Document: WT/DS108/RW2 Page C-1 ANNEX C THIRD PARTY SUBMISSIONS Contents Page Annex C-1 Third Party Submission of Australia C-2 Annex C-2 Third Party Submission of Brazil C-6
Document codes: WT/DS108/RW2
Complainant: EU
Respondent: U.S.
Third parties: Australia, Barbados, Brazil, Canada, China, India, Jamaica, Japan
Dispute stage: Retaliation & Arbitration
Agreements cited: Art. 1, 3, 8  AgricultureArt. 3.1(a), 3.1(b)  Subsidies and Countervailing Measures (SCM)Art. 9, 10  Agriculture

ANNEX C

THIRD PARTY SUBMISSIONS

Contents Page
Annex C-1 Third Party Submission of Australia C-2
Annex C-2 Third Party Submission of Brazil C-6
Annex C-3 Third Party Submission of The People's Republic of China C-11

 (a) the FSC subsidies be withdrawn at th e latest with effect from 1 October 2000;3 4 and

 (b) the United States bring the FSC measure into conformity with its obligations under
the Agreement on Subsidies and Countervailing Measures (the " SCM Agreement ")
and the Agreement on Agriculture.
5

5. Hence, the purpose of the current Article 21.5 proceeding is to decide whether certain
measures that the United States has taken to comp ly with the recommendations and rulings set out
above are consistent with the covered agreemen ts. For its part, the EC has argued that the
grandfathering of the FSC scheme and the transiti on and grandfathering provisions of the ETI scheme
are 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 GATT 1994.6

6. The United States does not contest that the grandfathering of the FSC scheme and the
transition and grandfathering provisions of the ETI scheme are measures taken to comply with the
DSB’s original recommendations and rulings. Under those circumstances, the measures at issue come
within the mandate of an Article 21.5 proceeding.

7. In addition, the United States does not appear to contest that the grandfathering of the FSC
scheme and the transition and grandfathering provisi ons of the ETI scheme are 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 GATT 1994. The Panel should therefore uphold the EC’s arguments
in this respect.

3. Is the United States Under an Obligation to Withdraw the ETI Scheme?

8. The United States submits that in order for it to be under any obligation to withdraw the ETI
scheme it would have been necessary for the Panel Report (First Article 21.5)
7 to make a finding
under Article 4.7 of the SCM Agreement .8 It follows that the Article 21.5 Panel would have been
required to "specify … the time-period within which the measure must be withdrawn". 9 T h e
United States’ argument would thus require that it be given a period of time to withdraw the ETI
scheme (e.g. from the adoption of the Article 21.5 re ports until the first practicable date by which the
United States could have withdrawn the ETI scheme) . However, such a ruling would be outside the
Article 21.5 mandate, which is to decide wh ether "measures taken to comply with the
recommendations and rulings" of the DSB exist or are consistent with a covered agreement.

9. Once a decision has been made, as in this di spute, that a measure "taken to comply" is
inconsistent with a covered agreement, it necessar ily follows that the Member has failed to take
"measures … to comply with the recommendations and rulings"
10 of the DSB in the original
proceeding and that the original, and any replaceme nt, measures must be brought into consistency
immediately.

3 Paragraph 8.8 of the Panel Report.
4 At its meeting on 12 October 2000, the DSB acced ed to the United States’ request to extend until
1 November 2000 the time by which the United St ates was required to comply with the DSB’s
recommendations and rulings (see WT/DSB/M/90).
5 Paragraph 178 of the Appellate Body Report.
6 Paragraphs 36, 46, 58, 59 and 69 of the First Wr itten Submission of the European Communities. See
also the second dash point on page 2 of the EC’s Request for the Establishment of a Panel.
7 Panel Report in United States – Tax Treatment for “Foreign Sales Corporations” – Recourse to
Article 21.5 of the DSU by the European Communities (WT/DS108/RW).
8 Paragraph 19 of the First Written Submission of the United States of America.
9 As required by the second sentence of Article 4.7 of the SCM Agreement.
10 See Article 21.5 of the DSU.

10. Australia thus submits that the obligation to withdraw the ETI scheme arises from the fact that
the Panel Report (First Article 21.5) and Appellate Body Report (First Article 21.5)
11, as adopted by
the DSB, found that the ETI scheme violated the covered agreements (including Article 3 of the SCM
Agreement).

11. As stated by the Panel in Australia – Measures Affecting Importation of Salmon - Recourse to
Article 21.5 by Canada:12

"The text [of Article 21.5 of the DSU] refers generally to "consistency with a covered
agreement". The rationale behind this is obvious: a complainant, after having
prevailed in an original dispute, should not have to go through the entire DSU process
once again if an implementing Member in seeking to comply with DSB
recommendations under a covered agreement is breaching, inadvertently or not, its
obligations under other provisions of cove red agreements. In such instances an
expedited procedure should be available. This procedure is provided for in
Article 21.5. It is in line with the fundamental requirement of "prompt compliance"
with DSB recommendations and rulings expressed in both Article 3.3 and
Article 21.1 of the DSU".
13
12. A similar point was made by the Panel in European Communities - Anti-Dumping Duties on
Imports of Cotton-Type Bed Linen From India - Recourse To Article 21.5 of the DSU by India 14 when
it stated that:

"[A] Member found to have violated a provision in an Article 21.5 proceeding
pursuant to a claim that could have been pur sued in the original dispute but was not
would be deprived of the opportunity to seek a mutually acceptabl e solution, of the
opportunity to bring its measure into conf ormity, and might, depending on the nature
of the violation, be subjected to suspension of concessions".
15
13. A recommendation or ruling under Article 4.7 of the SCM Agreement for the United States to
withdraw the ETI scheme would have been out side the mandate of a panel constituted under
Article 21.5 of the DSU. The requirement for the United Stat es to withdraw the ETI scheme follows
logically from the fact that it was required to w ithdraw the FSC scheme – a replacement for the FSC
scheme that is itself a violation of a covered agreem ent should not have been granted or maintained.
The United States cannot argue that such a measure should not be withdrawn.

4. The Relevance of Section 5 of the ETI Act

14. In defence of the EC’s assertions regardi ng the grandfathering of the FSC scheme, the
United States asserts that section 5 of the ETI Act is not within the Panel’s terms of reference.16

15. Australia notes that section 5 of the ETI Act sets up, amongst other things, the grandfathering
of the FSC scheme. The Panel Report (First Ar ticle 21.5) and Appellate Body Report (First
Article 21.5) have already found this grandfathering to be a violation of the covered agreements.
17

11 Appellate Body Report in United States – Tax Treatment for “Foreign Sales Corporations” –
Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108/AB/RW).
12 WT/DS18/RW.
13 Paragraph 7.10, subparagraph 9.
14 WT/DS141/RW.
15 Paragraph 6.45.
16 Paragraph 20 of the First Written Submission of the United States of America.
17 Paragraph 9.1(e) of the Panel Report (First Article 21.5) and paragraph 256(f) of the Appellate Body
Report (First Article 21.5).

16. Australia also notes that it is section 101 of the Jobs Act
18 that fails to repeal section 5 of the
ETI Act. The former section was mentioned in the EC’s request for the establishment of a panel.

5. Conclusion

17. The mandate of an Article 21.5 proceeding is to adjudicate on disputes "as to the existence or
consistency with a covere d agreement of measures taken to co mply with the recommendations and
rulings" of the DSB. Given the absence of any defence from the United States, the Panel should
uphold the EC’s arguments that the grandfathering of the FSC scheme and the transition and
grandfathering provisions of the ETI scheme are in consistent 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.

18. A ruling under Article 4.7 of the SCM Agreement in the Panel Report (First Article 21.5)
would have been outside of the mandate discussed above. The requirement for the United States to
withdraw the ETI scheme follows logically from th e fact that the United States was required to
withdraw the FSC scheme and that its replaceme nt, the ETI scheme, also violates the covered
agreements.

19. The Panel Report (First Article 21.5) and A ppellate Body Report (First Article 21.5) have
already found the grandfathering of the FSC scheme to be a violation of the covered agreements.
19

18 The term “Jobs Act” is used to refer to the American Jobs Creation Act of 2004.
19 Paragraph 9.1(e) of the Panel Report (First Article 21.5) and paragraph 256(f) of the Appellate Body
Report (First Article 21.5).

II. PROMPT COMPLIANCE AS A CORE PRINCIPLE AND CENTRAL OBJECTIVE
OF THE WTO DISPUTE SETTLEMENT MECHANISM

4. If a person not acquainted with the WTO di spute settlement mechanism were asked to
comment on the relevance of the present dispute, it c ould well be that he or she would be tempted to
classify this second recourse by the EC to Article 21.5 of the DSU on the FSC-related matters as a
legal action of minor importance. Let us not be easily deceived, however, by the first impression
caused by the conciseness of the first written submissions of the EC and the United States. These less-
than-30-pages (in total) briefs cannot dismiss or dis guise the density of the systemic implications this
controversy has for all WTO Membership.

5. The United States is b asically arguing that " in the absence of any recommendation or ruling
of withdrawal under Article 4.7 [of the SCM Agreement in the prior proceeding under Article 4 of the
SCM Agreement and Article 21.5 of the Unders tanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU")] this Panel cannot find that the United States has failed to comply
with a DSB recommendation or ruling to withdraw its prohibited subsidies"
2 as a result of
maintaining in the AJCA transition provisions that extend the life of previously found prohibited
subsidies.

6. Brazil will submit in the next section that, as th e United States itself recognizes, the AJCA is
nothing more than a new chapter of the same story. But, first, Brazil wishes to draw the Panel’s
attention to the central role played by the principle and objective of prompt compliance within the
WTO dispute settlement mechanism. It goes without saying that we find the United States to be in
breach of the prompt compliance requirement under the DSU as regards both the original FSC dispute
and its offspring.

7. The DSU drafters made it clear that prompt compliance is, at once, (i) one of the central
tenets for the optimal functioning of the WTO di spute settlement mechanism and (ii) a fundamental
objective of this mechanism. Such principle and objective not only permeates the whole system but is
also enshrined in the text of several provisions of the Understanding. Article 3.3 summarizes what has
just been stated:

The prompt settlement of situations in which a Member considers that any benefits
accruing to it directly or indirectly und er the covered agreements are being impaired
by measures taken by another Member is essential to the effective functioning of the
WTO and the maintenance of a proper balance between the rights and obligations of
Members. (emphasis added)
8. Article 21.1, in turn, develops further such a principle in the context of implementation of the
DSB’s rulings and recommendations. It reads:

Prompt compliance with recommendations or rulings of the DSB is essential in
order to ensure effective resolution of disputes to the benefit of all Members .
(emphasis added)
9. In addition, Articles 3.7 and 21.3 place the immediate withdrawal of the measure found to be
WTO-incompatible or the immediate compliance with DSB’s rulings and recommendations at the top
of the objectives to be pursued in and by the system, in the absence of a mutually satisfactory
solution.

2 US First Written Submission, at para. 2.

10. In our view, these abundant references to the principle of prompt compliance are far from
being a vain exercise of exhortatory style or te xt-embellishment. These textual references must be
given concrete meaning where disputes take pl ace. At a minimum, these provisions definitively
demonstrate that long-standing non-compliance situa tions are in complete disconnection with the
letter and spirit of the DSU. In fact, such situations operate against the very credibility of the system
to the detriment of all WTO Members.

11. Should any WTO Member still oddly consider that the DSU does not provide a sufficient
basis for the conclusion that prompt compliance is a critical feature of the WTO dispute settlement
mechanism, it is noteworthy that the present disp ute involves previous findings and conclusions
relating to prohibited subsidies under the SCM Agreem ent. Given the inherently distorting nature of
the prohibited subsidies, this Agreement is even more stringent than the DSU in respect of the prompt
compliance requirement. Article 4.7 establishes that

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 recommendation the time within which the
measure must be withdrawn.
12. In case a defendant Member does not implem ent the DSB’s recommendation in a prohibited
subsidy dispute within the time-period specified under Article 4.7, Article 4.10 of the SCM
Agreement obliges the DSB to gran t authorization to the complaining party to take appropriate
countermeasures. These countermeasures are not bound by the more restrictive (to complaining
parties’ discretion) "equivalency test" under Article 22.4 of the DSU. Therefore, they may be even
more onerous to the party complained against th at a DSU-only suspension of concessions or other
obligations.

III. THE TRANSITION AND "GRANDFATHERING" PROVISIONS IN THE
AMERICAN JOBS CREATION ACT OF 2004 ("AJCA") AS AN EXTENSION OF A
NON-COMPLIANCE SITUATION

13. Brazil takes the EC’s summary of the relevant sections of the AJCA as a fair and accurate
description of the US measure under review.
3 The United States does not a ppear to disagree with that
factual description.

14. According to the EC, the FSC scheme is, in pa rt, still effective, since section 101 of the AJCA
did not repeal section 5 of the ETI Act (entitled "E ffective date"), thereby providing room for the
continuation of the effects of the scheme of transact ions relating to certain binding contracts entered
into by FSCs in existence on 30 September 2000.
4

15. The EC also points out other aspects of the AJ CA, in particular the "grandfathering" provision
contained in section 101(f) for the benefit of all tr ansactions pursuant to a binding contract (1) which
is between the taxpayer and a person who is not a related person, and (2) wh ich is in effect on
17 September 2003, and at all times thereafter.
5

16. As to the "grandfathering clause", the treatme nt of transactions involving FSCs in existence
on 30 September 2000, and pursuant to a "binding contract", is sufficient to illustrate that both the
FSC and ETI Act subsidies will continue to be available, at least, for some of the beneficiaries of the
subsidies found to be WTO-incompatible by the origin al Panel in this dispute. Almost 5 years after
the expiry of the time-period for the withdrawal of the FSC-prohibited subsidies, part of these

3 See Section V of EC’s First Written Submission.
4 See paras. 36-37 of EC’s First Written Submission.
5 See para. 40 of EC’s First Written Submission.

subsidies would still remain in place in the situati on Brazil has just outlined. The two US legislations
adopted purportedly to comply with the previous recommendations of the DS B in the case may have
altered the original scenario, but have not withdrawn in totum, as required by the SCM Agreement
and the DSU, the subsidies held illegal by the DSB.

17. The United States submits that it " has not failed to comply with the DSB’s recommendations
and rulings, and the transition provisions of the AJCA are not inconsistent with Article 4.7 of the SCM
Agreement, for the simple reason that [...] there was no DSB recommendation or ruling under
Article 4.7 to withdraw the subsidy insofa r as the ETI Act tax exclusion is concerned ."
6 T h e
United States attempts to erroneously split into tw o completely separate cases a situation where the
facts and circumstances show that the cases are part of one same continuum (FSC – ETI – AJCA).

18. Both the ETI Act and, now, the AJCA are me asures taken to comply with the DSB’s rulings
and recommendations concerning the original procee dings. This is the premise on which hinges the
Appellate Body’s conclusion upholdi ng the Panel’s finding that the " United States has not fully
withdrawn the subsidies found, in the original pr oceedings, to be prohibited export subsidies under
Article 3.1(a) of the SCM Agreement , and that the United States has, therefore, failed fully to
implement the recommendations and rulings of th e DSB made pursuant to Article 4.7 of the SCM
Agreement."
7 On this basis, the Appellate Body recommended the DSB to request the United States to
implement fully the recommendations and ruling of the DSB in US – FSC, made pursuant to
Article 4.7 of the SCM Agreement.8

19. The United States asserts that " while the Article 21.5 Panel found that the ETI Act tax
exclusion constituted a prohibited export subsidy, it did not make a recommendation pursuant to
Article 4.7 that the subsidy be withdrawn [...]".9 In doing so, the United States is simply asking that a
compliance panel - having found that a prohibited subsid y expected to be eliminated in light of the
original panel’s findings is still in place – shoul d recommend – again! – that the very same (maybe
under new clothes) prohibited subsidy be withdraw n. Consequently, the de fendant would "deserve" a
new time-period for removing the prohibited subsidy.

20. Brazil notes that, as recalled in paragraph 18 above, the ETI Act Panel found that the United
States has not fully withdrawn the subsidies found, in the original proceedings , to be prohibited
export subsidies, and that the United States has, therefore, failed to fully implement the
recommendations and rulings of the DSB made pursuant to Article 4.7 of the SCM Agreement.

21. This being the case, the US argument in the present proceedings amounts to claiming that the
ETI Act proceedings should have resulted in DSB’ s recommendations or rulings adding to US rights
under the covered agreements, in violation to Article 19.2 of the DSU, through an extension of the
time-period for the full withdrawal of the prohibited FSC subsidies.
10

IV. CONCLUSION

22. In light of the above, Brazil considers that th is Panel should find that the United States has not
yet fully withdrawn the subsidies found to be WTO- incompatible in previous proceedings relating to
the matter being dealt with in the present dispute. Accordingly, the Panel should recommend the

6 See para. 10 of US first written submission.
7 See Report of the Appellate Body in US – Tax treatment for “Foreign Sales Corporations” –
Recourse to Article 21.5 of the DSU by the EC (WT/DS108/AB/RW, 14 January 2002), at para. 256(f).
8 Idem, at para. 257.
9 See para. 14 of the US first written submission.
10 See also para. 228 of the Report of the Appellate Body in US – FSC – Recourse to Article 21.5 of the
DSU by the EC (WT/DS108/AB/RW).

United States to promptly abide by its multilate ral commitments in accordance with the relevant
provisions of the SCM Agreement and the DSU.

ANNEX C-3

THIRD PARTY SUBMISSION OF THE
PEOPLE'S REPUBLIC OF CHINA

(9 June 2005)

1. China welcomes this opportunity to present its view on the dispute between the European
Community and the United States concerning the im plementation of the DSB recommendations or
rulings in the case of United States – Tax Treatment for "Foreign Sales Corporations".

2. Members agree to develop an integrated, more viable and durable multilateral trading system,
since they believe that all members will preserve the principles and rules of such a system so that all
members will benefit from such a system. In this regard, members are aware that "the dispute
settlement system of the WTO is a central element in providing security and predictability to the
multilateral trading system."
1 (emphasis added) That is the reason why effective functioning of the
WTO and the maintenance of a proper balance be tween the rights and obligations of members
essentially relies on the prompt settlement of any dis pute. However, dispute resolution does not end
by the adoption of the DSB recommendations or rulings. "Prompt compliance with recommendations
or rulings of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all
members."
2

3. The SCM Agreement contain strict disciplines on export-contingent subsidies. A member
shall neither grant nor maintain export subsidies, except as provided in the Agreement on Agriculture.
Article 4 of the SCM Agreement includes proceedings for enforcement and remedies. Any measure
founded to be prohibited subsidies must be withdr awn. To continue to make payments under an
export subsidy measure found to be prohibited is no t consistent with the obligation to "withdraw"
prohibited subsidies.3

4. In regard to the situation in this case, Chin a cannot share the view that "the United States has
not failed to comply with the DSB’s recommendations and rulings, and the transition provisions of the
AJCA are not inconsistent with Article 4.7 of the SCM Agreement, for the simple reason that, …
there was no DSB recommendation or ruling under Artic le 4.7 to withdraw the subsidy insofar as the
ETI Act tax exclusion is concerned."
4

5. The DSB made recommendations and rulings under article 4.7 when adopting the panel and
Appellate Body report on 20 March 2000, which re quested the US to withdraw the FSC subsidies
within certain time-period. Subsequently, the Un ited States enacted the ETI Act with a view to
complying with the recommendations and rulings of the DSB in US-FSC. In the first compliance
panel proceeding, the ETI scheme was found inconsis tent with article 3.1(a) of the SCM Agreement
and the US was requested to bring it into conform ity with its obligations under relevant Agreement,
including the SCM Agreement.
5

1 DSU Article 3.2.
2 DSU Article 21.1.

6. 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.
6 T h e
obligation to withdraw prohibited subsidies without delay is not released simply because the first
compliance panel did not specify a time-period in its conclusion. The party concerned failed to fully
implement the DSB recommendations and rulings by introducing transition period and grandfathering
provisions for FSC scheme, an export subsidy measure. How can transition period and grandfathering
provisions for another prohibited subsidy measure be justified?

7. The Appellate Body has made it clear wh y a long transition period and grandfathering
provision are not in conformity with the obligat ion to withdraw the prohibited subsidies without
delay. A Member's obligation under Article 4.7 of the SCM Agreement to withdraw prohibited
subsidies "without delay" is unaffected by contract ual obligations that the Member itself may have
assumed under municipal law. Likewise, a Memb er'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.
7

8. China would like to conclude its submissi on by recalling that the primary objective of the
dispute settlement mechanism is to secure the wit hdrawal of the measures found to be inconsistent
with the covered agreements.