United States – Tax Treatment for “Foreign Sales Corporations”, Second Recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes by the European Communities (WT/DS108): Report of the Appellate Body

Summary

INTRODUCTION

The United States appeals certain issues of law and legal interpretations developed in the Panel Report, United States – Tax Treatment for “Foreign Sales Corporations”, Second 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 regarding the American Jobs Creation Act of 2004 (the “Jobs Act”) and the United States’ compliance with the recommendations and rulings of the Dispute Settlement Body (the “DSB”) adopted on the basis of the Panel and Appellate Body Reports in United States – Tax Treatment for “Foreign Sales Corporations” (“US – FSC”) and United States – Tax Treatment for “Foreign Sales Corporations”, Recourse to Article 21.5 of the DSU by the European Communities (“US – FSC (Article 21.5 – EC)”). Relevant aspects of the Jobs Act are described in paragraph 6 below, as well as in paragraphs 2.13 to 2.17 of the Panel Report.

The panel in US – FSC (the “original panel”) concluded that the “FSC measure”, consisting of Sections 921 to 927 of the United States Internal Revenue Code (the “IRC”) and related measures establishing special tax treatment for foreign sales corporations (“FSC”), was inconsistent with the United States’ obligations under the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”) and the Agreement on Agriculture. The Appellate Body upheld the original panel's finding that the FSC measure was inconsistent with the United States’ obligations under the SCM Agreement and modified the original 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and that the FSC subsidies found to be prohibited export subsidies within the meaning of the SCM Agreement be withdrawn without delay, pursuant to Article 4.7 of the SCM Agreement, namely, “at the latest with effect from 1 October 2000”.