Canada, the European Union and two South American countries have asked the U.S. government to close a tax loophole worth as much as $8 billion to U.S. pulp companies.

The tax credits should be "instantly discontinued" or a legal complaint under World Trade Organization (WTO) rules could follow, the four jurisdictions said in a joint letter sent to Congress Thursday.

"From a legal perspective, it is clear that these credits amount to actionable subsidies and that any adverse effects caused by them could be subject to remedies in the WTO or through domestic countervailing duty investigations,” the letter said.

It was signed by the Washington ambassadors from Canada, the European Union (EU), Brazil and Chile.

The credits are encouraging U.S. companies to overproduce in a depressed market, the letter said.

Canadian pulp companies, unions and the Forest Products Association of Canada (FPAC) have complained that the loophole is a subsidy giving U.S. companies a huge financial advantage and threatening Canadian jobs.

Black liquor

"If the federal government doesn't act to level the playing field within the next two months, the damage done to the industry in terms of job losses will be irreversible," FPAC president and CEO Avrim Lazar said in a news release April 20.

The problem is a 2007 U.S. tax credit designed to support the use of alternative fuels. The government offered 50 cents US a gallon to companies that blended alternative and traditional fossil fuels.

Pulp mills produce a byproduct called black liquor, which is burned as fuel in the mills. U.S. companies "are mixing a small amount of taxable fuel (diesel) into the black liquor," the ambassadors said, "enabling them to qualify for, in some cases, hundreds of millions of dollars of funding."

Some companies could get about 30 per cent of the selling price of pulp, the ambassadors said.

According to statistics from U.S. investment companies cited by the Communications, Energy and Paperworkers Union of Canada, potential payments to seven pulp companies could total from $2.3 billion to $7.6 billion.

The Obama administration has indicated it wants to stop the use of black liquor tax credits, SKF Pulp said recently.