International trade law - original DSB rulings apply to subsequent remedial measures.

AuthorLevy, Leah
PositionDispute Settlement Body

INTERNATIONAL TRADE LAW--ORIGINAL DSB RULINGS APPLY TO SUBSEQUENT REMEDIAL MEASURES--United States--Tax Treatment for "Foreign Sales Corporations," Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/36 (March 14, 2006).

The World Trade Organization's (WTO) Agreement on Subsidies and Countervailing Measures (SCM Agreement) prohibits the creation or maintenance of subsidies that have a distorting effect on international trade. (1) Alleged violations of any WTO agreement may be brought before the Dispute Settlement Body (DSB) pursuant to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). (2) In United States--Tax Treatment for "Foreign Sales Corporations," Second Recourse to Article 21.5 of the DSU by the European Communities (US-FSC), (3) the DSB upheld the findings of the Panel and Appellate Body that the United States created a form of prohibited subsidy in continued violation of the SCM Agreement and Article 21.5 of the DSU in its tax treatment of foreign sales corporations (FSCs). (4) Specifically, the Panel and Appellate Body considered whether a recommendation made under Article 4.7 of the SCM Agreement, in an original DSB proceeding, remained in effect until the implementing Member had fully complied with DSB rulings and recommendations, in addition to any subsequent DSU Article 21.5 proceedings. (5)

The European Community (EC) requested a consultation with the United States on November 18, 1997, to discuss sections 921-927 of the United States Internal Revenue Code (IRC) and related measures establishing special tax treatment for foreign sales corporations. (6) Specifically, the EC alleged that the IRC provided tax exemptions on income related to exports to U.S. parent companies in violation of the SCM Agreement by creating an export-contingent subsidy. (7) The EC also alleged that local content requirements of the exemption provided less favorable treatment to imported products than is accorded like products of the United States, violating the General Agreement on Tariffs and Trade (GATT) 1994 and the SCM Agreement. (8) Finally, the EC alleged that by maintaining the tax exemptions, the United States violated the Agreement on Agriculture. (9)

The original panel concluded that the FSC scheme was inconsistent with the United States' obligations under the Agreement on Agriculture and recommended the FSC scheme be brought into conformity with that agreement. (10) The panel further concluded that the FSC scheme was inconsistent with the United States' obligations under the SCM Agreement, and recommended that the United States withdraw the FSC subsidies without delay by October 1, 2000. (11) The Appellate Body affirmed the Panel's findings and both the Panel and Appellate Body reports were adopted by the DSB on March 20, 2000. (12)

The United States enacted the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI Act) to implement the DSB's March 2000 recommendations and rulings. (13) The EC, however, asserted that the ETI Act continued to violate the SCM Agreement, the Agreement on Agriculture, and GATT 1994, and sought recourse to Article 21.5 of the DSU for the United States' failure to bring the IRC into compliance. (14) The DSB referred the matter to a Panel, which "concluded that the ETI Act was inconsistent with the United States' obligations under the SCM Agreement, the Agreement on Agriculture, and the GATT 1994." (15)The Panel further found that through section 5 of the ETI Act, the United States had not fully withdrawn the FSC subsidies that were prohibited by the original DSB rulings and recommendations. (16) The Appellate Body affirmed the Panel's findings and conclusions, and the DSB adopted these reports. (17)

The United States subsequently repealed the ETI Act through enactment of the American Jobs Creation Act of 2004 (Jobs Act). (18) Once again the EC argued this did not bring the U.S. tax scheme into conformity with its WTO obligations. (19) In this second recourse by the EC to Article 21.5 of the DSU, the DSB referred the matter to a panel, which found that "the inconsistencies with ... the SCM Agreement, ... the Agreement on Agriculture and ... GATT 1994 remain" and concluded that the United States continued to fail to fully implement DSB recommendations and rulings. (20) The United States then appealed some of the Panel's legal interpretations. The Appellate Body, in this second recourse, upheld the Panel's finding that Section 5 of the ETI Act was within the Panel's terms of reference and rejected the United States' argument that there was no DSB recommendation under the SCM Agreement with respect to tax exemptions of the ETI Act. (22) The Appellate Body also found the Panel's recommendations were not new recommendations under the SCM Agreement, instead holding that the Panel acted within the scope of its authority under the DSU in examining whether subsequent measures comply with earlier DSB rulings. (23)

The DSU governs disputes that arise between Member States related to covered agreements. (24) A Panel is established at the request of a complaining party, who must make the request in a writing that identifies the specific measures at issue and summarizes the legal basis of the complaint. (25) Compliance with this element of Article 6.2 of the DSU must be "demonstrated on the face of the request for the establishment of a panel." (26)

The...

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