

(MSNBC is a joint venture of Microsoft and NBC.)

The WTO backed an EU complaint claiming this gave U.S. companies an unfair advantage and broke world trade rules.

The EU estimates that Boeing is the single largest beneficiary, receiving about $1.6 billion in subsidies under the program from 1995 to 2005.

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