Decisions of the Appellate Body of the World Trade Organization United States - Tax Treatment for Foreign Sales Corporations--Recourse To Article 21.5 of the DSU by the European Communities Download the Complete Survey (PDF Format) * Full Text of the WTO Appellate Body Report (PDF Format) ** WTO APPELLATE BODY REPORT: United States - Tax Treatment for Foreign Sales Corporations--Recourse To Article 21.5 of the DSU by the European Communities ,AB-2001-8, WT/DS108/AB/RW, Adopted By Dispute Settlement Body, 29 January 2002. United States, Appellant-Appellee; European Communities, Appellant-Appellee. Division: Feliciano, Ganesan and Taniguchi. Major Topics Addressed By Appellate Body: Definition of a Subsidy under Article 1.1 of the SCM Agreement; Revenue Which Is "Otherwise Due" And Thus Gives Rise To A "Financial Contribution" Within The Meaning Of Article 1.1(a)(1)(ii) Of The SCM Agreement; Definition of an Export Subsidy under Article 3.1(a) of the SCM Agreement; Measures Taken to avoid Double Taxation under Footnote 59 of the SCM Agreement; Application of Article III:4 of GATT to Requirement of Domestic Content; Obligation to Withdraw Subsidies Under Article 4.7 of the SCM Agreement 1. Abstract This important case continues a saga that began in the 1970s with the DISC case. In this case, the U.S. ETI was challenged by the EU on the ground that it continued to provide an export subsidy. Interestingly, the U.S. had reformulated its law after the FSC law had been found to provide a prohibited export subsidy. The reformulated measure sought to respond to the original panel and Appellate Body decision, but retain the partial tax exemption for U.S. exporters. The Appellate Body found that the ETI continued to violate the prohibition of export subsidies, but continued to struggle with the distinction between the "normative baseline" tax system, and the "exceptional" measure under Article 1.1(a)(1)(ii) of the SCM Agreement. 2. Facts This case arose from the U.S. replacement measure for the Foreign Sales Corporation ("FSC") tax exemption, known as the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (the "ETI"). The FSC was found to confer an illegal export subsidy in the original panel and Appellate Body reports. The ETI must be understood against the full structure of the U.S. tax system, but it provides a limited exclusion from taxation for "qualifying foreign trade income." The ETI allows taxpayers to elect an exclusion from gross income for qualifying foreign trade income. It is a departure from the general U.S. rule of taxation of U.S. citizens and residents on "all income from whatever source derived." However, it must be recognized that this general rule already had many exceptions before the enactment of the ETI Act. The two most significant are first, that the U.S. provides a tax credit for foreign taxes on foreign source income, and second, that the U.S. does not generally tax foreign source income of foreign subsidiaries of U.S. citizens and residents. The ETI also establishes, as one of the conditions of eligibility, that not more than 50 percent of the fair market value of qualifying property be attributable to articles produced or direct labour performed outside the United States (the "foreign articles/labour limitation"). This was challenged by the EC under Article III:4 of GATT. * The free viewer (Acrobat Reader) for PDF file is available at the Adobe Systems ** provided by WorldTradeLaw.net
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