RESTRICTEDWORLD TRADE
ORGANIZATIONWT/DSB/M/118
18 February 2002
(02-0811)
Dispute Settlement Body
29 January 2002
MINUTES OF MEETING
Held in the Centre William Rappard
on 29 January 2002
Chairman:  Mr. K. Bryn (Norway)
1. Tax treatment for "Foreign Sales Corporations":  Recourse to Article 21.5 of the DSU
by the European Communities
(a) Report of the Appellate Body (WT/DS 108/AB/RW) and Report of the Panel
(WT/DS108/RW)
1. The Chairman recalled that at its meeting on 20 December 2000, the DSB had decided, in
accordance with Article 21.5 of the DSU, to refer to the original Panel the matter raised by the
European Communities concerning the implementation by the United States of the DSB's
recommendations in this case.  The Report of the Panel contained in document WT/DS108/RW had
been circulated on 20 August 2001.  On 15 October 2001, the United States had notified the DSB of
its decision to appeal certain issues of law covered in the Panel Report and certain legal
interpretations developed by the Panel.  The Report of the Appellate Body contained in documentWT/DS108/AB/RW had been circulated on 14 January 2002.  He recalled that in accordance with the
Decision on Procedures for the Circulation and Derestriction of WTO Documents contained in
WT/L/160/Rev.1, the Appellate Body Report and the Panel Report had been circulated as unrestricted
documents.  The Reports were now before the DSB for adoption at the request of the European
Communities.  He noted that the adoption procedure was without prejudice to the right of Members to
express their views on the Reports.
2. The representative of the European Communities said that the EC welcomed the findings of
the Panel and the Appellate Body confirming its view with regard to the WTO-incompatible nature of
the FSC Replacement and Extraterritorial Income Exclusion Act (the ETI Act) adopted by the United
States in November 2000.  The ETI Act was found to be an illegal export subsidy in breach of the
Agreement on Subsidies and the Agreement on Agriculture as well as in violation of Article III of the
GATT 1994.  In accordance with the findings, the ETI Act did not constitute proper implementationof the DSB's recommendations and rulings as the FSC scheme had been and was applicable after the
expiry of the compliance period.  Contrary to the arguments by the United States to justify its appeal
that the Panel Report did not provide sufficient guidance as to what the United States needed to do to
bring its legislation into conformity with WTO rules, the EC considered that both the Panel and the
Appellate Body rulings were clear as to what was required from the United States, namely, towithdraw the prohibited subsidy.
3. The Panel and the Appellate Body had given clear indications with regard to the legal issues
raised by the US legislation and now there was no room for further requests for clarifications and
guidance.  The Panel and the Appellate Body had been asked to rule on the WTO compatibility of the
FSC measure and the ETI Act and they had done so in a precise, comprehensible and legally soundmanner.  The Appellate Body had not reversed any of  the Panel's findings or criticized the Panel's
reasoning.  It had fully confirmed them and had developed a new reasoning in view of additionalWT/DSB/M/118
Page 2
arguments brought by the United States.  The EC expected that these rulings would put an end to this
long-standing dispute.  He noted that in accordance with the procedural agreement concluded by the
parties in September 20001, the arbitration on the amount of the countermeasures and suspension of
concessions requested by the EC would be automatically reactivated on 29 January 2002.
4. The representative of the United States said that her country was disappointed with the
Appellate Body Report and disagreed with its ultimate conclusions.  Notwithstanding this
disagreement, the United States would respect its obligation to comply with WTO rules, and was
working with the EC to manage and resolve this dispute in a responsible and non-confrontational
manner.  Progress was being made toward that end.  At the present meeting, the United States did not
wish to re-argue the case or analyse each aspect of the Appellate Body's reasoning.  She noted,
however, that certain aspects of the Appellate Body Report were encouraging and constituted a vast
improvement on the Panel's analysis.
5. The United States noted that, with regard to the existence of a subsidy under Article 1 of the
SCM Agreement, the Appellate Body had clarified that the normative benchmark for determining
whether "foregone" revenue was otherwise due involved a comparison of the fiscal treatment of
comparable income, in the hands of taxpayers in similar situations (paragraph 98 of the AB Report).
While the United States disagreed with the Appellat e Body's application of this standard to the facts,
it considered that the Appellate Body had made its standard clearer and more understandable.  As
such, that standard did not share the indeterminacy of the Panel's analysis, which included the
assertion that a tax system needed to have an "overall rationale and coherence" to avoid having a
measure labelled as a "subsidy".
6. However, more important was the Appellate Body's analysis of footnote 59 to the
SCM Agreement.  The Appellate Body had accepted the arguments that the United States had been
making since the beginning of this dispute in November 1997.  Specifically, the Appellate Body had
agreed that a Member with a so-called "world-wid e" tax system could apply, on an export-specific
basis, the "exemption method" for avoiding double taxation of foreign-source income, which was a
feature of so-called territorial systems.  Furthermore, the Appellate Body had appeared to agree withthe United States that the tax exclusion provided by  the ETI Act constituted the incorporation of the
exemption method into US tax law.  However, while the Appellate Body had suggested that the
ETI Act's tax exclusion, in principle, could qualify under footnote 59, as a factual matter it had found
that the exclusion did not so qualify, primarily because it had found that the Act's arithmetic formulas
might permit an exemption for some domestic-source income (paragraph 185 of the AB Report).
7. According to the United States this left several important questions unanswered.  First, the
status of "rules of thumb" was unclear.  Certai n portions of the Appellate Body Report could be
interpreted as precluding "rules of thumb" altogether.  If so, tax authorities around the world would be
shocked by such a proposition.  The United States believed that "rules of thumb" had a legitimate
place in the administration of tax laws of many countries, as well as other types of laws, and WTO
bodies should think twice before imposing an undue level of administrative precision.  On the other
hand, different portions of the Appellate Body Report suggested that "rules of thumb" might beacceptable as long as they generated results within some acceptable range.  While this was a more
reasonable approach, the Appellate Body had provided no guidance as to what might be considered an
acceptable range, or what standards should be used to identify one.  This lack of guidance would
make it difficult for Members to avail themselves of  the right provided in footnote 59 to the SCM
Agreement.  While the United States was pleased that the Appellate Body had modified the Panel'sreasoning, it could not support the adoption of the Reports.
8. The representative of Canada said that his country had participated as a third party both at the
original Panel and appeal stage, as well as before the Article 21.5 Panel and the Appellate Body.
                                                     
1 WT/DS108/12.WT/DSB/M/118
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Throughout the proceedings, Canada had consistently expressed the view that the FSC scheme was
inconsistent with the United States' WTO obligations.  Canada was pleased that the Appellate Body
had now made a definitive finding that the ETI Act violated the export subsidy provisions of the
SCM Agreement and the Agreement on Agriculture.  Canada also supported the Appellate Body's
conclusions that the measure violated the national treatment obligations of the United States underArticle III of the GATT 1994.  Canada urged the United States to take the necessary steps to comply
with the DSB's rulings w ithout delay.  In this regard, Article 3.5 of the DSU provided that "any
solution to a dispute must be consistent with the covered agreements, and cannot nullify or impair
benefits accruing to other Members".  Finally, Canada noted with satisfaction that the Appellate Body
had supported the position of the EC and Canada on the issue of third-party rights.  The Appellate
Body had found that third parties were entitled to receive all submissions i.e. both the principal and
the rebuttal submissions prior to the first meeting of the Article 21.5 Panel.  This determination wouldhelp ensure a more meaningful role for third part ies in the dispute settlement process, and would help
promote greater internal transparency in the WTO.
9. The representative of India said that his country had participated as a third party in the
proceedings of the Article 21.5 Panel and the Appellate Body and had presented its views with regard
to the following three issues.  First, the ETI Act was not a compliance measure.  Several restrictiveconditions in the ETI Act provided benefits to the same set of beneficiaries as under the original
FSC scheme.  Therefore, it would amount to subsidies:   i.e. forgoing of revenue which had otherwise
been due under Article 1.1(a)(1)(ii) of the SCM Agreement.  Second, with regard to export
contingency, India had pointed out that extension of subsidy to both exporting and non-exporting
firms would not absolve the ETI Act of the element of prohibited export subsidy under Article 3.1(a)of the SCM Agreement.  Third, with regard to avoidance of double taxation under footnote 59 of
SCM Agreement, while acknowledging that the objective of avoiding double taxation was a
legitimate one, India had stated that the linkage between the measure at issue, namely the ETI and its
objective, i.e. avoidance of double taxation, had to be clearly established.
10. India was pleased to note that the Article 21.5 Panel and the Appellate Body had affirmed
these views, and welcomed the above-mentioned rulings.  This decision would have far-reaching
effects on the global trading environment.  It rev ealed that major trading partners continued to use
prohibited measures to promote their trade while penalizing, through countervailing measures, even
legally permissible subsidies provided by developing countries for legitimate developmental
objectives.  This dispute had an impact not merely on the parties to the dispute but on all Members.
Given the pervasive nature of the measure, which had been found to be inconsistent with the WTO
covered agreements, and its adverse effects on all trading partners, India believed that the only wayfor the United States to implement the DSB's rulings was to remove subsidies found to be inconsistent
with its WTO obligations.
11. The representative of Australia wished to register his country's interest in implementation by
the United States in this dispute.  The prohibited export subsidies provided by the United States had
direct impact on the competitive trading opportunities of Australian exporters in all markets.Australia, therefore, urged the United States to comply as quickly as possible with the DSB's rulings
and recommendations by withdrawing the prohibited export subsidies.
12. The DSB took note of the statements and adopted
 the Appellate Body Report contained in
WT/DS108/AB/RW and the Panel Report contained in  WT/DS108/RW, as modified by the Appellate
Body Report.
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