WORLD TRADE  
ORGANIZATION  WT/DS108/AB/RW2 
13 February 2006 
 (06-0580) 
 Original:   English 
  
 
     
 
    
 
 
 
UNITED STATES – T AX TREATMENT FOR 
"FOREIGN SALES CORPORATIONS" 
 
SECOND RECOURSE TO AR TICLE 21.5 OF THE DSU 
BY THE EUROPEAN COMMUNITIES 
 
 
 
AB-2005-9 
   
 
    
 
   
Report of the Appellate Body 
  WT/DS108/AB/RW2 
 Page i 
 
 
   
I. Introduction................................................................................................................ .................1 
II. Arguments of the Participants  and the Third Participants ..........................................................6 
A. Claims of Error by the United States – Appellant .........................................................6 
1. Panel's Terms of Reference...............................................................................6 
2. Article 4.7 of the SCM Agreement  and Article 21.5 of the DSU......................8 
B. Arguments of the European Communities – Appellee .................................................10 
1. Panel's Terms of Reference.............................................................................10 2. Article 4.7 of the  SCM Agreement   and Article 21.5 of the DSU..................12 
C. Claims of Error by the European Communities – Other Appellant .............................14 
D. Arguments of the United States – Appellee ..................................................................15 
E. Arguments of the Third Participants ............................................................................17 
1. Australia..........................................................................................................17 2. Brazil...............................................................................................................18 
III. Issues Raised in This Appeal .............................................................................................. ......19 
IV. Panel's Terms of Reference................................................................................................. ......19 
V. Article 4.7 of the  SCM Agreement  and Article 21.5 of the DSU............................................25 
VI. European Communities' Conditional Appeals ..........................................................................34 VII. Findings and Conclusions.................................................................................................. .......35 
 
 
ANNEX I Notification of an Appeal by the United States 
 ANNEX II Notification of an Other A ppeal by the European Communities 
 ANNEX III Request for the Establishment of  a Panel by the European Communities 
 WT/DS108/AB/RW2 
Page ii  
 
  CASES CITED IN THIS REPORT 
 
Brazil – Aircraft  
(Article 21.5 – Canada)  Appellate Body Report, Brazil – Export Financing Pr ogramme for Aircraft  
– Recourse by Canada to Article 21.5 of the DSU , WT/DS46/AB/RW, adopted 4 
August 2000, DSR 2000:VIII, 4067 
Canada – Aircraft  
(Article 21.5 – Brazil)  Appellate Body Report, Canada – Measures Affecting the Export of Civilian 
Aircraft – Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/AB/RW, 
adopted 4 August 2000, DSR 2000:IX, 4299 
EC – Bananas III  Appellate Body Report, European Communities – Scheme for the Importation, 
Sale and Distribution of Bananas , WT/DS27/AB/R, adopted 25 September 1997, 
DSR 1997:II, 591 
EC – Bed Linen  
(Article 21.5 – India)  Appellate Body Report, European Communities – Anti-Dumping Duties on 
Imports of Cotton-Type Bed Linen from I ndia – Recourse to Article 21.5 of the 
DSU by India , WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965 
Mexico – Corn Syrup  
(Article 21.5 – US)  Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose 
Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU  
by the United States , WT/DS132/AB/RW, adopted 21 November 2001, DSR 
2001:XIII, 6675 
US – Carbon Steel  Appellate Body Report, United States – Countervailing Duties on Certain 
Corrosion-Resistant Carbon Steel Flat Products from Germany , 
WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779 
US – FSC  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" , WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619 
US – FSC  Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" , 
WT/DS108/R, adopted 20 March 2000, as modified by Appellate Body Report, 
WT/DS108/AB/R, DSR 2000:IV, 1675 
US – FSC  
(Article 21.5 – EC)  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Articl e 21.5 of the DSU by the European 
Communities , WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55 
US – FSC  
(Article 21.5 – EC)  Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – 
Recourse to Article 21.5 of the DSU by the European Communities , 
WT/DS108/RW, adopted 29 January 2002, as modified by Appellate Body 
Report, WT/DS108/AB/RW, DSR 2002:I, 119 
US – FSC  
(Article 21.5 – EC II) Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – 
Second Recourse to Article 21.5 of the DSU by the European Communities , 
WT/DS108/RW2, 30 September 2005 
US – FSC  
(Article 22.6 – US)  Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Arbitrati on by the United States under Article 22.6 
of the DSU and Article 4.11 of the SCM Agreement , WT/DS108/ARB, 30 August 
2002, DSR 2002:VI, 2517 
US – Softwood Lumber IV 
(Article 21.5 – Canada) Appellate Body Report, United States – Final Countervailing Duty Determination 
with Respect to Certain Softwood Lumber from Canada – Recourse by Canada to 
Article 21.5 of the DSU , WT/DS257/AB/RW, adopted 20 December 2005  
  WT/DS108/AB/RW2 
 Page iii 
 
 
  ABBREVIATIONS USED IN THIS REPORT 
 
DSB Dispute Settlement Body 
DSU Understanding on Rules and Procedures Governing the Settlement of 
Disputes  
ETI extraterritorial income 
ETI Act FSC Repeal and Extraterritorial Income Exclusion Act of 2000, 
United States Public Law 106-519, 114 Stat. 2423 (2000) (Exhibit  EC-2 submitted by the Europ ean Communities to the Panel) 
FSC foreign sales corporations 
GATT 1994 General Agreement on Tariffs and Trade 1994 
IRC United States Internal Revenue Code  
Jobs Act American Jobs Creation Act of 2004  
First Article 21.5 panel Panel in the first  US – FSC (Article 21.5 – EC)   proceedings 
Panel Panel in the current  US – FSC (Article 21.5 – EC II)   proceedings 
Panel Report Panel Report, US – FSC (Article 21.5 – EC II)   
original panel Panel in the original  US – FSC   proceedings  
SCM Agreement  Agreement on Subsidies and Countervailing Measures  
Section 5 Section 5(c)(1)(B) of the ETI Act 
Working Procedures  Working Procedures for Appellate Review , WT/AB/W/5,  
4 January 2005 
WTO World Trade Organization 
  WT/DS108/AB/RW2 
Page 1 
 
 
  WORLD TRADE ORGANIZATION  
APPELLATE BODY 
   United States – Tax Treatment for "Foreign Sales Corporations"  
Second Recourse to Articl e 21.5 of the DSU by the 
European Communities  
 
United States, Appellant/Appellee  
European Communities, Appellant/Appellee  
 Australia, Third Participant  
Brazil, Third Participant   
China, Third Participant   AB-2005-9 
  Present:   Abi-Saab, Presiding Member 
 Ganesan, Member 
 Janow, Member   
   
I. Introduction 
1. The United States appeals certain issues of law and legal interpretations developed in the 
Panel Report, United States – Tax Treatment for "Forei gn Sales Corporations", Second Recourse to 
Article 21.5 of the DSU by the European Communities (the "Panel Report").
1  The Panel was 
established to consider a complaint by the Eur opean Communities regarding the American Jobs 
Creation Act of 2004 (the "Jobs Act") and the United States' compliance with the recommendations 
and rulings of the Dispute Settlement Body (the  "DSB") adopted on the basis of the Panel and 
Appellate Body Reports in United States – Tax Treatment for "Foreign Sales Corporations"  
("US – FSC ") 2 and  United States – Tax Treatment for "Fo reign Sales Corporations", Recourse to 
Article 21.5 of the DSU by the European Communities ("US – FSC  (Article 21.5 – EC) ").3  Relevant 
aspects of the Jobs Act are described in paragraph 6 below, as well as in paragr aphs 2.13 to 2.17 of 
the Panel Report. 
2. The panel in US – FSC  (the "original panel") concluded th at the "FSC measure", consisting of 
Sections 921 to 927 of the United States Internal Revenue Code (the "IRC" ) and related measures 
establishing special tax treatment for foreign sales co rporations ("FSC"), was inconsistent with the 
United States' obligations under the  Agreement on Subsidies and Countervailing Measures  (the " SCM 
                                                      
1WT/DS108/RW2, 30 September 2005. 
2WT/DS108/R;  WT/DS108/AB/R.  
3WT/DS108/RW;  WT/DS108/AB/RW.  WT/DS108/AB/RW2 
Page 2  
 
  Agreement ") and the  Agreement on Agriculture .
4  The Appellate Body uphe ld the original panel's 
finding that the FSC measure was inconsistent with the United States' obligations under the  SCM 
Agreement  and modified the original panel's findings under the  Agreement on Agriculture . 
3. On 20 March 2000, the DSB adopted the reports of the original panel and the Appellate Body.  
The DSB recommended that the United States bring the FSC measure into conformity with its 
obligations under the covered agreements and that  the FSC subsidies found to be prohibited export 
subsidies within the meaning of the  SCM Agreement  be withdrawn without delay, pursuant to 
Article 4.7 of the SCM Agreement , namely, "at the latest with effect from 1 October 2000".5  At its 
meeting held on 12 October 2000, the DSB agreed to a request made by the United States to modify the time period to comply with the recommendati ons and rulings of the DSB so as to expire on 
1 November 2000.
6  The United States promulgated on 15 November 2000, the FSC Repeal and 
Extraterritorial Income ("ETI") Exclusion Act of 2000 (the "ETI Act")7 in order to comply with the 
recommendations and rulings of the DSB.8 
4. The European Communities considered that the ETI Act did not comply with the DSB 
recommendations and rulings in the original dispute,  because the ETI Act was not consistent with the 
United States' obligations under the  SCM Agreement ,  the  Agreement on Agriculture ,  and the 
General Agreement on Tariffs and Trade 1994  (the "GATT 1994").  As a result, the European 
Communities had recourse to Article 21.5 of the  Understanding on Rules and Procedures Governing 
the Settlement of Disputes  (the "DSU").9  On 20 December 2000, the DSB referred the matter to a 
panel under Article 21.5 of the DSU.10  The first Article 21.5 panel report was circulated to the 
Members of the World Trade Organization (the "WTO") on 20 August 2001. 
5. The panel in the first Article 21.5 proceedings concluded that the ETI Act was inconsistent 
with the United States' obligations under the  SCM Agreement , the  Agreement on Agriculture , and the 
GATT 1994.  In addition, it also held that, by maki ng available indefinitely the FSC tax benefit for 
certain transactions by virtue of Section 5(c)(1)(B ) ("Section 5") of the ETI Act, the United States 
                                                      
4Original Panel Report, US – FSC , para. 8.1.  A detailed description of the FSC measure is contained in 
paragraphs 2.1-2.8 of the Original Panel Report, and in paragraphs 11-18 of the Original Appellate Body 
Report, in US – FSC . 
5Original Panel Report, US – FSC , para. 8.8. 
6WT/DSB/M/90, paras. 6-7.  See also Panel Report, para. 1.1. 
7United States Public Law 106-519, 114 Stat. 2423 (2000).   
8Panel Report, US – FSC (Article 21.5 – EC) , para. 1.5.  A detailed description of the ETI Act is 
contained in paragraphs 2.2-2.8 of the Panel Report, and in paragraphs 15-25 of the Appellate Body Report, in US – FSC (Article 21.5 – EC) .  
9WT/DS108/16. 
10WT/DS108/19. WT/DS108/AB/RW2 
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  "ha[d] not fully withdrawn the FSC subsidies found to  be prohibited export subsidies [in the original 
proceedings] and ha[d] therefore failed to implement the recommendations and rulings of the DSB [in 
the original proceedings] made pur suant to Article 4.7 [of the]  SCM Agreement ."11  The Appellate 
Body upheld those findings of the first Article 21.5 panel.  The Appellate Body also recommended that the DSB "request the United States to brin g the ETI measure ... into conformity with its 
obligations ... and ... to impl ement fully the recommendations and rulings of the DSB in US – FSC , 
made pursuant to Article 4.7 of the  SCM Agreement ."
12  On 29 January 2002, the DSB adopted the 
reports of the first Article 21.5 panel and the Appellate Body.13 
6. On 22 October 2004, the United States, with a view to bringing its measures into conformity 
with its WTO obligations, enacted the Jobs Act, repealing the tax exclusion of the ETI Act.14  The 
Jobs Act applies from 1 January 2005.  Section 101 of the Jobs Act is entitled "Repeal of exclusion 
for extraterritorial income".  Section 101(a) provides that "Section 114 [of the IRC] is hereby 
repealed."  Section 101(b) is entitled "Conforming Am endments" and provides, in sub-paragraph (1): 
"Subpart E of Part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is 
hereby repealed."  At the same time, Section 101( d) contains a "transition provision", pursuant to 
which the ETI tax scheme remains available, on a redu ced basis, for certain transactions in the period 
between 1 January 2005 and 31 Dece mber 2006.  Further, Section 101(f) contains a "grandfathering 
provision", pursuant to which the ETI tax scheme remains available  indefinitely   with respect to 
certain transactions.15  Finally, Section 101 of the Jobs Act does not repeal or otherwise make 
reference to Section 5 of the ETI Act, which "grand fathered" indefinitely FSC subsidies with respect 
to certain transactions.16  A more detailed description of the Jobs  Act is contained in paragraphs 2.13 
to 2.17 of the Panel Report. 
                                                      
11Panel Report, US – FSC (Article 21.5 – EC) , para. 9.1(e).  
12Appellate Body Report, US – FSC  (Article 21.5 – EC) , para. 257.  
13On 17 November 2000, the European Communities had requested authorization to take "appropriate 
countermeasures" and to suspend concessions pursuant to Article 4.10 of the  SCM Agreement  and Articles 22.2 
and 22.7 of the DSU for an amount of US$ 4043 million per year. (WT/DS108/13)  The United States objected 
to the appropriateness of the countermeasures proposed by the European Communities, as well as to the level of suspension of concessions proposed by the European Communities, and requested that the matter be referred to 
arbitration.  The arb itrator, acting pursuant to Article 4.11 of the SCM Agreement  and Article 22.6 of the DSU, 
determined that the countermeasures sought by th e European Communities "would constitute appropriate 
countermeasures within the meaning of Article 4.10 of the SCM Agreement ". (Decision by the Arbitrator,  
US – FSC (Article 22.6 – US) , para. 8.1) 
14Panel Report, para. 1.6.  
15More specifically, to transactions made in the ordinary course of trade or business occurring pursuant 
to a binding contract between the taxpayer and an unrelated person, which contract was in effect on  17 September 2003 and at all times thereafter. ( Ibid., footnote 29 to para. 2.16)  
16Ibid., para. 2.17.  These transactions are transactions  pursuant to a binding contract between the FSC 
and an unrelated person, which contract was in effect on 30 September 2000.  ( Ibid., para. 2.12)   WT/DS108/AB/RW2 
Page 4  
 
  7. The European Communities considered that the United States had failed to withdraw its 
prohibited subsidies as required by Article 4.7 of the  SCM Agreement , had failed to bring its  
scheme into conformity with its WTO obligations , and had therefore failed to implement the 
recommendations and rulings of the DSB of 20 March 2000 and 29 January 2002.  The European 
Communities also considered that the United States  continued to violate certain provisions of the 
SCM Agreement , the  Agreement on Agriculture , and the GATT 1994. The European Communities 
therefore had recourse to Article 21.5 of the  DSU for a second time.
17  On 20 December 2000, the 
DSB referred the matter to a pane l under Article 21.5 of the DSU.18  The Panel Report was circulated 
to WTO Members on 30 September 2005. 
8. The Panel found that: 
The panel and Appellate Body findings in the first 21.5 compliance 
proceedings, as adopted by the DSB, established that the ETI scheme was in violation of Articles 3.1(a) and 3.2 of the SCM Agreement , 
Articles 10.1, 8 and 3.3 of the Agreement on Agriculture  and Article 
III:4 of the GATT 1994.  Pursuant to Articles 101(d) and (f) of the Jobs Act, the ETI benefits remain available throughout 2005 and 
2006 (albeit at reduced percentages) , and indefinitely (in the case of 
certain transactions).  The inconsis tencies with Articles 3.1(a) and 3.2 
of the SCM Agreement , Articles 10.1, 8 and 3.3 of the Agreement on 
Agriculture  and Article III:4 of GATT 1994 remain.   
We further note the indefinite grandfathering of the original FSC 
subsidies for certain transactions, through the continued operation of 
[S]ection 5[] of the ETI Act.  As confirmed by the United States in response to Panel questioning, nothi ng in the legislative language of 
the Jobs Act modifies, implicitly or  explicitly, these transition rules 
for the FSC subsidies.
19 (footnotes omitted) 
 
9. The Panel concluded that: 
... to the extent that the United St ates, by enacting Section 101 of the 
Jobs Act, maintains prohibited FSC and ETI subsidies through the 
transition and grandfathering measures at issue, it continues to fail to implement fully the operative DSB recommendations and rulings to withdraw the prohibited subsidies and to bring its measures into conformity with its obligations  under the relevant covered 
agreements.
20 
                                                      
17Request for the Establishment of a Panel by the European Communities, WT/DS/108/29 (attached as 
Annex III to this Report). 
18WT/DS108/30. 
19Panel Report, para. 7.60-7.61. 
20Ibid., para. 8.1.  See also para. 7.65. WT/DS108/AB/RW2 
Page 5 
 
 
  10. The Panel also stated that:  
Since the original DSB recommendations and rulings in 2000 remain 
operative through the results of the compliance proceedings in 2002, we make no new recommendation.
21   
 
11. On 14 November 2005, the United States notified th e DSB of its intention to appeal certain 
issues of law covered in the Panel Report and certa in legal interpretations developed by the Panel, 
pursuant to Article 16.4 of the DSU, and filed a Notice of Appeal22 pursuant to Rule 20 of the 
Working Procedures for Appellate Review  (the " Working Procedures ").23  On 21 November 2005, the 
United States filed an appellant's submission.24  On 28 November 2005, the European Communities 
notified the DSB of its intention to appeal certain  issues of law covered in the Panel Report and 
certain legal interpretations devel oped by the Panel, pursuant to Article 16.4 of the DSU, and filed a 
Notice of Other Appeal25 pursuant to Article 23(1) of the  Working Procedures .  On 29 November 
2005, the European Communities filed an other appellant's submission.26  On 9 December 2005, the 
European Communities and the United Stat es each filed an appellee's submission.27  On the same day, 
Australia and Brazil each filed a third participant's submission28 and China notified its intention to 
appear at the oral hearing as a third participant.29  On 16 December 2005, the Director of the 
Appellate Body Secretariat informed the par ties that Mr. John Lockhart was prevented from 
continuing to serve on the Division for serious pe rsonal reasons falling with in Rule 12 of the  
Working Procedures .  In accordance with Rule 13 of the Working Procedures , the Appellate Body 
selected Ms. Merit E. Janow to replace Mr. Lockhart.  The oral hearing in this appeal was held on  
9 January 2006.   
                                                      
21Panel Report, para. 8.2.  
22WT/DS108/32 (attached as Annex I to this Report). 
23WT/AB/WP/5, 4 January 2005. 
24Pursuant to Rule 21(1) of the Working Procedures . 
25WT/DS108/33 (attached as Annex II to this Report).  
26Pursuant to Rule 23(3) of the Working Procedures . 
27Pursuant to Rules 22 and 23(4) of the Working Procedures . 
28Pursuant to Rule 24(1) of the Working Procedures . 
29Pursuant to Rule 24(2) of the Working Procedures . WT/DS108/AB/RW2 
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  II. Arguments of the Participants  and the Third Participants 
A. Claims of Error by the United States – Appellant  
1. Panel's Terms of Reference 
 
12. The United States requests the Appellate Body to reverse the Panel's finding that, through the 
continued operation of Section 5 of the ETI Act,  the "grandfathering" of the FSC tax exemption 
remained in effect, and that nothing in the Jobs Act modified this grandfathering provision.  The 
United States argues that neither Section 5 of the ETI Act nor its continued operation was within the 
Panel's terms of reference and that, therefore, the Pa nel's findings in this regard are inconsistent with 
Articles 6.2 and 21.5 of the DSU. 
13. According to the United States, Section 5 of th e ETI Act was not within the Panel's terms of 
reference because it was not included in the Europ ean Communities' request for the establishment of a 
panel.  The only provisions identified by the Eur opean Communities in that request as the subject of 
the dispute were Sections 101(d) and 101(f) of the J obs Act.  Those provisions are, respectively, the 
"transition provision" and the "grandfathering provisi on" for the ETI tax exclusion;  those provisions 
do not relate to the FSC tax exemption.  Th e United States emphasizes that the European 
Communities' panel request does not mention Section 5 of the ETI Act at all, "let alone a failure to 
withdraw [S]ection 5[]".30 
14. The Panel, according to the United States, provi ded four reasons for its conclusion that the 
European Communities' panel request included Sec tion 5 of the ETI Act.  The first was that 
Section 101 of the Jobs Act "does not repeal [S]ection 5 of the ETI Act".31  The United States points 
out that the panel request defines Section 101 of th e Jobs Act, and its content, as the subject of the 
dispute;  the panel request does not define as the subject of the dispute what Section 101 does  not  
contain. 
15. The second of the Panel's reasons, according to th e United States, is that "elsewhere in the 
[European Communities'] panel request there are referen ces to the ETI Act in its entirety, as well as to 
the prior panel and Appellate Body reports adopted in this dispute."32  In the United States' view, these 
                                                      
30United States' appellant's submission, para. 46.  
31Ibid., para. 50. 
32Ibid., para. 51. (footnote omitted)  WT/DS108/AB/RW2 
Page 7 
 
 
  overly broad references are not "particularly info rmative as to the scope of the matter before the 
Panel".33   
16. The third reason given by the Panel is that th e European Communities' panel request referred 
to a failure to withdraw the prohibited subsidies and a failure to implement the recommendations and 
rulings of the DSB in the original and first Ar ticle 21.5 proceedings.  However, according to the 
United States, "the mere reference to a failure to withdraw prohibited subsidies does not indicate 
whether the alleged failure pertains to the FSC tax exemption, the ETI tax exclusion, or both."34 
17. The fourth reason given by the Panel, according to the United States, is that Article 6.2 does 
not require identification of specific aspects of  a measure, and does not prescribe the manner for 
identifying a specific measure at issue.  The United States asserts that—even assuming that this 
statement of the Panel is correct—"this does not me an that when a panel request expressly identifies 
the 'subject of the dispute'", and subsequently defi nes the subject of the dispute by referring to the 
specific provisions contained in a law, a panel may ignore the method actually used by the complainant to identify the measures at issue.
35 
18. The United States argues that, although the Panel pa id "lip service" to the requirement that a 
panel request be read as a whole, in reality, it did not do so.36  Instead, the Panel mechanically gave 
equal weight to every word or every section of th e panel request.  In the United States' view, the 
section of the European Communities' panel request  entitled "The Subject of the Dispute" was, by 
virtue of its title, "more probative" than the other sections as to the measures covered by the panel 
request. 37  Moreover, the Panel also ignored the fact th at Section 5 of the ETI Act was not mentioned 
anywhere in the panel request. 
19. Finally, the United States takes issue with th e Panel's conclusion that the United States was 
not prejudiced by a lack of clarity in the Europ ean Communities' panel request.  Where, as in this 
case, a matter is not within a panel's terms of reference because it was not included in the panel 
request, there is no need for a responding Member to demonstrate that it has suffered prejudice. 
                                                      
33United States' appellant's submission, para. 51.  
34Ibid., para. 52.   
35Ibid., para. 53.   
36Ibid., para. 54.  
37Ibid.  WT/DS108/AB/RW2 
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  2. Article 4.7 of the SCM Agreement  and Article 21.5 of the DSU
 
20. The United States requests the Appellate B ody to reverse the Panel's finding that  
the United States did not implement fully the DSB recommendations and rulings in the previous  
US – FSC  and  US – FSC (Article 21.5 – EC)  disputes.  The United States also requests the Appellate 
Body to reverse, in particular, the Panel's conclu sion that the United Sates failed to comply with a 
recommendation adopted by the DSB under Article 4.7 of the  SCM Agreement  to withdraw 
prohibited subsidies.  According to the United St ates, the Panel erred in making this conclusion 
because there was no DSB recommendation under Article 4.7 of the  SCM Agreement   to withdraw 
the ETI tax exclusion, while, in the case of the gra ndfathering provisions in Section 5 of the ETI Act, 
the Panel's terms of reference did not include as a measure this Section. 
21. In the United States' view, the Panel "impr operly equated the recommendation called for in 
Article 4.7 with an obligation on Members under the covered agreements".38  The United States 
argues that the panel in the original  US – FSC  proceedings made a recommendation under 
Article 4.7 of the  SCM Agreement , which recommendation pertained to the FSC tax exemption.  The 
only reference to that provision in the first Ar ticle 21.5 proceedings was the Appellate Body's 
reference to the FSC tax exemption as "grandfat hered" in the ETI Act.  No recommendation was 
made with respect to the ETI Act itself under Article 4.7 of the  SCM Agreement .   
22. According to the United States, the Panel erroneous ly "create[d] an obligation to withdraw the 
ETI tax exclusion within the meaning of Article 4.7."39  The Panel "essentially transform[ed] a DSB 
recommendation and ruling under Article 4.7 to wit hdraw the measures giving rise to the FSC tax 
exemption into a general obligation to withdraw prohibited subsidies."40  Moreover, the Panel found 
that the "withdrawal recommendation" made in the original panel proceedings is the "operative" 
recommendation in respect of all future measures taken to comply with the recommendations and 
rulings of the DSB.41  
23. The United States disagrees with these findings of  the Panel for two reasons.  First, in the 
United States' view, Article 4.7 of the  SCM Agreement  is directed to panels and not to WTO 
Members.  Secondly, Article 4.7 does not refer to an y "subsidy" but, rather, refers to "the measure in 
question ... found to be a prohibited subsidy".42  Thus, the "measure" subject to the Article 4.7 
                                                      
38United States' appellant's submission, heading III.A.  
39Ibid., para. 20.  
40Ibid., para. 21.   
41Ibid.   
42Ibid., para. 24.  WT/DS108/AB/RW2 
Page 9 
 
 
  withdrawal recommendation is the measure considered  by the original panel, and not "any future 
measure taken to comply that might be found to constitute a prohibited subsidy."43  In the context of 
the present dispute, "the measure in question" that  had to be withdrawn was the FSC tax exemption.44  
The Panel therefore erred in finding that the adopted recommendation of the original panel under 
Article 4.7 applies to measures other than the FSC tax exemption. 
24. Another major error committed by the Panel,  according to the United States, was to 
"mischaracteriz[e ]" its task under Article 21.5.45  The United States takes issue with the Panel's 
statement that its task under Article 21.5 was to determine whether a Member has "fixed the 
problem".46  The United States argues that, under the terms of  Article 21.5, a panel's task is simply to 
determine whether measures taken to comply exist or  not, and, when such measures do exist, whether 
they comply with the rulings and recommendations of the DSB.  By incorrectly characterizing its task 
under Article 21.5 as ensuring that a "problem" is "f ixed", the Panel "appears to have conferred on 
itself the authority to ignore the precise text of Article 4.7 of the SCM Agreement  and Article 21.5 [of 
the DSU], its terms of reference and the particul ar claims advanced by the complaining party".47  In 
the United States' view, Article 4.7 does not direct a panel to recommend that a Member refrain from 
enacting any new provision that may provide a prohibited subsidy.48 
25. According to the United States, the Panel moreover misinterpreted the findings and 
recommendations of the panel and the Appellate Bo dy in the first Article 21.5 proceedings.  The 
Panel stated that the first Article 21.5 panel "expressly  indicated the view that the original Article 4.7 
recommendation 'remain[ed] operative'."49  However, the first Article 21.5 panel made this statement 
in response to a comment on the interim report in which the European Commu nities asserted that the 
panel should not make new recommendations.  The Un ited States argues that the only findings made 
by the first Article 21.5 panel under Article 4.7 of the  SCM Agreement  pertained exclusively to the 
FSC tax exemption and Section 5 of the ETI Act, wh ich deals with that FSC tax exemption, but not 
with the ETI tax exclusion.  For this reason, the United States disputes the view that the 
recommendation under Article 4.7 adopted by the DSB in the original  US – FSC  proceedings is 
                                                      
43United States' appellant's submission, para. 24. (footnote omitted) 
44Ibid. (referring to Article 4.7 of the SCM Agreement ).  
45Ibid., para. 26.  
46Ibid. 
47Ibid., para. 29. 
48Ibid.  The United States stated at the oral hearing that the "syste mic issue" as to whether an 
Article 21.5 panel has the authority to make a new recommendation under Article 4.7 of the SCM Agreement , in 
respect of the measure taken to comply before its consideration, need not be addressed in this dispute.   
49United States' appellant's submission, para. 33 (referring to Panel Report, para. 7.56). WT/DS108/AB/RW2 
Page 10  
 
  "operative" with respect to the ETI tax exclusion, "a tax exclusion provided by a legislation that did 
not even exist at the time of the 2000 DSB recommendation."
50 
26. The United States maintains that the first Artic le 21.5 proceedings resulted in two different 
sets of findings and recommendations.  One set of findings pertained to Section 5 of the ETI Act and the transition provisions for the FSC tax exempti on.  With respect to this finding, there was a 
reference to the United States' failure to comply  with previous recommendations and rulings made 
pursuant to Article 4.7 of the SCM Agreement .  The other set of findings pertained to the ETI tax 
exclusion.  Although there were fi ndings of inconsistency of the ETI tax exclusion with the provisions 
of several covered agreements, there was no finding or recommendation with respect to Article 4.7 of the SCM Agreement .   
27. The United States also argues that the Panel' s interpretations of Article 4.7 of the  SCM 
Agreement  and Article 21.5 of the DSU were not necessary to avoid undermining the WTO dispute 
settlement system.  The Panel erroneously believe d that only an Article 4.7 recommendation could 
create an obligation for a Member to withdraw a measure found to be a prohibited subsidy.  The United States accepts that when, as a result of proceedings under Artic le 21.5, the DSB makes a ruling 
that a measure taken to comply is inconsistent w ith a covered agreement, "the Member maintaining 
that measure must withdraw it or otherwise bri ng it into conformity with the relevant covered 
agreement."
51  Thus, the United States does not dispute that it was under an obligation "to remedy 
the[] inconsistencies [of the ETI Act] with its WTO ... obligations";  however, the United States 
disagrees that "this obligation flowed from Article  4.7 of the SCM Agreement or the recommendation 
made thereunder."52 
B. Arguments of the European Communities – Appellee  
1. Panel's Terms of Reference  
28. The European Communities requests the Appellate Body to reject the United States' appeal 
against the Panel's finding concerning its terms of reference.   
29. The European Communities argues, first, that  the Panel was correct in considering the 
European Communities' panel request as a whole.  The United States has not demonstrated why 
panels should be required, on the basis of Article 6.2, to look at the text of only one particular part of 
a panel request.  Furthermore, reading Article 6. 2 of the DSU in the context of proceedings under 
                                                      
50United States' appellant's submission, para. 34. 
51Ibid., para. 40.  
52Ibid., para. 41.  WT/DS108/AB/RW2 
Page 11 
 
 
  Article 21.5, the subject of the present proceedings  "is primarily to review whether the 2004 Jobs Act 
finally achieved compliance with  inter alia   the 2000 DSB recommendations and rulings."53  Seen in 
this way, section 2 of the European Communities' pa nel request described the relevant aspects of the 
Jobs Act.  Furthermore, section 3 of the panel request is "inextricably linked"54 to section 2 and 
contains a clear reference to the origin al recommendation under Article 4.7 of the  SCM Agreement  
and to the findings made in the first Article 21.5 pr oceedings with respect to the ETI Act.  These latter 
findings clearly include findings that the ETI Act partly keeps in force the FSC scheme through the 
"grandfathering" provision.  Finally, the Europ ean Communities argues that the panel request 
explained why "pertinent aspects"55 of the Jobs Act failed to implement the DSB recommendations, 
namely, because these provisions maintained "the tax exemptions already found to be WTO incompatible"
56;  these tax exemptions include the ETI as well as the FSC scheme.   
30. Secondly, the European Communities argues that  the Panel correctly reviewed whether the 
United States had suffered prejudice as a result of th e alleged failure by the European Communities to 
identify Section 5 of the ETI Act correctly the measu re at issue.  The Panel did not impose a burden 
on the United States to demonstrate that the United States had suffered prejudice.  Rather, the Panel 
noted that whether the responding party has suffered prejudice is a pertinent issue to be examined in 
deciding on an alleged violation of Article 6.2 of the DSU.  Furtherm ore, the United States' arguments 
before the Panel also demonstrate that the United States was not prejudiced;  the United States did not contest, but rather confirmed, that the Jobs Act did no t, in substance, affect Section 5 of the ETI Act.  
Thus, the only defence put forward by the United States was "to acknowledge that there was nothing
 
to defend."57  This amounts to an admission that "in substa nce the Jobs Act did not affect Section 5[] 
of the ETI Act [and] demonstrates that there cannot  have been any adverse effects on [the] defence 
opportunities of the United States."58 
31. The European Communities also points out that (i) DSB rulings exist already to the effect that 
Section 5 of the ETI Acts does not achieve wit hdrawal of the FSC tax exemption pursuant to 
Article 4.7 of the SCM Agreement , resulting from the adoption of th e first Article 21.5 panel and 
Appellate Body reports59;  (ii) the United States has confirme d that the Jobs Act does not modify 
                                                      
53European Communities' appellee's submission, para. 64.  
54Ibid., para. 66.  
55Ibid., para. 70.  
56Ibid., para. 71.  
57Ibid., para. 77. (original underlining) 
58Ibid., para. 78.   
59This finding is contained in paragraph 9.1(e) of the Panel Report, and in paragraph 256(f) of the 
Appellate Body Report, in US – FSC (Article 21.5 – EC) . WT/DS108/AB/RW2 
Page 12  
 
  Section 5 of the ETI Act;  and (iii) the United Stat es does not contest that the Jobs Act and the ETI 
Act constituted "measures taken to comply".  The arguments of the United States—that the Panel 
should have found that only Sections 101(d) and 101(f) of the Jobs Act, and not also Section 5 of the 
ETI Act, were within its terms of re ference—are therefore not well founded. 
2. Article 4.7 of the  SCM Agreement   and Article 21.5 of the DSU 
 
32. The European Communities considers that the United States' arguments with respect to 
Article 21.5 of the DSU and Article 4.7 of the  SCM Agreement   are without merit and should be 
dismissed.  First, the recommendation made by the original panel under Article 4.7 of the  SCM 
Agreement  is relevant for the ETI Act, also with respect  to the portion of the Act that introduced the 
ETI tax or "FSC replacement"60 scheme.  The Panel did not invent a new obligation and did not 
improperly equate a recommendation under Article 4.7 with an obliga tion to withdraw a prohibited 
subsidy.  Rather, the United States incorrectly attemp ts to limit Article 21.5 proceedings to "original" 
panel proceedings.  According to the European Co mmunities, the focus of Article 21.5 proceedings 
"is to assess whether later measures taken to comp ly with earlier recommendations and rulings have 
in fact achieved compliance with such recommendations and rulings."61  As a result, Article 4.7 of the 
SCM Agreement   cannot be read in isolation. 
33. Secondly, the European Communities argues that the Panel did not formulate an improper 
"fixing the problem"62 standard.  The Panel was correct in reviewing whether, inter alia , the violations 
found to exist in the original and in the first Artic le 21.5 proceedings had been eliminated.  To the 
extent that the United States may be suggesting that Article 21.5 of the DSU "embodies a specific 
requirement to plead alternatively either the non- existence or the non-cons istency of the measures 
allegedly taken to comply", the European Communiti es disagrees and submits that this is "certainly 
not the practice"63 of requests for Article 21.5 panel establishment.  Rather, these two elements are 
"two different ways of looking at the same issue".64  With respect to the United States' argument that 
the Panel improperly blurred the distinction betwee n the original measure (that is, the FSC scheme) 
and the measures taken to comply (that is, the ETI tax scheme and the Jobs Act), the European 
Communities argues that the Appellate Body's finding in  Canada – Aircraft  (Article 21.5 – Brazil) , 
cited by the United States, does not support the Un ited States' argument that a measure taken to 
comply cannot be reviewed against the original recommendation.  The European Communities refers 
                                                      
60European Communities' appellee's submission, para. 35.  
61Ibid., para. 37. 
62Ibid., para. 28.  
63Ibid., para. 41. 
64Ibid. WT/DS108/AB/RW2 
Page 13 
 
 
  to the Appellate Body Report in  Brazil – Aircraft  (Article 21.5 – Canada)  in support of its 
argument.65 
34. Thirdly, according to the European Communities,  the Panel did not misinterpret the findings 
and recommendations made in the first Article 21.5 proceedings.  The European Communities 
disagrees with the United States that  the original recommendation applies only to the FSC scheme and 
Section 5, but does not apply to the ETI tax scheme.  Rather, accord ing to the European Communities, 
the original Article 4.7 recommendation does apply to the entirety of the ETI Act, including Section 5 
thereof.  The "fundamental" reason for this is th at the original recommendation represents the "very 
benchmark" against which the measure taken to comp ly must be reviewed in order to assess whether 
that measure has brought about compliance.66  A new recommendation under Article 4.7 of the  SCM 
Agreement   was not necessary in the first Article 21 .5 proceedings, because the main purpose of a 
recommendation under Article 4.7 is to define the time period within wh ich the subsidy found to be in 
violation of Article 3.1 of the  SCM Agreement   must be withdrawn.  The European Communities also 
notes that the United States admits that, even in  the absence of a recommendation under Article 4.7 
pertaining specifically to the ETI tax scheme, it wa s obliged to withdraw the ETI tax scheme in its 
entirety. 
35. In this regard, the European Communities ar gues that the Appellate Body, in the first 
Article 21.5 proceedings, made its recommendation with respect to the "ETI measure", which 
included Section 5 of the ETI Act.67  The Appellate Body also recalled that the "ETI measure" had 
been found to be inconsistent with United States' obligations under the three Agreements in question, 
and had recommended that the United States bring th e "ETI measure" into conformity with those 
Agreements.  The recommendation of th e Appellate Body thus included the  SCM Agreement  and, in 
particular, Article 4.7 of that Ag reement.  As a result, according to  the European Communities, if, at 
all, a new recommendation under Article 4.7 of the  SCM Agreement  were needed with respect to the 
ETI tax scheme, it is contained in that Appellate Body recommendation. 
36. In addition, the European Communities points to  its panel request in the first Article 21.5 
proceedings and argues that the enquiry of the pane l in those proceedings concerned the resolution of 
a disagreement whether the ETI Act as a whole achieved compliance with earlier recommendations 
                                                      
65European Communities' appellee's submission, pa ra. 43 (referring to Appellate Body Report, Brazil – 
Aircraft  (Article 21.5 – Canada) , para. 82(a) and (b)).   
66Ibid., para. 46.   
67Ibid., para. 53 (referring to Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 257).   WT/DS108/AB/RW2 
Page 14  
 
  and rulings.  No distinction was made between pr ovisions creating a new subsidy regime and those 
"perpetuating"
68 FSC benefits. 
37. Finally, the European Communities supports the concern of the Panel that, if a new 
Article 4.7 recommendation were necessary in ever y Article 21.5 proceeding, it might undermine the 
effective operation of the dispute settlement syst em, because it would involve setting new time-limits 
for compliance.  The European Co mmunities also draws attention to the inconsistencies in the United 
States' arguments that, on the one hand, no recommen dation under Article 4.7 to  withdraw the ETI tax 
exclusion had been made in the first Article 21.5 proceedings and that, on the other hand, Article 21.5 
compliance panels have no authority to ma ke such recommendations under Article 4.7. 
C. Claims of Error by the European Communities – Other Appellant  
38. In the event that the Appellate Body endorses an y of the United States' claims on appeal, the 
European Communities requests the Appellate Body to  rule on certain claims that the European 
Communities made before the Panel, which, acco rding to the European Communities, the Panel 
decided only in part.  
39.  These claims were, first, that, by not entirely withdrawing FSC and ETI subsidies, the United 
States has failed to comply with the recommenda tions and rulings of the DSB as well as with 
Article 4.7 of the SCM Agreement .  The European Communities submits that the Panel upheld this 
claim only "insofar as it found that the United States had failed to comply with the operative 
recommendations and rulings of the DSB."69  However, the Panel did not expressly state whether a 
violation of Article 4.7 of the  SCM Agreement   had occurred, nor did it say that it was exercising 
judicial economy with regard to this claim of the European Communities.  
40. Secondly, the European Communities argues that, by not entirely withdrawing FSC and ETI 
subsidies, the United States has failed to comply with the recommendations and rulings of the DSB 
and thereby its obligations under Articles 19.1 and 21. 1 of the DSU.  The Panel exercised judicial 
economy in respect of these claims .  The European Communities argues that Article 19.1 of the DSU 
contains an implicit obligation on WTO Members similar to that in Article 4.7 of the  SCM 
Agreement .  Therefore, the European Communities cons iders that the United States is violating 
Article 19.1 and Article 21.1 of the DSU and requests the Appellate Body to make such a finding, in 
the event that it reverses any of the Panel's findings. 
                                                      
68European Communities' appellee's submission, para. 55. 
69European Communities' other appellant's submission, para. 6.  WT/DS108/AB/RW2 
Page 15 
 
 
  41. In addition, in the event that the Appellate Body  considers that the Panel erred in holding that 
"the original DSB recommendations a nd rulings in 2000 remain operative"70, and that it did not 
therefore need to issue a new recommendation under Article 4.7 of the  SCM Agreement , the 
European Communities requests the Appellate Body to  make such a recommendation.  The European 
Communities explains that the reason why it requested the first compliance panel  not  to make an 
Article 4.7 recommendation is that such a recomme ndation requires the fixing of a time period for 
withdrawal of the subsidy found to be prohibited.   Compliance with WTO obligations should not be 
postponed through a "never-ending cycle"71 of litigation and advancem ent of the time-limit for 
compliance.  The European Communities furthermor e argues that, in the event that the first and 
second Article 21.5 panels erred in  not  making a recommendation in the first and second compliance 
proceedings, the Appellate Body should complete the analysis and make such a recommendation.  
42. The European Communities adds that recommendations under Article 4.7 of the SCM 
Agreement   and Article 19.1 of the DSU—in the event th ey are considered necessary by the Appellate 
Body—must be made "irrespective of a speci fic request of the complaining party".72  Accordingly, 
these recommendations may be made by the Appellate  Body when the Appellate Body considers it 
necessary to complete the analysis in the ab sence of any such request.  Such additional 
recommendations should not, however, imply setti ng a new time period for withdrawing the 
prohibited subsidies as that would undermine the e ffective operation of the dispute settlement system. 
D. Arguments of the United States – Appellee  
43. The United States requests the Appellate Body to reject the conditional claims of error raised 
by the European Communities.  The United States argu es that it could not have acted inconsistently 
with Articles 19.1 and 21.1 of the DSU:  Article 19. 1, first sentence, imposes an obligation on panels 
and the Appellate Body to make recommendati ons and does not impose obligations on WTO 
Members;  Article 21.1 does not provide for any ob ligation.  According to the United States, the 
European Communities confuses the role of reco mmendations with that of obligations of WTO 
Members.  In the United States' view, any incons istency is an inconsiste ncy with the relevant 
provision of a covered agreement, not an incons istency with Article 19.1 or Article 21.1.   
44. Secondly, the United States submits that, as with Articles 19.1 and 21.1 of the DSU, 
Article 4.7 of the  SCM Agreement   does not impose obligations  on WTO Members;  rather, 
                                                      
70European Communities' other appellant's submission, para. 7 (referring to Panel Report, paras. 7.49 
and 8.2).  
71Ibid., para. 24 (referring to Panel Report, para. 7.46).  
72Ibid., para. 27.  WT/DS108/AB/RW2 
Page 16  
 
  Article 4.7 is addressed to panels.  According to  the United States, the Eu ropean Communities bases 
its arguments not on the text of Article 4.7, but, ra ther, on its own interpretation of statements made 
by the Appellate Body in  US – FSC  (Article 21.5 – EC) .
73  In the United States' view, it is Article 3.2 
of the  SCM Agreement , rather than Article 4.7 of the SCM Agreement , that prohibits the granting or 
maintenance of prohibited subsidies.   Furthermore, the United States points out that neither the panel 
nor the Appellate Body in US – FSC  (Article 21.5 – EC)  found a violation of Article 4.7;  rather, the 
panel found that the United States had "failed to implement the recommendations and rulings of the 
DSB made pursuant to Article 4.7 of the SCM Agreement".74 
45. Thirdly, the United States argues that the A ppellate Body should reject the "contingency"75 on 
which the European Communities' request for recomme ndations is premised.  According to the United 
States, it is "impossible"76 that the contingency defined by the European Communities—namely, 
should the Appellate Body find that the Panel erre d in concluding that no new recommendations were 
necessary under Article 4.7 of the  SCM Agreement —could arise.  There "would be no basis for the 
Appellate Body to find that the Panel erred by not making new recommendations"77, because neither 
the United States' Notice of Appeal, nor the Europ ean Communities' Notice of Other Appeal, contain 
a claim that the Panel erred in concluding th at no new recommendations were necessary. 
46. Fourthly, according to the United States, the Eu ropean Communities failed to comply with 
Rule 21 of the Working Procedures , because the European Communities' other appellant's submission 
does not set out "a precise statement of the grounds  for the appeal" or "a precise statement of the 
provisions of the covered agreemen t and other legal sources relied on"78 as required by Rule 21.  In 
particular, the United States' points to the statemen t in the European Communities' other appellant's 
submission that "[t]he detailed arguments supporting [the European Communities'] claims can be 
found in the [European Communities'] submissions be fore the Panel and are hereby incorporated by 
reference."79  Although it "may perhaps be possible"80 to comply with Rule 21 through incorporation 
by reference, the United States contends the Eur opean Communities has not complied with Rule 21 in 
                                                      
73United States' appellee's submission, para. 17 (refe rring to European Communities' other appellant's 
submission, para. 12, in turn quoting Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 229, which 
reads:  "Article 4.7 of the SCM Agreement requires prohibited subsidies to be withdrawn 'without delay', and 
provides that a time-period for such withdrawal shall be specified by the panel."). 
74Ibid., para. 20 (referring to Panel Report, US – FSC (Article 21.5 – EC) , para. 9.1(e)).   
75Ibid., para. 22.  
76Ibid.  
77Ibid.  
78Ibid., para. 25. 
79Ibid. (referring to European Communities' other appellant's submission, para. 6). 
80Ibid., para. 27.  WT/DS108/AB/RW2 
Page 17 
 
 
  this particular instance.  This is because th e European Communities' references are "vague" and 
because the European Communitie s' approach ignores the interests of third parties.81  As a result, the 
United States asks the Appellate Body, pursuant to Rule 29 of the Working Procedures , to dismiss the 
relevant portions of the European  Communities' conditional appeal. 
E. Arguments of the Third Participants 
1. Australia  
47. With respect to the Panel's terms of reference, Australia submits that the grandfathering and 
exclusion provisions of Section 5 of the ETI Act c onstitute a measure already found to be inconsistent 
prior to the second Article 21.5 panel proceedings.  The fact that Section 5 of the ETI Act is not 
explicitly cited in the panel request "does not serve  to convert a WTO-inconsistent measure into a 
WTO-consistent measure."82  Even if the Appellate Body were to  reverse the Panel's ruing with regard 
to its terms of reference, the United States continues to be under a "continuing obligation"83 to bring 
the measure at issue into conformity. 
48. With respect to the United States' arguments regarding the ETI tax exclusion and the 
implementation of DSB recommendations and rulings, Australia agrees with the Panel's findings and 
argues that the United States is effectively seekin g to appeal the adopted recommendations of the 
DSB in the first Article 21.5 proceedings.  An Ar ticle 21.5 panel does not have a mandate to make 
recommendations under Article 4.7 of the SCM Agreement .  The recommendations of the DSB in the 
original dispute have "continuing application"84, given that the measures taken to comply continue to 
operate and these very same measures were found to be  inconsistent with WTO law.  In Australia's 
view, the United States' position woul d lead to a "legal absurdity"85 concerning the legal effect of 
DSB recommendations.  Moreover, the United St ates is under an obligation to remedy the 
inconsistencies, and a successful appeal by the United States "could not serve to convert a WTO-
inconsistent measure into a measure conforming to WTO obligations."86  
                                                      
81The United States submits, specifically, that the European Communities refers to submissions, oral 
statements, and responses to Panel questions that were ne ver served on the third parties.  Although the opening 
statement of the European Communities was included as an  annex to the Panel Report, the closing statement and 
responses to questions were not.  Nor were these materi als posted on the European Communities' website.    
82Australia's third participant's submission, para. 9. 
83Ibid. 
84Ibid., para. 6.   
85Ibid., para. 7.   
86Ibid.   WT/DS108/AB/RW2 
Page 18  
 
  2. Brazil
 
49. With respect to the Panel's terms of referenc e, Brazil submits that the United States is, in 
effect, arguing that the European Communities attributed  to one particular section of its panel request 
greater importance than to other sections, because  that section was entitled "The Subject of the 
Dispute".  In Brazil's view, the United Stat es' appeal elevates "form over substance".87  By asking, in 
the panel request, for a finding that the United Stat es had failed to withdraw  its prohibited subsidies 
and thus failed to implement the recommendati ons and rulings of the DSB, the European 
Communities satisfied the requirement of Article 6. 2 of the DSU to present the problem clearly.  The 
references to the ETI Act in its entirety and to previous panel and Appella te Body reports were 
sufficient to define the scope of the matter before  the Panel.  Moreover, the European Communities' 
first submission to the Panel made explicit refere nce to the fact that Section 5 of the ETI Act 
continued to be in force. 
50. With respect to the United States' arguments regarding the ETI tax exclusion and the 
implementation of DSB recommendations and rulings, Brazil submits that the "fixing the problem" standard set forth by the Panel is "in line with a sound textual interpretati on of Article 21.5 of the 
DSU".
88  Brazil also disagrees with the United States' argument that the "measure" subject to the 
Article 4.7 withdrawal recommendation is the measure considered by the original panel, and not any 
future measure taken to comply that might be fou nd to constitute a prohibited subsidy.  Rather, Brazil 
agrees with the Panel's finding that a Member’s ob ligation to withdraw a prohibited subsidy is "a 
constant" and "remains until  full implementation of DSB recommendations and rulings is 
achieved".89  In addition, although the United States recognizes that it was under an obligation to 
remedy the inconsistencies found with respect to th e ETI tax exclusion by the first compliance panel, 
it has not clarified how and when it would comply.  Finally, Brazil "strongly cautions" against any interpretation by which the intro duction of "new" inconsistencies
90, in the process of bringing a WTO-
inconsistent measure into conformity with th e covered agreements, would prolong disputes.  
 
                                                      
87Brazil's third participant' s submission, para. 19.  
88Ibid., para. 9.  
89Ibid., para. 12 (referring to Panel Report, para. 7.31 (original emphasis)).  
90Ibid., para. 17.    WT/DS108/AB/RW2 
Page 19 
 
 
  III. Issues Raised in This Appeal 
51. The following two issues are raised in  the appeal of the United States: 
(a) whether the Panel erred in finding that Section 5(c)(1)(B) ("Section 5") of the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000 (the "ETI Act")91, 
grandfathering prohibited foreign sales corpor ations ("FSC") subsidies, was within its 
terms of reference92;  and 
(b) whether the Panel erred in finding that, to the extent the United States maintains 
prohibited FSC and extraterritorial income  ("ETI") subsidies through the transition 
and grandfathering measures at issue, "it continues to fail to implement fully the 
operative DSB recommendations and rulings to  withdraw the prohibited subsidies and 
to bring its measures into conformity with  its obligations under the relevant covered 
agreements."93 
 
IV. Panel's Terms of Reference  
52. We first address the issue raised by the Un ited States that the Panel's conclusion that 
Section 5 of the ETI Act is within its terms of reference is inconsiste nt with Articles 6.2 and 7.1 of the 
DSU.94 
53. The Panel defined the issue before it as an alleged failure on the part of the European 
Communities to identify the specific "measure at issue", namely, Section 5 of the ETI Act, 
grandfathering prohibited FSC subs idies, as required by Article 6.2 .95  The Panel stated that this 
measure would be within its terms of reference "to the extent that it is  adequately identified   in the 
[European Communities'] request for the establishment of the Panel".96  The Panel took the view that 
the European Communities' panel re quest should be read "as a whole"97, and noted that the text of the 
panel request "refers to the ETI Act in its entir ety, and to the original DSB recommendations and 
rulings and the DSB adoption of the 2002 Article 21 .5 panel and Appellate Body reports containing, 
                                                      
91United States Public Law 106-519, 114 Stat. 2423 (2000).   
92Panel Report, para. 7.87. 
93Ibid., para. 7.65.  See also para. 8.1.  
94United States' appellant's submission, para. 57;  United States' Notice of Appeal, WT/DS108/32 
(attached as Annex I to this Report), para. 2.  
95Panel Report, para. 7.72. 
96Ibid., para. 7.73. (original emphasis)  
97Ibid., para. 7.76. (footnote omitted)  WT/DS108/AB/RW2 
Page 20  
 
  inter alia , findings of inconsistency of [Section] 5 of the ETI Act."
98  The Panel further noted that the 
panel request identifies the "subject of the dispute"  as Section 101 of the American Jobs Creation Act 
of 2004 (the "Jobs Act"), which provision "repeals the ETI [tax] scheme, except those transactions 
falling within the ETI transition and grandfathe ring provisions expressly cited, and the FSC 
grandfathering provisions in [S]ection 5 of the ETI Act."99  The Panel stated: 
Thus, we reject the [United States'] argument that our terms of 
reference should be interpreted as excluding Section 5 of the ETI Act 
because this provision bears on the sc ope of effective repeal of the 
ETI Act:  [S]ection 101 does not repeal the FSC grandfathering provisions in [S]ection 5 of the ETI Act.
100  
 
54. The Panel observed, moreover, that "[o]n a holistic basis, the text of the [European 
Communities'] Panel request cites the ETI Act, in its entirety, as well as both the 2000 and 2002 
(Article 21.5) panel and Appella te Body reports, including recomme ndations and rulings adopted by 
the DSB" and that the panel request also refers to "a  failure  to withdraw prohibited subsidies and a 
 failure  to implement DSB recommendations and rulings from the original and first compliance 
proceedings."101  The Panel declared that if the " content  [of a specific measure] is adequately 
described in the Panel request, then the partic ular measure may be adequately identified."102  T h e  
Panel concluded on this basis that: 
... the textual references in th e [European Communities'] Panel 
request embrace the ETI provisions grandfathering the original FSC [tax] scheme, as well as Panel a nd Appellate Body findings of 
inconsistency of Article 5 of the ETI Act, as adopted by the DSB.  In 
our view, this clearly meets the requirements of Article 6.2 of the 
DSU .
 103 (original italics) 
 
55. After reaching this conclusion, the Panel assessed whether the United States "may be 
prejudiced by any apparent defects in the ... panel request".104  The Panel recognized that defects in a 
panel request cannot be "cured"105 in a subsequent submission, but noted that, nevertheless, a 
complainant's first written submission "may confir m the meaning of the words used in the panel 
                                                      
98Panel Report, para. 7.78.  
99Ibid., para. 7.80. 
100Ibid. 
101Ibid., para. 7.82. (original emphasis)  
102Ibid. (emphasis added) 
103Ibid.  
104Ibid., para. 7.83.  
105Ibid. (referring to Appellate Body Report, EC – Bananas III , para. 143).  WT/DS108/AB/RW2 
Page 21 
 
 
  request"106.  The Panel took the view that the European  Communities, in its first written submission, 
"clearly made the distinction" between the grandfathering of the FSC tax scheme and the 
grandfathering of the ETI subsidies by the ETI Ac t and the Jobs Act, and that this first written 
submission showed that the European Co mmunities "wishe[d] to challenge both".107  The Panel 
further noted that the original recommendations and rulings required withdrawal of the prohibited 
subsidies by 1 October 2000, and that "[t]he Unite d States was well aware of its obligations since at 
least that point in time."108  The Panel concluded that it did not believe that the United States had been 
prejudiced in its ability to defend itself.109 
56. On appeal, the United States argues that sec tion 2 of the European Communities' panel 
request defines, as the subject of the dispute, only "what [S]ection 101  contains "110, and that this 
Section does not address Section 5 of the ETI Act at all.  The fact that the European Communities' 
panel request refers "elsewhere" to the ETI Act in its entirety, as well as to the prior panel and 
Appellate Body reports adopted in this dispute, is not "particularly informative as to the scope of the 
matter before the Panel".111  Similarly, a mere reference to a "fa ilure to withdraw prohibited subsidies" 
does not indicate whether that alleged failure pe rtains to the FSC tax exemption, the ETI tax 
exclusion, or to both, because this dispute involves "two different measures"112 found to be prohibited 
subsidies.   
57. The United States further submits that the Panel erred in giving equal weight to "every word 
or every section of the panel request"113;  rather, the Panel should have assigned "more probative"114 
value to section 2 of the panel request entitled "The Subject of the Dispute".  Finally, the United 
States disagrees with the Panel's finding on the issue of prejudice;  it submits that, where, as here, a matter is not within a panel's terms of reference because the measure at issue (Section 5 of the ETI 
Act) is not included in the panel request, ther e is no need for a responding Member to show 
prejudice.
115 
                                                      
106Panel Report, para. 7.83 (referring to Appellate Body Reports, US – Carbon Steel , para. 127).  
107Ibid., para. 7.85.   
108Ibid., para. 7.86.  
109Ibid.  
110United States' appellant's submission, para. 50. (original emphasis) 
111Ibid., para. 51.  
112Ibid., para. 52. 
113Ibid., para. 54. 
114Ibid.   
115Ibid., para. 56. WT/DS108/AB/RW2 
Page 22  
 
  58. We begin our analysis with the text of Article 21.5 of the DSU, which provides, in its relevant 
part: 
Where there is disagreement as to th e existence or consistency with  
a covered agreement of measur es taken to comply with the 
recommendations and rulings such dispute shall be decided through 
recourse to  these dispute settlement procedures , including wherever 
possible resort to the original panel. (emphasis added) 
 
59. The Appellate Body has, to date, not been ca lled upon to determine the precise scope of the 
phrase "these dispute settlement procedures" in Arti cle 21.5 and how it relates to Article 6.2 of the 
DSU.
116  We do not consider it necessary, for purposes of  resolving the present dispute, to determine 
the precise scope of this phrase.  However, we are of the view that the phrase "these dispute settlement procedures" does encompass Article 6.2 of  the DSU, and that Article 6.2 is generally 
applicable to panel requests under Article 21.5.
117  At the same time, given that Article 21.5 deals with 
compliance proceedings, Article 6.2 needs to be inte rpreted in the light of Article 21.5.  In other 
words, the requirements of Article 6.2, as they apply to an original panel request, need to be adapted 
to a panel request under Article 21.5. 
60. We note that the purpose of Article 21.5 is to resolve a disagreement between the parties "as 
to the existence or consistency with a covered agreement of measures taken to comply with the 
recommendations and rulings" of the DSB.  Thus , an Article 21.5 panel may be called upon to 
examine either the "existence" of "measures ta ken to comply" with DSB recommendations and 
rulings, or, when such measures exist, the "cons istency" of those measures with the covered 
agreements, or a combination of both, in situa tions where the measures taken to comply, through 
omissions or otherwise, may achieve only partial compliance.   
61. It is important to note that the text of Ar ticle 21.5 expressly links the "measures taken to 
comply" with the recommendations and rulings of th e DSB.  Therefore, the "specific measures at 
issue" to be identified in Article 21.5 proceedi ngs are measures that have a bearing on compliance 
with the recommendations and rulings of the DSB.  Th is, in our view, indicates that the requirements 
of Article 6.2 of the DSU, as they apply to an Artic le 21.5 panel request, must be assessed in the light 
                                                      
116In  Mexico – Corn Syrup (Article 21.5 – US) , the Appellate Body made certain findings assuming, 
arguendo , that Article 6.2 applied in the context of Article 21.5 proceedings.  The Appellate Body did not make 
a finding whether Article 6.2  actually applied   in the context of Article 21.5 proceedings and, if so, to what 
extent. (See Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US) , paras. 52-53 and 67)  
117In response to questioning at the oral hearing, bo th participants explicitly agreed with the general 
applicability of Article 6.2 in Article 21.5 proceedings, although they had some differences on the specific 
details of the requirements of Article  6.2 in Article 21.5 proceedings.  WT/DS108/AB/RW2 
Page 23 
 
 
  of the recommendations and rulings of the DSB in th e original panel proceedings that dealt with the 
same dispute. 
62. Hence, in order to identify the "specific measures at issue" and to provide "a brief summary of 
the legal basis of the complaint" in a panel requ est under Article 21.5, the complaining party must 
identify, at a  minimum , the following elements in its panel request.  First, the complaining party must 
cite the recommendations and rulings that the DSB made in the original dispute as well as in any 
preceding Article 21.5 proceedings, which, according to the complaining party, have not yet been 
complied with.  Secondly, the complaining party mu st either identify, with sufficient detail, the 
measures allegedly taken to comply with t hose recommendations and rulings, as well as any 
omissions or deficiencies therein118, or state that  no  such measures have been taken by the 
implementing Member.  Thirdly, the complaining part y must provide a legal basis for its complaint, 
by specifying how the measures taken, or not taken,  fail to remove the WTO-inconsistencies found in 
the previous proceedings, or whether they have brought about new WTO-inconsistencies.  We note 
that this latter issue is not before us in this case.119   
63. The participants agree that the case before us is not one of a  complete absence   of a "measure 
taken to comply".  Indeed, the European Communi ties stated at the oral hearing that the present 
dispute concerned, in part, the existence of a me asure taken to comply, namely, with respect to 
Section 5 of the ETI Act, as well as, in part, the consistency of a measure taken to comply, namely, 
Section 101 of the Jobs Act.  Moreover, we note that the issue before us is not the failure to state a 
legal basis for the claims;  rather, the issue before us  is whether, with respect to Section 5 of the ETI 
Act, the European Communities adequately id entified the "specific measure at issue". 
64. Turning to the European Communities' panel re quest in this dispute, we note that the 
European Communities identified all the recommendati ons and rulings of the DSB in both the original 
and the first Article 21.5 proceedings.120 
                                                      
118Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada) , para. 67.  
119In this respect, we recall that the Appellate Body stated, in  EC – Bed Linen (Article 21.5 – India) , 
that the measure taken to comply may be inconsistent with WTO law "in ways different from" the original measure. (Appellate Body Report, EC – Bed Linen  (Article 21.5 – India) , para. 79)  See also Appellate Body 
Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 40. 
120The European Communities' panel request explicitly  refers to the DSB recommendations and rulings 
in the original and first Article 21.5 disputes in secti on 1 ("The History of the Dispute"), in section 2 ("The 
Subject of the Dispute"), and in section 3 ("Request for the Establishment of a Panel"). (Request for the 
Establishment of a Panel by the European Communities, WT /DS/108/29 (attached as Annex III to this Report)) WT/DS108/AB/RW2 
Page 24  
 
  65. With respect to the "specific measures at i ssue", we note that the European Communities 
explicitly referred to Section 101 of the J obs Act as a "measure taken to comply".
121  T h e  U n i t e d  
States does not contend that the European Communities has failed to identify adequately the Jobs Act, 
or Section 101(d) and (f) thereof, as a measure at issue.122  Rather, the contention of the United States 
is that the European Communities' panel request is  specifically and exclusively limited to Section 101 
of the Jobs Act and that it does not extend to Sec tion 5 of the ETI Act.  The question before us, 
therefore, is whether the European Communities'  panel request put the United States on sufficient 
notice that a challenge was being brought against th e continued operation of Section 5 of the ETI Act. 
66. In our view, the European Communities has satisfi ed this requirement be cause, in its panel 
request, the European Communities has explicitly referred to a " fail[ure by the United States] to 
withdraw its prohibited subsidies  as required by Article 4.7 of the SCM Agreement  [and the] fail[ure] 
to implement the DSB's recommendations and ru lings, as specified by the DSB on 20 March 2000 
and on 29 January 2002".123  This language clearly indicates that the European Communities was 
referring to the  entirety   of the prohibited subsidies found to exist in the original and first Article 21.5 
proceedings and covered by the DSB recommendations  and rulings, which included Section 5 of the 
ETI Act.  Given that the Jobs Act does not apply to the prohibited FSC subsidies—because the Jobs 
Act "neither repeals nor explicitly or implicitly aff ects the operation of [S]ection 5 of the ETI Act in 
any way"124, a fact that the United States does not contest—the European Communities' panel request 
is to be read as including the continued operation of Section 5 of the ETI Act.   
67. We recall, as the Panel has done, that the Appe llate Body has previously stated that, "in 
considering the sufficiency of a panel request, subm issions and statements made during the course of 
the panel proceedings, in particular the first wr itten submission of the complaining party, may be 
consulted in order to confirm the meaning of the words used in the panel request".125  We note that,  
in its first written submission to the Panel, th e European Communities drew a clear distinction 
between "the grandfathering clause for FSC subsid ies contained in [S]ection 5[] of the ETI Act"126 
                                                      
121In section 2 of the panel request ("The Subject of the Dispute"), the European Communities states:  
"Section 101 of the JOBS Act purports to  repeal the ETI Act (Section 101(a))". 
122The United States' appeal concerning the Panel's terms of reference is limited to Section 5 of the ETI 
Act.  Furthermore, the United States submits: "Section 2 [of the European Communities' panel request]  clearly 
identifies   as the subject of the dispute [S]ections 101(d) and (f) of the [Jobs Act]". (United States' appellant's 
submission, para. 48) (emphasis added) 
123Request for the Establishment of a Panel by the Eu ropean Communities, section 3. (emphasis added) 
124Panel Report, para. 7.68.  
125Appellate Body Report, US – Carbon Steel , para. 127.  
126European Communities' first written submission to the Panel, para. 58;  Panel Report, p. A-14.  WT/DS108/AB/RW2 
Page 25 
 
 
  and "the transitional and grandfathering clauses in the Jobs Act"127, and explicitly stated that it was 
challenging both of these elements.128  We also agree with the Pane l that the European Communities' 
panel request should be read as a whole and that the assessment of the panel request should not be 
confined to the content of its section 2 entitled "The Subject of the Dispute". 
68. In the light of the above considerations, we conclude that the European Communities' panel 
request does identify the continued operation of Sectio n 5 of the ETI Act sufficiently to put the United 
States on notice in this respect.129  At the same time, we consider that it would have been preferable, 
and would have better fulfilled th e requirements of Article 6.2 of the DSU, had the European 
Communities explicitly articulated its challenge to the continued operation of Section 5 of the ETI 
Act.  The European Communities could have referr ed explicitly to the continued grandfathering of 
FSC subsidies when it was explicitly challenging th e grandfathering of ETI subsidies under the Jobs 
Act.  Nevertheless, looking at the European Comm unities' panel request as a whole, and in the 
specific circumstances of the present Article 21.5 dis pute, we consider that the panel request of the 
European Communities satisfies the minimum requireme nts of Article 6.2, read in the light of 
Article 21.5 of the DSU.130 
69. We therefore  uphold  the Panel's finding, in paragraph 7.87 of the Panel Report, that 
Section 5 of the ETI Act, grandfathering prohibite d FSC subsidies, was within the Panel's terms of 
reference. 
 
V. Article 4.7 of the  SCM Agreement  and Article 21.5 of the DSU 
70. We now turn to the second issue raised on app eal by the United States.  The United States 
appeals the Panel's finding that the United States "c ontinues to fail to implement fully the operative 
DSB recommendations and rulings to withdraw the prohibited [FSC and ETI] subsidies and to bring 
                                                      
127European Communities' first written submission to the Panel, para. 59;  Panel Report, p. A-14.   
128We wish to caution—as did the Panel in this case—that a panel examining a complaining party's  
first written submission for purposes of confirming the mean ing of that party's panel request must bear in mind 
that a deficient panel request cannot be "cured" subsequently in the first submission. (Appellate Body Report, EC – Bananas III , para. 143 (referring to the requirement under Article 6.2 of the DSU to provide "a brief 
summary of the legal basis of the complaint")) 
129We also note that the European Communities argues that the responding party in compliance 
proceedings may be expected to be aware of the measures that were co vered by the DSB recommendations or 
rulings in the original or firs t Article 21.5 proceedings. (See also Panel Report, para. 7.86) 
130Given our view that the European Communities satis fied the minimum requirement of Article 6.2, 
read in the light of Article 21.5, we do not consider it necessary to address the issue whether the United States 
may have been prejudiced by the alleged lack of clarity in the European Communities' panel request.  In this 
respect, we note that the United States agreed, at the or al hearing, with the proposition that, once a measure is 
determined to properly fall within a panel's terms of refere nce, there is no need to de monstrate, in addition, the 
presence or absence of prejudice to the responding party.  WT/DS108/AB/RW2 
Page 26  
 
  its measures into conformity with its obliga tions under the relevant  covered agreements."
131  M o r e  
specifically, the United States challenges the Panel's findi ng that there was a failure on the part of the 
United States to withdraw the prohibited FSC  and ETI subsides under Article 4.7 of the SCM 
Agreement .132  
71. The United States' appeal that the Panel e rroneously found non-compliance with the DSB's 
recommendations under Article 4.7 of the  SCM Agreement  rests on two separate grounds.  With 
respect to the ETI subsidy, the United States argues that the Panel was in error "because there was no 
recommendation by the DSB under Article 4.7 with respect to the ETI tax exclusion."133  As to the 
FSC subsidy, the Panel was in error because it "incorr ectly found that [S]ection 5[] of the ... 'ETI Act' 
... was within the Panel's terms of reference" a nd "[t]his error, in turn, resulted in the Panel 
erroneously making findings on a measure that  was not within its terms of reference."134  The United 
States does not dispute that, with respect to the FSC subsidy, there was a DSB recommendation under 
Article 4.7 that it be withdrawn, which made in th e original and first Article  21.5 panel and Appellate 
Body proceedings. 
72. In Section II above, we have upheld  the finding of the Panel that Section 5 of the ETI Act was 
within the Panel's terms of reference.  We theref ore confine our analysis below to the United States' 
challenge with respect to the ETI subsidy, namely, that there was no recommendation of the DSB under Article 4.7 with respect to the ETI tax excl usion, and that a panel under Article 21.5 may not 
make a new recommendation pursuant to Article 4.7 of the  SCM Agreement . 
73. We note that the original panel recommended, pursuant to Article 4.7 of the  SCM Agreement , 
that the United States withdraw the pr ohibited FSC subsidies by 1 October 2000.
135  The first 
Article 21.5 panel concluded that the United States , through the ETI Act, had failed to bring itself 
fully into conformity with its WTO obligations by not implementing the recommendations of the DSB made under Article 4.7 of the  SCM Agreement  to withdraw completely the prohibited FSC 
subsidies.
136  The Appellate Body upheld the findings of  the original panel and recommended in the 
first Article 21.5 proceedings that the DSB request  the United States to bring its ETI measure into 
                                                      
131Panel Report, para. 7.65;  United States' Notice of Appeal, para. 1.   
132United States' Notice of Appeal, para. 1.   
133United States' appellant's submission, para. 3. 
134Ibid., para. 4. 
 135Original Panel Report, US – FSC , paras. 8.3 and 8.8.  At its meeting held on 12 October 2000, the 
DSB agreed to modify the time period so that it expired on 1 November 2000. (Panel Report, para. 1.1) 
 136Panel Report, US – FSC (Article 21.5 – EC) , para. 8.170.  WT/DS108/AB/RW2 
Page 27 
 
 
  conformity with its WTO obligations as well as "to implement fully the recommendations and rulings 
of the DSB in  US – FSC , made pursuant to Article 4.7 of the  SCM Agreement ."137   
74. In these second Article 21.5 panel proceedings , the European Communities claims that 
Sections 101(d) and 101(f) of the Jobs Act are inc onsistent with the WTO obligations of the United 
States because they continue to ma intain the prohibited ETI subsidies.138  In addition, the European 
Communities claims that the United States persists in failing to withdraw fully those prohibited FSC 
subsidies that are grandfathered through Section 5 of the ETI Act.139  The United States "does not ... 
contest the substantive argument s of the European Communities"140 with respect to the grandfathering 
and transition provisions related to the ETI and FSC subsidies.  Nor does it contest the Panel's finding 
that the transition and grandfathering provisions  relating to the ETI subsidy (as contained in 
Sections 101(d) and (f) of the Jobs Act) are inc onsistent with Articles 3. 1(a) and 3.2 of the  
SCM Agreement , Articles 3.3, 8, and 10.1 of the Agreement on Agriculture , and Article III:4 of the 
GATT 1994.141   
75. The Panel concluded that: 
... to the extent that the United St ates, by enacting Section 101 of the 
Jobs Act, maintains prohibited FSC  and ETI subsidies through these 
transitional and grandfathering measures, it continues to fail to implement fully the operative DSB recommendations and rulings to withdraw the prohibited subsidies and to bring its measures into 
conformity with its obligations  under the relevant covered 
agreements.
142   
 
The Panel further concluded that it would not make  a new recommendation under Article 4.7 "[s]ince 
the original DSB recommendations and rulings in  2000 remain operative through the results of the 
compliance proceedings in 2002".143 
                                                      
137Appellate Body Report, US – FSC  (Article 21.5 – EC) , para. 257.  
 138First, the "transition provision", which provides for a two-year continuation of a percentage of ETI 
benefits (80 per cent in 2005 and 60 per cent in 2006);  and secondly, the "grandfathering provision", which 
exempts certain transactions indefinitely from the repeal of the ETI tax scheme. 
139This grandfathering provision has not been repealed or modified by the Jobs Act. (Panel Report, 
para. 7.80) 
140Ibid., para. 7.11;  United States' appellant's submission, para. 41. 
141Panel Report, para. 7.60;  United States' response to questioning at the oral hearing. 
142Panel Report, paras. 7.65 and 8.1. 
143Ibid., para. 8.2.  See also paras. 7.40-7.41 and 7.44. WT/DS108/AB/RW2 
Page 28  
 
  76. The United States appeals these findings.  Acco rding to the United States, there is no 
recommendation of the DSB under Article 4.7 of the  SCM Agreement  resulting from the first 
Article 21.5 proceedings (in 2002) with  respect to the ETI tax exclusion.
144  The panel and the 
Appellate Body in the first Article 21.5 proceedi ngs made such a recommendation only with respect 
to Section 5 of the ETI Act.  The United States argues that the Panel erroneously transformed the 
original DSB recommendation under Article 4.7 to withdraw the FSC tax exemption into a general 
obligation to withdraw any future prohibited subsidies.  The United States does not dispute that it was 
under an obligation to withdraw fully the WTO-incons istent FSC subsidy;  however, this obligation, 
in the United States' view, does not stem from Article 4.7 of the  SCM Agreement , but, exclusively, 
from Article 3 of that Agreement.  Accordi ng to the United States, Article 4.7 of the SCM 
Agreement —like its generic counterpart, Article 19.1 of the DSU—does not impose obligations on 
Members.145  Finally, the United States argues that th e task of an Article 21.5 panel is not to 
determine whether a Member has "fixed the problem"146, but, rather, to determine whether measures 
taken to comply exist or not, and, when such measu res do exist, whether they comply with the rulings 
and recommendations of the DSB. 
77. The United States points out that, when th e original panel made its Article 4.7 
recommendation to withdraw the prohibited FSC subs idies by October 2000, the ETI Act was not in 
existence.  The Article 4.7 recommendation of th e original panel obviously did not relate to, and 
therefore could not include, the ETI Act.147  Subsequently, in 2002, although the first  
Article 21.5 panel found the ETI Act to provide prohibited subsidies, it did not make any Article 4.7 
recommendation with respect to the ETI subsidies.  Consequently, the recommendations adopted by 
the DSB did not include a recommendation pertaining to the withdrawal of the ETI subsidy under Article 4.7, and the United States was therefore unde r no obligation to withdraw the ETI tax exclusion 
by virtue of a recommendation under Article 4.7.   
78. The European Communities responds that a new recommendation under Article 4.7 was not 
necessary in the first Article 21.5 proceedings, because the main purpose of a recommendation under 
Article 4.7 is to define the time period within whic h the subsidy found to be in violation of Article 3 
of the  SCM Agreement   must be withdrawn.  The original recommendation under Article 4.7 
represents the "benchmark" against wh ich the measure taken to comply must be reviewed in order to 
assess whether that measure has brought about compliance.
148  As a result, even in the absence of a 
                                                      
144United States' appellant's submission, para. 3. 
145United States' statement at the oral hearing. 
146United States' appellant's submission, para. 26. 
147Ibid., paras. 10-11. 
148European Communities' appellee's submission, para. 46. WT/DS108/AB/RW2 
Page 29 
 
 
  new Article 4.7 recommendation pertaining specifically to the ETI tax scheme, the United States was 
obliged to withdraw the ETI tax scheme in its  entirety without delay.  If a new Article 4.7 
recommendation were necessary in every Article 21.5 proceeding, that would undermine the effective 
operation of the dispute settlement system, because  it would involve extending the time-limits for 
compliance through successive Article 21.5 proceed ings.  The European Communities also argues 
that the Panel did not invent an improper "fix ing the problem" standard, but, rather, correctly 
reviewed whether the violations of WTO law found in the original and first Article 21.5 proceedings 
had been eliminated.   
79. The European Communities also draws attention to  what it considers to be a contradiction in 
the arguments of the United States.  On the one hand, the United States argues that the first 
Article 21.5 panel did not make a r ecommendation under Article 4.7 of the  SCM Agreement  with 
respect to the ETI tax exclusion;  on the ot her hand, the United States argues that the second 
Article 21.5 Panel—the present Panel—was not entitled to make a new recommendation under 
Article 4.7 with respect to the ETI tax exclusion.149  Finally, the European Communities submits that 
the recommendation of the Appellate Body in the first Article 21.5 proceedings relating to the 
withdrawal of the FSC subsidy pursuant to Article 4.7 of the  SCM Agreement 150 implicitly covers 
also the withdrawal of the ETI subsidy under that provision.151 
80. The United States' appeal thus raises the question whether a recommendation under 
Article 4.7 made in the original proceedings re mains in effect until the implementing Member has 
fully complied with the DSB recommendations and ru lings in the original proceedings as well as 
subsequent Article 21.5 proceedings. 
81. We begin our analysis with the text of Article 4.7 of the  SCM Agreement , which provides: 
If the measure in question is found to be a prohibited subsidy, the 
panel shall recommend that the s ubsidizing Member withdraw the 
subsidy without delay.  In this re gard, the panel shall specify in its 
recommendation the time period within which the measure must be 
withdrawn.  
 
82. It is clear from the text of Article 4.7 that, when a panel finds a measure at issue to be a 
prohibited subsidy, the panel is re quired to make a recommendation with  two components:  (i) that the 
subsidy be withdrawn "without delay";  and (ii) that the time period within which the subsidy must be 
                                                      
149European Communities' appellee's submission, para. 56. 
150Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 257. 
151European Communities' appellee's submission, para. 53. WT/DS108/AB/RW2 
Page 30  
 
  withdrawn be specified by the Panel.  When such  a recommendation is adopted by the DSB, it must 
be, by virtue of Article 17.14 of the DSU, "uncond itionally accepted by the parties to the dispute", and 
it thus becomes effective and binding on the pa rties.  Pursuant to Article 4.10 of the  SCM Agreement , 
if compliance with an Article 4.7 recommendation is not achieved within the time period specified, 
the DSB may authorize the imposition of appropriate countermeasures upon the subsidizing Member.   
83. We are of the view that the obligation of the subsidizing Member to withdraw the prohibited 
subsidy "without delay", and within  the time period specified, emanates from a finding of a violation 
of Article 3 of the  SCM Agreement  and a consequent Article 4.7 recommendation once adopted by 
the DSB.  That recommendation under Article 4.7 remains in effect until the Member concerned has 
fulfilled its obligation by  fully  withdrawing the prohibited subsidy.
152  Where a Member withdraws a 
prohibited subsidy only in part, it has failed to comply  fully  with its WTO obligation and the Article 
4.7 recommendation continues to be in effect with resp ect to the part of the subsidy that has not been 
withdrawn.  Similarly, full  withdrawal   of a prohibited subsidy within the meaning of Article 4.7 of 
the  SCM Agreement   cannot be achieved by a "measure taken to comply" that replaces the original 
subsidy with yet another subsidy found to be prohibited.  In bot h instances, the Member cannot be 
said to have complied with the obligation to withdraw fully the prohibited subsidy.153 
84. As a result, if, in an Article 21.5 proceeding, a panel finds that the measure taken to comply 
with the Article 4.7 recommendation made in the original proceedings does not achieve  full  
withdrawal of the prohibited subsidy—either because  it leaves the entirety or part of the original 
prohibited subsidy in place, or because it replaces that  subsidy with another subsidy prohibited under 
the SCM Agreement —the implementing Member continues to be under the obligation to achieve full 
withdrawal of the subsidy.  The obligation to co mply with an Article 4.7 recommendation remains in 
effect, even if several proceedings under Article 21.5 become necessary, until the prohibited subsidy 
is fully withdrawn. 
                                                      
152As noted earlier, Article 17.14 of the DSU provides that Appellate Body reports, including panel 
findings upheld or modified by th e Appellate Body, are to be unconditi onally accepted by the parties to the 
dispute upon adoption by the DSB. 
153We recall that the Appellate Body has previously held that Article 21.5 proceedings involve not  any 
measure taken by a WTO Member, but rather "measures  taken to comply with the recommendations and 
rulings". (Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 36)  We also recall the 
findings of the Appellate Body and the criteria identif ied by the Appellate Body to determine when a measure 
has a "particularly close relationship to the declared 'measure taken to comply'". (Appellate Body Report, US – 
Softwood Lumber IV (Article 21.5 – Canada) , para. 77)  There are a number of dimensions that would have to 
be examined to determine whether a challenged subsidy falls within the scope of "measures taken to comply".  
We note that the issue of what constitutes "measures take n to comply" that can be examined in an Article 21.5 
proceeding is not before us in this appeal. WT/DS108/AB/RW2 
Page 31 
 
 
  85. These second Article 21.5 proceedings before us concern a situation where the measure taken 
to comply with the DSB recommendations from the original and first Article 21.5 proceedings—the 
Jobs Act—has in large part w ithdrawn the prohibited subsidies.154  However, to the extent that the 
Jobs Act, by virtue of its transition and grandf athering provisions, does not fully withdraw the ETI 
subsidies found in the previous pro ceedings to be prohibited under the  SCM Agreement , it was 
sufficient for the second Article 21.5 Panel to concl ude that the original Article 4.7 recommendation 
adopted by the DSB has not been complied with entirel y and remains in effect for the part that has not 
been implemented.   
86. Even if,  arguendo , an Article 21.5 panel made a new Article 4.7 recommendation to 
withdraw the prohibited subsidy "without delay", it would presumably also "specify ... the time period within which the measure must be withdrawn".  If th is were to result in an extension of the time 
period set for withdrawal of the subsidy found to be prohibited in th e original proceedings, 
compliance proceedings could have the effect of  extending implementation periods through new 
Article 4.7 recommendations in successive Article 21. 5 proceedings.  This could lead to a potentially 
"never-ending cycle"
155 of dispute settlement proceedings and i nordinate delays in  the implementation 
of recommendations and rulings of the DSB.   
87. We agree with the Panel that the relevant  recommendations adopted by the DSB in the 
original proceedings in 2000, and those in the first and these second Article 21.5 proceedings, form 
part of a continuum of events relating to comp liance with the recommendations and rulings of the 
DSB in the original proceedings.156  The purpose of the first compliance proceedings in 2002 was to 
determine whether the ETI Act, enacted by the Un ited States to comply with the recommendations 
and rulings of the DSB in the original proceedings, did, in fact, bring about compliance pertaining to 
the FSC subsidies.  However, the first Article 21. 5 panel and Appellate Body  reports adopted by the 
DSB in 2002, pertaining to the ETI subsidies, found that the United States had not fully withdrawn the 
FSC subsidies.157  In these second Article 21.5 proceedings, the Panel found that the Jobs Act has not 
fully withdrawn the prohibited FSC and ETI subsidi es.  This shows that the United States has not 
implemented the totality of the findings and recommendations adopted by the DSB, has not met its obligation to withdraw fully the prohibited subsidies, and continues to be under an obligation to do so.   
                                                     
 
154We note that Section 101(a) of th e Jobs Act repeals the ETI Act. 
155Panel Report, para. 7.46. 
156Ibid., para. 7.86;  Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US) , para. 121. 
157Panel Report, para. 7.52. WT/DS108/AB/RW2 
Page 32  
 
  88. We now turn to the issue of whether an Artic le 21.5 panel has the authority to make a new 
recommendation pursuant to Article 4.7 of the  SCM Agreement .  At the oral hearing, the United 
States confirmed that, upon further reflection, it withdrew its appeal concerning this issue.
158  T h e  
United States further stated that it based its appeal  on the other grounds it had advanced, namely, that 
there was no Article 4.7 recommendation of the DSB in  this case with respect to the ETI tax exclusion 
and that, therefore, the United States was under no obliga tion to withdraw it by vi rtue of Article 4.7 of 
the SCM Agreement .159   
89. In our view, whether the first Article 21.5 pa nel made or could make a new Article 4.7 
recommendation is not dispositive of the question whether the original Article 4.7 recommendation 
continues to be in effect un til full compliance is achieved.160  Like the Panel, we see "no material 
significance in the purported lack of an explicit 'new' ... recommendation under Article 4.7 of the  
SCM Agreement  in the first [Article 21.5] compliance proceeding."161   
90. Finally, we address the United States' claim that the Panel "mischaracterized[d]" its task 
under Article 21.5 by stating that it was to determine whether a Member has "fixed the problem".162  
The United States argues that the task of an Article 21.5 panel is not to determine whether a Member 
has "fixed the problem", but, rather, to determine whether measures taken to comply exist or not, and, 
when such measures do exist, whet her they do comply with the rulings and recommendations of the 
DSB.  According to the United States, by following a "fixing the problem" standard, the Panel 
"appears to have conferred on itself the authority to  ignore the precise text of Article 4.7 of the SCM 
Agreement and Article 21.5 [of the DSU], its terms of  reference and the particular claims advanced by 
the complaining party".163  The United States submits that Article 4.7 requires a panel to recommend 
withdrawal of the measure "foun d to be a prohibited subsidy"164, but does not go further and direct a 
panel to recommend that a WTO Member refrain fro m enacting any new provisions that may provide 
a prohibited subsidy. 
                                                      
158United States' appellant's submission, footnote 36 to para. 38.  The United States confirmed this in 
response to questioning at the oral hearing.  
159The United States does not dispute that it is under an obligation to withdraw fully the ETI subsidy by 
virtue of Articles 3.1(a) and 3.2 of the  SCM Agreement . 
160We note that the United States "does not contest that it was under an obligation [deriving from 
Article 3 of the SCM Agreement ] to remedy these inconsistencies with its WTO Agreement obligations", 
regardless of whether or not there is a specific Article 4.7 recommendation. (United States' appellant's 
submission, para. 41) 
161Panel Report, para. 7.55.  See also Panel Report, US – FSC  (Article 21.5 – EC) , para. 9.1(e));  and 
Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 257.  
162United States' appellant's submission, para. 26. 
163Ibid., para. 29.  
164Ibid.  WT/DS108/AB/RW2 
Page 33 
 
 
  91. The European Communities responds that the task of an Article 21.5 panel "can be more fully 
described as examining whether the previously foun d violations have been removed and whether in 
doing so the implementing Member has fully respect ed its WTO obligations (and has not introduced 
any new violations)."165  According to the Europ ean Communities, this is what the Panel meant by the 
term "fixing the problem ... both literally and logically".166 
92. The Panel noted: 
Article 21.5 compliance proceedings form part of a continuum of 
events flowing from the various steps in dispute settlement 
proceedings, with the operative recommendations and rulings for the purposes of Article 21.5 compliance proceedings being those adopted 
by the DSB in the original  proceedings.  These remain operative 
through compliance panel proceedings under Article 21.5 of the DSU  
until the "problem" is entirely "fixed"
, in terms of  full withdrawal of 
the prohibited subsidy.167 (original italics; underlining added;  
footnote omitted) 
 
93. In order to determine whether the Panel indeed  "mischaracterized" its task under Article 21.5, 
as alleged by the United States, we consider, firs t, the task of a panel under Article 21.5, and 
secondly, we review the Panel's findings in this r espect.  The task of an Article 21.5 panel is to 
determine whether "measures taken to comply" implement the "recommendations and rulings" 
adopted by the DSB in the original proceedings.168  In doing so, an Article 21.5 panel may examine 
either the "existence" of measures taken to comp ly with DSB recommendations and rulings, or, when 
such measures exist, the "consistency" of tho se measures with the covered agreements, or a 
combination of both in situations where the measu res taken to comply, through omissions or other 
deficiencies, may achieve only partial compliance.  As we noted earlier, the text of Article 21.5 
expressly links the "measures taken to comply" and the recommendations and rulings of the DSB.169  
The determination of whether "measures taken to  comply" challenged by the complaining party 
implement fully, or only in part, the DSB recomme ndations and rulings requires a panel to examine 
all of the previous DSB recommendations and rulin gs and the entire range of measures covered by 
them.170  Hence, in compliance proceedings, an Article  21.5 panel may have to examine whether the 
                                                      
165European Communities' appellee's submission, para. 29.  
166Ibid. 
167Panel Report, para. 7.36. 
168Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 40. 
169See supra , para. 61. 
170Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada) , para. 68. WT/DS108/AB/RW2 
Page 34  
 
  "measures taken to comply" implement fully, or  only partially, the recommendations and rulings 
adopted by the DSB.   
94. We now turn to examine how the Panel conducted its enquiry under Article 21.5 in this case.  
The Panel stated that Article 21.5 compliance proceedings "form part of a continuum of events flowing from the various steps in dispute settlement proceedings".
171  According to the Panel, the 
original recommendations and rulings of the DS B "remain operative through compliance panel 
proceedings under Article 21.5 of the DSU  until the 'problem' is entirely 'fixed'"172, that is, until the 
prohibited subsidy is fully withdrawn.  Subsequent ly, the Panel stated that it would examine whether 
the measures taken by the United States to comply with the recommendations and rulings are consistent with the relevant cove red agreements.  The Panel, first,  identified the "measures taken to 
comply" and the recommendations and rulings at i ssue;  secondly, it set out its view concerning 
Article 4.7 of the  SCM Agreement  and the recommendations made thereunder by the original panel;  
and, finally, it addressed the existence or consiste ncy of the identified "measures taken to comply".  
95. The Panel could have used language more preci se than "fixing the problem" in describing its 
task under Article 21.5.  On reading the Panel's anal ysis as a whole, we consider that the Panel did 
adequately describe its task and, more importantly , did not exceed its authority under Article 21.5.  
The Panel examined whether the United States had re moved fully the subsidies found in the original 
and first Article 21.5 proceedings to be prohib ited as required by the recommendations and rulings 
adopted by the DSB.   
96. For the reasons set out above, we  uphold  the Panel's finding, in paragraph 7.65 of the Panel 
Report, that "to the extent that the United States, by enacting Section 101 of the Jobs Act, maintains 
prohibited FSC and ETI subsidies through [the] tran sitional and grandfatheri ng measures, it continues 
to fail to implement fully the operative DSB recomm endations and rulings to withdraw the prohibited 
subsidies and to bring its measures into conformity  with its obligations u nder the relevant covered 
agreements."   
 
VI. European Communities' Conditional Appeals 
97. The European Communities makes two conditional appeals with respect to "certain claims 
that [the European Communities] made before the Panel and which the Panel did not consider 
                                                     
 
171Panel Report, para. 7.36. (footnote omitted) 
172Ibid. (original italics) WT/DS108/AB/RW2 
Page 35 
 
 
  necessary to decide".173  In the event that the Appellate Body  should reverse "any of the Panel's 
findings", the European Communities requests the Appellate Body to find that: 
[b]y not entirely withdrawing FSC and ETI subsidies, the United 
States has failed to comply with its obligations under Article 4.7 of 
the SCM Agreement ;  [and that] [b]y not entirely withdrawing FSC 
and ETI subsidies and maintaining the less favourable treatment of imported as compared to domestic  products, the United States has 
failed to comply with its obligati ons under Articles 19.1 and 21.1 of 
the  DSU .
174 (original italics) 
 
98. The European Communities confirmed at the or al hearing that these appeals are "conditional 
in nature" and that it is "only if the Appellate Body were to reverse in full or in part the Panel Report 
that it will need to consider these claims in order to complete the analysis and resolve the dispute."175 
99. Having upheld both of the Panel's findings that are under appeal by the United States, the 
condition on which the European Communities' conditi onal appeal is predicated does not arise, and 
there is no need for us to examine these conditional appeals. 
 
VII. Findings and Conclusions 
100. For the reasons set forth in this Report, the Appellate Body: 
(a) upholds  the Panel's finding, in paragraph 7.87 of the Panel Report, that 
Section 5(c)(1)(B) of the FSC Repeal and Extraterritorial Income Exclusion Act  
of 2000, grandfathering prohibited FSC subsidies, was within its terms of 
reference176;  and  
(b) upholds  the Panel's finding and conclusion, in paragraphs 7.65 a nd 8.1 of the Panel 
Report, that "to the extent that the United States, by enacting Section 101 of the 
American Jobs Creation Act of 2004, main tains prohibited FSC and ETI subsidies 
through [the] transitional and grandfathe ring measures, it continues to fail to 
implement fully the operative DSB recomme ndations and rulings to withdraw the 
prohibited subsidies and to bring its measur es into conformity with its obligations 
under the relevant covered agreements." 
                                                      
173European Communities' other appellant's submission, para. 3.  
174Ibid., para. 29. 
175Ibid., para. 4;  European Communities' response to questioning at the oral hearing.  
176Panel Report, para. 7.87. WT/DS108/AB/RW2 
Page 36  
 
   
Signed in the original in Geneva this 26th day of January 2006 by:  
 
    
_________________________ 
Georges Abi-Saab  
Presiding Member 
 
 
 
  
 _________________________ _________________________ 
 A.V. Ganesan Merit E. Janow 
 Member Member 
 
 
 WT/DS108/AB/RW2 
Page 37 
 
 
  ANNEX I  
 WORLD TRADE  
ORGANIZATION  WT/DS108/32 
16 November 2005 
 (05-5377) 
 Original:   English 
 
UNITED STATES – TAX TREATMENT FO R "FOREIGN SALES CORPORATIONS" 
 
Second Recourse to Article 21.5 of the DSU by the European Communities  
 
Notification of an Appeal by the United States  
under Article 16.4 and Article 17 of the Understanding on Rules  
and Procedures Governing the Settlement of Disputes (DSU),  
and under Rule 20(1) of the Working Procedures for Appellate Review  
 
 The following notification, dated 14 November 2005, from the Delegation of the United States, is being circulated to Members. 
_______________ 
  Pursuant to Article 16 of the Understanding on Rules and Procedures Governing the 
Settlement of Disputes ("DSU") and Rule 20 of the Working Procedures for Appellate Review , the 
United States hereby notifies its decision to appeal  to the Appellate Body certain issues of law 
covered in the Report of the Panel on United States – Tax Treatment for "Foreign Sales 
Corporations": Second Recourse to Article 21.5 of the DSU by the European Communities  
(WT/DS108/RW2) ("Panel Report") and certain legal in terpretations developed by the Panel in this 
dispute. 
 1. The United States seeks review of the Panel’s conclusion that the United States continues to 
fail to implement fully the operative DSB recomme ndations and rulings to withdraw the prohibited 
subsidies and to bring its measures into conformity  with its obligations u nder the relevant covered 
agreements.  This conclusion is in error and is based on errone ous findings on issues of law and 
related legal interpretations, including with respect to Articles 6.2 and 21.5 of the DSU and Article 4.7 
of the Agreement on Subsidies and Countervailing Measures  ("SCM Agreement").
1  These erroneous 
findings and related legal interpretations incl ude that there was a recommendation pursuant to 
Article 4.7 of the SCM Agreement with respect to the Extraterritorial Income Exclusion Act ("ETI 
Act") and that a panel established under Artic le 21.5 of the DSU may make a recommendation 
pursuant to Article 4.7 of the SCM Agreement. 
 2. The United States seeks review of the Panel’s legal conclusion that section 5 of the ETI Act is 
within the Panel’s terms of reference pur suant to Articles 6.2 and 7.1 of the DSU.
2  This conclusion is 
in error and is based on errone ous findings on issues of law a nd related legal interpretations. 
 
_______________ 
                                                      
1See, for example, Panel Report, paragraphs 7.39, 7.41 - 7.44, 7.51 - 7.58, 7.62 - 7.65. 
2See, for example, Panel Report, paragraphs 7.61, 7.68, 7.72 - 7.73, 7.76, 7.78 - 7.87. WT/DS108/AB/RW2 
Page 38  
 
  ANNEX II
 
 WORLD TRADE  
ORGANIZATION  WT/DS108/33 
30 November 2005 
 (05-5652) 
 Original:   English 
 
UNITED STATES – TAX TREATMENT FO R "FOREIGN SALES CORPORATIONS" 
 
Second Recourse to Article 21.5 of the DSU by the European Communities  
 
Notification of an Other Appeal by the European Communities  
under Article 16.4 and Article 17 of the Understanding on Rules  
and Procedures Governing the Settlement of Disputes (DSU),  
and under Rule 23(1) of the Working Procedures for Appellate Review  
 
 The following notification, dated 28 November 2005, from the Delegation of the European Commission, is being circulated to Members. 
_______________ 
 1.  Pursuant to Article 16.4 and Article 17 of the DSU and to Rule 23.1 of the Working 
Procedures for Appellate Review, the European Co mmunities submits its Notice of Other Appeal on 
certain issues of law in the Report of the Panel on United States – Tax Treatment for “Foreign Sales 
Corporations”: Second recourse to Article 21. 5 of the DSU by the European Communities
1 and 
certain legal interpretations  developed by the Panel. 
 
2.  The European Communities agrees with th e Panel’s findings of c ontinued violation and 
inconsistency and its conclusion that there is a c ontinuing failure to implement DSB recommendations 
and rulings, as well as with the Panel’s rejection of the US procedural defences.  However, if the 
Appellate Body were to uphold any of the US cl aims on appeal, the European Communities considers 
that it would become necessary for the Appellate Body  to consider certain other issues in order to 
resolve this dispute.  For this reason, the Eur opean Communities requests the Appellate Body, in the 
event that it should reverse any of the Panel’ s findings, to consider the following claims: 
 
(a) By not entirely withdrawing FSC and ETI subsidies, the United States has failed to 
comply with its obligations under Article 4.7 of the SCM Agreement ;2 
 
(b) By not entirely withdrawing FSC a nd ETI subsidies and maintaining the less 
favourable treatment of imported as compared  to domestic products, the United States 
has failed to comply with its obligations under Articles 19.1 and 21.1 of the DSU .3 
 
3.  Furthermore, for the case the Appellate B ody considered that the Panel was in error in 
concluding that no new recommenda tions under Article 4.7 of the SCM Agreement  or Article 19.1 of 
the DSU are needed,4 the European Communities respectfully requests the Appellate Body to correct 
the error and issue the necessary recommendations.   
                                                      
1 WT/DS108/RW2, circulated on 30 September 2005. 
2 Which the Panel did not address in its Report (see WT/DS108/29, 14 January 2005). 
3 On which the Panel exercised judicial ec onomy (see e.g. Panel Report, footnote 84). 
4 See e.g. Panel Report, paras. 7.37-7.46, 7.49, 7.52-7.58, 8.2. WT/DS108/AB/RW2 
Page 39 
 
 
  4.  The European Communities considers that if the Appellate Body were to find that the Panel 
had erred, this would mean that the Panel ha d not conducted its assessment of the matter in 
accordance with Article 11 of the DSU and had not contributed to an effective resolution of the 
dispute within the meaning of Article 3 of the DSU.  
 
_______________ WT/DS108/AB/RW2 
Page 40  
 
  ANNEX III
 
 WORLD TRADE  
ORGANIZATION  WT/DS108/29 
14 January 2005 
 
 (05-0183) 
 Original:   English 
 
UNITED STATES – TAX TREATMENT FO R "FOREIGN SALES CORPORATIONS" 
 
Second Recourse to Article 21.5 of the DSU by the European Communities  
 
Request for the Establishment of a Panel  
 
 The following communication, dated 13 January  2005, from the delegation of the European 
Communities to the Chairperson of the Dispute Settlem ent Body, is circulated pursuant to Article 21.5 
of the DSU. 
_______________ 
 
1. THE HISTORY OF THE DISPUTE 
 
 On 8 October 1999, the Panel in this dispute found that the United States of America's 
"Foreign Sales Corporations" scheme violated Artic le 3.1(a) of the Agreement on Subsidies and 
Countervailing Measures (the " SCM Agreement ") and Article 3.3 of the Agreement on Agriculture 
[WT/DS108/R].  On 24 February 2000  the Appellate Body confirmed the findings of the Panel with 
respect to the violations of the SCM Agreement  and modified the findings concerning the Agreement 
on Agriculture, concluding that the Foreign Sales Co rporations scheme violated Articles 10.1 and 8 of 
the Agreement on Agriculture [W T/DS108/AB].  On 20 March 2000, the Dispute Settlement Body 
(the "DSB") adopted the Appellate Body report an d the report of the Panel, as modified by the 
Appellate Body.  The resulting DSB recommendations  and rulings include the recommendation that 
the United States bring its measures found to be inconsistent with the SCM Agreement  and the 
Agreement on Agriculture into conformity with th e provisions of those agreements, and that the 
United States withdraw its export subsidies at  the latest with effect from 1 October 2000. 
 
 On 12 October 2000, at a special session, the DSB agreed to the United States' request to 
allow it a time period expiring on 1 November 2000 to implement the DSB recommendations and 
rulings.  
 On 15 November 2000, the President of the Un ited States signed into law the FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000, US Public law No 106-519 (the "ETI Act").  
  On 20 December 2000, the matter was referred back to the Panel under Article 21.5 of the 
DSU and on 29 January 2002 the DSB adopted th e Panel [WT/DS108/RW] and Appellate Body 
[WT/DS108/AB/RW] reports declaring that the ETI Act violates Articles 3.1(a), 3.2 and 4.7 of the 
SCM Agreement,  Articles 8, 10.1 and 3.3 of the Agreemen t on Agriculture and Article III:4 of the 
General Agreement on Tariffs and Trade 1994 (the " GATT 1994"), so that the US had failed to fully 
withdraw its prohibited subsidy scheme and failed to implement DS B recommendations and rulings in 
this dispute.  
 On 22 October 2004, the United States enacted the "the American JOBS Creation Act of 
2004" (the "JOBS Act").  In purported implementation of the above DSB recommendations and rulings WT/DS108/AB/RW2 
Page 41 
 
 
  in case WT/DS108, the JOBS Act fails to properly implement them and is inconsistent with the same 
provisions of the WTO Agreement  as its predecessor legislation.  
 
2. THE SUBJECT OF THE DISPUTE 
  Section 101 of the JOBS Act purports to repeal  the ETI Act (Section 101 (a)).  However, at 
the same time, it effectively maintains part of the ETI Act tax exemptions for a transitional period up 
to the end of 2006 (Section 101 (d)).  Furthermore, the repeal of the ETI Act does not apply to certain contracts, without any time limits (Section 101(f)).  
 In the light of the above, the European Communities considers that Section 101 of the JOBS 
Act contains provisions which will a llow US exporters to continue be nefiting from the tax exemptions 
already found to be WTO incompatible (a) in the years 2005 and 2006 with respect to all transactions, 
and (b) for an indefinite period with respect to certa in contracts.  Thus, the United States has failed to 
implement the DSB's recommendations and rulings by failing to withdraw without delay schemes 
found to be prohibited subsidies under the SCM Agreement  and to bring its legislation into conformity 
with its obligations under the SCM Agreement , the Agreement on Agriculture and the GATT 1994.  
 
3. REQUEST FOR THE ESTABLISHMENT OF A PANEL 
 
 On 5 November 2004, the European Communiti es requested consultations with the United 
States of America with a view to reaching a mutually  satisfactory solution of the matter.  The request 
was circulated in document WT/DS/108/27 dated 10  November 2004.  Consultations were held on 
11 January 2005 in Geneva.  They  have allowed a better understandi ng of the respective positions but 
have not led to a satisfactory resolution of the matter.    
 Therefore, there continues to be "a disagreem ent as to the existence or consistency with a 
covered agreement of measures taken to comply w ith the recommendations and rulings" of the DSB 
between the United States and the European Commun ities, within the meaning of Article 21.5 of the 
DSU.       Accordingly, pursuant to Articles 6 and 21.5 of the DSU, Article 4 of the SCM Agreement , 
Article 19 of the Agreement on Agriculture a nd Article XXIII of the GATT 1994, the European 
Communities hereby requests the establishment of a Pa nel.  In particular, the European Communities 
respectfully requests the Panel to find the following:   – that the United States has failed to wit hdraw its prohibited subsidies as required by 
Article 4.7 of the SCM Agreement , has failed to bring its scheme into conformity with 
its WTO obligations and has thus failed to implement the DSB's recommendations 
and rulings, as specified by the DSB on 20 March 2000 and on 29 January 2002, as required by Articles 19.1 and 21.1 of the DSU .   
  – that the United States continues to violate Articles 3.1(a) and 3.2 of the SCM 
Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on Agriculture  and Article III:4 
of the GATT 1994. 
  In accordance with Article 21.5 of the DSU, the European Communiti es requests that this 
matter be referred to the original Panel.  It furthe r requests that the Panel examines the matter above in 
accordance with the standard terms of refe rence set out in Article 7 of the DSU. 
  The European Communities asks that this request  be placed on the agenda for the meeting of 
the Dispute Settlement Body to be held on 25 January 2005.  
__________