RESTRICTEDWORLD TRADE
ORGANIZATIONWT/DSB/M/95
19 February 2001
(01-0803)
Dispute Settlement Body
20 December 2000
MINUTES OF THE MEETING
Held in the Centre William Rappard
on 20 December 2000
Chairman:  Mr. S. Harbinson (Hong Kong, China)
Subjects discussed: Page
1. United States – Tax treatment for "Foreign Sales Corporations".......................................1
(a) Recourse to Article 21.5 of the DSU by the European Communities: Request for the
establishment of a panel....................................................................................................... .......1
2. Statement by Panama regarding the EC's proposal to modify its banana import
regime......................................................................................................................... ................3
1. United States – Tax treatment for "Foreign Sales Corporations"
(a) Recourse to Article 21.5 of the DSU by the European Communities: Request for the
establishment of a panel  (WT/DS108/16)
1. The Chairman drew attention to the communication from the European Communities
contained in document WT/DS108/16.
2. The representative of the European Communities expressed regret that the United States had
decided not to address the concerns raised by the EC during the bilateral discussions on the draft laws
prepared to replace the Foreign Sales Corporations (FSC) scheme.  After long and detailed exchanges
of views during which the EC had made clear that the US proposal was WTO-inconsistent, the EC
was surprised that the United States had decided to adopt a new law that replicated the elements of theFSC scheme which had already been condemned by the WTO.  That scheme maintained the same tax
benefits to exporting companies, and aggravated the previous violations by increasing the level of
subsidization and by adding further violations of the WTO Agreements.  Moreover, it was only on
15 November 2000 that the FSC Repeal and Extrater ritorial Income Exclusion Act of 2000 had been
signed into law:  i.e. 15 days after the deadline agreed by the DSB for the United States to comply
with its WTO obligations;  i.e. by 1 November  2000.  This delay would have entitled the EC to
request immediate authorization to impose sanctio ns.  On 17 November 2000, the EC had requested
consultations with the United States under Article 21.5 of the DSU.  These consultations, which had
been held in Geneva on 4 December 2000, had been useful to clarify both sides' positions.  However,
they had not resulted in a solution.  For this reason, the parties had jointly considered that theconsultations had failed to settle the dispute in the sense of Article 4.7 of the DSU.  Therefore, the EC
was requesting the establishment of a panel pursuant to Article 21.5 of the DSU to examine the
compatibility of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 with the WTOWT/DSB/M/95
Page 2
Agreements.  The EC attached importance to the reso lution of this dispute in accordance with the
DSU rules, and that was why it had agreed with the United States on the procedures to be followed in
this case.
3. The representative of the United States said that the EC's request for a panel pursuant to
Article 21.5 proceedings while not unexpected was nonetheless regrettable.  While the United States
did not agree with the findings of either the Panel or the Appellate Body in the original dispute, it had
nevertheless engaged in an extraordinary effort to enact legislation which fixed the problems that the
Panel and the Appellate Body had identified with the FSC legislation.  The United States had done so
notwithstanding the fact that the deadlines established by the Panel were extremely short (less than
eight months from the date of the Appellate Body report) for legislative action;  the legislation
involved the complex subject of income taxation and it was a national election year in the United
States.  Moreover, in its legislation, the United States had sought to address issues of concern to theEC on which the Panel and the Appellate Body had not even made findings.  The United States had
also eliminated the so-called FSC administrative pricing rules to alleviate the EC's concerns about
transfer pricing between related firms.  The United States had eliminated the requirement to set up a
foreign subsidiary in order to address the EC's c oncerns regarding so-called "tax havens".  It had
addressed both concerns of the EC even though neither had been substantiated.  The US task mighthave been made easier if the EC had been willing to engage in a meaningful discussion as to what
precise steps the United States could take to satisfy the EC's concerns.  However, the US inquiries had
been repeatedly rebuffed by the EC with the explanation:  "we are not tax experts".  Nevertheless, this
self-proclaimed lack of expertise regarding income tax matters had not delayed the EC in its move to
challenge the FSC replacement legislation.  At the present meeting, he did not wish to providedetailed legal arguments as to why the FSC replacement legislation complied with the DSB's
recommendations and rulings and was otherwise WTO-c onsistent.  The United States had agreed with
the EC on procedures for resolving these issues, and would present its arguments to the appropriate
bodies in due course.  It was sufficient to state that while EC officials had stated publicly that they
were confident that the FSC replacement legislation would be found to be WTO-inconsistent, theUnited States was equally confident that its legislation would be found to be WTO-consistent.
4. However, there were some points on which the United States felt compelled to comment and
he believed that those points should also be of concern to other Members.  First, the EC has
acknowledged that the exclusion of extraterritorial income provided by the FSC replacement
legislation was not limited to US exporters, but also encompassed companies that manufactured and
sold abroad.  Second, the EC had acknowledged that exempting extraterritorial income from taxation -
which was what the FSC replacement legislation did – was an appropriate and widely accepted taxpractice that did not constitute a prohibited export subsidy.  Finally, in the first round of this
proceeding, the EC had conceded that the use of the internationally-accepted exemption method to
avoid double taxation could result in exports being taxed more favorably than comparable domestic
transactions.  These points of agreement represented small progress, but progress nonetheless.
Unfortunately, there remained areas of misunderstanding and disagreement that appeared to go to theheart of this dispute and had left the United States perplexed.  Perhaps most importantly, in their
various statements regarding the FSC replacement legislation, EC officials avoided the indisputable
fact that the tax treatment of export transactions under the FSC replacement legislation was very
similar to the tax treatment of export transacti ons under European regimes that employed the
exemption method.  This fundamental error caused many of the EC's objections to the FSCreplacement legislation to be unfounded and, in any event, these objections would be equally
applicable to certain European tax regimes.
5. Another area of misunderstanding concerned the te rm "extraterritorial income".  The EC had
asserted that the FSC replacement legislation "exempts income that is generated in the US while
territorial systems only exempt income derived from activities carried out abroad".  This assertion wasnot only incorrect, but also unsupported by any ev idence.  Rather, the FSC replacement legislationWT/DSB/M/95
Page 3
excluded from US tax only "extraterritorial income", which was defined in the legislation as income
generated outside the territory of the United States.  Finally, with respect to what the EC had
sometimes referred to as the "US content provisions" of the FSC replacement legislation, those
provisions simply were not what the EC claimed they  were, and the EC's charges appeared to reflect a
fundamental misunderstanding of what these provisions implied and how they were intended tooperate.  In the US view, these provisions did not require the use of domestic over imported goods,
and the EC had yet to provide any evidence that they had.  The United States continued to be puzzled
by the EC's charges, given how the tax regimes of its member States functioned.  Nevertheless, it
recognized the EC's right under the DSU and the procedural agreement to request a panel to consider
its claims.  In accordance with the procedural agreement, the United States would not object to the
establishment of a panel at the present meeting.
6. The DSB took note of the statements and agreed
, pursuant to Article 21.5 of the DSU, to refer
to the original Panel the matter raised by the European Communities in document WT/DS108/16.
The panel would have standard terms of reference.
7. The representatives of Australia, Canada , India  and Japan  reserved their third-party rights to
participate in the Panel's proceedings.
2. Statement by Panama regarding the EC's proposal to modify its banana import regime
8. The representative of Panama, speaking under "Other Business", said that on
19 December 2000, the EC Council of Agriculture Ministers had adopted a new proposal in an
attempt to solve the banana dispute and, at the same time, it had undertaken a political commitment to
continue considering the option presented by the European Commission which included a first come,
first served system.  Panama rejected this political agreement and noted that the proposal provided theCommission with a broad spectrum of actions.  It, th erefore, urged the EC not to implement the option
which was based on a first come, first served system but to adopt regulations to implement an option
which was WTO-compatible.  Such an outcome would provide Latin American producers with
effective and fair access to the EC market.
9. The representative of Costa Rica said that his country also regretted that the EC had ignored
the views expressed by seven Latin American banana exporting countries representing more than
70 per cent of the banana exports.  On several occasions, the countries in question had rejected the
regime based on a first come, first served system.  He noted that the United States had also objected to
that system.  The EC had maintained that it had to protect its operators and producers as well as the
ACP countries.  He noted that Latin American c ountries were not receiving any preferences because
in line with their comparative advantage they had become the most efficient producers of bananas in
the world.  The EC had adopted criteria that implied that comparative advantage was irrelevant sinceits decisions were based on political considerations.  Trade in agricultural products was directly linked
to sustainable development.  However, this link ha d not been taken into consideration by the EC.  In
the past, the EC had defended policies in favour of sustainable development and had supported the
coordination mechanism between the Bretton Woods institutions in order to ensure coherent
development policies.  However, these goals seemed to be in contradiction with the EC's statement onits agricultural policy, which worked against the interests of developing countries' agricultural
development, in this case Latin American countries, and favoured another group of countries thus
creating inequality among developing countries.
10. The representative of Guatemala said that her country supported the statements made by the
previous speakers who had urged the EC to implement a WTO-compatible banana import regime.
Guatemala was concerned that the EC was taking a decision on the proposal based on a first come,
first served system which was incompatible with the interests of Latin American banana producing
countries.WT/DSB/M/95
Page 4
11. The representative of Honduras said that it was regrettable that more than three years after the
WTO had condemned the EC's banana import regime, on 19 December 2000, the EC Council of
Ministers of Agriculture had adopted the recommendation by the European Commission to implement
a new banana import regime based on a first come, first served system.  That decision would seriously
affect the Honduran banana industry and would perpetuate the discrimination that had beenmaintained for many years.  Honduras rejected any new banana import regime that included a first
come, first served option.  It urged the EC member St ates not to implement a regime that infringed the
WTO Agreements because there were other legal and fair options which had not yet been taken into
account.  Furthermore, notwithstanding its feelings of frustration resulting from the EC's lack of
compliance in this case, his country was fully prepared to explore legal and fair solutions.  Honduras
would closely follow the regulations  issued on the basis of the decision of the Council of Ministers of
Agriculture with a view to taking legal action in the WTO in order to restore its rights.
12. The representative of Ecuador said that his country had great interest in this matter and his
authorities were now examining the decision taken by the EC Council of Ministers of Agriculture.
Ecuador awaited further details as to how the European Commission would implement this recent
Council decision, and reiterated its interest in maintaining a close dial ogue with the European
Commission in order to participate in the definition of those details, which were essential to makingthe new regime operational.  He recalled that the questions related to the banana case which had been
raised by Ecuador at the past three meetings of the DSB remained open since Ecuador still had doubts
as to whether the proposed regime would be implemented in a fully WTO-consistent manner.
13. The representative of Colombia said that his delegation also wished to voice concerns about
the recent decision of the EC that the new banana  import regime would be implemented on the basis
of a first come, first served system.  Like Ecuador, Colombia wished to examine different aspects of
that decision and would present its views thereon at a future DSB meeting.
14. The representative of Nicaragua said that his country was concerned about the measures
adopted by the EC and supported the statements made by Colombia, Costa Rica, Guatemala,
Honduras and Panama.
15. The representative of Mexico said that his authorities were examining the EC's proposal.
Mexico wished to participate in any discussions to be carried out on this matter.
16. The representative of Mauritius said that her country was not a banana producer but had
always wished to have a fair and constructive solution to this dispute, which would take into account
the situation of the most vulnerable producers.
17. The representative of the European Communities said that his delegation had noted the
statements made at the present meeting and would make a substantive response at the next regular
DSB meeting.
18. The DSB took note of the statements.
__________