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Tax Treatment for “Foreign Sales Corporations”

Key Facts
Short Title: US — FSC
Respondent: United States
Third Parties: Barbados; Brazil; Canada; Jamaica; China; Japan; India; Australia;
Complaintant(s): European Communities;
Dispute Number: DS108
Link to Dispute Site: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds108_e.htm
Dispute Subject(s): Foreign Sales Corporations;
Dispute Status: Concluded
Complaint by the European Communities.

On 18 November 1997, the EC requested consultations with the US in respect of Sections 921-927 of the US Internal Revenue Code and related measures, establishing special tax treatment for "Foreign Sales Corporations" (FSC). The EC contended that these provisions were inconsistent with US obligations under Articles III:4 and XVI of the GATT 1994, Articles 3.1(a) and (b) of the Subsidies Agreement, and Articles 3 and 8 of the Agreement on Agriculture.

On 1 July 1998, the EC requested the establishment of a Panel. In the request for a panel, the EC invoked Article 3.1(a) and (b) of the Subsidies Agreement, and Articles 3 and 8, 9 and 10 of the Agreement on Agriculture, and did not pursue the claims under the GATT 1994. At its meeting on 23 July 1998, the DSB deferred the establishment of a panel. Further to a second request to establish a panel by the EC, the DSB established a panel at its meeting on 22 September 1998. Barbados, Canada and Japan reserved their third-parties rights. On 9 November 1998, the Panel was composed. The report of the panel was circulated to Members on 8 October 1999. The panel found that, through the FSC scheme, the United States had acted inconsistently with its obligations under Article 3.1(a) of the Subsidies Agreement as well as with its obligations under Article 3.3 of the Agreement on Agriculture (and consequently with its obligations under Article 8 of that Agreement).

On 28 October 1999, the US notified its intention to appeal certain issues of law and legal interpretations developed by the panel. On 2 November 1999, the US withdrew its notice of appeal pursuant to Rule 30 of the Working Procedures for Appellate Review, stating that the withdrawal was conditional on its right to file a new notice of appeal pursuant to Rule 20 of the Working Procedures. On 26 November 1999, the US notified its intention to appeal certain issues of law and legal interpretations developed by the panel. The report of the Appellate Body was circulated to Members on 24 February 2000. The Appellate Body ruled as follows:

* it upheld the panel's finding that the FSC measure constituted a prohibited subsidy under Article 3.1(a) of the SCM Agreement.

* it reversed the panel's finding that the FSC measure involved "the provision of subsidies to reduce the costs of marketing exports" of agricultural products under Article 9.1(d) of the Agriculture Agreement and, in consequence, reversed the panel's findings that the US had acted inconsistently with its obligations under Article 3.3 of the Agriculture Agreement.

* it found that the US acted inconsistently with its obligations under Articles 10.1 and 8 of the Agriculture Agreement by applying export subsidies, through the FSC measure, in a manner which results in, or threatens to lead to, circumvention of its export subsidy commitments with respect to agricultural products.

* it also emphasized that it was not ruling that a Member must choose one kind of tax system over another so as to be consistent with that Member's WTO obligations.

The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, at its meeting on 20 March 2000.

Appellate Body and Panel Compliance Reports (Article 21.5) Adopted

On 7 December 2000, the EC notified the DSB that consultations had failed to settle the dispute and that it was requesting the establishment of a panel pursuant to Article 21.5 of the DSU. At its meeting of 20 December 2000, the DSB agreed to refer the matter to the original panel. Australia, Canada, India, Jamaica and Japan reserved their third party rights. On 5 January 2001, the Panel was composed. On 21 December 2000, pursuant to an agreement between the parties, the US and the EC jointly requested the Article 22.6 DSU arbitrator to suspend the arbitration proceeding until adoption of the panel report or, if there is an appeal, adoption of the Appellate Body report. The arbitration was accordingly suspended.

On 20 August 2001, the compliance panel report was circulated to the Members. The Panel concluded that the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (the amended FSC legislation) was still inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement, with 10.1 and 8 of the Agreement on Agriculture and with Article III:4 of the GATT 1994.

On 15 October 2001, the US notified its decision to appeal certain issues of law and legal interpretations developed by the panel report. On 14 January 2002, the Appellate Body circulated its Report to the Members. The Appellate Body:

* upheld the Panel's findings that the US acted inconsistently with its obligations under the SCM Agreement, the Agreement on Agriculture, and the GATT 1994 through the FSC amended legislation, a measure taken by the United States to implement the recommendations and rulings made by the DSB in the original proceedings in the United States - FSC dispute;

* with respect to third party rights, found that the Panel erred in its interpretation of Article 10.3 of the DSU in declining to rule that all written submissions of the parties filed prior to the first meeting of the Panel must be provided to the third parties.

At its meeting on 29 January 2002, the DSB adopted the Appellate Body Report and the Panel Report, as upheld by the Appellate Body Report.

On 13 January 2005, the EC notified the DSB that consultations had failed to settle the dispute and that it was requesting the establishment of a panel pursuant to Article 21.5 of the DSU. At its meeting of 25 January 2005, the DSB deferred the establishment of a panel. At its meeting of 17 February 2005, the DSB agreed to refer the matter to the original panel.

On 22 April 2005, the European Communities requested the Director-General to compose the panel. On 2 May 2005, the Director-General composed the panel. On 2 August 2005, the Panel informed the DSB that given the particular circumstances of this case and the schedule agreed after consultations with parties to this dispute, it was not possible for the Panel to complete its work within the 90-day period as foreseen in Article 21.5, and that the Panel expected to complete its work by the second week of August.

On 30 September 2005, the Panel Report was circulated to Members. The Panel found that the United States has failed to implement fully the DSB recommendations and rulings arising from the original dispute and first compliance proceedings. On 24 November 2005, the United States notified its decision to appeal to the Appellate Body certain issues of law covered in the Panel Report and certain legal interpretations developed by the Panel.

On 10 January 2006, the Appellate Body informed the DSB that due to the time required for completion and translation of the report, the Appellate Body would not be able to circulate its report within the 60-day period, and that it estimated that the report would be circulated no later than 13 February 2006. The report of the Appellate Body was circulated to Members on 13 February 2006. In its report, the Appellate Body upheld the Panel's findings. At its meeting on 14 March 2006, the DSB adopted the Appellate Body report and the Panel report, as upheld by the Appellate Body report.

Implementation Status of Adopted Reports

Pursuant to Article 21.3 of the DSU, the US informed the DSB on 7 April 2000 of its intention to implement the recommendations of the DSB in a manner consistent with its WTO obligations. At the request of the United States, at its meeting of 12 October 2000, the DSB modified the time-period for implementation so as to expire on 1 November 2000. On 17 November 2000, the US stated that, with the adoption on 15 November 2000 of the FSC Repeal and Extraterritorial Income Exclusion Act, it had implemented the recommendations and rulings of the DSB. On the same date, the EC stated that, in its view, the US had failed to comply with the DSB recommendations and rulings, and requested the US to enter into consultations with the EC pursuant to Articles 4 and 21.5 of the DSU, Article 4 of the SCM Agreement, Article 19 of the Agreement on Agriculture and Article XXIII:1 of GATT 1994. Also on 17 November 2000, the EC requested authorisation from the DSB to take appropriate countermeasures and suspend concessions pursuant to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU.

Pursuant to an agreement between the parties to the dispute, the US would request arbitration with respect to the EC's request and the arbitration would be suspended until the reconstituted panel has decided the conformity of the new US legislation with the panel and Appellate Body reports. On 27 November 2000, the US requested that the matter be referred to arbitration pursuant to Article 22.6 of the DSU. On 7 December 2000, the EC notified the DSB that consultations had failed to settle the dispute and that it was requesting the establishment of a panel pursuant to Article 21.5 of the DSU. At its meeting of 20 December, the DSB agreed to refer the matter to the original panel. On 21 December 2000, pursuant to an agreement between the parties, the US and the EC jointly requested the Article 22.6 DSU arbitrator to suspend the arbitration proceeding until adoption of the panel report or, if there is an appeal, adoption of the Appellate Body report. The arbitration was accordingly suspended.

For details of the Article 21.5 panel and Appellate Body proceedings, see above.

At its meeting on 29 January 2002, the DSB adopted the Article 21.5 Appellate Body Report and the Panel Report, as upheld by the Appellate Body Report. In accordance with the procedural agreement concluded by the parties to the dispute in September 2000 (WT/DS108/12), the Article 22.6 arbitration on the amount of countermeasures and suspension of concessions would be automatically reactivated.

On 30 August 2002, the Arbitrator's award was circulated. The Arbitrator determined that the suspension by the EC of concessions under the GATT 1994 in the form of the imposition of a 100 per cent ad valorem charge on imports of certain goods from the United States in a maximum amount of $4,043 million per year, as described in the EC's request for authorization to take countermeasures and suspend concessions, would constitute appropriate countermeasures within the meaning of Article 4.10 of the SCM Agreement.

On 24 April 2003, the EC requested authorization to suspend concessions or other obligations under Article 22.7 of the DSU and Article 4.10 of the SCM Agreement. At its meeting on 7 May 2003, the DSB granted the EC authorization to take appropriate countermeasures and to suspend concessions.

On 5 November 2004, the EC requested consultations under Articles 4 and 21.5 of the DSU, Article 4 of the SCM Agreement, Article 19 of the Agreement on Agriculture and Article XXII:1 of GATT 1994 with respect to the American JOBS Creation Act of 2004 (the "JOBS Act") enacted by the US on 22 October 2004. According to the EC, the JOBS Act was intended to implement the DSB recommendations and rulings in this case (compliance phase) but failed to do so properly and was inconsistent with the same provisions of the WTO Agreement as did the predecessor legislation. In particular, the European Communities considers that Section 101 of the JOBS Act contains transitional provisions which will allow US exporters to continue to benefit from the WTO incompatible FSC Replacement and Extraterritorial Income Exclusion Act (a) in the years 2005 and 2006 with respect to all export transactions and (b) for an indefinite period with respect to certain binding contracts, thus failing to withdraw the subsidy and implement the DSB's recommendations and rulings.

On 17 November 2004, Australia requested to join the consultations.

On 13 January 2005, the EC notified the DSB that consultations had failed to settle the dispute and that it was requesting the establishment of a panel pursuant to Article 21.5 of the DSU. At its meeting of 25 January 2005, the DSB deferred the establishment of a panel. At its meeting of 17 February 2005, the DSB agreed to refer the matter to the original panel.

For details of the second Article 21.5 panel and Appellate Body proceedings, see above.

Article 21.5 Appeal Proceedings
Brief DateBrief Description
11/28/2001Response of the United States to the Appellate Body Question (pdf)
11/28/2001Oral Statement of the United States (pdf)
11/16/2001Appellee Submission of the United States (pdf)
11/01/2001Appellant Submission of the United States (pdf)
11/01/2001Executive Summary of U.S. Appellant Submission (pdf)

Article 22.6 Arbitration
Brief DateBrief Description
03/25/2002Comments of the United States on the EC's Replies to the Questions of the arbitrator and the United States (pdf)
03/20/2002Replies of the United States to the Questions of the European Communities (pdf)
03/20/2002Replies of the United States to the Questions of the Arbitrator (pdf)
03/20/2002Additional Written Submission of the United States (pdf)
03/08/2002Questions of the United States for the European Communities (pdf)
03/07/2002Oral Statement of the United States (pdf)
02/26/2002Second Written Submission of the United States (pdf)
02/14/2002First Written Submission of the United States (pdf)
02/08/2002U.S. Comments on EC Methodology Paper (pdf)

Second Recourse to Article 21.5
Brief DateBrief Description
07/15/2005U.S. Comments on the EC’s Answers to the Panel’s Questions in Connection with the Substantive Meeting of the Panel (pdf)
07/11/2005U.S. Answers to the Panel’s Questions in Connection with the Substantive Meeting of the Panel (pdf)
06/30/2005Opening Statement of the United States at the Substantive Meeting of the Panel (pdf)
06/02/2005U.S. First Written Submission (pdf)

Second Recourse to Article 21.5: Appeal Proceedings
Brief DateBrief Description
01/09/2006Oral Statement by the United States at the Oral Hearing (pdf)
12/09/2005Appellee Submission of the United States (pdf)
11/21/2005Appellant Submission of the United States (pdf)