WORLD TRADE WT/DS108/AB/RW2
13 February 2006 ORGANIZATION
(06-0580)
Original: English
UNITED STATES – TAX TREATMENT FOR
"FOREIGN SALES CORPORATIONS"
SECOND RECOURSE TO ARTICLE 21.5 OF THE DSU
BY THE EUROPEAN COMMUNITIES
AB-2005-9
Report of the Appellate Body
WT/DS108/AB/RW2
Page i
I. Introduction ........................................................................................................................... 1
II. Arguments of the Participants and the Third Participants ........................................................ 6
A. Claims of Error by the United States – Appellant ....................................................... 6
1. Panel's Terms of Reference ........................................................................... 6
2. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU ..................... 8
B. Arguments of the European Communities – Appellee ............................................... 10
1. Panel's Terms of Reference ......................................................................... 10
2. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU ................. 12
C. Claims of Error by the European Communities – Other Appellant ........................... 14
D. Arguments of the United States – Appellee ............................................................... 15
E. Arguments of the Third Participants ........................................................................ 17
1. Australia ..................................................................................................... 17
2. Brazil .......................................................................................................... 18 III. Issues Raised in This Appeal ................................................................................................ 19
IV. Panel's Terms of Reference .................................................................................................. 19
V. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU .......................................... 25
VI. European Communities' Conditional Appeals ....................................................................... 34 VII. Findings and Conclusions .................................................................................................... 35
ANNEX I Notification of an Appeal by the United States
ANNEX II Notification of an Other Appeal by the European Communities
ANNEX III Request for the Establishment of a Panel by the European Communities
WT/DS108/AB/RW2
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CASES CITED IN THIS REPORT
Brazil – Aircraft Appellate Body Report, Brazil – Export Financing Programme for Aircraft
(Article 21.5 – Canada) – Recourse by Canada to Article 21.5 of the DSU, WT/DS46/AB/RW, adopted 4
August 2000, DSR 2000:VIII, 4067
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian (Article 21.5 – Brazil) Aircraft – Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/AB/RW,
adopted 4 August 2000, DSR 2000:IX, 4299
EC – Bananas III Appellate Body Report, European Communities – Scheme for the Importation,
Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997,
DSR 1997:II, 591
EC – Bed Linen Appellate Body Report, European Communities – Anti-Dumping Duties on (Article 21.5 – India) Imports of Cotton-Type Bed Linen from India – Recourse to Article 21.5 of the
DSU by India, WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965
Mexico – Corn Syrup Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose (Article 21.5 – US) Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU
by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR
2001:XIII, 6675
US – Carbon Steel Appellate Body Report, United States – Countervailing Duties on Certain
Corrosion-Resistant Carbon Steel Flat Products from Germany,
WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
US – FSC Panel Report, United States – Tax Treatment for "Foreign Sales Corporations",
WT/DS108/R, adopted 20 March 2000, as modified by Appellate Body Report,
WT/DS108/AB/R, DSR 2000:IV, 1675
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales (Article 21.5 – EC) Corporations" – Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55
US – FSC Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – (Article 21.5 – EC) Recourse to Article 21.5 of the DSU by the European Communities,
WT/DS108/RW, adopted 29 January 2002, as modified by Appellate Body
Report, WT/DS108/AB/RW, DSR 2002:I, 119
US – FSC Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" –
(Article 21.5 – EC II) Second Recourse to Article 21.5 of the DSU by the European Communities,
WT/DS108/RW2, 30 September 2005
US – FSC Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales (Article 22.6 – US) Corporations" – Recourse to Arbitration by the United States under Article 22.6
of the DSU and Article 4.11 of the SCM Agreement, WT/DS108/ARB, 30 August
2002, DSR 2002:VI, 2517
US – Softwood Lumber IV Appellate Body Report, United States – Final Countervailing Duty Determination (Article 21.5 – Canada) with Respect to Certain Softwood Lumber from Canada – Recourse by Canada to
Article 21.5 of the DSU, WT/DS257/AB/RW, adopted 20 December 2005
WT/DS108/AB/RW2
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ABBREVIATIONS USED IN THIS REPORT
DSB Dispute Settlement Body
DSU Understanding on Rules and Procedures Governing the Settlement of
Disputes
ETI extraterritorial income
ETI Act FSC Repeal and Extraterritorial Income Exclusion Act of 2000,
United States Public Law 106-519, 114 Stat. 2423 (2000) (Exhibit
EC-2 submitted by the European Communities to the Panel) FSC foreign sales corporations
GATT 1994 General Agreement on Tariffs and Trade 1994 IRC United States Internal Revenue Code
Jobs Act American Jobs Creation Act of 2004
First Article 21.5 panel Panel in the first US – FSC (Article 21.5 – EC) proceedings Panel Panel in the current US – FSC (Article 21.5 – EC II) proceedings Panel Report Panel Report, US – FSC (Article 21.5 – EC II)
original panel Panel in the original US – FSC proceedings
SCM Agreement Agreement on Subsidies and Countervailing Measures Section 5 Section 5(c)(1)(B) of the ETI Act
Working Procedures Working Procedures for Appellate Review, WT/AB/W/5,
4 January 2005
WTO World Trade Organization
WT/DS108/AB/RW2
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WORLD TRADE ORGANIZATION
APPELLATE BODY
AB-2005-9 United States – Tax Treatment for "Foreign
Sales Corporations"
Present:
Second Recourse to Article 21.5 of the DSU by the
European Communities Abi-Saab, Presiding Member
Ganesan, Member
United States, Appellant/Appellee Janow, Member
European Communities, Appellant/Appellee
Australia, Third Participant
Brazil, Third Participant
China, Third Participant
I. Introduction
1. The United States appeals certain issues of law and legal interpretations developed in the Panel Report, United States – Tax Treatment for "Foreign Sales Corporations", Second Recourse to
1Article 21.5 of the DSU by the European Communities (the "Panel Report"). The Panel was
established to consider a complaint by the European Communities regarding the American Jobs Creation Act of 2004 (the "Jobs Act") and the United States' compliance with the recommendations and rulings of the Dispute Settlement Body (the "DSB") adopted on the basis of the Panel and Appellate Body Reports in United States – Tax Treatment for "Foreign Sales Corporations"
2("US – FSC") and United States – Tax Treatment for "Foreign Sales Corporations", Recourse to
3Article 21.5 of the DSU by the European Communities ("US – FSC (Article 21.5 – EC)"). Relevant
aspects of the Jobs Act are described in paragraph 6 below, as well as in paragraphs 2.13 to 2.17 of the Panel Report.
2. The panel in US – FSC (the "original panel") concluded that the "FSC measure", consisting of Sections 921 to 927 of the United States Internal Revenue Code (the "IRC") and related measures establishing special tax treatment for foreign sales corporations ("FSC"), was inconsistent with the United States' obligations under the Agreement on Subsidies and Countervailing Measures (the "SCM
1WT/DS108/RW2, 30 September 2005.
2WT/DS108/R; WT/DS108/AB/R.
3WT/DS108/RW; WT/DS108/AB/RW.
WT/DS108/AB/RW2
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4Agreement") and the Agreement on Agriculture. The Appellate Body upheld the original panel's
finding that the FSC measure was inconsistent with the United States' obligations under the SCM
Agreement and modified the original panel's findings under the Agreement on Agriculture.
3. On 20 March 2000, the DSB adopted the reports of the original panel and the Appellate Body. The DSB recommended that the United States bring the FSC measure into conformity with its obligations under the covered agreements and that the FSC subsidies found to be prohibited export subsidies within the meaning of the SCM Agreement be withdrawn without delay, pursuant to
5Article 4.7 of the SCM Agreement, namely, "at the latest with effect from 1 October 2000". At its
meeting held on 12 October 2000, the DSB agreed to a request made by the United States to modify the time period to comply with the recommendations and rulings of the DSB so as to expire on
6 November 2000. The United States promulgated on 15 November 2000, the FSC Repeal and 1
7 Extraterritorial Income ("ETI") Exclusion Act of 2000 (the "ETI Act")in order to comply with the
8recommendations and rulings of the DSB.
4. The European Communities considered that the ETI Act did not comply with the DSB recommendations and rulings in the original dispute, because the ETI Act was not consistent with the United States' obligations under the SCM Agreement, the Agreement on Agriculture, and the
General Agreement on Tariffs and Trade 1994 (the "GATT 1994"). As a result, the European
Communities had recourse to Article 21.5 of the Understanding on Rules and Procedures Governing
9the Settlement of Disputes (the "DSU"). On 20 December 2000, the DSB referred the matter to a
10panel under Article 21.5 of the DSU. The first Article 21.5 panel report was circulated to the
Members of the World Trade Organization (the "WTO") on 20 August 2001.
5. The panel in the first Article 21.5 proceedings concluded that the ETI Act was inconsistent with the United States' obligations under the SCM Agreement, the Agreement on Agriculture, and the
GATT 1994. In addition, it also held that, by making available indefinitely the FSC tax benefit for certain transactions by virtue of Section 5(c)(1)(B) ("Section 5") of the ETI Act, the United States
4Original Panel Report, US – FSC, para. 8.1. A detailed description of the FSC measure is contained in paragraphs 2.1-2.8 of the Original Panel Report, and in paragraphs 11-18 of the Original Appellate Body Report, in US – FSC.
5Original Panel Report, US – FSC, para. 8.8.
6WT/DSB/M/90, paras. 6-7. See also Panel Report, para. 1.1.
7United States Public Law 106-519, 114 Stat. 2423 (2000).
8Panel Report, US – FSC (Article 21.5 – EC), para. 1.5. A detailed description of the ETI Act is
contained in paragraphs 2.2-2.8 of the Panel Report, and in paragraphs 15-25 of the Appellate Body Report, in US – FSC (Article 21.5 – EC).
9WT/DS108/16.
10WT/DS108/19.
WT/DS108/AB/RW2
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"ha[d] not fully withdrawn the FSC subsidies found to be prohibited export subsidies [in the original proceedings] and ha[d] therefore failed to implement the recommendations and rulings of the DSB [in
11 The Appellate the original proceedings] made pursuant to Article 4.7 [of the] SCM Agreement."
Body upheld those findings of the first Article 21.5 panel. The Appellate Body also recommended that the DSB "request the United States to bring the ETI measure ... into conformity with its obligations ... and ... to implement fully the recommendations and rulings of the DSB in US – FSC,
12made pursuant to Article 4.7 of the SCM Agreement." On 29 January 2002, the DSB adopted the
13reports of the first Article 21.5 panel and the Appellate Body.
6. On 22 October 2004, the United States, with a view to bringing its measures into conformity
14with its WTO obligations, enacted the Jobs Act, repealing the tax exclusion of the ETI Act. The
Jobs Act applies from 1 January 2005. Section 101 of the Jobs Act is entitled "Repeal of exclusion for extraterritorial income". Section 101(a) provides that "Section 114 [of the IRC] is hereby repealed." Section 101(b) is entitled "Conforming Amendments" and provides, in sub-paragraph (1): "Subpart E of Part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is hereby repealed." At the same time, Section 101(d) contains a "transition provision", pursuant to which the ETI tax scheme remains available, on a reduced basis, for certain transactions in the period between 1 January 2005 and 31 December 2006. Further, Section 101(f) contains a "grandfathering provision", pursuant to which the ETI tax scheme remains available indefinitely with respect to
15certain transactions. Finally, Section 101 of the Jobs Act does not repeal or otherwise make reference to Section 5 of the ETI Act, which "grandfathered" indefinitely FSC subsidies with respect
16to certain transactions. A more detailed description of the Jobs Act is contained in paragraphs 2.13 to 2.17 of the Panel Report.
11Panel Report, US – FSC (Article 21.5 – EC), para. 9.1(e).
12Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257.
13On 17 November 2000, the European Communities had requested authorization to take "appropriate countermeasures" and to suspend concessions pursuant to Article 4.10 of the SCM Agreement and Articles 22.2
and 22.7 of the DSU for an amount of US$ 4043 million per year. (WT/DS108/13) The United States objected to the appropriateness of the countermeasures proposed by the European Communities, as well as to the level of suspension of concessions proposed by the European Communities, and requested that the matter be referred to arbitration. The arbitrator, acting pursuant to Article 4.11 of the SCM Agreement and Article 22.6 of the DSU,
determined that the countermeasures sought by the European Communities "would constitute appropriate countermeasures within the meaning of Article 4.10 of the SCM Agreement". (Decision by the Arbitrator,
US – FSC (Article 22.6 – US), para. 8.1)
14Panel Report, para. 1.6.
15More specifically, to transactions made in the ordinary course of trade or business occurring pursuant to a binding contract between the taxpayer and an unrelated person, which contract was in effect on 17 September 2003 and at all times thereafter. (Ibid., footnote 29 to para. 2.16)
16Ibid., para. 2.17. These transactions are transactions pursuant to a binding contract between the FSC and an unrelated person, which contract was in effect on 30 September 2000. (Ibid., para. 2.12)
WT/DS108/AB/RW2
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7. The European Communities considered that the United States had failed to withdraw its prohibited subsidies as required by Article 4.7 of the SCM Agreement, had failed to bring its
scheme into conformity with its WTO obligations, and had therefore failed to implement the recommendations and rulings of the DSB of 20 March 2000 and 29 January 2002. The European Communities also considered that the United States continued to violate certain provisions of the
SCM Agreement, the Agreement on Agriculture, and the GATT 1994. The European Communities
17therefore had recourse to Article 21.5 of the DSU for a second time. On 20 December 2000, the
18DSB referred the matter to a panel under Article 21.5 of the DSU. The Panel Report was circulated
to WTO Members on 30 September 2005.
8. The Panel found that:
The panel and Appellate Body findings in the first 21.5 compliance
proceedings, as adopted by the DSB, established that the ETI scheme
was in violation of Articles 3.1(a) and 3.2 of the SCM Agreement,
Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article
III:4 of the GATT 1994. Pursuant to Articles 101(d) and (f) of the
Jobs Act, the ETI benefits remain available throughout 2005 and
2006 (albeit at reduced percentages), and indefinitely (in the case of
certain transactions). The inconsistencies with Articles 3.1(a) and
3.2 of the SCM Agreement, Articles 10.1, 8 and 3.3 of the Agreement
on Agriculture and Article III:4 of GATT 1994 remain.
We further note the indefinite grandfathering of the original FSC
subsidies for certain transactions, through the continued operation of
[S]ection 5[] of the ETI Act. As confirmed by the United States in
response to Panel questioning, nothing in the legislative language of
the Jobs Act modifies, implicitly or explicitly, these transition rules 19for the FSC subsidies. (footnotes omitted)
9. The Panel concluded that:
... to the extent that the United States, by enacting Section 101 of the
Jobs Act, maintains prohibited FSC and ETI subsidies through the
transition and grandfathering measures at issue, it continues to fail to
implement fully the operative DSB recommendations and rulings to
withdraw the prohibited subsidies and to bring its measures into
conformity with its obligations under the relevant covered 20agreements.
17Request for the Establishment of a Panel by the European Communities, WT/DS/108/29 (attached as Annex III to this Report).
18WT/DS108/30.
19Panel Report, para. 7.60-7.61.
20Ibid., para. 8.1. See also para. 7.65.