WT/DS108/RW2 
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ANNEX A 
  
FIRST SUBMISSIONS OF THE PARTIES 
  
Contents Page 
Annex A-1 First Written Submission of the European Communities A-2 
Annex A-2 First Written Submission of the United States A-18 
 WT/DS108/RW2 
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ANNEX A-1 
  
FIRST WRITTEN SUBMISSION OF THE  
EUROPEAN COMMUNITIES 
 
(19 May 2005) 
 
 
TABLE OF CONTENTS 
Page   
I. INTRODUCTION ...............................................................................................................A -3 
 
II. BACKGROUND ................................................................................................................. .A-3 
 III. THE FINDINGS IN THE ORIGINAL  ARTICLE 21.5 PROCEEDING.......................A-6 
 
A. THE PANEL'S FINDINGS ...................................................................................................A-6 
 B. THE APPELLATE BODY'S FINDINGS .............................................................................A-8  
IV. SUMMARY OF PROCEDURE LEADING TO THE PRESENT  
 ARTICLE 21.5 PROCEEDING .........................................................................................A-9 
 
V. THE JOBS ACT................................................................................................................ .A-10 
 
A. SUMMARY OF THE JOBS ACT.......................................................................................A-10 
 1. The limited scope of the repeal (section 101(a)-(b) of the Jobs Act)..............................A-10  2. What the Jobs does not repeal immediately, or does not repeal at all ..........................A-10  
B. TABLE COMPARING THE TRANSITIONAL AND "GRANDFATHERING"   CLAUSES OF THE ETI AND JOBS ACT.........................................................................A-11 
 C. THE TRANSITI ONAL PERIOD ........................................................................................A-12 
 D. THE "GRANDFATHERING CLAUSE" ............................................................................A-13  VI. LEGAL ARGUMENT.......................................................................................................A-13  
A. INTRODUCTION ...............................................................................................................A -13 
 B. THE UNITED STATES CONTINUES TO VIOLATE ARTICLE 4.7  
 OF THE SCM AGREEMENT  AND ARTICLES 19.1 AND 21.1 OF THE DSU ...............A-14 
 C. 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.............A-15 
 VII. CONC LUSION ................................................................................................................ ..A-15  WT/DS108/RW2 
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I. INTRODUCTION 
 
1. It is with regret that the European Comm unities returns for a second time to the Panel to seek 
resolution of a disagreement as to the existence or  conformity with the covered agreements of 
measures taken by the United States purportedly to comply with the previously adopted 
recommendations of the WTO Dispute Settlement Body (the "DSB") in this case. 
 2. However, the European Communities consid ers that compliance with DSB recommendations 
should not only be prompt, as re quired by Article 21.1 of the Understanding on rules and procedures 
governing the settlement of disputes  (the "DSU") and Article 4.7 of the Agreement on Subsidies and 
Countervailing Measures ( the " SCM Agreement "), but should also be comple te and consistent with 
the implementing Members’ WTO obligations.  As  the European Communities will explain below, 
the actions of the United States in this  case meet none of these requirements.  
 3. The European Communities will first set out th e background to this dispute and the previous 
Article 21.5 proceedings (Sections II and III below).  It will then set out the origins of this second 
Article 21.5 proceeding and describe the purported new US implementing measure, The American 
Jobs Creation Act of 2004  (the "Jobs Act")
1 (Sections IV and V below).  Thereafter it will set out its 
legal arguments (Section VI) a nd conclude (Section VII).  
 
II. BACKGROUND 
 4. In the original  proceeding in this dispute the Panel concluded that the FSC scheme, consisting 
of sections 921-927 of the United States Internal Revenue Code (the "IRC" ) and related measures 
establishing special tax treatment for Foreign Sa les Corporations, was inconsistent with the 
obligations of the United States under Article 3.1( a) of the SCM Agreement and under Articles 3.3 
and 8 of the Agreement on Agriculture .
2   
 5. The Appellate Body upheld the Panel's finding  that the FSC measure was inconsistent with 
the obligations of the United States under the SCM Agreement and modified the Panel's findings 
under the Agreement on Agriculture  by finding a violation of Articles 10.1 and 8 instead. 
 
6. On 20 March 2000, the DSB adopted the reports  of the 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 su bsidies found to be pr ohibited export subsidies 
within the meaning of the SCM Agreement be withdrawn without delay, namely, "at the latest with 
effect from 1 October 2000".
3  At its meeting on 12 October 2000, the DSB acceded to a request made 
by the United States to fix a new time-period for complying with the DSB recommendations and 
rulings in this dispute so as to expire on 1 November 2000.4   
 7. On 15 November 2000, the United States promulgated the FSC Repeal and Extraterritorial 
Income Exclusion Act of 2000  (the "ETI Act").
5  A detailed description of the ETI Act was contained 
in paragraphs 2.2 to 2.8 of the Re port of the Panel in the first Article 21.5 proceedings brought by the 
                                                      
1 H.R. 4520, 118 Stat. 1418, Public Law 108–357— 22 October 2004 (excerpts in Exhibit EC-1 , full 
text available at http://frwebgate.access.gpo. gov/cgi-bin/getd oc.cgi?dbname=1 08_cong_public_laws 
&docid=f:publ357.108.pdf ). 
2 Panel Report, United States – Foreign Sales Corporations, WT/DS108/R, adopted 20 March 2000 
(“original Panel Report”), as modified by the Appellate Body Report, WT/DS108/AB/R, adopted 
20 March 2000, DSR 2000:III, 1619 (“original Appellate Body Report”). 
3 Ibid., para. 8.8. 
4 WT/DSB/M/90, paras. 6-7.  See also original Panel Report, para. 1.3. 
5 Original Appellate Body Report, paras. 16-18.  Th e text of the ETI Act, attached to the First written 
submission of the European Communities in the original  Article 21.5 proceeding, is submitted again for the 
convenience of the Panel as Exhibit EC-2 . WT/DS108/RW2 
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European Communities.
6  However, it is useful to recall th e fundamental aspects and key provisions 
of the ETI Act.  8. The ETI Act consisted of five sections of wh ich elements of sections 2 and 5 were relevant 
for FSCs.  Section 3, entitled "Treatment of Extr aterritorial Income", amended the IRC by inserting 
into it a new section 114, as well as a new Subpart E,  which was in turn composed of new sections 
941, 942 and 943.
7 
 9. The ETI Act was promulgated by the Unite d States in purported compliance with the 
recommendations and rulings of the DSB of 20 March 2000.  Thus, section 2 of the ETI Act repealed 
the provisions of the IRC relating to FSCs.
8  Section 5(b) prohibited foreign corporations from 
electing to be treated as FSCs after 30 September 2000 and provided for the termination of inactive 
FSCs.    10. Nevertheless, section 5(c) created a "trans ition period" and a "grandfathering clause" for 
certain transactions of existing FSCs.  More speci fically, under section 5(c)(1) of the ETI Act, it was 
explicitly stipulated that the repeal of the provisi ons of the IRC relating to FSCs "shall not apply" to 
transactions of existing FSCs which occur before 1 January 2002 or to any other transactions of such 
FSCs which occur after 31 December 2001, pursuant to a binding contract between the FSCs and an unrelated person which is in effect on 30 September 2000.   
11. These provisions were challenged by the European Communities on the ground that the 
United States had not fully  withdrawn the FSC subsidies, in a ccordance with Article 4.7 of the 
SCM Agreement . 
 12. Furthermore, sections 114, 941, 942 and 943 of the IRC were inserted into the IRC by virtue 
of section 3 of the ETI Act, and created new ru les under which certain income was excluded from 
United States taxation.    13. The tax treatment provided by the ETI schem e was available to United States' citizens and 
residents, including natural persons, corporations and partnerships.  In addition, the provisions of the 
ETI measure also applied to foreign corporations which elected to be treated, for tax purposes, as 
United States corporations.
9  The ETI measure permitted all these taxpayers to elect to have qualifying 
income taxed in accordance with the provisions of that measure. This election could be made by 
taxpayers on a transaction-by-transaction basis.    14. Generally, income from specific transactions  would qualify for treatment in accordance with 
the provisions of the ETI measure if it was income attributable to gross receipts:  (i) from specific 
types of transaction;  (ii) involving "qualifying foreign trade property" ("QFTP");  and (iii) if the "foreign economic process requirement" was fulf illed with respect to each such transaction.
10   
 15. As regards the first of these conditions, the ru les contained in the ETI measure applied, in 
particular, to income arising from sale, lease or rent al transactions.  The ETI measure also applied to 
                                                     
 
6 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 the Appellate Body Report, WT/DS108/AB/RW, DSR 2002:I, 119 (“Article 21.5 Panel Report”). 
7 The remaining provisions of the ETI Act consist of  section 1 containing the short title of the ETI Act 
and section 4 which sets forth a number of "technical and conforming" amendments. 
8 Subpart C of part III of Subchapter N of chapter 1, consisting of sections 921-927 of the IRC. 
9 Section 3 of the ETI Act, section 943(e) of the IRC. 
10 Under the ETI Act, the need to satisfy these three conditions is subject to a number of exceptions.  
We examine certain of these exceptions be low, to the extent that they are per tinent to our analysis of the issues 
on appeal.  WT/DS108/RW2 
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income earned from the performance of services "relat ed or subsidiary to" qualifying sales or lease 
transactions, as well as to income earned from the performance of certain other services.11 
 16. The second condition is that these transactions  involve QFTP.  Section 943(a)(1) of the IRC 
defined QFTP as property:  (A) manufactured, produ ced, grown or extracted within or outside the 
United States;  (B) held primarily for sale, lease or rental, in the ordinary course of business, for direct 
use, consumption, or disposition outside the United States;  and (C) not more than 50 per cent of the fair market value of which is attributable to:  (i) articles manufactured, produced, grown, or extracted 
outside the United States;  and (ii) direct costs for labour performed outside the United States.
12 
 
17. The third condition is that the "foreign econom ic process requirement" must be fulfilled with 
respect to each individual transaction.13  This requirement is fulfilled if the taxpayer (or any person 
acting under contract with the taxpayer) participat ed outside the United States in the solicitation, 
negotiation, or making of the contract relating to th e transaction.  Furthermore, a specified portion of 
the "direct costs" of the transaction must be attributable to activities performed outside the 
United States.14 
 18. Section 942(a) of the IRC designated as "forei gn trading gross receipts" the receipts generated 
in transactions satisfying all three of these conditions.  Under section 114(e) of the IRC, 
"extraterritorial income" was the gross income attribut able to foreign trading gross receipts and, under 
section 941(b) of the IRC, "foreign trade income" w as the taxable income attributable to foreign 
trading gross receipts. 
 19. Section 114(a) of the IRC provided that a taxpayer's gross income "does not include extraterritorial income".  Section 114(b) of the IRC a dded that this exclusion of extraterritorial income 
from gross income "shall not apply" to that portion of extraterritorial income which is not "qualifying 
foreign trade income" ("QFTI").  Accordingly, the  only   portion of extraterritorial income which was 
excluded from gross income – and, thereby, from United States taxation – was QFTI.  20. QFTI was an amount which, if excluded from the taxpayer's gross income, would result in a 
reduction of the taxable income of the taxpayer from the qualifying transaction.  Pursuant to 
section 941(a)(1) and (2) of the IRC, QFTI would be  calculated as the greatest of, or the taxpayer's 
choice of, the following three options:  (i) 30 per cent of the foreign sale and leasing income derived 
by the taxpayer from such transaction;
15 (ii) 1.2 per cent of the forei gn trading gross receipts derived 
                                                      
11 The detailed rules of the ETI measure provide th at foreign trading gross receipts may be earned 
through (i) any sale, exchange, or other disposition of quali fying foreign trade property;  (ii) any lease or rental 
of qualifying foreign trade property;  (iii) any services wh ich are related and subsidiary to (i) and (ii);  (iv) for 
engineering or architectural services  for construction projects located (or proposed for location) outside the 
United States;  and (v) for the performance of managerial services for a person other than a related person in 
furtherance of activities under (i), (ii) or (iii). (section 3 of the ETI Act, section 942(a ) of the IRC)  We will 
generally refer to sale and lease transactions as a shortha nd reference to the transactions described in (i) and (ii) 
of this footnote. 
12 Section 3 of the ETI Act, section 943(a)(1) of the IRC.  Section 943(a)(3) and (4) of the IRC set forth 
specific exclusions from this general definition. 
13 Section 3 of the ETI Act, section 942(b) of the IRC. 
14 The relevant activities are:  (i) advertising and sale s promotion;  (ii) proces sing of customer orders 
and arranging for delivery;  (iii) tr ansportation outside the United States in connection with delivery to the 
customer;  (iv) determination and transmittal of final invoi ce or statement of account or  the receipt of payment;  
and (v) assumption of credit risk.  A taxpayer will be tr eated as having satisfied the foreign economic process 
requirement when at least 50 per cent of the total costs at tributable to such activities is attributable to activities 
performed outside the United States, or, for at least two of these five categories of activity, when at least 85 
per cent of the total costs attributable to such category of activity is attributable to activities performed outside 
the United States (section 3 of the ETI Act, section 942(b)(2)(A)(ii), (b)(2)(B) and (b)(3) of the IRC). 
15 Foreign sales and leasing income is defined in section 941(c)(1) of the IRC. WT/DS108/RW2 
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by the taxpayer from the transaction;
16 or (iii) 15 per cent of the foreign trade income derived by the 
taxpayer from the transaction.17 
 21. The European Communities did not consider that the ETI Act complied with the original 
recommendations and rulings of the DSB.  Specifically, it considered (a) that the United States 
continued to violate Article 3.1(a), item (e) of Annex I, Article 3.1(b) and Article 3.2 of the 
SCM Agreement , as well as Articles 3, 8 and 10.1 of the Agreement on Agriculture ;  and (b) that the 
ETI was contrary to Article III:4 of the General Agreement on Tariffs and Trade 1994  
(the "GATT 1994").
18  
 
22. On 20 December 2000, in accordance with Ar ticle 21.5 of the DSU, the DSB referred the 
matter to the original Panel.19  The Panel report was circulated to the Members of the 
World Trade Organization (the "WTO") on 20 August 2001.  As recalle d in more detail in 
Section III.A below, the Panel found the ETI Act to be  inconsistent with Articles 3.1(a), 3.2 of the 
SCM Agreement , 10.1 and 8 of the Agreement on Agriculture  and III:4 of the GATT 1994.  It further 
found that contrary to Article 4.7 of the SCM Agreement , the US had failed to fully withdraw its 
prohibited subsidy.  To the extent the Unite d States had acted inconsistently with the SCM Agreement , 
the Agreement on Agriculture and the GATT 1994, the United States had nullified or impaired 
benefits accruing to the European Communities under those agreements.20 
 23. Following this, on 15 October 2001 the United St ates notified the DSB of its intention to 
appeal certain issues of law covered in the Panel Report and legal interpreta tions developed by the 
Panel.
21  The Appellate Body fully upheld, with modi fied reasoning, the Panel’s findings concerning 
the FSC and ETI subsidy schemes.    24. On 29 January 2002 the DSB adopted the Pane l Report, as modified by the Appellate Body 
report, declaring that the ETI Act violated Artic les 3.1(a), 3.2 and 4.7 of the SCM Agreement, 
Articles 8, 10.1 and 3.3 of the Agreement on Agricu lture and Article III:4 of the General Agreement 
on Tariffs and Trade 1994 (the "GATT 1994"), so that the United States had failed to fully withdraw its prohibited subsidy scheme and failed to impl ement DSB recommendations and rulings in this 
dispute.  
25. On 11 October 2004 the US Senate passed th e Jobs Act, completing the Congress approval 
procedure.  On 22 October 2004 the Act was eventu ally signed into law by the President of the 
United States and enacted as "The American Jobs Creation Act of 2004".  The Jobs Act entered into 
force on 1 January 2005.   III. THE FINDINGS IN THE ORIGINAL ARTICLE 21.5 PROCEEDING  
A. THE PANEL’S FINDINGS 
 26. The Panel circulated its report in the orig inal proceeding under Article 21.5 of the DSU on 
20 August 2001.  It found that the ETI Act violates a number of provisions of the WTO Agreement  
and came to the following conclusions:  
 
(a) the Act is inconsistent with Article 3.1(a) of the SCM Agreement  as it involves 
subsidies "contingent… upon export performance" within the meaning of 
                                                     
 
16 Foreign trading gross receipts are de fined in section 942(a) of the IRC. 
17 Foreign trade income is defined in section 941(b) of the IRC. 
18 WT/DS108/16, 8 December 2000. 
19 WT/DS108/19, 5 January 2001. 
20 WT/DS108/RW, para. 9.2. 
21 WT/DS108/21, 15 October 2001.  WT/DS108/RW2 
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Article 3.1(a) of the SCM Agreement  by reason of the requirement of "use outside the 
United States" and fails to fall within the scope of the fifth sentence of footnote 59 of the SCM Agreement  because it is not a measure to avoid the double taxation of 
foreign-source income within the meaning of footnote 59 of the SCM Agreement ;  
(b) the United States has acted inconsistently w ith its obligation under Article 3.2 of the 
SCM Agreement  not to maintain subsidies referred to in paragraph 1 of Article 3 of 
the SCM Agreement ; 
(c) the Act , by reason of the requirement of "use outside the United States", involves 
export subsidies as defined in Article 1(e) of the Agreement on Agriculture  for the 
purposes of Article 10.1 of the Agreement on Agriculture  and the United States has 
acted inconsistently with its ob ligations under Article 10.1 of the Agreement on 
Agriculture  by applying the export subsidies, with respect to both scheduled and 
unscheduled agricultural products, in a manne r that, at the very least, threatens to 
circumvent its export subsidy commi tments under Article 3.3 of the Agreement on 
Agriculture  and, by acting inconsistently with  Article 10.1, the United States has 
acted inconsistently with its obl igation under Article 8 of the Agreement on 
Agriculture ; 
(d) the Act is inconsistent with Article III:4 of the GATT 1994  by reason of the foreign 
articles/labour limitation as it accords less fa vourable treatment within the meaning of 
that provision to imported products than to like products of US origin;  and 
(e) the United States has not fully withdrawn the FSC subsidies found to be prohibited 
export subsidies inconsistent with Article 3.1(a) of the SCM Agreement  and has 
therefore failed to implement the reco mmendations and rulings of the DSB made 
pursuant to Article 4.7 SCM Agreement . 
9.2 Since Article 3.8 of the DSU  provides that "[i]n cases where there is an 
infringement of the obligations assumed unde r a covered agreement, the action is 
considered prima facie to constitute a case of nullification or impairment", we 
conclude that to the extent the United States has acted inconsistently with the 
SCM Agreement , the Agreement on Agriculture  and the GATT 1994  it has nullified or 
impaired the benefits accruing to the Eur opean Communities under those agreements.  
 27. Specifically with respect to the transitiona l and "grandfathering" provisions, which were the 
subject of the claim relating to Article 4.7 of the SCM Agreement , the Panel stated: 
 
8.167 We recall that the Act provides that  "amendments made by this Act shall 
apply to transactions after 30 September 2000"
283, and that no new FSCs may be 
created after 30 September 2000.284 However, in the case of a FSC in existence on 
30 September 2000, the amendments made by the Act shall not apply to any 
transaction in the ordinary course of trade or business involving a FSC which occurs:  (A) before 1 January 2002;  or (B) after 31 December 2001, pursuant to a binding contract between the FSC (or any related pe rson) and any unrelated person that is in 
effect on 30 September 2000.
285 
8.168 Thus, for FSCs in existence as of  30 September 2000, the FSC subsidies 
continue in operation for one year and, w ith respect to FSCs that entered into long-
term, binding contracts with unrelated par ties before 30 September 2000 the Act does 
not alter the tax treatment of those contracts for an indefinite period of time.  We recall the statement of the Appellate Body in Brazil - Export Financing Programme 
for Aircraft, Recourse by Canada to Article 21.5 of the DSU  that, "to continue to 
make payments under an export subsidy me asure found to be prohibited is not 
consistent with the obligation to "withdraw " prohibited export subsidies, in the sense 
of "removing" or "taking away".
286 WT/DS108/RW2 
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8.169 We also observe that the United St ates does not dispute that prohibited FSC 
subsidies continue to be available after the time-period set for compliance in this 
dispute.
287 
8.170 In light of these considerations, we find that the United States has not fully 
withdrawn the FSC subsidies found to be prohibited export subsidies inconsistent 
with Article 3.1(a) of the SCM Agreement  and has therefore failed to implement the 
recommendations and rulings of the DSB made pursuant to Article 4.7 SCM Agreement .  
__________ 
 283  Act, section 5(a). 
 284  Act, section 5(b)(1). 
 285  Act, section 5(c)(1).  The Act specifi es that a binding contract shall include a 
purchase option, renewal option or replacement option which is included in such contract and which is enforceable against the seller or lessor. 
 286  Appellate Body Article 21.5 Report, Brazil - Export Financing Programme for 
Aircraft, Recourse by Canada to Article 21.5 of the DSU, WT/DS46/AB/RW, 
adopted 4 August 2000, para. 45.  
 287  See US first written submission, Annex A-2, para. 224.  
 B. THE APPELLATE BODY’S FINDINGS  
28. The Appellate Body fully upheld the Pane l’s findings on the substance of this case.
22 
 29. Specifically with respect to the claim relating to Article 4.7 of the SCM Agreement , the 
Appellate Body found that:  
228 Under the ETI Act, no corporation may elect to be treated as an FSC after 
30 September 2000.
193  However, for FSCs in existence as of that date, the repeal of 
the original FSC measure "shall not apply" to any transaction which occurs before 1 
January 2002.194  Moreover, even after that date , existing FSCs can continue to use 
the original FSC measure for transactions pursuant to a binding contract between the FSC and any unrelated person that was in effect on and after 30 September 2000.
195  
Thus, by the United States' own acknow ledgement, the original FSC measure 
continues to apply, unmodified, to existing FSCs in respect of a defined set of transactions.
196  The success of the United States' appeal depends on the success of its 
argument that prohibited FSC subsidies can continue to be granted to protect the 
contractual interests of private parties and to ensure an orderly transition to the 
regime of the new measure.  In short,  on the basis of these arguments, the 
United States seeks to have the time-period for the full withdrawal of the prohibited 
FSC subsidies extended, in some circumstances, indefinitely . 
229 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.  We can  see no basis in Article 4.7 of the SCM Agreement  
for extending the time-period prescribed fo r withdrawal of prohibited subsidies for 
the reasons cited by the United States.  In that respect, we recall that, in  Brazil – 
Aircraft (Article 21.5 – Canada) , Brazil made a similar argument to the one made by 
                                                      
22 Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse 
to Article 21.5 of the DSU by the European Communities , WT/DS108/AB/RW, adopted 29 January 2002, 
DSR 2002:I, 55 (“Article 21.5 Appellate Body Report”).  WT/DS108/RW2 
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the United States in these proceedings.  Brazil argued that, after the expiration of the time-period for withdrawal of the prohibite d export subsidies, it should be permitted 
to continue to grant certain of these subsidies because it had assumed contractual obligations, under municipal law, to do so.
197  We rejected this argument, and 
observed that: 
… to continue to make payments under an export subsidy measure 
found to be prohibited is not cons istent with the obligation to 
"withdraw" prohibited export subsidi es, in the sense of "removing" or 
"taking away".198 
230 Thus, as we indicated in that appeal , a Member's obligation under Article 4.7 
of the SCM Agreement to withdraw prohibited subsidi es "without delay" is unaffected 
by contractual obligations that the Member itself may have assumed under municipal law.  Likewise, a Member's obligation to withdraw prohibited export subsidies, under 
Article 4.7 of the SCM Agreement , cannot be affected by contractual obligations 
which private parties may have assumed inter se  in reliance on laws conferring 
prohibited export subsidies.  Accordingly,  we see no legal basis for extending the 
time-period for the United States to withdr aw fully the prohibited FSC subsidies. 
231 Accordingly, we uphold the Panel's findi ng, in paragraphs 8. 170 and 9.1(e) of 
its Report, that the United States has not fu lly withdrawn the FSC subsidies found to 
be prohibited export subsidies under Article 3.1(a) of the SCM Agreement  and has 
therefore failed to implement the reco mmendations and rulings of the DSB made 
pursuant to Article 4.7 of the SCM Agreement . (underlining added) 
__________ 
 193  Section 5(b)(1) of the ETI Act. 
 194  Section 5(c)(1)(A) of the ETI Act. 
 195  See section 5(c)(1)(B)(ii) of the ETI Act.   
 196  Panel Report, para. 8.169. 
 197 Appellate Body Report, Brazil – Aircra ft (Article 21.5 – Canada), supra, 
footnote 86, para. 46. 
 198  Ibid., para. 45. 
 
IV. SUMMARY OF PROCEDURE LEADING TO THE PRESENT ARTICLE 21.5 
PROCEEDING 
 
30. On 5 November 2004, the European Communities 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 understanding of the respective 
positions but have not led to a satisf actory resolution of the matter.   
 31. 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.     
 32. Accordingly, on 13 January 2005, pursuant to Ar ticles 6 and 21.5 of the DSU, Article 4 of the 
SCM Agreement , Article 19 of the Agreement on Agriculture  and Article XXIII of the GATT 1994, 
the European Communities requested the establishment of a Panel.  The request was circulated in 
document WT/DS/108/29, dated 14 January 2005. WT/DS108/RW2 
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 33. At its meeting on 17 February 2005, the DSB referr ed this dispute, if possible, to the original 
Panel in accordance with Article 21.5 of the DSU to examine the matter referred to the DSB by the 
European Communities in document WT/DS108/29.  At that DSB meeting, the parties to the dispute also agreed that the Panel should have standard terms of reference.  Th e Panel was composed on 
2 May 2005. 
 
V. THE JOBS ACT 
 
A. SUMMARY OF THE JOBS ACT  
34. The Jobs Act introduces a new US manufactur ing tax deduction and makes numerous other 
changes to US tax rules, most of which are unrelated to the FSC or ETI subsidy schemes 
(section 102 ff. of the Jobs Act).  It also provides for repeal of certain provisions of the ETI Act and is 
thus the purported US compliance w ith the previous Panel and Appellate  Body reports in this dispute. 
 
1. The limited scope of the repeal (section 101(a)-(b) of the Jobs Act) 
 
35. Section 101 (a) of the Jobs Act repeals ce rtain provisions inserted into the IRC by the 
ETI Act.  
 First, the Jobs Act repeals section 114 of the IRC (section 101(a) of the Jobs Act); 
  It further repeals "Subpart E of Part III of subchapter N of chapter 1 (relating to qualifying 
foreign trade income)", which were inserted into the IRC by section 3 of the ETI Act (section 101(b)(1) of the Jobs Act); 
 
 Last, the Jobs Act provides for certain "conf orming amendments" of the IRC to take account 
of the fact that it repeals the parts of the IRC just mentioned (section 101(b)(2) to (6) of the Jobs Act). 
 
2. What the Jobs does not repeal immediately, or does not repeal at all 
 
36. Although section 101 of the J obs Act repeals section 114 of the ETI Act, it does not repeal the 
provisions contained in other relevant sections of the ETI Act.  In particular, it does not repeal 
section 2 (entitled "Repeal of Foreign Sales Corporation rules") and section 5 (entitled "Effective date").  This means that the repeal of the FSC scheme, set out in section 2 of the ETI Act, 
continues to operate, but it does so subject to the limitations in section 5.  Of these limitations, the 
first one provided for the full survival of the FSC scheme for a transitional period which has now 
expired.  The second one concerns the continuing e ffects (potentially indefinitely) of the scheme for 
transactions relating to certain binding contr acts entered into by FSCs in existence on 
30 September 2000 (see section 5 (c) of the ETI Act). 37. The continuing effect of section 5 of the ETI  Act demonstrates that there is still no correct 
implementation of the original Panel report in this dispute.  The FSC scheme is, in part, still effective. 
 
38. Second, in the period between promulgation and 31 December 2004, the Jobs Act did not 
apply (section 101(c) of the Jobs Act).  This means that US exporters have continued benefiting fully 
from the ETI scheme for all export transactions agreed up to the end of 2004.    
39. Third, for export transactions in the peri od between 1 January 2005 and 31 December 2006, 
the ETI scheme remains available on a reduced basis (section 101(d) of  the Jobs Act).  Yet, during 
this transition period the ETI scheme is maintained  for any transaction falling within its scope.   
 40. Fourth, for certain transactions the repeal of  the ETI provisions simply does not apply (section 
101(f) of the Jobs Act).  The ETI scheme is "grand fathered" (that is, continues to apply) for the  WT/DS108/RW2 
 Page A-11 
 
 
benefit of all transactions pursuant to a binding contract (1) which is between the taxpayer and a 
person who is not a related person (as defined in section 943(b)(3) of such Code, as in effect on the 
day before the date of the enactment of this Ac t), and (2) which is in effect on 17 September 2003, 
and at all times thereafter.  
B. TABLE COMPARING THE TRANSI TIONAL AND "GRANDFATHERING" CLAUSES 
OF THE ETI AND JOBS ACT 
 41. The virtual identity of the "t ransitional" and "grandfathering" cl auses in the Jobs Act with the 
ones included in the ETI Act is immediately apparent: 
 
ETI ACT JOBS ACT RESULT/EFFECT 
[…] 
Sec. 5. Effective date.  
 
(a) In General.–The amendments 
made by this Act shall apply to 
transactions after 30 September 2000. […] 
(c) Transition period for existing 
Foreign Sales Corporations.– (1) In general.–In the case of a FSC 
(as so defined) in existence on 
30 September 2000, and at all times thereafter, the amendments made by 
this Act shall not apply to any 
transaction in the ordinary course of trade or business involving a FSC 
which occurs- 
(A) before 1 January 2002; or  
(B) after 31 December 2001, pursuant 
to a binding contract–  
(i) which is between the FSC (or any 
related person) and any person which 
is not a related person;  and 
 (ii) which is in effect on 
30 September 2000, and at all times 
thereafter. For purposes of this paragraph, a 
binding contract shall include a 
purchase option, renewal option, or replacement option wh ich is included 
in such contract and which is 
enforceable against the seller or lessor. 
 […] 
Sec. 101 REPEAL ON EXCLUSION FOR 
EXTRATERRITORIAL INCOME 
[…] 
(c) E
FFECTIVE DATE .– The 
amendments made by this section shall apply to transactions after 
31 December 2004. 
(d) Transitional rule for 2005 and 2006.– 
(1) In general.– In the case of 
transactions during 2005 or 2006, the amount includible in gross 
income by reason of the 
amendments made by this section shall not exceed the applicable 
percentage of the amount which 
would have been so included but for this subsection.  
(2) Applicable percentage.– For 
purposes of paragraph (1), the applicable percentage shall be as 
follows: 
(A) For 2005, the applicable 
percentage shall be 20 per cent. 
(B) For 2006, the applicable percentage shall be 40 per cent. 
[…] 
(f) Binding contracts.– The amendments made by this section 
shall not apply to any transaction in 
the ordinary course of a trade or business which occurs pursuant to a 
binding contract– 
(1) which is between the taxpayer and a person who is not a related 
person (as defined in section 
943(b)(3) of such Code, as in effect on the day before the date of the 
enactment of this Act), and  
(2) which is in effect on 17 September 2003, and at all times 
thereafter. 
For purposes of this subsection, a 
binding contract shall include a  
  
Transitional period *: 
→ ETI benefits will still be 
available during the 
transition period , i.e. in 2005 
and 2006, as follows: 80% in 
2005, 60% in 2006 (on the 
contrary to the ETI Act, the JOBS Act does not provide for 
enjoyment in full during the 
transition period). → Apart from the reduction 
in amount, the ETI Act 
continues to apply as usual 
during the transition period . 
Therefore the violations of the 
SCM Agreement, of the Agreement on Agriculture and 
of Article III:4 of the 
GATT 1994 persist.  
(*See section C below ) 
 
 
 Grandfathering clause *:  
→ The ETI Act will continue 
to be available to all exporters who have engaged themselves 
contractually to provide 
goods, i.e. via: - a binding contract (for sale 
or lease of goods that have 
already been sold or leased, or goods which may be sold or 
leased in the future through 
the exercise of an option); - or a purchase, option, 
renewal option or replacement 
option which is included in such a contract and which is 
enforceable against the seller 
or lessor [‘enforceable’ being 
interpreted in a flexible way – WT/DS108/RW2 
Page A-12  
 
ETI ACT JOBS ACT RESULT/EFFECT 
purchase option, renewal option, or 
replacement option which is included in such contract and which 
is enforceable against the seller or 
lessor. 
 see §50]. 
 *(See section D below ) 
 
C. THE TRANSITIONAL PERIOD 
 
42. For the years 2005 and 2006, pursuant to section 101(d) of the Jobs Act, the ETI benefits are 
still available as follows:   - 80 per cent  in 2005  - 60 per cent in 2006.   
 
43. Even taking as a basis (for purely illustrative purposes) the US$4043 million mentioned in the Arbitrator’s Decision in this dispute
23 (which is a lesser amount than actually budgeted for the ETI 
Act in 2004), the ETI Act would still confer a s ubsidy for US$3234.4 million and US$2425.8 million 
for 2005 and 2006 respectively.   
 
44. There are only three differences between the tran sitional clause of the ETI Act and that of the 
Jobs Act.  First, the end dates are different.  Sec ond, the duration of the transition period of the Jobs 
Act is longer than the one of the ETI Act (from 1 Janua ry 2005 to 31 December  2006 in the Jobs Act, 
from 1 October 2000 to 31 December 2001 in the ETI Act.).  Third, whereas for the transition period 
the ETI Act provided for continuing enjoyment in fu ll, the transition period of the Jobs Act provides 
for enjoyment of 80 per cent and 60 per cent of the otherwise applicable benefits in the first and 
second year respectively.    45. These differences do not of course warrant any di stinction from the situation reviewed by this 
Panel and the Appellate Body in the original Artic le 21.5 proceedings.  The basis for the Panel’s and 
the Appellate Body’s findings was the fact that the WTO inconsistent subsidy continued to be 
available after the date set out in the original Pa nel report for its withdrawal "without delay".  The 
same reasoning applies to the new transition and grandf athering provisions contained in the Jobs Act.   
 46. Apart from the gradual reduction in amount, during the transitional period the ETI Act will 
continue to apply as usual.  Thus , the benefits will continue to be available to any US producer 
exporting goods in 2004, 2005 and 2006, provided t hose goods meet the "foreign content limitation" 
or "fair market value rule".    47. Therefore, the violations 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 persist to this date.   
 
48. Also, the United States will inter alia  be maintaining prohibited export subsidies for 6 years 
beyond the deadline set in the original Panel Repor t for withdrawal "without delay", contrary to 
Article 4.7 of the SCM Agreement .   
 
                                                     
 
23 Arbitrator Decision, United States – Tax Treatment for "Foreign Sales Corporations" , Recourse to 
Arbitration 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, para. A34.  WT/DS108/RW2 
 Page A-13 
 
 
D. THE "GRANDFATHERING CLAUSE" 
 49. The Jobs Act does not apply to any transaction in the ordinary course of a trade pursuant to a 
binding contract (1) which is between the taxpaye r and a person who is not a related person (as 
defined in section 943(b)(3) of the IRC), and (2) which was already in effect on 17 September 2003 
(the date of the introduction of the bill before the Se nate).  In other words, the ETI Act will continue 
to be available to all exporters  who have engaged themselves contractually to provide goods.  
Moreover, just like the ETI Act the Jobs Act c ontains a provision accordin g to which a "binding 
contract shall include a purchase option, renewal opt ion, or replacement option which is included in 
such contract and which is enforceab le against the seller or lessor."   
 
50. The Joint Explanatory Statement of the Comm ittee of Conference already interprets the term 
"binding contract" in a flexib le way by specifying that 
 
a replacement option will be considered enfor ceable against a lessor notwithstanding the fact 
that a lessor retained approval of the replacement lessee.
24  
 51. The grandfathering clause applies to both sale and leasing contracts.  Furthermore, these contracts cover (1) goods that have already been  sold or leased as well as (2) goods which may be 
sold or leased in the future if the buyer/lessee exercises an option.   
 
52. With respect to goods already sold or leased , grandfathering covers sales contracts the goods 
relating to which have already been ordered but not yet exported, or lease contracts which expire 
some time in the future but which, under US accoun ting rules, only produce ETI benefits at the end of 
their life.    
53. The differences between the "grandfathering" cl ause of the ETI Act and that of the Jobs Act 
are even fewer than for the transition clauses.  The Jobs Act does no more than replacing "FSC" by 
"taxpayer" and provides an express cross-reference to  the IRC provision defining "related persons".   
 
VI. LEGAL ARGUMENT 
 
A. INTRODUCTION 
 54. The essential reason why the Jobs Act is inc onsistent with the WTO obligations of the 
United States is that it does not entirely remove th e prohibited subsidies whic h were required to be 
withdrawn as a result of the previous recommendations  of the DSB nor does it remove the violation of 
Article III:4 of the GATT 1994.  This constitu tes a violation of Article 4.7 of the SCM Agreement and 
of Articles 19.1 and 21.1 of the DSU.   The Eu ropean Communities sets out the reasoning leading to 
this conclusion in Section VI.B below.  55. As a consequence of the prohibited subsidies not having been withdrawn, the violations 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, persist.  Th is consequential conclusion is set out in 
Section VI.C below.  
                                                     
 
24 House of Representatives, 108th Congress, 2nd Session, American Job Creation Act of 2004, 
Conference Report to accompany H.R. 4520, Report 108-755, 7 October 2004 (excerpt in Exhibit EC-3 , full 
text available at http://frwebgate.access.gpo.gov/cgi-bin/g etdoc.cgi?dbname=108_cong_reports&docid= 
f:hr755.108.pdf ), p. 265, footnote 7. WT/DS108/RW2 
Page A-14  
 
B. THE UNITED STATES CONTINUES TO VIOLATE ARTICLE 4.7 OF THE 
SCM AGREEMENT AND ARTICLES 19.1 AND 21.1 OF THE DSU 
 56. The Panel and the Appellate  Body found in the first Article 21.5 proceeding that the 
transitional and "grandfathering" clauses permitting continued availability of  FSC subsidies meant 
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.
25  The Panel exercised judicial economy in respect of 
the violation of Article 21 of the DSU claimed by the European Communities in that proceeding.26 
 57. The Appellate Body upheld this finding a nd expressly recognised that Article 4.7 of the 
SCM Agreement  contains an obligation for an implementi ng Member to withdraw subsidies declared 
to be prohibited "without delay" and that there was no legal basis for extending the time-period in 
order to protect "private parties".
27  
 58. As the European Communities has explained in Section V.A.2 above, the grandfathering 
clause for FSC subsidies contained in section 5(c)(1)(B ) of the ETI Act is still in force and so this 
violation Article 4.7 of the SCM Agreement  subsists. 
 59. Further, as the European Communities has e xplained in Sections V.B, C and D above, the 
transitional and grandfathering clauses in the Jobs Act ar e identical in all material respects to those in 
the ETI Act, except that they provide for continue d availability of ETI subsidies rather than FSC 
subsidies.  Accordingly, they are also inconsistent with the obligati on of the United States to withdraw 
the ETI subsidies without delay pursuant to Article 4.7 of the SCM Agreement  for the same reasons. 
 60. The fact that the FSC and ETI subsidies w ill remain available for quite some time is 
confirmed by the estimate of the budget effects of the Jobs Act circulated by the US Congress Joint 
Committee on Taxation on 5 October 2004, which stretches to year 2014.
28  
61. The continuing availability of FSC and ETI subs idies also gives rise to a continued violation 
of Article III:4 of the GATT 1994.  This is not inconsistent with Article 4.7 of the SCM Agreement  
but only with Articles 19.1 and 21.1 of the DSU.  62. Article 19.1 of the DSU provides as follows: 
 
Where a panel or the Appellate Body conclud es that a measure is inconsistent with a 
covered agreement, it shall recommend that the Member concerned bring the measure 
into conformity with that agreement.  In  addition to its recommendations, the panel or 
Appellate Body may suggest ways in which the Member concerned could implement 
the recommendations. (footnotes omitted) 
63. The first sentence of Article 19.1 of the DSU is virtually identical to the first sentence of 
Article 4.7 of the DSU.  It therefore follows that  the maintenance of the less favourable treatment of 
imported as compared to domestic products inhere nt in the ETI scheme is inconsistent with 
Article 19.1 of the DSU.  
64. Article 21.1 of the DSU provides as follows: 
 
                                                     
 
25 Article 21.5 Panel Report, paras 8.170 and 9.1(e). 
26 Article 21.5 Panel Report, para. 8.171. 
27 Article 21.5 Appellate Body Report, paras. 230, 231 and 256(f). 
28 Joint Committee on Taxation, Estimated budget effects of the Chairman’s mark relating to 
H. R. 4520, the “American Jobs Creation Act of 2004”, 5 October 2004 ( Exhibit EC-4 ), p. 1.  The figures of 
this estimate are maintained in the Congressional Budget Office Cost Estimate for the American Jobs Creation 
Act of 2004, Revised 9 November 2004 ( Exhibit EC-5 ), p. 2.  WT/DS108/RW2 
 Page A-15 
 
 
Prompt compliance with recommendations or rulings of the DSB is essential in order 
to ensure effective resolution of dis putes to the benefit of all Members. 
65. Since there was no reasonable period of time for the implementation of the recommendations 
in the first Article 21.5 proceeding pursuant to Ar ticle 21.3, the United States was accordingly under a 
duty to remove the violation of Article III:4 of th e GATT 1994 immediately.  It has failed to do so and 
the violation is ongoing and continuing into the fu ture.  There is therefore also a violation of 
Article 21.1 of the DSU.  C. 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 
 66. Since, as established above, the Jobs Act still maintains the FSC and ETI subsidies (a) up to 
2006 and (b) for transactions mentioned in section 101 (f) of the Jobs Act, potentially indefinitely, it 
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. 
 67. The reasons for these inconsistencies are set out  in the Appellate Body and Panel reports in 
the original proceeding and the first Article 21.5 proc eeding and are incorporated by reference in this 
submission. These reports have all been adopted by the DSB and are res judicata and, thus, 
indisputable as between the parties.  Article 17.14 of the DSU expressly provides that adopted 
Appellate Body reports shall be unconditionally accepted by the par ties to the dispute unless the DSB 
decides by consensus not to adopt the reports (which it did not).  The Appellate Body has confirmed that the same principle applies to panel reports by virtue of Articles 16.4 and 19.1, paragraphs 1 and 3 
of Article 21, and Article 22.1 of the DSU.
29 
 
68. Accordingly, since it is established that the subsidies have not been withdrawn, it cannot be 
denied and the Panel has to find that these subsidies remain inconsistent 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 
the GATT 1994 and the United States remains in violation of these provisions.  
VII. CONCLUSION 
 69. For the above reasons the European Co mmunities requests the Panel to find 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 Article 4.7 of the SCM Agreement ; 
 
• By not entirely withdrawing FSC and ETI subsidies and consequently maintaining 
the less favourable treatment of importe d as compared to domestic products, the 
United States has failed to comply with the recommendations and rulings of the DSB and its obligations under Articles 19.1 and 21.1 of the DSU;  
 
• These subsidies remain inconsistent 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 the GATT 1994 and the Unite d States remains in violation of these 
provisions; 
 
                                                     
 
29 Appellate Body Report, European Communities – Anti-Dumping Duties on Imports of Cotton-Type 
Bed Linen from India – Recourse to Article 21.5 of the DSU by India , WT/DS141/AB/RW, adopted 
24 April 2003, para. 93. WT/DS108/RW2 
Page A-16  
 
and consequently to find that there is nullifica tion or impairment of benefits accruing to the 
European Communities and to recommend that the United States withdraw its prohibited subsidies 
without delay and otherwise bring the measures into conformity with the WTO Agreement.  
  WT/DS108/RW2 
 Page A-17 
 
 
LIST OF EXHIBITS 
 
EC-1 The American Jobs Creation Act of 2004 , H.R. 4520, 118 Stat. 1418, Public Law 108–357, 
22 October 2004 
 
EC-2  FSC Repeal and Extraterritorial Income Exclusion Act of 2000 , 15 November 2000, 
US Public Law 106-519, 114 Stat. 2423 (2000) 
 EC-3  House of Representatives, 108th Congress, 2nd Session, American Jobs Creation Act of 2004, 
Conference Report to accompany H.R. 4520, Report 108-755, 7 October 2004 
 
EC-4 Estimated budget effects of the Chairman’s mark  relating to H. R. 4520, the "American Jobs 
Creation Act of 2004", 5 October 2004 
 EC-5 Congressional Budget Office, Cost Estimate for the American Jobs Creation Act of 2004, 
Revised 9 November 2004 
 WT/DS108/RW2 
Page A-18  
 
 
 
ANNEX A-2 
 
 
FIRST WRITTEN SUBMISSION OF THE 
UNITED STATES 
 
 
(2 June 2005) 
   
TABLE OF CONTENTS 
 
Page
 
 
Table of Reports............................................................................................................... ............. A-19 
 
I. INTRODUCTION ........................................................................................................... A-20 
 II.  FACTUAL BACKGROUND.......................................................................................... A-20  
III. LEGAL AR GUMENT..................................................................................................... A-21 
 
A.  IN THE ABSENCE OF ANY RECOMMENDATION OF WITHDRAWAL UNDER  ARTICLE 4.7, THIS PANEL CANNOT FIND THAT THE UNITED STATES   HAS FAILED TO WITHDRAW ITS PROHIBITED SUBSIDIES WITHIN THE   MEANING OF ARTICLE 4.7 OF THE SCM AGREEMENT......................................... A-21 
 
B.  SECTION 5 OF THE ETI ACT IS NOT WITHIN THE PANEL’S TERMS OF   REFERENCE..................................................................................................................... A-23 
 
IV.  CONC LUSION ................................................................................................................ A-23 
  WT/DS108/RW2 
 Page A-19 
 
 
Table of Reports 
 
 
 
Short Form  
Full Citation 
 
US – FSC (Panel)    
Panel Report, United States – Tax Treatment for "Foreign Sales 
Corporations" , WT/DS108/R, adopted 20 March 2000, as modified by 
the Appellate Body Report, WT/DS108/AB/R 
 US – FSC (AB)   
 
  
Appellate Body Report, United States – Tax Treatment for "Foreign 
Sales Corporations" , WT/DS108/AB/R, adopted 20 March 2000 
 
US – FSC (Article 21.5) 
(Panel)   
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 the Appellate Body Report, WT/DS108/AB/RW 
 
US – FSC (Article 21.5) (AB)   
Appellate Body Report, United States – Tax Treatment for "Foreign 
Sales Corporations" – Recourse to Article 21.5 of the DSU by the 
European Communities , WT/DS108/AB/RW, adopted 
29 January 2002 
 WT/DS108/RW2 
Page A-20  
 
 
I. INTRODUCTION 
 
1. It is with regret that the United St ates makes this written submission.  In the American Jobs 
Creation Act of 2004  ("AJCA"),
1 the United States repealed the income tax exclusion provided for in 
the Extraterritorial Income Exclusion Act of 2000  ("ETI Act").  However, the European Communities 
("EC") has sought to prolong this dispute by cha llenging the transition provisions contained in the 
AJCA – specifically, sections 101(d) and (f).  The EC  has done so notwithstanding the fact that these 
transition provisions are reasonable, are consiste nt with standard practice regarding major tax 
legislation, and are the product of close c onsultations between US and EC officials. 
 
2. Be that as it may, the EC ’s claims are unfounded.  As dem onstrated below, the transition 
provisions of the AJCA are not inc onsistent with Article 4.7 of the Agreement on Subsidies and 
Countervailing Measures  ("SCM Agreement") because, in the prior proceeding under Article 4 of the 
SCM Agreement and Article 21.5 of the Understanding on Rules and Procedures Governing the 
Settlement of Disputes  ("DSU"), there was no recommendation or ruling, pursuant to Article 4.7, by 
the Dispute Settlement Body ("DSB") that the ETI Act tax exclusion should be withdrawn.  Thus, 
while the United States has repealed the ETI Act ta x exclusion, in the absen ce of any recommendation 
or ruling of withdrawal under Article 4.7, this Pa nel cannot find that the United States has failed to 
comply with a DSB recommendation or ruling to withdraw its prohibited subsidies within the 
meaning of Article 4.7 of the SCM Agreement. 
 
3. In this submission, the United States firs t will describe the purpose of the transition 
provisions, and the process by which these provisions were developed.  Thereafter, the United States 
will present its legal arguments.  II.  FACTUAL BACKGROUND 
 
4. The purpose of transition provisions, such as sections 101(d) and (f) of the AJCA, is to provide a smooth and orderly transition in order to prevent the repeal of tax legislation from having a 
retroactive effect on taxpayers who entered into arra ngements in reliance on pre-repeal law.  As such, 
this basic principle of non-retroactivity is similar to the principles of "legal certainty" and "legitimate 
expectations" that play such an important role in the legal regimes of many WTO Members.  
 5. The rules embodied in sections 101(d) and (f) ar e consistent with the transition rules that are 
typically included in major US tax legislation.  Section 101(d) – the genera l transition provision – 
provides for a two-year phase out of the ETI Act tax exclusion.  Section 101(f) – the "grandfather" 
provision – exempts certain pre-existing binding contracts from the repeal of the ETI Act tax 
exclusion.  6. During the development of the AJCA, US offi cials consulted closely with officials of the 
European Communities at all levels.  US officials explained the types of transition rules that are 
standard in US tax legislation, and emphasized th at such rules were essential in order to obtain 
Congressional passage of the repeal of the ETI Act tax exclusion. 
 7. With respect to the general transition provisi on, the EC stated that its primary concern was 
that the transition period not exceed two years.  Although there were legislative proposals then pending for transition periods as long as five y ears, Congress accommodated the EC’s concerns by 
limiting the transition period to two years, and by reducing the amount of the tax exclusion in each 
year.  Congress did so with the understanding that, toge ther with repeal, limiting the transition period 
to two years would resolve the dispute.  
                                                     
 
1  Exhibit EC-1.   WT/DS108/RW2 
 Page A-21 
 
 
8. With respect to the grandfather provision of section 101(f), the EC officials never indicated to 
US officials that they had a problem with a grandfather provision per se .  In the AJCA, Congress 
limited the grandfather provision to certain transac tions that occur pursuant to a binding contract (1) 
between the taxpayer and an unrelated party (2) ente red into before 17 September 2003, and (3) which 
has been binding on both parties at all times since that date.  Congress chose 17 September 2003, 
because that was the date legislation to repeal th e ETI Act was submitted in the US Senate.  Because 
legislation to repeal the ETI Act tax exclusion pr eviously had been submitted in the US House of 
Representatives, as of 17 September 2003, taxpayers were on notice that there was legislation in both houses of Congress to repeal the ETI Act tax exclusi on and that, when entering into new contracts, 
they no longer could count on the continued existen ce of the ETI Act tax exclusion.  Adoption by the 
AJCA of an earlier date also would have been inconsistent with common practice regarding tax 
legislation that effectuates major changes in ta x law.  In any event, the cut-off date of 
17 September 2003, significantly limited the availab ility of the grandfather provision, because the 
AJCA was not enacted until 22 October 2004.  
9. Sections 101(d) and (f) did not  contain any surprises for the EC.  Each element of these 
provisions was contained in either the House or Sena te versions of the legislation, and each element 
had been explained to EC officials prior to passage of the AJCA.  In particular, by limiting the general 
transition period to two years, Congress accommodated what EC officials had indicated was their primary concern.  In so doing, Congress understood th at this would resolve the dispute.  Regrettably, 
however, the EC has chosen to prolong the dispute.
2 
 
III. LEGAL ARGUMENT 
 
A.  IN THE ABSENCE OF ANY RECOMMENDATION OF WITHDRAWAL UNDER 
ARTICLE 4.7, THIS PANEL CANNOT FIND THAT THE UNITED STATES HAS 
FAILED TO WITHDRAW ITS PROHIBITED SUBSIDIES WITHIN THE MEANING OF 
ARTICLE 4.7 OF THE SCM AGREEMENT 
 10. In commencing this proceeding against sections  101(d) and (f) of the AJCA, the EC, as it did 
in the first Article 21.5 proceeding, has alleged th at the United States has "failed to implement the 
DSB’s recommendations and rulings, as specified by the DSB on 20 March 2000 and on 
29 January 2002" because it has "failed to withdraw its prohibited subsidies as required by Article 4.7 
of the SCM Agreement."
3  However, the United States has not  failed to comply with the DSB’s 
recommendations and rulings, and the transition provis ions of the AJCA are not inconsistent with 
Article 4.7 of the SCM Agreement, for the simple reason that, as explained below, there was no DSB recommendation or ruling under Article 4.7 to wit hdraw the subsidy insofar as the ETI Act tax 
exclusion is concerned.  
 11.   This dispute began with an EC challe nge to the Foreign Sales Corporation ("FSC") 
provisions of US tax law.  The original Pane l found that the FSC provisions constituted export 
subsidies that were prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement.
4  Pursuant to 
Article 4.7 of the SCM Agreement, the original Panel recommended that the United States withdraw 
the FSC subsidy with effect from 1 October 2000.5  The Appellate Body subsequently modified the 
original Panel’s reasoning, but affirmed the or iginal Panel’s findings under the SCM Agreement.6 
 
                                                      
2  While the United States is not in a position to speculate on the EC’s reasons for prolonging this 
dispute, such speculations have appeared in the press.  See Lamy Links Airbus Case to EU Willingness to Accept 
FSC Repeal Bill , INSIDE US TRADE  (1 Oct. 2004), page 23.  
3  WT/DS108/29 (14 January 2005), page 2.  
4  US – FSC (Panel) , para. 8.1(a).  
5  US – FSC (Panel) , para. 8.8.  The DSB later modified the withdrawal deadline to 1 November 2000.  
6  US – FSC (AB) , para. 177(a).  WT/DS108/RW2 
Page A-22  
 
12. Subsequently, the United States enacted the ETI Act.  The ETI Act repealed the FSC tax 
exemption, but also contained a general transiti on provision and a grandfather provision that allowed 
the FSC tax exemption to be claimed after 1 Nove mber 2000.  The EC initiated a proceeding under 
Article 4 of the SCM Agreement and Article 21.5 of  the DSU in which it essentially complained of 
two things.  First, it claimed that the ETI Act’s tran sition provisions resulted in a failure to withdraw 
the FSC tax exemption as required by the original  Panel’s recommendation pursuant to Article 4.7.  
Second, it alleged that the ETI Act tax exclusion constituted an export subsidy in its own right. 
 13. With respect to the ETI Act’s transition prov isions relating to the FSC tax exemption, the 
Article 21.5 Panel found that these provisions resulted in a failure on the part of the United States to 
withdraw the FSC subsidies found to be prohibited in  the original proceeding and, thus, to implement 
the recommendations and rulings of the DSB pur suant to Article 4.7 of the SCM Agreement.
7  The 
Appellate Body affirmed this finding.8  The EC acknowledges that the transition provision has expired 
and is not at issue in this dispute.9 
 
14. With respect to the ETI Act tax exclusion,  the Article 21.5 Panel found that the exclusion 
constituted an export subsidy inconsistent w ith Article 3.1(a) of the SCM Agreement.10  T h e  
Appellate Body affirmed this finding.11  However, while the Article 21.5 Panel found that the ETI Act 
tax exclusion constituted a prohib ited export subsidy, it did not ma ke a recommendation pursuant to 
Article 4.7 that the subsidy be withdrawn, notwithst anding the fact that the EC had initiated the panel 
proceeding pursuant to Article 4 of the SCM Agreement.12 
 
15. For its part, the Appellate Body recommended that the DSB request the United States to bring 
the ETI measure into conformity with its obligati ons under Article 3.1(a) of the SCM Agreement, as 
well as provisions of the Agreement on Agriculture  and Article III:4 of the GATT 1994 .13  However, 
with respect to the ETI Act tax exclusion, the Appellate Body did not make any recommendations 
pursuant to Article 4.7 of the SCM Agreement.  To the extent that the Appellate Body made a 
recommendation referencing Article 4.7, it recomme nded "that the DSB request the United States to 
implement fully the recommendations and rulings of the DSB in US – FSC , made pursuant to 
Article 4.7 of the SCM Agreement ."14  By citing to the original  proceeding regarding the FSC 
provisions, the Appellate Body clearly was referri ng to the recommendation that the FSC subsidy – 
not the ETI Act subsidy – be withdrawn. 
 
16. Thus, the DSB did not recommend or request pur suant to Article 4.7 that the ETI Act subsidy 
be withdrawn or that it be withdrawn within a particular time.  In the absence of any such recommendation or request, it cannot be found that by  including reasonable transition provisions in 
the AJCA – which pertain to the ETI Act tax exclusion, not the FSC tax exemption – the 
United States has failed to comply with some DS B recommendation or ruling to withdraw, within the 
meaning of Article 4.7, the ETI Act tax exclusion.  17. The jurisdiction of a panel under Article 21.5 of  the DSU is limited - it is limited to "measures 
taken to comply with the recommendations and ruli ngs."  Here, the EC has chosen to invoke the 
                                                     
 
7  US – FSC (Article 21.5) (Panel) , paras. 8.170 and 9.1(e).  
8  US – FSC (Article 21.5) (AB) , para. 256(f).  
9  First Written Submission of the European Communities  (19 May 2005), para. 36.  
10  US – FSC (Article 21.5) (Panel) , paras. 8.75 and 9.1(a).  
11  US – FSC (Article 21.5) (AB) , para. 256(b).  
12  WT/DS108/16 (8 December 2000).  The absence of a recommendation appears to have been the 
result of the EC’s insistence that the Article 21.5 Panel not make any recommendation, notwithstanding the fact that it was the EC that had invoked Article 4 of the SCM Agreement.  US – FSC (Article 21.5) (Panel) , para. 7.5 
(discussing EC comment on the Article 21.5 Panel’s interim report).
 
13  US – FSC (Article 21.5) (AB) , para. 257.  
14  US – FSC (Article 21.5) (AB) , para. 257.   WT/DS108/RW2 
 Page A-23 
 
 
aspect of the Panel’s jurisdiction involving the allege d failure of the United States to comply with a 
DSB recommendation or ruling concerning Article 4.7 of the SCM Agreement.  However, there is no 
such recommendation or ruling.  18. Article 4.7 of the SCM Agreement provides as follows: 
 
If the measure in question is found to be  a prohibited subsidy, the panel shall 
recommend that the subsidizing Member withdr aw the subsidy without delay.  In this 
regard, the panel shall specify in its r ecommendation the time  period within which 
the measure must be withdrawn. 
19. Any obligation to withdraw the ETI Act tax excl usion, or to withdraw it within a particular 
period of time, had to be triggered by a r ecommendation under Article 4.7.  Because no such 
recommendation was made, the United States was not under an obligation to withdraw the ETI Act 
tax exclusion.  Therefore, while the United States has repealed the ETI Act, it was not precluded from 
adopting reasonable transition provisions to govern the phase-out of the ETI Act tax exclusion.  
Furthermore, there is no basis for an Article 21.5 panel to make a finding of compliance or 
noncompliance with a DSB recommendation or ruli ng under Article 4.7 of the SCM Agreement in 
this dispute, and thus the Panel should reject  the EC’s claims under Article 4.7 of the SCM 
Agreement.  B.  SECTION 5 OF THE ETI ACT IS NOT WITHIN THE PANEL’S TERMS OF REFERENCE 
 
20. The measures before this Panel are secti ons 101(d) and (f) of the AJCA, the transition 
provisions concerning the ETI Act tax exclusion.  In  its panel request, the EC does not allege that 
other provisions of the AJCA are inconsistent with US obligations under the WTO agreements.
15  
Moreover, while the EC makes references in its fi rst written submission to section 5 of the ETI Act16, 
which included transition provisions for the FSC ta x exemption, section 5 is not mentioned in the 
EC’s panel request, and, thus, is not within the Panel’s terms of reference.17 
 
IV.  CONCLUSION 
 
21. For the foregoing reasons, the United States resp ectfully requests that the Panel reject the EC 
claims. 
 
                                                      
15  WT/DS108/29 (14 January 2005).  
16  See, e.g.,  First Written Submission of the European Communities  (19 May 2005), paras. 36-37.  
17  WT/DS108/29 (14 January 2005).