Congress failed in its attempt to repeal an export tax break and bring its laws in line with global trade rules, the World Trade Organization ruled.

The WTO backed a European Union complaint that America gives unfair tax breaks to companies, reviving the possibility that the E.U. may reimpose $4 billion in sanctions against American goods, people familiar with the decision said.

The Geneva-based WTO said America is failing to comply with a January 2002 ruling that outlawed tax breaks to exporters, the people said, declining to be identified. The WTO found that America is still in violation because companies such as Microsoft Corporation and Boeing Company continue to get breaks even after Congress passed new tax legislation in October, the sources said.

The E.U. argued that the tax package – the biggest rewrite of American corporate tax legislation since 1986 – contains transition periods that extend the illegal breaks through at least 2006.

“Congress is just going to shrug this off and say you’ve got to be kidding me,” a manager for Washington National Tax Services at Pricewaterhouse-Coopers, Scott McCandless, said. “I am sure Congress will be aggravated, but they’re not going to do anything.”

The confidential ruling, set to be published August 12, threatens to escalate tensions between the world’s two biggest economies. The $750 billion trans-Atlantic trade relationship is already strained because of dueling WTO complaints over aircraft subsidies and disagreements about gene-engineered seeds and hormone-treated beef.

Congress voted in October to replace the $50 billion export tax break ruled illegal by the WTO with $145 billion in tax cuts for manufacturers and companies with overseas operations. The vote was part of a two-year effort to repeal the benefit and avoid further EU sanctions.

The E.U. duties, on imports including wood, paper, jewelry, and clothing, started at 5% in March 2004 and reached 14% in December.

The changes initially satisfied the E.U., which removed the tariffs at the beginning of this year. A month later, trade representatives in Europe asked WTO arbitrators to examine the tax rewrite to make sure American companies were no longer illegally benefiting, zeroing in on the transition period written into the new law.

America has said the transition period is consistent with practice from previous WTO cases and is necessary to provide a consistent tax load to American companies.

Boeing and General Electric Company headed a list of 15 companies that claimed $6.2 billion from the original export tax break between 1997 and 2002, according to a study in Tax Notes magazine in 2003. Other top beneficiaries included Honeywell International Incorporated, Motorola Incorporated, and Cisco Systems Incorporated.

The E.U.’s latest WTO victory may force America to rework the tax package that gives breaks to thousands of companies including General Electric, Exxon Mobil Corporation, and Citigroup Incorporated.

A European Commission spokeswoman, Claude Veron-Reville, said in December that the E.U. may reimpose a new round of the sanctions to the value of “around 60%” of the previous ones should the WTO find that the American law still doesn’t comply with its rules.

She wouldn’t discuss the decision, saying only that it is a “supplementary step in the compliance panel.”

A spokesman for the U.S. trade representative’s office in Washington, Richard Mills, declined to comment.

The E.U.’s challenge prolonged an eight-year-old dispute. The WTO first judged the U.S. tax breaks illegal after the E.U. filed a complaint in 1997. American lawmakers overhauled the law in 2000, and again last year after the WTO agreed with a second E.U. complaint that the changes were inadequate and then authorized the bloc to impose tariffs.

General Electric, which runs its world operations from Fairfield, Conn., may save more than $8 billion over the next decade from the changes by avoiding American taxes on the foreign profits of its financing businesses, according to an analysis by Democrats on the House Ways and Means Committee after Congress approved the new law.