Decisions of the Appellate Body of the World Trade Organization

United States: Tax Treatment for `Foreign Sales Corporations'

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Joel P. Trachtman

WTO Appellate Body Report: United States: Tax Treatment for `Foreign Sales Corporations',AB-1999-9, WT/DS108/AB/R (00-00675), adopted by Dispute Settlement Body, 20 March 2000. United States, Appellant/Appellee; European Communities, Appellant/Appellee; Canada and Japan, Third Participants. Division: Lacarte-Muró, Bacchus and Feliciano. Major topics addressed by Appellate Body: Export Subsidies under GATT, the Agreement on Subsidies and Countervailing Measures and the Agreement on Agriculture.

1. Abstract

In this case, the US sought to defend its Foreign Sales Corporation tax regime, providing certain tax benefits in connection with certain export activities, from attack under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) and the Agreement on Agriculture. The Appellate Body found, however, that the US measure constituted an export subsidy, as it provides for the US to forego taxes `otherwise due'. The theoretical core of this finding is that, while states may generally construct their tax systems as they wish, they may not condition the availability of any tax benefit on export activity. The Appellate Body did not find any special exemption under the language of Footnote 59 of the SCM Agreement, which arose from the settlement of the Tax Legislation cases in 1981. The Tax Legislation cases related in part to the predecessor statute to the US measure, the DISC.

As a procedural defence, the US argued that the EC had not complied sufficiently with the notice requirements under the SCM Agreement, which require the complainant to make a statement of the evidence available at the time it commences consultations. However, the Appellate Body developed an estoppel-type approach, holding that the failure of the US to assert this non-compliance at an earlier stage prevented the US from asserting this point.

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