DISPUTE SETTLEMENT: DISPUTE DS108

United States — Tax Treatment for “Foreign Sales Corporations”


This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.

  

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One-page summary of key findings of this dispute
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Current status  back to top

 

Key facts  back to top

Short title:
Complainant:
Respondent:
Third Parties:
Agreements cited:
(as cited in request for consultations)
Request for Consultations received:
Panel Report circulated: 8 October 1999
Appellate Body Report circulated: 24 February 2000
Article 21.5 Panel Report circulated: 20 August 2001
Article 21.5 Appellate Body Report circulated: 14 January 2002
Recourse to Article 22.6 Arbitration Report circulated: 30 August 2002
Second Recourse to Article 21.5 Panel Report circulated: 30 September 2005
Second Recourse to Article 21.5 Appellate Body Report circulated: 13 February 2006

 

Summary of the dispute to date  back to top

The summary below was up-to-date at
See also: One-page summary of key findings of this dispute

Consultations

Complaint by the European Communities.

On 18 November 1997, the European Communities requested consultations with the United States 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 European Communities contended that these provisions were inconsistent with the United States' obligations under Articles III:4 and XVI of the GATT 1994, Articles 3.1(a) and (b) of the SCM Agreement, and Articles 3 and 8 of the Agreement on Agriculture.

On 1 July 1998, the European Communities requested the establishment of a panel. In the request for a panel, the European Communities invoked Article 3.1(a) and (b) of the SCM 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.

 

Panel and Appellate Body proceedings

Further to a second request to establish a panel by the European Communities, 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.   

On 8 October 1999, the panel report was circulated to Members. The panel found that, through the FSC scheme, the United States had acted inconsistently with its obligations under Article 3.1(a) of the SCM 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).  The panel recommended, pursuant to Article 4.7 of the SCM Agreement, that the DSB request the United States to withdraw the FSC subsidies without delay.   Given that this would require legislative action, the panel accordingly specified that the FSC subsidies must be withdrawn at the latest with effect from 1 October 2000.On 28 October 1999, the United States notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the panel. On 2 November 1999, the United States withdrew, for scheduling reasons, its notice of appeal pursuant to Rule 30(1) 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 United States notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the panel. On 24 February 2000, the Appellate Body report was circulated to Members. The Appellate Body:

  • upheld the panel’s finding that the FSC measure constituted a prohibited subsidy under Article 3.1(a) of the SCM Agreement.
     
  • 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 Agreement on Agriculture and, in consequence, reversed the panel’s findings that the United States had acted inconsistently with its obligations under Article 3.3 of the Agreement on Agriculture.
     
  • found that the United States acted inconsistently with its obligations under Articles 10.1 and 8 of the Agreement on Agriculture 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.
     
  • 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.

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

 

Reasonable period of time

The DSB adopted the Appellate Body and panel reports on 20 March 2000 which included the recommendation that the United States had to comply with the DSB ruling as from 1 October 2000.  At the DSB meeting on 7 April 2000, the United States informed the DSB that it intended to implement the DSB's recommendations and rulings in a manner which respected its WTO obligations.  On 29 September 2000, the United States proposed that the DSB modify the time-period so as to expire on 1 November 2000.  At the DSB meeting on 12 October 2000, given that there was no opposition to the United States proposal, the DSB acceded to the United States' request.

At the DSB meeting on 17 November 2000, the United States informed the DSB that on 15 November 2000, the US President had signed into law HR4986, the FSC Repeal and Extraterritorial Income Exclusion Act.  With the enactment of this legislation, the United States had implemented the DSB's recommendations and rulings.  The European Communities did not consider that the FSC Replacement Act met the requirement of the DSB's recommendations and considered it to be WTO‑incompatible. Consequently, the European Communities had requested, simultaneously, consultations under Article 21.5 and recourse to Article 22.2 (see below).

 

Compliance proceedings

On 2 October 2000, the European Communities and the United States informed the DSB of Agreed Procedures under Articles 21 and 22 of the DSU and Article 4 of the SCM Agreement.  On 17 November 2000, the European Communities requested consultations under Article 21.5 of the DSU.  On 7 December 2000, the European Communities requested the establishment of a compliance panel.. At its meeting on 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 compliance panel was composed.

On 20 August 2001, the compliance panel report was circulated to the Members. The compliance 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 Articles 10.1 and 8 of the Agreement on Agriculture and with Article III:4 of the GATT 1994.

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

  • upheld the compliance panel’s findings that the United States 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 US — FSC dispute;
     
  • with respect to third party rights, found that the compliance 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 compliance panel must be provided to the third parties.

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

 

Proceedings under Article 22 of the DSU (remedies)

On 17 November 2000, the European Communities requested authorization from the DSB to take appropriate countermeasures and to suspend concessions pursuant to Article 4.10 of the SCM Agreement and Article 22.2 of the DSU in the amount of USD 4043 million per year.

On 27 November 2000, the United States requested that the matter be referred to arbitration pursuant to Article 22.6 of the DSU alleging that the proposed countermeasures were not appropriate within the meaning of Article 4.10 of the SCM Agreement and that the level of suspension of concessions was not equivalent to the level of nullification or impairment within the meaning of Article 22.7 of the DSU.  At the DSB meeting on 28 November 2000, the DSB agreed that the matter raised by the United States is referred to arbitration as required by Article 22.6 of the DSU.

On 21 December 2000, in accordance with paragraph 11 of the Agreed Procedures, the United States and the European Communities requested the Arbitrator to suspend the arbitration proceeding until adoption of the compliance panel report or, if there is an appeal, adoption of the Appellate Body report. The arbitration proceeding was accordingly suspended.

On 29 January 2002, after the adoption of the compliance reports (see above), the arbitration proceeding was automatically reactivated.

On 30 August 2002, the Decision of the Arbitrator was circulated to Members. The Arbitrator determined that the suspension by the European Communities 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 USD 4,043 million per year, as described in the European Communities’ 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 European Communities 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 European Communities authorization to take appropriate countermeasures and to suspend concessions.

 

Compliance proceedings (second recourse)

On 5 November 2004, the European Communities 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 the GATT 1994 with respect to the American JOBS Creation Act of 2004 (the “JOBS Act”) enacted by the United States on 22 October 2004. According to the European Communities, 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 considered 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 European Communities requesting the establishment of a compliance panel. At its meeting of 25 January 2005, the DSB deferred the establishment of a panel. At its meeting on 17 February 2005, the DSB agreed to refer the matter to the original panel.  Australia, Brazil and China reserved their third party rights.

On 22 April 2005, the European Communities requested the Director-General to compose the compliance panel. On 2 May 2005, the Director-General composed the compliance panel. On 2 August 2005, the Chairman of the compliance 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 compliance panel to complete its work within the 90-day period as foreseen in Article 21.5, and that the compliance panel expected to complete its work by the second week of August.

On 30 September 2005, the second compliance panel report was circulated to Members. The compliance 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 the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the compliance panel report and certain legal interpretations developed by the compliance 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.  On 13 February 2006, the Appellate Body report was circulated to Members.  The Appellate Body upheld the compliance panel’s findings.

At its meeting on 14 March 2006, the DSB adopted the Appellate Body report and the compliance panel report, as upheld by the Appellate Body report.

 

Implementation status of adopted reports

At the DSB meeting on 17 May 2006, the United States reported that, on 11 May 2006, the US Congress had passed legislation to repeal the “grandfather” provisions of the American Jobs Creation Act and the ETI Act that were a subject of the recent compliance proceedings. The United States understood that the US President was expected to sign the legislation later in the course of the day. With that development, the United States understood that the United States and the European Communities would be able to put this dispute behind them. The United States welcomed news of recent efforts by the European Communities in response to the repeal and looked forward to hearing more from the European Communities in the course of the day.

The European Communities said that they warmly welcomed the repeal by Congress of the “grandfather” provisions of the American Jobs Creation Act. When the transition rules of that Act were to expire at the end of the year, compliance would finally be achieved in this very long saga. The European Communities affirmed that once the US President signed the Bill, the sanctions would end.

 

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