The fight over US companies moving to Bermuda to cut income tax has flared again.

Companies would face curbs on relocating to offshore countries - if Congress approves a new bill.

The bill is being crafted by House Ways and Means Committee chairman Bill Thomas, representing California.

It comes after president George W. Bush signed a $350 billion tax cut and economic stimulus bill into law last week.

According to Dow Jones Newswires, the emerging debate pits domestic US manufacturers such as Boeing Co. (BA), Caterpillar Inc. (CAT) and United Technologies Corp. (UTX) against US multinationals such as 3M (MMM), General Electric Co. (GE) and Ford Motor Co. (F).

The issue concerns a tax break worth $4 billion a year to US exporters - known as foreign sales corporations - which the World Trade Organization has declared to be an illegal trade subsidy.

Congress has to repeal the subsidy or face $4 billion in trade sanctions from the European Union, which could come as early as January.

To avoid the sanctions, Thomas is crafting a bill to repeal the trade subsidy, also known as the extraterritorial income exclusion act.

In its place, Thomas would simplify a range of international tax provisions that benefit US multinationals, such as simplifying foreign tax credit rules. It also would penalise taxpayers for using tax shelters and restrict companies from relocating to Bermuda or other offshore countries - a process known as corporate inversions - to cut their US income taxes.

The problem is, the powerful Ways and Means chairman has had difficulty selling his bill - first unveiled last July - to fellow Republicans. Many were angered Thomas's bill wouldn't provide benefits to US-based manufacturers that lack overseas operations; 89 percent of the current foreign sales corporation benefit goes to manufacturers.

As a result, Thomas is facing a challenge from the tax committee's No. 2 Republican, Rep. Phil Crane of Illinois, who is proposing to replace the foreign sales corporation benefit with a reduced corporate tax rate.

The corporate tax rate would fall to 31.5 percent from 35 percent for manufacturers whose products are produced in the US under the bill.

The tax committee's top Democrat, Rep. Charles Rangel of New York, and House Small Business Committee Chairman Donald Manzullo, R-Illinois, are the main cosponsors of the bill.

It's gaining support, with about 90 House members backing the measure, along with the AFL-CIO and the National Association of Manufacturers.

A third proposal is in the works that seeks to bridge the divide between multinationals and domestic manufacturers. The Coalition for American Manufacturing Jobs, backed by Lockheed Martin Corp. (LMT), Emerson Electric Co. (EMR) and the Semiconductor Equipment and Materials International, are proposing a 15 percent exclusion from taxes of manufacturing and processing income in the US.

The coalition is seeking support among members of the Senate Finance Committee, who have yet to advance a proposal, a spokeswoman for the group said.

Faced with the Crane-Rangel-Manzullo proposal, Thomas has been rewriting the bill he proposed last year, adding significant incentives to attract support.

According to Thomas's aides, he intends to add to his bill an extension of the research and experimentation tax credit, which expires June 30, 2004.

This credit is a priority for high technology firms, drug companies and manufacturers.

Thomas also is proposing to add a version of a bill, sponsored by Rep. Phil English, R-Pennsylvania, to let US companies bring home funds in overseas at a 5.25 percent tax rate, aides said.

Also being discussed are revisions to an anti-tax shelter provision which seeks to write into law a definition of when tax shelter schemes lack "economic substance" and therefore are subject to penalties.

And Thomas is discussing a change to his plan to prevent "earnings stripping," which involves companies building up large debts to generate tax deductions for an overseas parent company, a Thomas aide said.

Thomas may unveil his revised bill next month.

Lobbyists are closely watching the looming battle and few are venturing to predict the outcome.