DISPUTE SETTLEMENT

DS: United States — Conditional Tax Incentives for Large Civil Aircraft

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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Current status

 

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Key facts

Short title:
Complainant:
Respondent:
Third Parties:
Agreements cited:
(as cited in request for consultations)
Request for Consultations received:
Panel Report circulated: 28 November 2016
Appellate Body Report circulated: 4 September 2017
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Latest document

  

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Summary of the dispute to date

The summary below was up-to-date at

Consultations

Complaint by the European Union.

On 19 December 2014, the European Union requested consultations with the United States with respect to conditional tax incentives established by the State of Washington in relation to the development, manufacture, and sale of large civil aircraft.

The European Union alleges that the measures constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. The European Union also considers that the measures are prohibited subsidies that are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement.

 

Panel and Appellate Body proceedings

On 12 February 2015, the European Union requested the establishment of a panel.

At its meeting on 23 February 2015, the DSB established a panel. Brazil, China, India, Japan, Korea and the Russian Federation reserved their third-party rights. Subsequently, Australia and Canada reserved their third-party rights.

On 13 April 2015, the European Union requested the Director-General to compose the panel. On 22 April 2015, the Director-General composed the panel. On 29 September 2015, the Chair of the panel informed the DSB that it estimated to issue its report within 12 months. On 23 September 2016, the Chair of the panel informed the DSB that the final report was to be circulated to all Members by the end of November 2016.

On 28 November 2016, the panel report was circulated to Members.

This dispute concerns legislation enacted in the state of Washington in the United States in November 2013 through Engrossed Substitute Senate Bill 5952 (ESSB 5952), which amended and extended various tax incentives for the aerospace industry. The European Union identified seven separate tax incentives, including a reduced business and occupation tax rate, credits against business taxation, and exemptions from various other taxes in the state of Washington.

The European Union claimed that those tax incentives are prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement as subsidies that are contingent on the use of domestic over imported goods. According to the European Union, the contingency results from two siting provisions contained in ESSB 5952, namely a First Siting Provision and a Second Siting Provision. In the European Union's view, the challenged aerospace tax measures are de jure contingent upon the use of domestic over imported goods inasmuch as the text of the relevant legislation sets out the prohibited contingency. The European Union also made a secondary claim that the aerospace tax measures are de facto contingent upon the use of domestic over imported goods.

The Panel found that, under each of the aerospace tax measures at issue, there is a financial contribution by the Washington State government and a benefit is thereby conferred. The Panel concluded therefore that each of the aerospace tax measures at issue constitutes a subsidy within the meaning of Article 1 of the SCM Agreement.

With respect to the European Union's de jure claim against the aerospace tax measures at issue, the Panel looked separately at the First Siting Provision and the Second Siting Provision contained in ESSB 5952, to assess whether the European Union had successfully demonstrated the existence of the prohibited contingency in either of the provisions. In this regard, the Panel concluded that the European Union had not demonstrated that, on their own, and based on their express terms, the First Siting Provision or the Second Siting Provision make the challenged aerospace tax measures de jure contingent upon the use of domestic over imported goods.

The Panel subsequently considered the two siting provisions acting jointly and concluded that the European Union had not demonstrated that, acting together, the First Siting Provision and the Second Siting Provision make the challenged aerospace tax measures de jure contingent upon the use of domestic over imported goods.

With respect to the European Union's de facto claim against the aerospace tax measures at issue, the Panel considered the joint operation of the First Siting Provision and the Second Siting Provision contained in ESSB 5952, to assess whether the European Union had successfully demonstrated the existence of the prohibited contingency. The Panel concluded that the siting provisions in ESSB 5952, and in particular the prospective modalities of operation of Washington State Department of Revenue's discretion under the Second Siting Provision, make one of the challenged aerospace tax measures (namely, the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under the 777X programme) de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement.

Having found that the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under the 777X programme is inconsistent with Article 3.1(b) of the SCM Agreement, the Panel also found that the United States has acted inconsistently with Article 3.2 of the SCM Agreement.

On 16 December 2016, the United States notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretations in the panel report. On 17 January 2017, the European Union notified the DSB of its decision to cross-appeal.

On 3 March 2017, after the expiry of the 30-day period provided for in Article 4.9 of the SCM Agreement, the Appellate Body informed the DSB that it would not be able to circulate the Appellate Body report in this appeal by the end of the 30-day period, or within the 60 day timeframe provided for in Article 4.9 of the SCM Agreement. The Appellate Body referred to the scheduling of parallel appeals, shortage of staff in the Appellate Body Secretariat, and to particular aspects arising in this proceeding, including the time needed for adopting and complying with additional procedures to protect business confidential information, the consequent extensions of the deadlines for filing submissions, and overlapping issues identified by the participants in parallel proceedings. The Appellate Body also informed the DSB that the circulation date of the Appellate Body report in this appeal would be communicated to the participants and third participants in due course. On 31 August 2017, the Appellate Body informed the DSB that its report in this appeal would be circulated on 4 September 2017.

On 4 September 2017, the Appellate Body report was circulated to Members.

The United States appealed the Panel's finding that, with respect to the First and Second Siting Provisions, considered jointly, the business and occupation (B&O) aerospace tax rate is a subsidy de facto contingent upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement. For its part, the European Union appealed the Panel's findings that the European Union did not demonstrate that the First and Second Siting Provisions, considered separately or jointly, make the United States' aerospace tax measures de jure contingent, or that the First Siting Provision makes such measures de facto contingent, upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement.

In addressing the European Union's interpretation claims, the Appellate Body ruled that the Panel, in its de jure contingency analyses of the First and Second Siting Provisions, did not articulate a legal standard under Article 3.1(b) of the SCM Agreement requiring the use of domestic goods to the complete exclusion of imported goods. Neither did the Panel articulate such a legal standard in assessing the de facto contingency of the First Siting Provision. The Appellate Body therefore rejected the European Union's claims that the Panel erred in its interpretation of Article 3.1(b) in the context of its de jure contingency analyses of the First and Second Siting Provisions, as well as its de facto contingency analysis of the First Siting Provision.

The Appellate Body rejected the European Union's claim that the Panel erred in its application of Article 3.1(b) of the SCM Agreement in finding that the First Siting Provision does not make the aerospace tax measures de jure contingent upon the use of domestic over imported goods. The Appellate Body also rejected the European Union's claim that the Panel erred in its application of Article 3.1(b) by unduly restricting the scope of the evidence from which it assessed de jure contingency with respect to the Second Siting Provision. In addition, the Appellate Body did not consider that the Panel committed error under Article 11 of the DSU in setting out the scope of application of the Second Siting Provision.

In addressing the appeal by the United States, the Appellate Body considered that the Panel did not properly establish that the Second Siting Provision entails a de facto condition requiring the use of domestic over imported goods. The Appellate Body did not consider that the Panel's analysis and reasoning provided a sufficient basis for its finding that the Second Siting Provision makes the B&O aerospace tax rate de facto contingent upon the use of domestic over imported goods. Therefore, the Appellate Body reversed the Panel's finding that the B&O aerospace tax rate is a prohibited subsidy under Article 3.1(b) of the SCM Agreement.

Having reversed the Panel's sole finding of inconsistency under Article 3.1(b) of the SCM Agreement, the Appellate Body made no recommendation in this dispute.

At its meeting on 22 September 2017, the DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report.

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