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WTO ANALYTICAL INDEX: SUBSIDIES AND COUNTERVAILING MEASURES Agreement on Subsidies and Countervailing Measures |
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> General Issues |
A. Object and Purpose of the SCM Agreement 1. In Brazil - Aircraft, the Panel considered that the object and purpose of the SCM Agreement is to impose multilateral disciplines on subsidies which distort international trade: "In our view, the object and purpose of the SCM Agreement is to impose multilateral disciplines on subsidies which distort international trade. It is for this reason that the SCM Agreement prohibits two categories of subsidies - subsidies contingent upon exportation and upon the use of domestic over imported goods - that are specifically designed to affect trade."(2) 2. In Canada - Aircraft, the Panel stated that "the object and purpose of the SCM Agreement could more appropriately be summarized as the establishment of multilateral disciplines 'on the premise that some forms of government intervention distort international trade, [or] have the potential to distort [international trade]."(3) 3. The Panel on US - Export Restraints, noted its agreement with the Panels on Brazil - Aircraft and Canada - Aircraft with regard to their statements on the object of the SCM Agreement (see paragraphs 1 and 2 above).(4) The Panel concluded, however, that not every government action or intervention is to be considered as a subsidy that may distort trade and that, accordingly, the object and purpose of the SCM Agreement can only be in respect of 'subsidies' as defined the Agreement: "It does not follow from those statements, however, that every government intervention that might in economic theory be deemed a subsidy with the potential to distort trade is a subsidy within the meaning of the SCM Agreement. Such an approach would mean that the 'financial contribution' requirement would effectively be replaced by a requirement that the government action in question be commonly understood to be a subsidy that distorts trade.
[W]hile the object and purpose of the Agreement clearly is to discipline subsidies that distort trade, this object and purpose can only be in respect of 'subsidies' as defined in the Agreement. This definition, which incorporates the notions of 'financial contribution', 'benefit', and 'specificity', was drafted with the express purpose of ensuring that not every government intervention in the market would fall within the coverage of the Agreement".(5) 4. In US - Carbon Steel, the Appellate Body agreed with the Panel that the objectives and purposes of the SCM Agreement include "the establishment of a framework of rights and obligations relating to countervailing duties, and the creation of a set of rules which WTO Members must respect in the use of such duties."(6) The Appellate Body stated: "We turn to the object and purpose of the SCM Agreement. We note, first, that the Agreement contains no preamble to guide us in the task of ascertaining its object and purpose. In Brazil - Desiccated Coconut, we observed that the 'SCM Agreement contains a set of rights and obligations that go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947."(7) The SCM Agreement defines the concept of 'subsidy', as well as the conditions under which Members may not employ subsidies. It establishes remedies when Members employ prohibited subsidies, and sets out additional remedies available to Members whose trading interests are harmed by another Member's subsidization practices. Part V of the SCM Agreement deals with one such remedy, permitting Members to levy countervailing duties on imported products to offset the benefits of specific subsidies bestowed on the manufacture, production or export of those goods. However, Part V also conditions the right to apply such duties on the demonstrated existence of three substantive conditions (subsidization, injury, and a causal link between the two) and on compliance with its procedural and substantive rules, notably the requirement that the countervailing duty cannot exceed the amount of the subsidy. Taken as a whole, the main object and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to the use of both subsidies and countervailing measures.
We thus believe that the Panel properly identified, as among the objectives of the SCM Agreement, the establishment of a framework of rights and obligations relating to countervailing duties(8), and the creation of a set of rules which WTO Members must respect in the use of such duties.(9) Part V of the Agreement is aimed at striking a balance between the right to impose countervailing duties to offset subsidization that is causing injury, and the obligations that Members must respect in order to do so."(10) 5. In the same vein, the Panel on US - FSC (Article 21.5 - EC) concluded that the United States' argument that a government could chose to bestow financial contributions in the form of fiscal incentives by, for example, manipulating the definition of the tax base to accommodate "exemptions" so that there would not be a foregoing of revenue "otherwise due", would have the effect of reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to "redundancy and inutility" and "[a]s such, it is inherently contradictory to what may be viewed as the object and purpose of the SCM Agreement in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of expectations to Members".(11) The Panel found that: "In this regard, it is evident that the interpretation advanced by the United States would be irreconcilable with that object and purpose, given that it would offer governments 'carte-blanche' to evade any effective disciplines, thereby creating fundamental uncertainty and unpredictability. In short, such an approach would eviscerate the subsidies disciplines in the SCM Agreement."(12)
Part I: General Provisions
II. Article 1 back to top Members hereby agree as follows: Article 1: Definition of a Subsidy 1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government"), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)(1);
(footnote original) 1 In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.
(iii) a government provides goods or services other than general infrastructure, or purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or (a) (2) there is any form of income or price support in the sense of Article XVI of GATT 1994; and (b) a benefit is thereby conferred.
1.2 A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2. (i) "mandatory/discretionary subsidization" 6. As regards the relevance of the mandatory/discretionary distinction when challenging subsidy programmes as such, see paragraphs 56-64 below. As regards this distinction in general, see paragraphs 141 to 150 of the Chapter on the DSU. Concerning the mandatory/discretionary distinction in the context of an affirmative defence under paragraph 2 of item (k) of the Illustrative List of Export Subsidies, see paragraphs 451-452 below. (i) Object and purpose of Article 1.1 7. In US - Softwood Lumber III, the Panel stated that "the object and purpose of Article 1.1 SCM Agreement is to provide a definition of a subsidy for the purposes of the SCM Agreement."(13) (ii) Distinction between "financial contribution" and "benefit" 8. In Brazil - Aircraft, the Appellate Body indicated that it considers "a 'financial contribution' and a 'benefit' as two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a subsidy exists".(14) 9. In Brazil - Aircraft (Article 21.5 - Canada II) the Panel first examined whether the measure at stake constituted a "subsidy," as defined in Article 1.1. To this effect, the Panel examined whether both elements in the definition of a subsidy can be found: (i) a "financial contribution" by a government; and (ii) a "benefit" is thereby conferred. The Panel examined each element in turn and stated: "Article 1.1 of the SCM Agreement sets out a general definition of a subsidy. It provides that a subsidy is deemed to exist, inter alia, if there is 'a financial contribution by a government' and 'a benefit is thereby conferred'."(15) 10. This approach was followed by the Panel on US - Export Restraints, where the Panel stated: "Article 1.1 makes clear that the definition of a subsidy has two distinct elements (i) a financial contribution (or income or price support), (ii) which confers a benefit. The Appellate Body emphasised this point in Brazil - Aircraft, stating that financial contribution and benefit are 'separate legal elements in Article 1.1 ... which together determine whether a 'subsidy' exists'(16), which the panel in that case had erroneously blended together by importing the concept of benefit into the definition of financial contribution."(17) 11. This was further recalled in Canada - Aircraft Credits and Guarantees where the Panel considered that Article 1.1 of the SCM Agreement makes clear that the definition of a subsidy has two distinct elements: (i) a financial contribution, (ii) which confers a benefit. In this instance the Panel considered that the complainant must demonstrate that the measures under consideration mandate (i) a financial contribution, (ii) which confers a benefit, and a subsidy therefore exists, and (iii) that subsidy is contingent upon export performance. The Panel stated: "In this case, Brazil would have to demonstrate that the legal instruments governing the establishment and operation of the programmes at issue are mandatory in respect of the alleged violation, i. e., the grant of prohibited export subsidies. In other words, Brazil would have to demonstrate that the legal instruments mandate (i) a financial contribution; (ii) which confers a benefit, and a subsidy therefore exists, and (iii) that subsidy is contingent upon export performance."(18) 12. The Panel on Canada - Aircraft Credits and Guarantees further distinguished the two elements and concluded that to demonstrate the existence of a 'benefit', a complaining party must do more than establish the existence of a 'financial contribution'.(19) 3. Article 1.1(a)(1): "financial contribution" 13. In US - Export Restraints, the Panel considered the negotiating history of Article 1 and found that the inclusion of "financial contribution" in the text of the provision was meant to guarantee that not all government measures that confer benefits would be considered to be subsidies and to avoid the countervailing of benefits from government measures by restricting the kinds of such measures that would constitute subsidies if they conferred benefits: "The negotiating history of Article 1 confirms our interpretation of the term 'financial contribution'. This negotiating history demonstrates, in the first place, that the requirement of a financial contribution from the outset was intended by its proponents precisely to ensure that not all government measures that conferred benefits could be deemed to be subsidies. This point was extensively discussed during the negotiations, with many participants consistently maintaining that only government actions constituting financial contributions should be subject to the multilateral rules on subsidies and countervailing measures.
[T]he negotiating history confirms that the introduction of the two-part definition of subsidy, consisting of 'financial contribution' and 'benefit', was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies. The negotiating history confirms that items (i)-(iii) of that list limit these kinds of measures to the transfer of economic resources from a government to a private entity. Under subparagraphs (i)-(iii), the government acting on its own behalf is effecting that transfer by directly providing something of value - either money, goods, or services - to a private entity. Subparagraph (iv) ensures that the same kinds of government transfers of economic resources, when undertaken through explicit delegation of those functions to a private entity, do not thereby escape disciplines."(20) (b) Concept of "financial contribution" 14. The Panel on US - Softwood Lumber III described the concept of "financial contribution" under Article 1.1(a)(1) of the SCM Agreement in general terms: "Article 1.1(a)(1) SCM Agreement provides that the first element of a subsidy is a 'financial contribution by the government'. Subparagraphs (i) through (iv) then explain that a financial contribution can exist in a wide variety of circumstances including, of course, the direct transfer of funds. But subparagraphs (ii) and (iii) show that a financial contribution will also exist if the government does not collect the revenue which it is entitled to or when it gives something or does something for an enterprise or purchases something from an enterprise or a group of enterprises. Subparagraph (iv) ensures that government directed transfers effected through a private entity do not thereby cease to be government transfers. In other words, Article 1.1(a)(1) SCM Agreement provides that a financial contribution can exist not only when there is an act or an omission involving the transfer of money, but also in case goods or certain services are provided by the government."(21) 15. The Panel on US - Export Restraints considered that the principal significance of the concept of financial contribution was foreclosing "the possibility of the treatment of any government action that resulted in a benefit on a subsidy": "[B]y introducing the notion of financial contribution, the drafters foreclosed the possibility of the treatment of any government action that resulted in a benefit as a subsidy. Indeed, this is arguably the principal significance of the concept of financial contribution, which can be characterized as one of the 'gateways' to the SCM Agreement, along with the concepts of benefit and specificity. To hold that the concept of financial contribution is about the effects, rather than the nature, of a government action would be effectively to write it out of the Agreement, leaving the concepts of benefit and specificity as the sole determinants of the scope of the Agreement."(22) 4. Article 1.1(a)(1)(i): Transfer of funds (a) "Direct transfer of funds" 16. In Canada - Aircraft Credits and Guarantees, the parties agreed that some of the programmes at issue were direct transfers of funds within the meaning of Article 1.1(a)(1)(i).(23) 17. The Panel on Brazil - Aircraft (Article 21.5 - Canada II) considered that certain payments made in the form of bonds constituted direct transfers of funds under Article 1.1(a)(1)(i) of the SCM Agreement.(24) 18. In Canada - Aircraft, the Panel concluded that TPC (Technology Partners Canada) contributions constituted direct transfers of funds by the Government of Canada in the sense of Article 1.1(a)(1)(i).(25) 19. With regard to the granting of subsidies for the purpose of Article 27.4 of the SCM Agreement, see paragraphs 332-333 below. (b) "Potential direct transfers of funds" 20. In Brazil - Aircraft, the Panel had found that "a 'potential direct transfer of funds' exists only where the action in question gives rise to a benefit and thus confers a subsidy irrespective of whether any payment occurs", and that "the existence of a 'potential direct transfer of funds' does not depend upon the probability that a payment will subsequently occur".(26) The Appellate Body however considered that the Panel did not have to determine whether the export subsidies at issue constituted a "direct transfer of funds" or a "potential direct transfer of funds", within the meaning of Article 1.1(a)(i), in order to determine when the subsidies are "granted" for the purposes of Article 27.4 and thus this analysis was not relevant.(27) 21. In Canada - Aircraft Credits and Guarantees, the parties agreed that the so-called IQ equity guarantees were "potential direct transfers of funds" within the meaning of Article 1.1(a)(1)(i).(28) 22. The Panel on Brazil - Aircraft, in a finding subsequently not addressed by the Appellate Body, rejected the argument that a subsidy exists only when the transfer of funds has actually been effectuated: "[A]ccording to Article 1:1(i) a subsidy exists if a government practice involves a direct transfer of funds or a potential direct transfer of funds and not only when a government actually effectuates such a transfer or potential transfer (otherwise the text of (i) would read: 'a government directly transfers funds ... or engages in potential direct transfers of funds or liabilities') ... As soon as there is such a practice, a subsidy exists, and the question whether the practice involves a direct transfer of funds or a potential direct transfer of funds is not relevant to the existence of a subsidy. One or the other is sufficient. If subsidies were deemed to exist only once a direct or potential direct transfer of funds had actually been effectuated, the Agreement would be rendered totally ineffective and even the typical WTO remedy (i.e. the cessation of the violation) would not be possible."(29) 5. Article 1.1(a)(1)(ii): "government revenue otherwise due is foregone or not collected" 23. The Appellate Body on US - FSC , considered the legal standard for "foregoing revenue" that is "otherwise due" and emphasized certain principles based on the understanding that: (i) "a financial contribution" does not arise simply because a government does not raise revenue which it could have raised; and (ii) the term "otherwise due" implies a comparison with a "defined normative benchmark": "[U]nder Article 1.1(a)(1)(ii), a 'financial contribution' does not arise simply because a government does not raise revenue which it could have raised. It is true that, from a fiscal perspective, where a government chooses not to tax certain income, no revenue is 'due' on that income. However, although a government might, in a sense, be said to 'forego' revenue in this situation, this alone gives no indication as to whether the revenue foregone was 'otherwise due'. In other words, the mere fact that revenues are not 'due' from a fiscal perspective does not determine that the revenues are or are not 'otherwise due' within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement."(30) 24. The Panel on US0 - FSC (Article 21.5 - EC) in findings not reviewed by the Appellate Body, considered that the examination whether there is revenue foregone that is "otherwise due" must be based on actual substantive realities and not be restricted to a formalistic approach. Otherwise it would have the effect of reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to "redundancy and inutility": "To give due meaning and effect to Article 1.1 of the SCM Agreement, our examination as to whether there is revenue foregone that is 'otherwise due' must be based on actual substantive realities and not be restricted to pure formalism. ... [A] government could opt to bestow financial contributions in the form of fiscal incentives simply by modulating the 'outer boundary' of its 'tax jurisdiction' or by manipulating the definition of the tax base to accommodate any 'exclusion' or "exemption" or 'exception' it desired, so that there could never be a foregoing of revenue 'otherwise due'. This would have the effect of reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to 'redundancy and inutility' and cannot be the appropriate implication to draw from the stipulation as to what constitutes one of the enumerated forms of 'financial contribution' under Article 1.1 of the SCM Agreement. Furthermore, the consequences of this reasoning would also entirely undermine Article 3.1(a) of the SCM Agreement, as there could never be, in this situation, a subsidy contingent upon export in the form of a financial contribution involving of a foregoing of revenue that is otherwise due. As such, it is inherently contradictory to what may be viewed as the object and purpose of the SCM Agreement in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of expectations to Members. ... In short, such an approach would eviscerate the subsidies disciplines in the SCM Agreement."(31) 25. The Appellate Body on US - FSC referred on several occasions to the concept of "categories of revenue" and indicated that a Member is free not to tax any particular category of revenues: "A Member, in principle, has the sovereign authority to tax any particular categories of revenue it wishes. It is also free not to tax any particular categories of revenues. But, in both instances, the Member must respect its WTO obligations. What is "otherwise due", therefore, depends on the rules of taxation that each Member, by its own choice, establishes for itself. ... Members of the WTO are not obliged, by WTO rules, to tax any categories of income, whether foreign- or domestic-source income."(32) 26. Considering the operation of the arm's length principle when a Member chooses whether to tax or not certain categories of revenues, the Appellate Body in US - FSC considered: "[T]he arm's length principle operates when a Member chooses not to tax, or to tax less, certain categories of foreign-source income. However, the operation of the arm's length principle is unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will not tax, or will tax less. Likewise, the operation of the arm's length principle is unaffected by the choice a Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source income that it has selected for itself. In short, the requirement to use the arm's length principle does not address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export subsidies within the meaning of Article 3.1(a) of the SCM Agreement."(33) 27. In findings not reviewed by the Appellate Body, the Panel on US - FSC (Article 21.5 - EC), noting that the concept of "categories of revenue" is not actual treaty language, followed the Appellate Body's interpretation in US - FSC and rejected the argument that foreign-source income is a "category" of income that may be excluded from taxation consistently with the SCM Agreement: "We turn now to whether utilization of the term 'category' would in any way alter the nature of our analysis to this point. However, before considering these issues, we first observe that the concept of 'categories' of revenue to which the Appellate Body referred is not actual treaty language. We further note that the Appellate Body also emphasized that, regardless of any 'category' of revenue that may be under consideration, a Member is bound at all times to respect its WTO obligations. ... [E]ven if one applies the term of 'category' to the measure at issue, this linguistic or formal distinction in no way alters the underlying substance of the actual relationship between the measure at issue and the default tax regime as outlined above. Employment of the terminology in no way substantively modifies that relationship. Nor does it introduce any new elements or rationale to the measure at issue that change its essential character."(34) (c) Members' tax rules as normative benchmark 28. In US - FSC, the Appellate Body, interpreting the phrase "foregoing of revenue otherwise due", partly agreed with the Panel's interpretation that the term "otherwise" referred to a "normative benchmark" as established by the tax rules applied by the Member in question. The Appellate Body rejected the use of a benchmark other than the tax rules of the Member in question, holding that to do otherwise would be contrary to a Member's sovereignty of taxation: "In our view, the 'foregoing' of revenue 'otherwise due' implies that less revenue has been raised by the government than would have been raised in a different situation, or, that is, 'otherwise'. Moreover, the word 'foregone' suggests that the government has given up an entitlement to raise revenue that it could 'otherwise' have raised. This cannot, however, be an entitlement in the abstract, because governments, in theory, could tax all revenues. There must, therefore, be some defined, normative benchmark against which a comparison can be made between the revenue actually raised and the revenue that would have been raised 'otherwise'. We, therefore, agree with the Panel that the term 'otherwise due' implies some kind of comparison between the revenues due under the contested measure and revenues that would be due in some other situation. We also agree with the Panel that the basis of comparison must be the tax rules applied by the Member in question. To accept the argument of the United States that the comparator in determining what is 'otherwise due' should be something other than the prevailing domestic standard of the Member in question would be to imply that WTO obligations somehow compel Members to choose a particular kind of tax system; this is not so. A Member, in principle, has the sovereign authority to tax any particular categories of revenue it wishes. It is also free not to tax any particular categories of revenues. But, in both instances, the Member must respect its WTO obligations.(35) What is 'otherwise due', therefore, depends on the rules of taxation that each Member, by its own choice, establishes for itself."(36) 29. The Appellate Body on US - FSC (Article 21.5 - EC) stated that Article 1.1(a)(1)(ii) does not require panels to identify a "general" rule of taxation and "exceptions" to that "general" rule. Rather, they should compare the domestic fiscal treatment of "legitimately comparable income" to ascertain whether the measure under consideration involves the foregoing of revenue that is "otherwise due". The Appellate Body further considered that the comparison ought to be made with respect to taxpayers in "comparable situations":(37) "The treaty phrase 'otherwise due' implies a comparison with a 'defined, normative benchmark'. The purpose of this comparison is to distinguish between situations where revenue foregone is 'otherwise due' and situations where such revenue is not 'otherwise due'. As Members, in principle, have the sovereign authority to determine their own rules of taxation, the comparison under Article 1.1(a)(1)(ii) of the SCM Agreement must necessarily be between the rules of taxation contained in the contested measure and other rules of taxation of the Member in question. Such a comparison enables panels and the Appellate Body to reach an objective conclusion, on the basis of the rules of taxation established by a Member, by its own choice, as to whether the contested measure involves the foregoing of revenue that would be due in some other situation or, in the words of the SCM Agreement, 'otherwise due'.
In our Report in US - FSC, we recognized that it may be difficult to identify the appropriate normative benchmark for comparison under Article 1.1(a)(1)(ii) because domestic rules of taxation are varied and complex. In identifying the appropriate benchmark for comparison, panels must obviously ensure that they identify and examine fiscal situations which it is legitimate to compare. In other words, there must be a rational basis for comparing the fiscal treatment of the income subject to the contested measure and the fiscal treatment of certain other income. In general terms, in this comparison, like will be compared with like. For instance, if the measure at issue involves income earned in sales transactions, it might not be appropriate to compare the treatment of this income with employment income.
As we said earlier, under Article 1.1(a)(1)(ii) of the SCM Agreement, the normative benchmark for determining whether revenue foregone is otherwise due must allow a comparison of the fiscal treatment of comparable income, in the hands of taxpayers in similar situations. ... In other words, our inquiry under Article 1.1(a)(1)(ii) is not simply ended at this stage of analysis because the measure involves an allocation of income between domestic- and foreign-source income. Rather, we must compare the way the United States taxes the portion of the income covered by the measure, which it treats as foreign-source, with the way it taxes other foreign-source income under its own rules of taxation."(38) 30. The Appellate Body on US - FSC expressed some reservations about the Panel's "but for" test. The Panel had interpreted the term "otherwise due" as referring to the situation that would prevail "but for" the United States' tax measures under consideration. The Panel held that it would determine whether, absent these measures, there would be a higher tax liability, meaning that it would examine the situation "that would exist but for the measure in question".(39) The Appellate Body noted that this "but for" test established by the Panel was not actual treaty language and cautioned that the test may "not work in other cases":(40) "The Panel found that the term 'otherwise due' establishes a 'but for' test, in terms of which the appropriate basis of comparison for determining whether revenues are 'otherwise due' is 'the situation that would prevail but for the measures in question'.(41) In the present case, this legal standard provides a sound basis for comparison because it is not difficult to establish in what way the foreign-source income of an FSC would be taxed 'but for' the contested measure. However, we have certain abiding reservations about applying any legal standard, such as this 'but for' test, in the place of the actual treaty language. Moreover, we would have particular misgivings about using a 'but for' test if its application were limited to situations where there actually existed an alternative measure, under which the revenues in question would be taxed, absent the contested measure. It would, we believe, not be difficult to circumvent such a test by designing a tax regime under which there would be no general rule that applied formally to the revenues in question, absent the contested measures. We observe, therefore, that, although the Panel's 'but for' test works in this case, it may not work in other cases. We note, however, that, in this dispute, the European Communities does not contest either the Panel's interpretation of the term 'otherwise due' or the Panel's application of that term to the facts of this case. The United States also accepts the Panel's interpretation of that term as a general proposition."(42) (e) Tax exclusion of extraterritorial income as revenue foregone 31. The Panel on US - FSC (Article 21.5 - EC) considered, in a finding upheld by the Appellate Body(43), whether the exclusion of extraterritorial income constitutes the foregoing of revenue. The Panel considered that income provided by the United States regulations at issue through the tax "exclusion" of the United States foregoes revenue that is otherwise due within the meaning of Article 1.1(a)(1)(ii), and therefore a "financial contribution" exists. The Panel indicated that in order to assess the nature of the relationship between the measure at issue and the party's overall tax regime, it had looked at the "essential shape and the rationale that is exhibited": "For instance - and without prejudice to what the status of such a measure might be under the SCM Agreement - the Act manifestly does not represent a coherent approach to corporate earnings derived from offshore activities only. The conditionality is such that the eligibility is, in fact, circumscribed carefully to render it only effective, for example, with respect to goods, only with respect to certain goods - i.e. certain 'qualifying foreign trade property' - produced within or outside the United States, where those goods are for 'use outside the United States' and where those goods fulfill the foreign articles/labor limitation included in the definition of qualifying foreign trade property. In short, one is left with the perspective simply of certain carve-outs being provided for in relation to what would otherwise be the prevailing regime of revenue liability in respect of the income concerned.
We add that while, in our view, the terms of the SCM Agreement are clear enough, their application to the facts of the multiplicity of Members' regimes will not necessarily be self-evident. Indeed, discerning what might be described as "the prevailing domestic standard" for a particular tax regime may be a particularly exacting exercise. In more common usage, it might be rather difficult to discern what is the exception, as it were, and what is the rule. But the terms of the SCM Agreement are clearly of general application: there is nothing which states that they are only to be applied when the results are self-evident. Be that as it may, we are not, in this dispute, presented with a situation of such complexity. This dispute does not involve a debatable call as to whether the glass is half-full or half-empty. As outlined above, we have looked at the essential shape and the rationale that is exhibited. In examining that, we have weighed such considerations as the degree of conditionality, the range of limitations and the manner in which the measure at issue relates to the overall regime. Taken together, they enable us to assess the nature of the relationship of the measure at issue and the overall regime. That is precisely how one is in a position to arrive at the judgment required by the terms of the SCM Agreement.
In light of these considerations, we are of the view that, through the tax 'exclusion' provided by the Act, the United States government foregoes revenue that is otherwise due within the meaning of Article 1.1(a)(1)(ii). In our view, a 'financial contribution' thereby arises within the meaning of Article 1.1 SCM Agreement."(44) (f) Footnote 1 to Article 1.1(a)(1)(ii) 32. The measure at issue in Canada - Autos consisted of the exemption of import duties for motor vehicles imported into Canada by Canadian car manufacturers who fulfilled certain conditions. The Appellate Body rejected the argument that the Canadian measure was "'analogous' to the situation described in footnote 1".(45) The Appellate Body stated: "Footnote 1 ... deals with duty and tax exemptions or remissions for exported products. The measure at issue applies, in contrast, to imports ... . For this reason we do not consider that footnote 1 bears upon the import duty exemption at issue in this case."(46) 6. Article 1.1(a)(1)(iii): government provision of goods or services 33. The Panel on US - Softwood Lumber III took into account the context in which the term "goods" is used in Article 1.1(a)(1)(iii), and considered that the object and purpose of Article 1.1(a)(1)(iii) confirms its "broad ordinary meaning" as "tangible or movable personal property, other than money": "In Article 1.1(a)(1)(iii) SCM Agreement, 'goods' is used in the context of 'goods or services other than general infrastructure'. We consider that the context in which the term 'goods' is used in Article 1.1(a)(1)(iii) SCM Agreement confirms the broad ordinary meaning of 'goods' as tangible or movable personal property, other than money. In our view, the sentence 'goods or services other than general infrastructure' refers to a very broad spectrum of things a government may provide. The fact that the only exception provided for in subparagraph (iii) is general infrastructure reinforces our view concerning the unqualified meaning of the term goods as used in this provision.
In short, Article 1.1(a)(1)(iii) SCM Agreement in its context and in light of its object and purpose establishes that a financial contribution also exists in case goods or services are provided which can be valued and which represent a value to the beneficiary in question. The word 'goods' in this context of 'goods or services' is intended to ensure that the term financial contribution is not interpreted to mean only a money-transferring action, but encompasses as well an in-kind transfer of resources, with the exception of general infrastructure."(47) 34. In US - Softwood Lumber III, the Panel addressed the issue of whether a government that allows the exercise of harvesting rights to a company is actually providing goods within the meaning of Article 1.1(a)(1)(iii). The Panel considered that when a government does allow this it is "providing" timber to the harvesting companies. For the Panel, "from the tenure holder's point of view, there is no difference between receiving from the government the right to harvest standing timber and the actual supply by the government of standing timber through the tenure holder's exercise of this right."(48) The Panel stated: "In sum, and in the context of Article 1.1(a) (1)(iii) SCM Agreement, we are of the view that where a government allows the exercise of harvesting rights, it is providing standing timber to the harvesting companies. From the perspective of the harvesting company the situation is clear: most forest land is Crown land, and if the company wants to cut the trees for processing or sale, it will need to enter into a stumpage contract with the provincial government, under which it will have to take on a number of obligations in addition to paying a stumpage fee for the trees actually harvested. We thus view the service and maintenance obligations, the obligations to undertake various forestry management, conservation and other measures, combined with the stumpage fees required by the stumpage agreements, as the price the tenure holder has to pay for obtaining and exercising its harvesting rights."(49) 35. The Panel on US - Softwood Lumber III, rejected the argument that "goods" are limited to products with an actual or potential tariff line: "[A]lthough in many cases the general word 'good' may indeed be used as an equivalent of the term "products", this does not imply that this necessarily is always so, precisely because "goods" is a term with a broad and general meaning ... Although 'goods' in Article 1.1(a)(1)(iii) SCM Agreement certainly includes tradable products, there is no reason to limit its meaning to only such products, particularly where the immediate context in which the term is used does not suggest such a limitation. In particular, this provision states that when the government provides 'goods or services', this constitutes a financial contribution. The 'goods' in question are not imported or exported, simply provided by the government, and nothing suggests therefore that the goods in question need to be tradeable products with a potential or actual tariff line. Goods in this context are distinguished from services, and in our view the two cover the full spectrum of in-kind transfers the government may undertake by providing resources to an enterprise. Our view is reinforced by the fact that there is only one exception among all possible goods and services that could be provided by the government - general infrastructure - which is explicitly defined as not constituting a financial contribution. We thus find that there is no basis in the text of the SCM Agreement to conclude that "goods" in Article 1.1 is limited to products with an actual or potential tariff line."(50) 36. The Panel on US - Softwood Lumber III, further considered that the text of the SCM Agreement provides no exception for "harvesting rights" mentioned in a working paper from the Uruguay Round negotiations and that the discussion paper "has little if any probative value."(51) "Canada argues that rights to exploit in situ natural resources are not covered by Article 1.1(a)(1)(iii) SCM Agreement. Canada can not point to any provision in particular in the Agreement in support of this view, but instead reaches this conclusion on the basis of a working paper from the time of the Uruguay Round negotiations which explicitly mentioned harvesting rights separately from goods or services.
We note that the text of the SCM Agreement does not in any way provide an exception for the right to exploit natural resources. The only exception from the term 'goods or services' provided for in Article 1.1(a)(1)(iii) SCM Agreement is general infrastructure, not natural resources."(52) 7. Article 1.1(a)(1)(iv): funding mechanism, private bodies (a) Purpose of subparagraph (iv) 37. The Panel on US - Export Restraints considered that the purpose of subparagraph (iv) of Article 1.1(a)(i) to the SCM Agreement is to avoid circumvention of subparagraphs (i)-(iii) of the same Article by a government officiating through a private body: "[W]e find no support in the text of the Agreement for the US reading of the word 'type'. Rather, in our view, the phrase 'type of functions' refers to the physical functions identified in subparagraphs (i)-(iii). In this regard, we believe that the intention of subparagraph (iv) is to avoid circumvention of subparagraphs (i)-(iii) by a government simply by acting through a private body. Thus, ultimately, the scope of the actions (the physical functions) covered by subparagraph (iv) must be the same as those covered by subparagraphs (i)-(iii). That is, the difference between subparagraphs (i)-(iii) on the one hand, and subparagraph (iv) on the other, has to do with the identity of the actor, and not with the nature of the action. The phrase 'type of functions' ensures that this is the case, that is, that Article 1 covers the types of functions identified in subparagraphs (i)-(iii) whether those functions are performed by the government itself or are delegated to a private body by the government."(53) (b) Requirement for the existence of a financial contribution under Article 1.1(a)(1)(iv) 38. In US Export - Restraints, the Panel examined the text and context of Article 1.1(a)(1)(iv) and noted that it contains five requirements in order for a financial contribution to exist: "The definition of financial contribution in Article 1.1(a)(1)(iv)contains five requirements:
(i) a government 'entrusts or directs'
(ii) 'a private body'
(iii) 'to carry out one or more of the type of functions illustrated in' subparagraphs (i)-(iii) of Article 1.1(a)(1) (in this case the provision of goods)
(iv) 'which would normally be vested in the government' and
(v) 'the practice, in no real sense, differs from practices normally followed by governments'(54) (i) Government-entrusted or government-directed provision of goods 39. The Panel on US - Export Restraints addressed the issue of whether an export restraint could constitute a financial contribution in the sense of Article 1.1(a)(1)(iv). In considering whether export restraints involve government "entrustment" or "direction," the Panel stated that this requirement refers "to the situation in which the government executes a particular policy by operating through a private body." Following dictionary definitions of these terms, the Panel stated that the action taken by the government must contemplate the concept of "delegation", and must include three separate elements: (i) be "an explicit and affirmative action, be it delegation or command"; (ii) be "addressed to a particular party"; and (iii) be "the objective of which is a particular task or duty". The Panel concluded that "an export restraint as defined in this dispute cannot constitute government-entrusted or government-directed provision of goods in the sense of subparagraph (iv) and hence does not constitute a financial contribution in the sense of Article 1.1(a) of the SCM Agreement."(55) "In our view, the requirement of 'entrustment' or 'direction' in subparagraph (iv) refers to the situation in which the government executes a particular policy by operating through a private body.
It follows from the ordinary meanings of the two words 'entrust' and 'direct' that the action of the government must contain a notion of delegation (in the case of entrustment) or command (in the case of direction). To our minds, both the act of entrusting and that of directing therefore necessarily carry with them the following three elements: (i) an explicit and affirmative action, be it delegation or command; (ii) addressed to a particular party; and (iii) the object of which action is a particular task or duty. In other words, the ordinary meanings of the verbs 'entrust' and 'direct' comprise these elements - something is necessarily delegated, and it is necessarily delegated to someone; and, by the same token, someone is necessarily commanded, and he is necessarily commanded to do something. We therefore do not believe that either entrustment or direction could be said to have occurred until all of these three elements are present.
Having said that, it is clearly the first element - an explicit and affirmative action of delegation or command - that is determinative. The second and third elements - addressed to a particular party and of a particular task - are aspects of the first."(56) 40. The Panel on US - Export Restraints concluded that the meaning of the words "entrusts" and "directs" requires an "explicit and affirmative action of delegation or command", and that an export restraint in the sense that the term is used in this dispute cannot fulfil the "entrusts or directs" standard of subparagraph (iv) of Article 1.1(a)(1) of the SCM Agreement. The Panel stated: "[T]he ordinary meanings of the words 'entrusts' and 'directs' require an explicit and affirmative action of delegation or command. Moreover, we find that the 'effects' test (i. e., a proximate causal relationship) advanced by the United States as the definition of 'entrusts or directs' has implications which in our view would be contrary to the intended scope and coverage of the SCM Agreement, in that it would effectively read out of the text of Article 1 the financial contribution requirement. Thus, we find that an export restraint in the sense that the term is used in this dispute cannot satisfy the 'entrusts or directs' standard of subparagraph (iv)."(57) 41. As to the requirement that there be a "private body" that is "entrusted or directed," the Panel on US - Export Restraints stated that the term "private body" is used in Article 1.1(a)(1)(iv) as a counterpoint to the terms "government" or "any public body" as used in Article 1.1. The Panel concluded that the companies or other entities affected by or reacting to an export restraint could be "private bodies" in this sense. The Panel stated: "We believe that the term 'private body' is used in Article 1.1(a)(1)(iv) as a counterpoint to 'government' or 'any public body' as the actor. That is, any entity that is neither a government nor a public body would be a private body. Under this reading of the term 'private body', there is no room for circumvention in subparagraph (iv). As it is a government or a public body that would have to entrust or direct under subparagraph (iv), any entity other than a government or a public body could receive the entrustment or direction and could constitute a 'private body'."(58) 42. The Panel on US - Export Restraints took the view that the scope of the functions covered by subparagraph (iv) is the same as those in subparagraphs (i) to (iii). In the Panel's view, the differences between subparagraphs (i) to (iii) and (iv) have to do with the identity of the actions: "In this regard, we believe that the intention of subparagraph (iv) is to avoid circumvention of subparagraphs (i)-(iii) by a government simply by acting through a private body. Thus, ultimately, the scope of the actions (the physical functions) covered by subparagraph (iv) must be the same as those covered by subparagraphs (i)-(iii). That is, the difference between subparagraphs (i)-(iii) on the one hand, and subparagraph (iv) on the other, has to do with the identity of the actor, and not with the nature of the action. The phrase 'type of functions' ensures that this is the case, that is, that Article 1 covers the types of functions identified in subparagraphs (i)-(iii) whether those functions are performed by the government itself or are delegated to a private body by the government."(59) 43. With regard to the word "type", the Panel on US - Export Restraints further clarified that this word refers to the fact that each subparagraph (i)-(iii) constitutes by itself a general "type of functions" encompassing one or more categories of behaviour: "The subsequent phrase 'illustrated in (i) to (iii) above' confirms this. In particular, subparagraphs (i)-(iii) each refer to multiple government actions and provide examples thereof. Subparagraph (i), for instance, refers to three general categories (direct transfers of funds; potential direct transfers of funds; and potential direct transfers of liabilities) of the 'type of function' of transfers of funds and liabilities.
We therefore find that the phrase 'type of functions' refers to the physical functions encompassed by subparagraphs (i)-(iii), and does not expand the scope of subparagraph (iv) beyond these, to encompass other kinds of 'government mechanisms'."(60) (c) Relationship with Article 1.1(b) 44. With respect to the relationship with Article 1.1(b), see paragraph 20 above ("potential direct transfer of funds") and paragraphs 46 and 71 below ("ordinary meaning of 'benefit'"). 8. Article 1.1(b): "benefit is thereby conferred" 45. In Canada - Aircraft, the Appellate Body quoted approvingly the Panel's focus on the recipient of the subsidy in its interpretation of the term "benefit" under Article 1.1(b):(61) "[T]he ordinary meaning of 'benefit' clearly encompasses some form of advantage. ... In order to determine whether a financial contribution (in the sense of Article 1.1(a)(i)) confers a 'benefit', i.e., an advantage, it is necessary to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution. In our view, the only logical basis for determining the position the recipient would have been in absent the financial contribution is the market. Accordingly, a financial contribution will only confer a 'benefit', i.e., an advantage, if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market."(62) 46. The Appellate Body on Canada - Aircraft agreed with the Panel's findings rejecting an interpretation of benefit based on whether there was a "net cost" to the government and focusing rather on the recipient of the subsidy. The Panel added that interpreting the term "benefit" with a view to the granting government - rather than with a view to the recipient - was not consistent with the object and purpose of the SCM Agreement.(63) In so doing, it first considered the dictionary meaning of the term "benefit": "The dictionary meaning of 'benefit' is 'advantage', 'good', 'gift', 'profit', or, more generally, 'a favourable or helpful factor or circumstance'. Each of these alternative words or phrases gives flavour to the term 'benefit' and helps to convey some of the essence of that term. These definitions also confirm that the Panel correctly stated that 'the ordinary meaning of 'benefit' clearly encompasses some form of advantage.' Clearly, however, dictionary meanings leave many interpretive questions open."(64) 47. The Appellate Body on Canada - Aircraft then confirmed the Panel's focus on the recipient of a subsidy in determining the existence of a benefit: "A 'benefit' does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a 'benefit' can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term 'benefit', therefore, implies that there must be a recipient. This provides textual support for the view that the focus of the inquiry under Article 1.1(b) of the SCM Agreement should be on the recipient and not on the granting authority. The ordinary meaning of the word 'confer', as used in Article 1.1(b), bears this out. 'Confer' means, inter alia, 'give', 'grant' or 'bestow'. The use of the past participle 'conferred' in the passive form, in conjunction with the word 'thereby', naturally calls for an inquiry into what was conferred on the recipient. Accordingly, we believe that Canada's argument that 'cost to government' is one way of conceiving of 'benefit' is at odds with the ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the government providing the 'financial contribution'."(65) 48. The Appellate Body on Canada - Aircraft finally held that a determination whether a benefit exists for the recipient of a subsidy implies a comparison with market conditions: "We also believe that the word 'benefit', as used in Article 1.1(b), implies some kind of comparison. This must be so, for there can be no 'benefit' to the recipient unless the 'financial contribution' makes the recipient 'better off' than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a 'benefit' has been 'conferred', because the trade-distorting potential of a 'financial contribution' can be identified by determining whether the recipient has received a 'financial contribution' on terms more favourable than those available to the recipient in the market."(66) 49. The Panel on US - Lead and Bismuth II, in its interpretation of the term "benefit"(67) - subsequently upheld by the Appellate Body - considered that the existence or lack thereof of benefits rests on whether the potential recipient or beneficiary has received a financial contribution on more favourable terms. The Panel further indicated that consideration should also be given to Articles VI:3 of GATT 1994 and footnote 36 to Article 10 of the SCM Agreement: "[T]he existence or non-existence of 'benefit' rests on whether the potential recipient or beneficiary, which 'logically' must be a legal or natural person, or group of persons, has received a 'financial contribution' on terms more favourable than those available to the potential recipient or beneficiary in the market. Moreover, in the particular context of countervailing duties, we believe that consideration should also be given to Article VI:3 of the GATT 1994, and footnote 36 to Article 10 of the SCM Agreement.
Article VI:3 of the GATT 1994 provides in relevant part:
'The term 'countervailing duty' shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise.'
Footnote 36 to Article 10 of the SCM Agreement provides that:
'The term 'countervailing duty' shall be understood to mean a special duty levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.'
These provisions state that countervailing duties levied on imported products are intended to offset (countervailable) subsidies found to have been bestowed on inter alia the production of such imported products. The notion of 'subsidy' comprises two elements: (1) 'financial contribution', and (2) 'benefit'. As noted above, 'benefit' is determined by reference to the terms on which a 'financial contribution" would have been made available to a particular legal or natural person, or group of persons, in the market. Full consideration of Article VI:3 of the GATT 1994 and footnote 36 to Article 10 of the SCM Agreement leads us to conclude that, in the context of countervailing duty investigations, the existence of a 'benefit' should be determined by reference to the market terms on which a "financial contribution" bestowed directly or indirectly upon the production of any merchandise would have been made available to the producer of that merchandise."(68) 50. In Brazil - Aircraft (Article 21.5 - Canada II), the Panel noted that, under the programme at issue the borrower is free to select the lender that offers the best terms, and that payments under the programme allow that lender to offer better export credit terms than it could otherwise provide. As a result, the Panel concluded that from a theoretical standpoint, such payments may be expected to enable purchasers to obtain export credits on terms more favourable than those available to them in the commercial market, and thus to confer a benefit: "[T]hat the borrower is free to select the lender, whether Brazilian or otherwise, that offers him the best terms, and that PROEX III payments allow that lender to offer better export credit terms than he could otherwise provide ... ... We recognise the theoretical possibility that a particular purchaser of Brazilian regional aircraft might be able to obtain export credit financing at (or even below52) CIRR rates in the commercial marketplace. Even if, as a result, PROEX III did not always confer a benefit on the buyer of Brazilian regional aircraft, it is important to bear in mind that this Panel's task is to review the PROEX III programme as such (insofar as it relates to exports of regional aircraft), not just specific situations which may arise under it. We are concerned, in this case, with all situations in which PROEX III may reasonably be expected to be involved. Thus, to the extent that PROEX III required Brazil, in some situations, to make PROEX III payments that would result in a benefit being conferred in respect of regional aircraft, the PROEX III programme would be mandatory legislation (in respect of the conferral of a benefit) and thus a subsidy potentially inconsistent with the SCM Agreement."(69) 51. The Panel on Canada - Aircraft Credits and Guarantees considered whether the repayment terms and interest rate spread offered by the programme under consideration conferred a "benefit" and rejected Brazil's argument that a repayment term of more than ten years is in itself positive evidence of a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement. The Panel considered evidence demonstrating that repayment terms of up to 18.25 years were available in the market. Thus, for the Panel, the fact that a given repayment term may exceed the ten-year term provided for in the regulation under consideration does not mean ipso facto that financing is provided on terms more favourable than those available to the recipient on the market.(70) 52. In Brazil - Aircraft (Article 21.5 - Canada II), the Panel considered that, although the text of Article 1.1(b) does not define which participant in a subsidized transaction is a recipient of a benefit, that in itself does not mean that a benefit can be found to be provided to any participant to a transaction that receives a financial contribution:(71) "In considering whether PROEX III payments confer a benefit, the Panel notes that the financial contribution in this case is in the form of a (non-refundable) payment, rather than in the form of a loan. As a usual matter, of course, a non-refundable payment will confer a benefit. Thus, there would be no need for complex benefit analysis if PROEX III payments were made directly to producers or to purchasers of Brazilian regional aircraft. In this case, however, the payment is not provided to a producer of regional aircraft. Rather, PROEX III payments are provided to a lender in support of an export credit transaction relating to Brazilian regional aircraft. Thus, while there can be no doubt that PROEX III payments confer a benefit, we consider that the question remains whether PROEX III payments confer a benefit to producers of regional aircraft.
... whether the financial contribution has conferred a benefit to producers of regional aircraft - as opposed merely to a benefit to suppliers of financial services - depends upon the impact of PROEX III payments on the terms and conditions of the export credit financing available to purchasers of Brazilian regional aircraft."(72) 53. In Canada - Aircraft Credits and Guarantees, the Panel considered whether a "benefit" is conferred on a company by virtue of a "benefit" being conferred on the customer purchasing the product of such company: "In examining Brazil's claims in this case, we shall consider whether or not a 'benefit' is conferred on Bombardier by virtue of a 'benefit' being conferred on the airline customer purchasing Bombardier aircraft. ... In our view, the fact that Bombardier may arrange financing in the form of government support does not necessarily confer a "benefit" simply because Bombardier is 'reliev[ed] ... of the necessity of providing or arranging its own financing'. If that were the case, a 'benefit' would be conferred whenever Bombardier arranged external financing - even through commercial banks - since any external financing would 'reliev[e] it of the necessity of providing or arranging its own financing'. We find it difficult to accept that the existence of 'benefit' (in the context of financing) is determined on the basis of whether or not Bombardier provides internal or external financing. The existence of 'benefit' (in the context of financing) is determined by reference to the terms at which similar financing is available to the airline customer in the market."(73) 54. In US - Lead and Bismuth II, the United States argued that the present tense of the verb "is conferred" in Article 1.1 of the SCM Agreement shows that an investigating authority must demonstrate the existence of "benefit" only at the time the "financial contribution" was made.(74) The consequence of this argument was that an investigating authority would not be required to make a finding of benefit in a (subsequent) review of the countervailing measure. The Appellate Body on US - Lead and Bismuth II rejected this holding that "Article 1.1 does not address the time at which the 'financial contribution' and/or the 'benefit' must be shown to exist."(75) 55. As regards the timing of the transfer of goods, see paragraph 22 above. (ii) Mandatory/discretionary conferral of a benefit Challenging subsidy programmes "as such" Relevance of the mandatory/discretionary distinction 56. In Canada - Aircraft Credits and Guarantees, Brazil claimed that certain Canadian programmes were "as such" prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. The Panel considered that, as Brazil's claims regarded programmes as such, the mandatory/discretionary distinction(76) "would traditionally apply", i.e. that only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules: "We recall that Brazil claims that the EDC Canada and Corporate Accounts and IQ are "as such" prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. Given that Brazil's claims are in respect of the programmes as such, the mandatory/discretionary distinction would traditionally apply.(77) Under that distinction - employed in both GATT and WTO cases over the years(78) - only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules."(79) Order of analysis when applying the mandatory/discretionary distinction 57. The Panel on Canada - Aircraft Credits and Guarantees further explained that it would examine each of the programmes at issue to see if they mandated a benefit within the meaning of Article 1, and, if so, it would then examine whether that subsidy was contingent upon export performance:(80) "[W]e shall apply the mandatory/discretionary distinction in this dispute in determining whether the Canadian programmes at issue are as such inconsistent with WTO obligations, i. e., whether the legal texts governing the establishment and operation of these programmes are mandatory in respect of the violations alleged by Brazil. In other words, to assess Brazil's claim against the EDC as such, we must determine whether the EDC programme mandates the grant of prohibited export subsidies in a manner inconsistent with Article 3.1(a) of the SCM Agreement."(81) "Substantive context" in the application of the mandatory/discretionary distinction 58. In Canada - Aircraft Credits and Guarantees, Brazil argued that the mandatory/discretionary distinction should be applied in the "substantive context" of the Canadian programme at issue further to the Panel report in US - Export Restraints.(82) The Panel disagreed with Brazil's interpretation of the Panel report in that case and considered that the relevant "substantive context" in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review: "We note, ..., that the Panel in [United States - Export Restraints] was primarily addressing the issue of whether the mandatory/discretionary distinction had to be addressed by a panel as a threshold matter as argued by the United States in that case, or whether a panel could address this distinction after considering the legal requirements of the applicable provisions of the WTO Agreement. In other words, the phrase 'substantive context' refers to Articles 1 and 3 of the SCM Agreement(83), and not the measure under review. The point made by the panel in United States - Export Restraints is simply that it may be difficult to determine whether non-conforming conduct is mandated, without first determining what the obligations are against which conformity is measured. In the present case, the relevant 'substantive context' in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review.
We shall therefore apply the mandatory/discretionary distinction in light of Article 3.1(a) of the SCM Agreement. In other words, the question we must address is whether the EDC - the EDC Canada Account and the EDC Corporate Account - or IQ requires Canada to provide subsidies contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement."(84) Extent of the complainant's burden of proof 59. The Panel on Canada - Aircraft Credits and Guarantees considered that, to prove that a given programme "as such" provides export subsidies, the complainant must establish, on the basis of the pertinent legal instruments, that the programmes at issue "mandate subsidization, in particular, the conferral of a benefit": "Whatever the reason for the existence of export credit agencies, to prove that the EDC as such provides export subsidies, Brazil would have to establish that to be the case on the basis of the various legal texts regarding the establishment and operation of the EDC (i. e., both its Canada and its Corporate Accounts).
We consider that, despite the fact that Brazil has the burden of proof, it has not pointed to any specific provision in those legal texts that suggests that these programmes mandate subsidization, in particular, the conferral of a benefit within the meaning of Article 1 of the SCM Agreement. We have nonetheless examined the various legal texts submitted by Brazil and found nothing that points to mandatory subsidization on the part of the EDC."(85) 60. The Panel on Canada - Aircraft Credits and Guarantees clarified that "to satisfy the 'benefit' element of Article 1 of the SCM Agreement for purposes of a challenge to [the programme at issue] as such, [the complainant] would have to show that the program requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so."(86) Fiscal advantages 61. The Panel on Canada - Aircraft Credits and Guarantees clarified that the granting of fiscal advantages per se does not prove that the entity is required to pass on those advantages to its clients in the form of Article 1 subsidies and that even if the programme may have provided subsidies in the past, it does not then follow that the programme under consideration is required to provide such subsidies: "Brazil submits that ECAs benefit from a competitive advantage over their private sector competitors (because ECAs do not pay taxes, for example), and this enables them to offer more favourable terms than those available in the private sector. According to Brazil, 'not paying taxes is illustrative of, and an essential prerequisite to, an ECA's capability to perform its normal mission - to provide export subsidies'.(87) Brazil also implies that there would be no need for the EDC if it did not provide support on terms more favourable than those available on the market.(88) Whether or not these arguments are factually correct, however, we do not see how they establish mandatory subsidization. That an entity enjoys certain fiscal advantages does not in and of itself prove that that entity is required to pass on those advantages to its clients in the form of subsidies within the meaning of Article 1 of the SCM Agreement.(89)
In our opinion, the fact that ECAs may have a competitive advantage that allows them to undercut private sector competitors does not mean that they are necessarily required to do so. Furthermore, although the EDC may have provided subsidies in the form of loan guarantees, financial services or debt financing in specific transactions(90), it does not follow from this that the EDC is required to provide such subsidies."(91) Compliance with the OECD Arrangement 62. The Panel on Canada - Aircraft Credits and Guarantee further considered that "while it may be true that even when a programme complies with the OECD Arrangement, it may - pursuant to the findings of the panel in Canada - Aircraft (Article 21.5 - Brazil) involve the grant of prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement, that is not necessarily the case."(92) Provision of services not available in the market 63. The Panel on Canada - Aircraft Credits and Guarantee rejected the complainant's argument that the programme provided a subsidy by providing services that were not available on the market and clarified that, even if the particular programme had the potential to offer such other services, that fact did not necessarily mean that it was required to do so: "Even assuming that the provision of services not available on the market necessarily confers a benefit, the fact that the EDC Corporate Account has the 'ability' to provide such services does not necessarily mean that it is required to do so. As noted above, to satisfy the 'benefit' element of Article 1.1 of the SCM Agreement for purposes of a challenge to the EDC Corporate Account as such, Brazil would have to show that the program requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so.(93)"(94) Challenging subsidy programmes "as applied" 64. The Panel on Canada - Aircraft Credits and Guarantee considered inappropriate to make a finding on the subsidies programmes under consideration "as applied" because the complainant's "as applied" claims were based on evidence from specific transactions, and these claims were not independent from claims regarding specific transactions for which the Panel did make findings. The Panel considered that "findings regarding a programme 'as applied' would undermine the utility of the mandatory/discretionary distinction": "In our view, there are a number of reasons why it would not be appropriate for us to make separate findings regarding the EDC and IQ programmes 'as applied'. First, we do not consider that Brazil's 'as applied' claims are independent of its claims regarding 'specific transactions'. Indeed, Brazil itself acknowledges that '[i]n order for Brazil to prevail on its 'as applied' claims, the Panel must find that the challenged programmes have been applied in specific transactions in a manner that is inconsistent with the SCM Agreement". Since Brazil's 'as applied' claims are not independent of its claims against 'specific transactions', and since we make findings regarding 'specific transactions', we see no practical purpose in making 'as applied' findings." ... We recall our earlier remarks regarding the application of the mandatory / discretionary distinction. Further, we recall the statement of the panel in United States - Export Restraints that 'the distinction between mandatory and discretionary legislation has a rational objective in ensuring predictability of conditions for trade. It allows parties to challenge measures that will necessarily result in action inconsistent with GATT/WTO obligations, before such action is actually taken'(95). The conclusion by a panel that a programme is discretionary and therefore is not inconsistent with the WTO Agreement and a subsequent conclusion, by the same panel, that the programme 'as applied' (i.e., the manner in which the discretion inherent in that programme has been applied) is inconsistent with the WTO Agreement would be of little value. In our view, findings regarding a programme 'as applied' would undermine the utility of the mandatory / discretionary distinction."(96) (d) Passing the benefit through 65. In US - Lead and Bismuth II, the European Communities challenged the administrative review of the imposition of countervailing duties by United States' authorities. The United States' investigating authorities had imposed countervailing duties on products of a company which had received subsidized equity infusions from the United Kingdom Government while still under state control, but for which a fair market value price had been paid in a subsequent privatization by the buyers. Both the equity infusion and the privatization had occurred prior to the initiation of the investigation of the United States' authorities. The applicable United States' statutory provisions contained an "'irrebuttable presumption that nonrecurring subsidies benefit merchandise produced by the recipient over time", without requiring any re-evaluation of those subsidies based on the use or effect of those subsidies or subsequent events in the marketplace.(97) As a consequence, the competent United States' authority examined whether "potentially allocable subsidies ... could have traveled with the productive unit" following a change in ownership and concluded that a benefit indeed still existed, accruing to the new owners of the privatized corporation. In its report, the Panel first found that, in general, there could not be an irrebuttable presumption that a benefit "continues to flow from untied, non-recurring 'financial contributions', even after changes in ownership."(98) The Panel then stated that it also failed to see how, in the specific case at hand, the new owners of the producing facility could be deemed to have obtained a benefit by previous subsidies bestowed upon the enterprise, if a fair market value had been paid for all productive assets in the course of the privatization.(99) Upon appeal, the Appellate Body held that it saw "no error in the Panel's conclusion".(100) 66. Discussing the payment of value by owners of companies, rather than the companies themselves, the Panel on US - Lead and Bismuth II, in a statement not addressed by the Appellate Body, held that "[i]n the context of privatizations negotiated at arm's length, for fair market value, and consistent with commercial principles, the distinction between a company and its owners is redundant for the purpose of establishing 'benefit'."(101) 67. In US - Softwood Lumber III, the Panel, basing itself on the findings of the Appellate Body in US - Lead and Bismuth II(102), examined whether considering the facts of this case, the Member conducting a countervailing duty investigation was required to examine if the alleged benefit to the tenure holders from the stumpage programmes were "passed through" to the softwood lumber producers.(103) In the Panel's view, an authority "may not assume that a subsidy provided to producers of the 'upstream' input product automatically benefits unrelated producers of downstream products, especially if there is evidence on the record of arm's-length transactions between the two." For the Panel, in such circumstances the investigating authority should "examine whether and to what extent the subsidies bestowed on the upstream producers benefited the downstream producers."(104) 68. The Panel on US - Softwood Lumber III concluded that where there is "complete identity between the tenure holder/logger and the lumber producer, no pass-through analysis is required." The Panel found that "where a downstream producer of subject merchandise is unrelated to the allegedly subsidized upstream producer of the input, an authority is not allowed to simply assume that a benefit has passed through." The Panel concluded that by "not examining whether the independent lumber producers "paid arm's-length prices" for the logs that they purchased", the Member defined the benefit to the producers of the subject merchandise inconsistently with the SCM Agreement.(105) (e) Rebuttal of a prima facie case of benefit 69. Considering whether a party has rebutted a prima facie case of subsidization established against it, the Panel on Canada - Aircraft stated: "In order to rebut the prima facie case of 'benefit', we consider that Canada must do more than simply demonstrate that the amount of specific 'benefit' estimated by Brazil may be incorrect, or that TPC's rate of return covers Canada's cost of funds. Rather, Canada must demonstrate that no 'benefit' is conferred, in the sense that the terms of the contribution provide for a commercial rate of return."(106) 70. In Canada - Aircraft Credits and Guarantees, the Panel noted the statements made by a Member's government official that the programme financing under consideration would be at a "better rate" than loans available commercially. For the Panel, these statements were an indication that the financing confers a "benefit": "We recall that a 'benefit' is conferred when a recipient receives a 'financial contribution' on terms more favourable than those available to the recipient in the market In our view, Minister Tobin's statements indicate that the Canada Account financing to Air Wisconsin, which will take the form of a loan, will confer a 'benefit' because it will be on terms more favourable than those available to the recipient in the market. This is confirmed by the fact that, in these proceedings, Canada itself initially considered the terms of the Canada Account financing to Air Wisconsin to be more favourable than those available in the market."(107) (f) Relationship of Article 1.1(b) with Article 1.1(a)(1) 71. The Appellate Body on Canada - Aircraft found Article 1.1(a)(1) a relevant context for interpreting the term "benefit" in Article 1.1(b): "The structure of Article 1.1 as a whole confirms our view that Article 1.1(b) is concerned with the 'benefit' to the recipient, and not with the 'cost to government'. The definition of 'subsidy' in Article 1.1 has two discrete elements: 'a financial contribution by a government or any public body' and 'a benefit is thereby conferred'. The first element of this definition is concerned with whether the government made a 'financial contribution', as that term is defined in Article 1.1(a). The focus of the first element is on the action of the government in making the 'financial contribution'. That being so, it seems to us logical that the second element in Article 1.1 is concerned with the 'benefit... conferred' on the recipient by that governmental action. Thus, subparagraphs (a) and (b) of Article 1.1 define a 'subsidy' by reference, first, to the action of the granting authority and, second, to what was conferred on the recipient. Therefore, Canada's argument that 'cost to government' is relevant to the question of whether there is a 'benefit' to the recipient under Article 1.1(b) disregards the overall structure of Article 1.1."(108) (g) Relationship of Article 1.1(b) with other Articles of the SCM Agreement 72. Both the Panel and the Appellate Body in Canada - Aircraft held that Article 14 was relevant context for interpretation of the term "benefit". The Appellate Body considered the explicit |
