United States – Tax Treatment for “Foreign Sales Corporations” – Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108): Report of the Appellate Body

Summary

INTRODUCTION

The United States appeals certain issues of law and legal interpretations in the Panel Report, United States – Tax Treatment for “Foreign Sales Corporations” – Recourse to Article 21.5. of the DSU by the European Communities (the “Panel Report”). The Panel was established to consider a complaint by the European Communities concerning the consistency of the United States FSC Replacement and Extraterritorial Income Exclusion Act (the “ETI Act”) with the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”), the Agreement on Agriculture, and the General Agreement on Tariffs and Trade 1994 (the “GATT 1994”). The ETI Act is a measure taken by the United States with a view to complying with the recommendations and rulings of the Dispute Settlement Body (the “DSB”) in United States – Tax Treatment for “Foreign Sales Corporations” (“US – FSC”). Pertinent aspects of the ETI Act are described in Section II below, as well as in paragraphs 2.1- 2.8 of the Panel Report.

In US – FSC, the original panel concluded that the “FSC measure”, consisting of Sections 921-927 of the United States Internal Revenue Code (the “IRC”) and related measures establishing special tax treatment for foreign sales corporations, was inconsistent with the United States’ obligations under the SCM Agreement and under the Agreement on Agriculture. The Appellate Body upheld the original panel's finding that the FSC measure was inconsistent with United States’ obligations under the SCM Agreement and modified the Panel's findings under the Agreement on Agriculture.

On 20 March 2000, the DSB adopted the reports of the original panel and the Appellate Body. The DSB recommended that the United States bring the FSC measure into conformity with its obligations under the covered agreements and that the FSC subsidies found to be prohibited export subsidies within the meaning of the SCM Agreement be withdrawn without delay, namely, “at the latest with effect from 1 October 2000.” At its meeting on 12 October 2000, the DSB acceded to a request made by the United States to modify the time-period for complying with the DSB's recommendations and rulings in this dispute so as to expire on 1 November 2000. On 15 November 2000, with a view to such compliance, the United States promulgated the ETI Act. The background of this dispute is set out in further detail in the Panel Report.