WASHINGTON (AP) _ A last-minute agreement Saturday with the European Union gives the United States until Nov. 1 to replace a $4 billion annual tax break for American companies that sell goods abroad, from giants Microsoft and Boeing to small businesses.

The Clinton administration was negotiating against a Sunday deadline for bringing U.S. tax laws into compliance with an adverse ruling from the World Trade Organization. The dispute involves the biggest case the United States has lost before the Geneva-based arbiter of world trade rules.

Congress now has until Nov. 1 to pass the legislation. The EU agreed not to impose any economic penalties until a WTO panel determines whether the new tax system complies with WTO rules.

A top Senate Republican, Finance Committee Chairman William Roth of Delaware, said he was hopeful Congress would approve the legislation ``in very short order.''

At issue is a U.S. tax program that grants $4.1 billion in annual tax breaks to 6,000 American companies which set up export subsidiaries in offshore tax havens such as the Virgin Islands and Barbados.

The WTO in February ruled that it was an illegal export subsidy.

``The United States and European Union today demonstrated a commitment to avoid escalating trans-Atlantic trade tensions and managing this WTO trade dispute responsibly,'' U.S. Trade Representative Charlene Barshefsky said in a statement.

In a separate statement, Pascal Lamy, Europe's top trade negotiator, said, ``Our priority is to resolve disputes, not exacerbate them.''

Lamy, however, repeated the EU position that the legislation, which has passed the House, still would violate international trade laws.

The Foreign Sales Corporation program was created in 1984 to enable U.S. companies, including Microsoft, Boeing, General Motors and United Technologies, to reduce U.S. corporate income taxes by 15 percent by creating export subsidiaries.

The program was intended to offset an EU tax rebate given to European companies for products sold overseas. The replacement legislation would create new tax breaks that would apply equally to U.S. exports and to products the companies manufacture in their overseas plants.

The extension gives Congress more time to complete work on the replacement legislation and helps to defuse trade tensions between the United States and the EU, the world's two largest trading partners.

Groundwork for the compromise was laid last month when President Clinton agreed to a request by British Prime Minister Tony Blair to delay penalties against some European products, possibly including British cashmere.

That dispute with the EU is over barriers the Europeans have erected to sale of bananas from American-run plantations in the Caribbean and South America and the import of American beef treated with growth hormones.

The United States has imposed $308 million in penalties on a variety of European luxury goods _ Danish ham, German chocolate, French mustard, Roquefort cheese _ in an effort to get Europe to drop its barriers and comply with the WTO rulings in those cases.

To increase pressure, Congress this year ordered the administration to rotate the target list periodically.

Efforts to bring the replacement tax legislation for debate were blocked last week by Senate Democrats. The dispute centers on Republican efforts to limit amendments and Democrats' insistence on their right to offer them _ even those dealing with unrelated topics such campaign finance reform or the minimum wage.

A senior U.S. trade official, speaking on condition of anonymity, expressed optimism that Congress would approve the legislation by the new deadline.

A challenge by the EU would take at least six months. If the EU were to win its case against replacement legislation, only then could it push for clearance to file for penalties.

That would mean that any penalties on U.S. imports would not appear until next summer at the earliest. The EU, however, is expected to publish a preliminary target list by late November.

That list is likely to include a far larger amount of U.S. exports from which the EU will later choose items totaling the $4 billion in economic harm it claims to be suffering.

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The bill is H.R. 4986.

On the Net:

Joint Committee on Taxation: http://www.house.gov/jct