UNITED STATES - TAX TREATMENT FOR "FOREIGN SALES CORPORATIONS"
Document: Second recourse to Article 21.5 of the DSU by the European Communities Report of the Panel
Date: 30 September 2005
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

UNITED STATES - TAX TREATMENT FOR
"FOREIGN SALES CORPORATIONS"

Second recourse to Article 21.5 of the DSU
by the European Communities

Report of the Panel

I. PROCEDURAL BACKGROUND
1.1 The original Panel and Appellate Body Reports in this dispute were adopted by the Dispute
Settlement Body (the "DSB”) on 20 March 2000. In its recommendations and rulings, the DSB
requested the United States to bring the FSC measure that was found, in the Panel and Appellate Body
Reports, to be inconsistent with its obliga tions under Articles 3.1(a) and 3.2 of the Agreement on
Subsidies and Countervailing Measures (the "SCM Agreement") and under Articles 10.1 and 8 of the
Agreement on Agriculture , into conformity with its oblig ations under those Agreements. 1 Adopting
the recommendation of the original Panel made under Article 4.7 of the SCM Agreement, the DSB
specified that the prohibited FSC subsidies had to be withdrawn “at the latest with effect from
1 October 2000”. On 12 October 2000, at a special session, the DSB agreed to the United States'
request to allow it a time period expiring on 1 November 2000 to implement the DSB
recommendations and rulings.2
1.2 On 15 November 2000, the United States enacted the “FSC Repeal and Extraterritorial Income
Exclusion Act of 2000 ”3 (the “ETI Act"). With the enactment of this legislation, the United States
considered that it had implemented the DSB's recommendations and rulings in the dispute and that the
legislation was consistent with the United States' WTO obligations.4
1.3 Following consultations requested by the European Communities on 17 November 2000, the
DSB, acting under Article 21.5 of the DSU, referred the matter back to the original Panel on
20 December 2000. On 29 January 2002, the DSB adopted the Article 21.5 Panel and Appellate Body
reports. The Article 21.5 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:
"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."

1 Original Panel and Appellate Body Reports, US – FSC, para. 178. The original Panel concluded that
the FSC scheme 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. The original Panel recommended at
paras. 8.3-8.4:
"With respect to our conclusions regarding the SCM Agreement, we recommend, pursuant to
Article 4.7 of that Agreement, that the DSB request the United States to withdraw the FSC
subsidies without delay." [i.e. by 1 October 2000 – see para. 8.8].
"With respect to our conclusions regarding the Agreement on Agriculture, we recommend that
the United States bring the FSC scheme into co nformity with its obligations in respect of
export subsidies under that Agreement....".
The Appellate Body upheld the Panel's SCM Agreement finding and modified the Panel's findings under the
 Agreement on Agriculture to find a violation of Articles 10.1 and 8. The original Appellate Body
recommendation read:
"The Appellate Body recommends that the DSB request the United States to bring the FSC
measure that has been found, in this Report and in the Panel Report as modified by this
Report, to be inconsistent with its obligations under Articles 3.1(a) and 3.2 of the
SCM Agreement and under Articles 10.1 and 8 of the Agreement on Agriculture , into
conformity with its obligations under those Agreements." (para. 178).
2 See Minutes of the DSB meeting held on 12 October 2000, WT/DSB/M/90, paras. 6-7.
3 United States Public Law 106-519, 114 Stat. 2423 (2000), Exhibit EC-2.
4 Minutes of the DSB meeting held on 17 November 2000, WT/DSB/M/92, para. 143.

1.4 The 2002 Article 21.5 Panel Report contained no explicit new "withdrawal without delay"
recommendation pursuant to Article 4.7 of the SCM Agreement , opining that the original DSB
recommendation "remained operative".
5
1.5 The Appellate Body upheld the 2002 Article 21.5 Panel’s substantive findings (with modified
reasoning). The 2002 Article 21.5 Appellate Body Report read, in part:
"The Appellate Body recommends that the DSB request the United States to bring
the ETI measure, found in this Report, and in the Panel Report as modified by this
Report, to be inconsistent with its obligations under Article 3.1(a) of the
 SCM Agreement, under Articles 3.3, 8 and 10.1 of the Agreement on Agriculture ,
and under Article III:4 of the GATT 1994, into conformity with its obligations under
those Agreements, and 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."
1.6 On 22 October 2004, the United States enacted th e "the American Jobs Creation Act of 2004"
(the "Jobs Act").6 The United States made the following statement in the DSB in November 2004:
"...on 22 October 2004, President Bush had signed into law the American Jobs
Creation Act of 2004 ("AJCA"). The AJCA had repealed the tax exclusion of the
"FSC Repeal and Extraterritorial Income Exclusion Act of 2000" ("ETI Act"). It had
thereby withdrawn the subsidy found to exist and brought the measure in question
into conformity with US WTO obligations."
7
1.7 On 5 November 2004, the European Communities requested consultations with the
United States.8 Consultations, held on 11 January 2005 in Geneva, did not lead to a satisfactory
resolution of the matter.
1.8 On 14 January 2005, the European Communiti es requested the establishment of another
Article 21.5 DSU Panel as there continued to be "a disag reement as to the existence or consistency
with a covered agreement of measures taken to co mply with the recommendations and rulings" of the
DSB between the United States and the European Communities, within the meaning of Article 21.5 of
the DSU.9 The European Communities made this requ est pursuant to Articles 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.

 5 The interim review section of the 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 –EC) , at
para. 7.5, states:
"The European Communities submits that it is not appropriate for us to make a recommendation in this
case, as our mandate under Article 21.5 DSU is to decide a disagreement. In the EC view, this replaces
the normal rule in Articles 7 and 11 DSU that a panel makes findings so as to assist the DSB in making
recommendations and rulings. The European Communities argues that we have already made the
recommendation referred to in Article 19 DSU in our original Report. The Panel, noting that the
United States did not respond to this EC comment and that practice in this area has not been entirely
consistent in Article 21.5 DSU proceedings44, is of the view that the original recommendation adopted by
the DSB on 20 March 2000 remains operative. We ha ve therefore deleted what was originally
paragraph 9.3 of the interim report (and made a consequentia l change in the title of Section IX of the
Report)."
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, it also was agreed that the
Panel should have standard terms of reference, as follows:10
“To examine, in the light of the relevant provisions of the covered agreements cited
by the European Communities in document WT/DS108/29 the matter referred by the
European Communities to the DSB in that document, and to make such findings as
will assist the DSB in making the recommendations or in giving the rulings provided
for in those agreements.”
1.10 The Panel was composed on 2 May 2005 as follows:
11
 Chairman: Mr. Germain Denis

 Members: Mr. Didier Chambovey
Professor Seung Wha Chang
1.11 Australia, Brazil and China reserved their rights to participate in the Panel proceedings as
third parties.
1.12 The Panel met with the parties on 30 June-1 July 2005 and with third parties on 1 July 2005.
1.13 The Panel submitted its interim report to the parties on 22 July 2005. On 1 August 2005, both
parties submitted written requests that the Panel review certain specific aspects of the interim report.
On 5 August 2005, each party submitted written comme nts on the other party's written request. The
Panel submitted its final report to the parties on 10 August 2005.
II. FACTUAL ASPECTS
A.
INTRODUCTION
2.1 These proceedings of this Article 21.5 complia nce panel follow the United States enactment
of the Jobs Act in late 2004.
2.2 Before briefly describing the Jobs Act, we reca ll the relevant provisions of the original FSC
and ETI subsidy measures.
B. THE ORIGINAL FSC SCHEME
2.3 A detailed description of the original FSC scheme was contained in paragraphs 2.1-2.8 of the
original Panel Report.12
2.4 Briefly, Sections 921-927 of the US Internal Revenue Code provided for a US tax exemption
on a portion of a FSC's earnings. This was "foreign trade income", the gross income of a FSC
attributable to "foreign trading gross receipts". Foreign trading gross receipts meant the gross receipts
of any FSC generated by qualifying transactions, whic h generally involved the sale or lease of certain

10 See document WT/DS108/30.
11 Ibid.
12 Original Panel Report, US – FSC, paras. 2.1-2.8.

“export property”.
13 A FSC had to meet certain requirements of foreign presence and foreign
economic processes.14
2.5 A portion of the “foreign trade income” was deemed to be “foreign source income not
effectively connected with a trade or business in th e United States” and was therefore not taxed in the
United States.15 This untaxed portion was “exempt foreign trade income”. 16 The remaining portion
was taxable to the FSC. Dividends paid by the FSC out of exempt and non-exempt income to the
shareholder (ordinarily, the “related supplier”) generally qualified for a full dividends-received
deduction.17 Special rules applied for agricultural cooperatives. 18 The FSC scheme also contained
certain income allocation (including two administrative pricing) rules in the case of a sale of export
property to a FSC by a person described in Section 482 of the Internal Revenue Code ( i.e., by a
related supplier). There were also certain requirements relating to distribution activities attributable to
the export transaction.
19
C. THE ETI ACT
2.6 A detailed description of the ETI Act was contai ned in paragraphs 2.2 to 2.8 of the 2002
Article 21.5 Panel Report.20
2.7 Briefly, the ETI Act consisted of five sections . Aspects of sections 2, 3 and 5 are most
relevant.21
2.8 Section 3, entitled "Treatment of Extraterrito rial Income", amended the Internal Revenue
Code by inserting a new section 114, as well as a new Subpart E, which was in turn composed of new
sections 941, 942 and 943. The ETI Act permitted certain US and forei gn taxpayers to elect to have
qualifying income taxed in accordance with the ETI provisions on a transaction-by-transaction basis.
2.9 Subject to certain exceptions, income from speci fic transactions would qualify for ETI fiscal
treatment if it was attributable to "foreign trading gross receipts": 22 (i) from specific types of

 13 With certain exceptions, export property is:
• property held for sale or lease;
• manufactured, produced, grown, or extracted in the United States;
• by a person other than a FSC;
• sold, leased, or rented for use, consumption, or disposition outside the United States; and
• with no more than 50 per cent of its fair market value attributable to imports."
14 Section 922(a) and Section 924(b) of the Internal Revenue Code.
15 Such income is generally exempt from tax under section 882 of the Internal Revenue Code, if it is
earned by a corporation resident outside the United States.
16 See Section 923(a) of the Internal Revenue Code.
17 Section 926(a) and 245(c) Internal Revenue Code.
18 See Section 923(a)(4) and Section 245(c)(2)(B) of the Internal Revenue Code.
19 See Section 925(c) and Section 924 (d) and (e) of the Internal Revenue Code.
 20 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 – EC).
21The 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.
22 Section 942(a) of the Internal Revenue Code de signated as "foreign trad ing gross receipts" the
receipts generated in transactions satisfying all three of these conditions. Under sectio n 114(e) of the Internal
Revenue Code, "extraterritorial income" was the gross income attributable to foreign trading gross receipts and,
under section 941(b) of the Internal Revenue Code, "foreign trade income" was the taxable income attributable
to foreign trading gross receipts.

transactions;23 (ii) involving "qualifying foreign trade property"; 24 and (iii) if the "foreign economic
process requirement" was fulfilled.25
2.10 Section 114(a) of the Internal Revenue Code provided that a taxpayer's gross income "does
not include extraterritorial income". Section 114( b) added 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". Accordingly, the portion of extraterritorial income which was
excluded from gross income – and, thereby, fro m United States taxation – was an amount which
would result in a reduction of the taxable income of the taxpayer from the qualifying transaction.26
2.11 Section 2 of the ETI Act repealed the provisions of the Internal Revenue Code relating to
FSCs.27 Section 5(b) prohibited foreign corporatio ns from electing to be treated as FSCs after
30 September 2000 and provided for the termination of inactive FSCs.
2.12 However, section 5(c) created a “transition pe riod” and a “grandfathering clause” for certain
transactions of existing FSCs. Specifically, section 5(c )(1) of the ETI Act stipulated that the repeal of
the provisions of the Internal Revenue Code rela ting 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.
D. THE JOBS ACT
2.13 The Jobs Act applied from 1 January 2005 (secti on 101(c) of the Jobs Act). Thus, the ETI
scheme continued until the end of 2004.
2.14 Section 101 of the Jobs Act is entitled "Repeal of exclusion for extraterritorial income".
Section 101(a) of the Jobs Act stipulates: "Secti on 114 [of the Internal Revenue Code] is hereby
repealed." Section 101(b), entitled "conforming amen dments", provides, in its sub-paragraph (1):
“Subpart E of Part III of subchapter N of chapte r 1 (relating to qualifying foreign trade income) is
hereby repealed".28

23Foreign trading gross receipts coul d be earned through (i) any sale, exchange, or other disposition of
qualifying foreign trade property; (ii) any lease or rental of qualifying fore ign trade property; (iii) any services
which 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 Internal Revenue Code).
24 Qualifying foreign trade property was property: (A) manufactured, produced, 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. Section 3 of the
ETI Act, section 943(a)(1) of the Internal Revenue Code. Section 943(a)(3) and (4) of the Internal Revenue
Code set forth specific exclusions from this general definition.
25 Section 3 of the ETI Act, section 942(b), (b)(2)(A)(ii), (b)(2)(B) and (b)(3) of the Internal Revenue
Code.
26 Pursuant to section 941(a)(1) and (2) of the Internal Revenue Code, qualifying foreign trade income
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; (ii) 1.2 per cent of the foreign
trading gross receipts derived by the ta xpayer from the transaction; or ( iii) 15 per cent of the foreign trade
income derived by the taxpayer from the transaction.
 27Subpart C of part III of Subchapter N of chapter 1, consisting of sections 921-927 of the Internal
Revenue Code.
28 Section 101(b)(2) also contains other “conforming amendments”, Exhibit EC-1.

2.15 However, pursuant to the "transition provision" in section 101(d) of the Jobs Act, for certain
transactions in the period between 1 January 200 5 and 31 December 2006, the ETI scheme remains
available on a reduced basis. That is, a percentage of ETI benefits remain available in respect of each
qualifying transaction (80 per cent in 2005 and 60 per cent in 2006).
2.16 In addition to that time-limited transition provision, section 101(f) of the Jobs Act indefinitely
grandfathers the ETI scheme in respect of certain transactions.
29
2.17 Moreover, Section 101 of the Jobs Act does not repeal section 5(c)(1) of the ETI Act,
indefinitely grandfathering FSC subsidies in respect of certain transactions. 30 Nothing in the
legislative language of the Jobs Act modifies, explic itly or implicitly, the tr ansition rules for the FSC
subsidies.31
III. REQUESTS BY THE PARTIES
3.1 In its request for establishment of the Panel, the European Communities asks the Panel to
find:
 "– that the United States has failed to wit hdraw its prohibited subsidies as required by
Article 4.7 of the SCM Agreement, has failed to bring its scheme into conformity with
its WTO obligations and has thus failed to implement the DSB's recommendations
and rulings, as specified by the DSB on 20 March 2000 and on 29 January 2002, as
required by Articles 19.1 and 21.1 of the DSU.

 – that the United States continues to violate Articles 3.1(a) and 3.2 of the SCM
Agreement, Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article III:4
of the GATT 1994."
32

3.2 In response to Panel questioning, the European Communities clarified that it "is not seeking
repetition of" the findings, recommendations and ruli ngs "already made in pr evious Reports and by
the DSB in this dispute".
33 Rather, the European Communities seeks a finding that by promulgating
the Jobs Act, "the United States has not fully co mplied with the findings and recommendations made
by the Panel and the Appellate Body in the origin al proceeding and in the Article 21.5 proceeding, as
adopted by the DSB."34 The European Communities also clarified that we might legitimately exercise
judicial economy with respect to the "claims" of the European Communities under Articles 19.1 and
21.1 of the DSU.35
3.3 The United States requests that "the Panel reject the EC claims".36

29 The amendments made by section 101 of the Jobs Act do 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
an unrelated person, and (2) which was already in effect on 17 September 2003 (the last day prior to the
introduction of the bill before the US Senate) and at all times thereafter.
30 See, for example, US response to Panel Question 1.
31 See, for example, US response to Panel Question 2.
32 WT/DS108/29.
33 See EC response to Panel Question 8. Although the European Communities, in its first written
submission, requested that we make a further recomme ndation, it subsequently asserted that such a further
recommendation was not necessary. According to the European Communities: "The Panel can confirm that
[the] Article 4.7 recommendation made in the original pr oceedings remains operative and unsatisfied". See EC
response to Panel Questions 8, 27 and 28.
34 See EC response to Panel Question 8.
35 See EC response to Panel Question 10.

IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties are set out in th eir submissions to the Panel. The parties'
submissions are attached to this Report as Annexes (see List of Annexes, page iv).
V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments of the third parties -- Austra lia, Brazil and China -- are set out in their
submissions to the Panel and are attached to this Report as Annexes (see List of Annexes, page iv).
VI. INTERIM REVIEW
6.1 The Panel submitted its interim report to the parties on 22 July 2005. On 1 August 2005, both
parties submitted written requests that the Panel review certain specific aspects of the interim report.
On 5 August 2005, each party submitted written comments on the other party's written request.
A. COMMENTS BY THE EUROPEAN COMMUNITIES
6.2 The European Communities requested changes in the terminology or formatting in
paragraphs 1.4, 7.35, 7.37 (footnote 65), 7.43 and 7.47.
6.3 The United States submitted no comments in respect of the EC comments on paragraphs 1.4
and 7.37.
6.4 However, in respect of paragraph 7.35, the United States asserts that the EC’s suggested
textual changes are designed to equate the "findings " of a panel with the "rulings" of the Dispute
Settlement Body ("DSB"). Indeed, this same assu mption appears to underlie the Panel’s draft of
paragraph 7.35. In the view of the United Stat es, however, "findings" are distinct from both
"recommendations" and "rulings". According to th e United States, the EC’s proposed approach is
contradicted by the text of the DSU (e.g. Articles 7.1 and 11). At the same time, the United States
agrees with the essence of the paragraph, that is, that a panel or Appellate Body recommendation only
has effect when adopted by the DS B. The third sentence of this paragraph raises the question of how
the recommendations in a single report could "mel d" into DSB recommendations. This may have
been meant to refer to the effect of an Appellate Body report on a panel report where the panel report
may be modified. Furthermore, in reviewing the EC comments, the United States noted that the first
sentence of paragraph 7.35 refers to "object and purpose considerations" but the remainder of the
paragraph does not address "object and purpose." This first sentence would appear unnecessary and,
to avoid confusion, may better be deleted. Accordingly, the United States would agree with the EC
that paragraph 7.35 should be revised for greater accuracy, but the United States does not agree with
the EC’s proposed revisions and offers one of its own.
6.5 In respect of paragraph 7.43, the United States as serts that the first change suggested by the
EC highlights the fact that the interim report has created the notion of "rulings" under Article 19 of
the DSU. Article 19, however, does not use that te rm. Accordingly, the United States requests that
the third sentence of paragraph 7.41 be revised to de lete "and rulings". The United States recalls that
the second change suggested by the EC regarding this paragraph would be to italicize the word
"requirement" in line 5. The United States opposes this change, because it would suggest that an
Article 21.5 panel would have the discretionary authority to make new recommendations. As
previously explained by the United States, an Artic le 21.5 panel does not have the mandate to make
recommendations.
6.6 With respect to paragraph 7.47, the United Stat es disagrees with the EC proposal to add, at
the end of the first sentence, the following phrase: "and the relevant recomme ndations and rulings."
The United States asserts that this would be inco nsistent with the text of Article 21.5 of the DSU,

which says nothing about consistency with "the relevant recommendations and rulings." DSB
recommendations and rulings are themselves required to be consistent with th e covered agreements.
DSB recommendations and rulings do not – indeed cannot – amend the covered agreements nor can
they "add to or diminish" the rights and obligations under the covered agreements. Accordingly, the
question of "consistency" remains a question of co nsistency with the covere d agreements, not with
recommendations and rulings.
6.7 In considering the parties' comments, the Panel has remained mindful that: Article 19.1 of
the DSU states that a panel "shall recommend"; Article 4.7 of the SCM Agreement states that "the
panel shall recommend..."; and a pa nel report must be adopted by the DSB to produce operative DSB
rulings and recommendations. We have made certain changes in paragraphs 1.4 and 7.43. For greater
clarity, and noting that we address the issue of whether Article 21.5 requires a new recommendation,
we have made certain changes in paragraph 7.35 and in paragraph 7.37 (footnote 65). Mindful of the
text of Article 21.5 of the DSU, and observing that the covered agreements also subsume, and govern,
recommendations and rulings, we declined to alter paragraph 7.47.
6.8 In line with the European Communities' request, and noting that the United States made no
reply, we have also supplemented the references to the relevant Panel and Appe llate Body reports in
paragraphs 7.56 (footnotes 75 and 76) and 7.60 and footnote 79.
B.
COMMENTS BY THE UNITED STATES
6.9 The United States requests changes in footnote 29. The European Communities agrees.
We have made changes in that footnote to reflect more accurately the text of section 101(f) of the
Jobs Act.
6.10 Taking note of the United States statement that it never argued that de minimis adverse
effects are relevant to the required withdraw al of a prohibited subsidy, and noting the European
Communities suggestion that the United Stat es does not argue that they are, we have deleted what
was footnote 73 of the interim report.
6.11 According to the United States, in paragraphs 7.42 and 7.46, th e Panel refers to the "object
and purpose" of various provisions of the DSU and the SCM Agreement. The United States asserts
that this appears to reflect an incorrect applica tion of customary rules of interpretation of public
international law. Article 31(1) of the Vienna Convention on the Law of Treaties , which is generally
regarded as reflecting such rules, provides that a treaty is to be "interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the
light of its object and purpose" (emphasis added). T hus, according to the United States, it is the
object and purpose of the treaty that is to be considered. The European Communities suggests that
we could take into account the US comments by referring to the object and purpose of the DSU,
which includes the prompt and effective resolution of disputes.
6.12 The Panel is well aware of the principles of treaty interpretation cited by the United States,
which are already cited in paragraph 7.21 of this Panel Report and which have, indeed, guided the
Panel's examination. In respect of object and purpose of treaty terms, we recall the following
statement of the Appellate Body in US-Shrimp:
"A treaty interpreter must begin with, a nd focus upon, the text of the particular
provision to be interpreted. It is in the words constituting that provision, read in their
context, that the object and purpose of the states parties to the treaty must first be
sought. Where the meaning imparted by the text itself is equivocal or inconclusive, or
where confirmation of the correctness of the re ading of the text itself is desired, light

from the object and purpose of the treaty as a whole may usefully be sought." 37
(emphasis added)
6.13 We believe that Article 3.2 of the DSU articulates a fundamental tenet relating to the object
and purpose of the DSU, including its special and additional pr ovisions, such as Article 4.7 of the
SCM Agreement : "The dispute settlement system of the WTO is a central element in providing
security and predictability to the multilateral trading system." The DSU aims to achieve the fair,
prompt and effective resolution of trade disputes. 38 In respect of our interpretation of the terms of the
SCM Agreement, we further recall and endorse the view of the 2002 Article 21.5 Panel that we must
avoid an interpretation that "... is inherently contradictory to what may be viewed as the object and
purpose of the SCM Agreement in terms of disciplining trade-distorting subsidies in a way that
provides legally binding security of expectations to Members." (para. 8.39) In our view, our
interpretation of the text of the relevant treaty provi sions, in their context, is reflective of their object
and purpose. Moreover, this interpretation is entirel y consistent with, reflective of, and confirmed by,
the object and purpose of the DSU (and the SCM Agreement), as a whole. We have slightly altered
paragraphs 7.42 and 7.46, by, among other things, inserting footnotes 66 and 69.
6.14 The United States asserts that the European Communities made three primary claims in this
proceeding: under Article 4.7 of the SCM Agreement and Articles 19.1 and 21.1 of the DSU. The EC
also made some "consequential" claims that flowed from the supposed breaches of these three articles.
According to the United States, none of these three articles appropriately serves as the basis for claims
in this proceeding. As a result, those primary clai ms fail and, because they are "consequential," the
EC’s consequential claims fail as well. According to the United States, the US arguments need to be
viewed in this context, but the interim report does no t appear to reflect this. For example, continues
the United States, paragraph 7.37 misstates the US argument and makes it broader than it is. The US
argument is that the EC erred in claiming that the United States had breached Article 4.7 of the SCM
Agreement with respect to the ETI Act. There wa s no Article 4.7 recommendation, nor, for the
reasons found by the Panel, would it have been appr opriate for there to have been one. The United
States asserts that paragraph 7.51 similarly misstates the US argument. The United States was not
taking a position in the abstract rega rding Members’ obligations under the SCM Agreement (indeed,
even aside from the question of whether a party could ever ask a panel to undertake such a discussion,
given the terms of reference for this proceeding, that issue is not one that the Panel needs to
undertake), but rather was responding to the EC claim of a breach of Article 4.7. For the reasons set
forth in the US submissions, including the fact that Article 4.7 is not directed to Members but rather to
panels, the US asserts that the EC failed to meet its burden of proving a breach of Article 4.7. The
United States requests that the interim report, in cluding these paragraphs, be modified accordingly.
For example, the US asserts, the first sentence of paragraph 7.37 would more accurately read:
"Before us, the United States asserts that in order fo r the EC to establish a breach of Article 4.7 of the
SCM Agreement, the EC would first need to establi sh that there was a recommendation under Article
4.7 that the United States withdraw the ETI Act. " Similarly, the US asserts, paragraph 7.51 would
more accurately read: "We recall the United States argument that, in order for the EC to establish a
breach of Article 4.7 of the SCM Agreement the EC would first need to establish the existence of a
recommendation under Article 4.7 of the SCM Agre ement that the United States withdraw the ETI
Act." According to the United States, footnotes 65 and 74 also reflect the same misunderstanding,
and the United States requests that they be deleted. In particular, footnote 65 ascribes an argument to
the United States that the United States did not make, in that the issue was not presented to this Panel
in the abstract of what obligations attach in the event a Member were to adopt a new prohibited
subsidy, and the United States did not opine on that issue.
6.15 According to the European Communities , the United States draws an unwarranted
distinction between the different EC claims in this proceeding, which in the US view are “primary” or

37 Appellate Body Report, US-Shrimp, para. 114.
38 See, for example, Original Appellate Body Report, US – FSC, para. 166.

“consequential”. The United States does not furt her clarify what would be in its view the
“consequential” claims of the European Communiti es. Given that the United States designates as
“primary” the claims relating to Article 4.7 of the SCM Agreement and to Articles 19.1 and 21.1 of the
DSU, the European Communities infers that the “con sequential claims” would be the other claims
contained in its request for establishment of a pane l. According to the Eu ropean Communities, this
would however be a gross misrepresentation of th e European Communities’ position (and one that the
United States is making for the first time). There is no basis in the European Communities’ request
for the establishment of the Panel for this c ontention by the United States. The European
Communities asserts that the word “consequential” is put by the United States in quotation marks but
with no indication of from where it is quoted. And for good reason because the claims of violation of
Articles 3.1(a) and 3.2 of the SCM Agreement, Articles 10.1, 8 and 3.3 of the Agreement on
Agriculture and Article III:4 of the GATT 1994 were never described as “consequential” to any others.
They are a consequence of the US having failed to withdraw the prohibited subsidies – not of the
violations of Article 4.7 of the SCM Agreement or Articles 19.1 and 21.1 of the DSU.
6.16 The European Communities asserts that each claim listed in the EC re quest for establishment
of the panel in this proceeding has its own merit and is grounded in a self-standing provision of the
WTO.
39 In particular, the claims based on provisions other than Articles 4.7 of the SCM Agreement
and 19.1 and 21.1 of the DSU are claims that the United States continues to violate certain WTO
provisions because the measures found to be in violation of those provisions have not been fully
removed or brought into compliance. As for the Pa nel’s summary of the US argument in para. 7.37,
the European Communities notes that it is very close to the title of section III.A of the US first written
submission, reading:
"A. In the Absence of Any Recommendation of Withdrawal under
Article 4.7, this Panel Cannot Fi nd that the United States Has Failed
to Withdraw Its Prohibited Subsidies Within the Meaning of
Article 4.7 of the SCM Agreement"
6.17 The European Communities asserts that it is also very close to the first part of paragraph 19 of
the US first written submission, reading:
"Any obligation to withdraw the ETI Act tax exclusion, or to
withdraw it within a particular peri od of time, had to be triggered by
a recommendation 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."
6.18 The European Communities asserts that, as for paragraph 7.51, the Panel does not seem to
attribute to the United States a position “in the abstract ”, but rather in respect of the present dispute.
The European Communities further notes that ne ither the distinction between “primary” and
“consequential” claims, nor the alternative formulations suggested by the United States for paras. 7.37
and 7.51 of the Interim Report appear to find corres pondence in the submissions of the United States,
unlike the current drafting of the said two paragraphs. The United States has referred to no passage of
its own submissions where the points it makes in its comments would be reflected. Accordingly,
should the Panel consider that some modifications of paras. 7.37 and/or 7.51 are in order, the
European Communities respectfully submits that they should be limited to adding references to, e.g.,
paragraph 19 of the US first written submission.
6.19 We are confident that our original formulations of the US arguments were faithful to the
arguments of the United States as articulated, inter alia, in its first written submission
40 and its oral

39 [Footnote reference not used.]
40 In its first written submission, para. 2, the United States asserted:

statement.41 We note that the United States did not specifically identify any perceived inaccuracy in
our description of its arguments in Section VII.B.2 of this Report. We have nevertheless clarified the
US arguments in paragraphs 7.37 - 7.39 and 7.51 for greater certainty. To the extent that the United
States is suggesting that it is not possible to establish a Member's breach of Article 4.7 (which,
according to the United States, is not directed to Members but rather to panels), we recall that an issue
before us is whether there is an operative DSB recommendation that the United States withdraw the
prohibited subsidy. A key point for us is that the operative recommendations and rulings are those
flowing from the original proceedings; these re mained operative through the 2002 compliance
proceedings. Arising therefrom is an operative DS B recommendation, rooted in Article 4.7 of the
SCM Agreement, that the United States withdraw the prohi bited ETI subsidies. For the reasons we
have given, we find that the US has not yet fully done so.
6.20 We declined, however, to make the requested de letions of footnotes 65 and 74. In our view,
these footnotes accurately depict a logical extensio n of the United States argument. While that
hypothetical scenario is not before us, we neverthe less believe it serves as a useful aid in analyzing
the merits of the United States argument.
6.21 To eliminate any possibility that paragraph 7.47 could, as suggested by the United States, be
misread as implying that the task of the Panel is to be determined without regard to its terms of
reference, and noting no disagreement on the part of the European Communities, we have inserted
footnote 71, cross-referencing earlier footnotes 47 and 48.
6.22 The United States asserts that, in footnote 77, we appear to "conflate" the two standards
under Article 21.5 of the DSU of "existence" and "consistency". According to the United States, the
question of whether a measure "exists" is distinct from the question of whether a measure that does
exist is "consistent with" a cove red agreement. Given that, in the United States' view, the two
standards clearly are different, the United States requests that this footnote be deleted. The European

"...the transition provisions of the AJCA are not inconsistent with Article 4.7 of the Agreement
on Subsidies and Countervailing Measures ("SCM Agreement") because, in the prior
proceeding under Article 4 of the SC M 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 tax exclusion, in the absence of any recommendation or ruling of
withdrawal under Article 4.7, this Panel 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."

At para. 19 of its first written submission, the United States asserted:

"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 reco mmendation 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....Furthermore, there is no basis for an Article 21.5 panel to make a
finding of compliance or noncompliance with a DSB recommendation or ruling 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."

 41 See United States oral statement at Panel meeting, para. 5:

"...the EC’s claim that the transition provisions of the AJCA are inconsis tent with Article 4.7
is premised on the notion that the ETI Act tax exclusion was found to be inconsistent with the
DSB recommendation under Article 4.7 to withdr aw the FSC subsidies. The US response to
this claim is straightforward: no such finding was ever made, nor did the DSB make a
recommendation under Article 4.7 that the ETI Act tax exclusion be withdrawn."

Communities disagrees that there is necessarily a diffe rence in standards between “existence” and
“consistency” of a measure taken to comply. According to the European Communities, in the case of
partial compliance such as exists in this case the s ituation can be described as inconsistency or partial
non-existence of the measure taken to comply. Wh ere, as in the present case, a measure “taken to
comply” has been adopted and the measure achieves partial compliance, there is a measure taken to
comply for the part for which compliance is achieved ; for the remainder, there is no measure. For the
European Communities, there is no reason why the formulation that is chosen to describe the situation
(non-existence or inconsistency) should lead to a difference in outcome. We have made certain
changes in footnote 77 to better reflect our view.
6.23 In response to the United States request that we clarify the "alternative" to which we referred
in paragraph 7.69, and noting the European Communities suggestion that this is, in fact, "in
addition" rather than "in the alternative", we have modified that paragraph.
6.24 The United States submits that the second sentence of paragraph 7.80 is inaccurate in
describing the scope of section 101 of the Jobs Act. The European Communities suggests a certain
re-formulation of this paragraph. We have made clarifying changes in paragraph 7.80.
VII. FINDINGS
A.
INTRODUCTION
7.1 This is the second time that the European Communities has asked a Panel to rule on the
WTO-consistency of measures taken by the United States to comply with DSB recommendations and
rulings in this dispute.
7.2 The original WTO dispute settlement proceedings resulted in DSB recommendations and
rulings, in 2000, that the United States withdraw the prohibited FSC subsidies and bring itself into
conformity with its obligations under the releva nt covered agreements. The time period for
withdrawal of the prohibited subsid ies pursuant to Article 4.7 of the SCM Agreement expired on
1 November 2000.
7.3 Subsequently, the 2002 Article 21.5 DSU compliance proceedings established that the ETI
Act42 had failed to withdraw completely the prohib ited FSC subsidy and to bring the United States
fully into conformity with its WTO obligations.
7.4 Since that time, the United States has enacted the Jobs Act.43
7.5 We now turn to the parties' main claims and arguments before this Article 21.5 DSU
compliance Panel.
B. ARGUMENTS OF THE PARTIES
1. European Communities
7.6 Before this Article 21.5 compliance Panel, the European Communities asserts that two
provisions of the Jobs Act conti nue inconsistencies with the Unite d States' WTO obligations. These
two provisions are:
• the "transition provision" 44, which provides for a two-year continuation of a percentage of
ETI benefits (80 per cent in 2005 and 60 per cent in 2006); and

42 Text of the ETI Act is in Exhibit EC-2.
 43 Text of the Jobs Act is in Exhibit EC-1.

• the "grandfathering provision" 45, which exempts certain transactions indefinitely from the
repeal of the ETI scheme.
7.7 Moreover, the European Communities submits th at, as the Jobs Act is silent as to the
prohibited FSC subsidies grandfathered through section 5 of the ETI Act, the United States persists in
failing to withdraw fully these prohibited subsidies.
7.8 According to the European Communities, by not entirely withdrawing FSC and ETI
subsidies, the United States has failed to impl ement the DSB recommendations and rulings of
March 2000 and January 2002 and is in violation of Article 4.7 of the SCM Agreement and
Articles 19.1 and 21.1 of the DSU. The European Communities argues that 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.
7.9 The European Communities asserts that the United States has sought to reduce unduly the
content of the Panel's terms of reference as set out in the EC Panel request. When read as a whole, the
EC Panel request contains a clear reference to th e original recommendation under Article 4.7 of the
SCM Agreement and to the findings in the 2002 Article 21.5 proceedings (including with respect to
the FSC grandfathering provisions in section 5 of the ETI Act).
2. United States
7.10 According to the United States, the purpose of fiscal transition provisions contained in
sections 101(d) and (f) of the Jobs Act is to provide a smooth and orderly transition in order to prevent
the repeal of tax legislation from having a retr oactive effect on taxpaye rs who entered into
arrangements in reliance on pre-repeal law. Such transition rules are typically included in major US
tax legislation.
7.11 The United States does not directly contest th e substantive arguments of the European
Communities stated supra, paras. 7.6-7.9. Rather, the United States makes the following arguments:
• there is no recommendation or ruling under Article 4.7 of the SCM Agreement resulting from
the 2002 Article 21.5 compliance proceedings to withdraw the ETI subsidy "without delay".
The Appellate Body recommendations in th e 2002 compliance proceeding relating to
Article 4.7 do not pertain to the ETI Act, as the Appellate Body in the 2002 compliance report
referenced the recommendations and rulings in the original proceedings, which were made
before the ETI Act tax exclusion even existed. Consequently, the United States has not failed
to comply with the DSB’s recommendations and rulings, and the transition provisions of the
Jobs Act are not inconsistent with Article 4.7 of the SCM Agreement; and
• this Panel's terms of refere nce do not include section 5 of the ETI Act, indefinitely
grandfathering original FSC subsidies for certain transactions. The measures before the Panel
are sections 101(d) and (f) of the Jobs Act, c oncerning the ETI Act tax exclusion, and the EC
Panel request does not refer to any other provi sion of the Jobs Act. While the European
Communities makes references in its first writte n submission to section 5 of the ETI Act,
section 5 is not mentioned in the EC Panel request , and, thus, is not within the Panel’s terms
of reference.

44 Section 101(d) of the Jobs Act.
45 Section 101(f) of the Jobs Act.

C. A
RGUMENTS OF THE THIRD PARTIES
1. Australia
7.12 Australia submits that the pertinent Article 21.5 of the DSU “recommendations and rulings”
are those made by the original Panel and Appellate Body, as adopted by the DSB in 2000. Hence, the
purpose of the current Article 21.5 proceeding is to decide whether certain measures that the
United States has taken to comply with these reco mmendations and rulings ar e consistent with the
covered agreements.
7.13 According to Australia, 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.
7.14 Australia asserts that, given the absence of an y substantive 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 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. The obligation to withdraw the ETI scheme arises from the fact that the 2002
Article 21.5 Panel and Appellate Body Reports, as adopted by the DSB, found that the ETI scheme
violated the covered agreements.
7.15 With respect to the Panel's terms of reference, Australia notes that section 5 of the ETI Act
sets up, amongst other things, the grandfathering of the FSC scheme. The 2002 Article 21.5 Panel
and Appellate Body Reports have al ready found this grandfathering to be a violation of the covered
agreements. Australia also notes that it is section 101 of the Jobs Act that fails to repeal section 5 of
the ETI Act. The former section was mentioned in the EC’s Panel request.
2. Brazil
7.16 Citing Articles 3.3, 3.7, 21.1 and 21.3 of the DSU, Brazil asserts that prompt compliance and
immediate withdrawal of WTO-inconsistent measure s are core principles of WTO dispute settlement.
The SCM Agreement (particularly Article 4.7) is even more stringent than the DSU.
7.17 According to Brazil, the transition and “grandfat hering” provisions in the Jobs Act are an
extension of a non-compliance situa tion. The United States attemp ts erroneously to split into two
completely separate cases a situation where the facts and circumstances show that the cases are part of
one same continuum (FSC – ETI – Jobs Act). Both the ETI Act and, now, the Jobs Act are measures
taken to comply with the DSB’s rulings and recommendations concerning the original proceedings.
3. China
7.18 Recalling the terms of Article 4.7 of the SCM Agreement, China submits that the obligation
to withdraw prohibited subsidies without delay is not released simply because the 2002 compliance
Panel did not specify a time-period in its conclusion. According to China, the party concerned failed
to fully implement the DSB recommendations and rulings by introducing the transition period and
grandfathering provisions for the FSC scheme, an export subsidy measure.
7.19 China also submits that a Member's obligation under Article 4.7 of the SCM Agreement to
withdraw prohibited subsidies "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. China que stions how transition period and grandfathering
provisions for another prohibited subsidy measure can be justified.
D. EVALUATION BY THE PANEL
1. Introduction
7.20 We structure our evaluation as follows. First, we identify the relevant guiding principles in
Article 21.5 proceedings in light of the text of Article 21.5 of the DSU. Second, we apply these
guiding principles to the case before us. In so doing, we identify the "measures taken to comply with
the recommendations and rulings" within the meaning of Article 21.5 of the DSU and consider
whether those measures are consistent with the Un ited States' obligations under the relevant covered
agreements. Third, we consider our terms of reference. Finally, we state our conclusions.
7.21 We are guided by Article 3.2 of the DSU, which provides that Members recognise that the
dispute settlement system serves to clarify the prov isions of the covered agreements "in accordance
with customary rules of interpretation of public intern ational law." In this regard, Article 31.1 of the
Vienna Convention on the Law of Treaties ("Vienna Convention")46 provides:
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object and
purpose."
2. Guiding principles under Article 21.5 of the DSU
(a) Relevant treaty text
7.22 Article 21.5 of the DSU governs the proceedings of this Panel.47 It states:
"Where there is disagreement as to the existence or consistency with a covered
agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recourse to these dispute settlement procedures,
including wherever possible resort to the orig inal panel. The panel shall circulate its
report within 90 days after the date of refe rral of the matter to it. When the panel
considers that it cannot provide its report within this time frame, it shall inform the
DSB in writing of the reasons for the delay together with an estimate of the period
within which it will submit its report."
7.23 Article 21.5 of the DSU operates in circumstances where th ere is a “disagreement as to the
existence or consistency with a covered agre ement of measures taken to comply with the
recommendations and rulings”.

46 (1969) 8 International Legal Materials 679.
Article 32 of the Vienna Convention is also generally accepted as such a customary rule (see, for
example, Appellate Body Report, Japan – Alcoholic Beverages II , p. 11). It provides:
"Recourse may be had to supplementary means of interpretation, including the preparatory
work of the treaty and the circumstances of its conclusion, in order to confirm the meaning
resulting from the application of article 31 , or to determine the meaning when the
interpretation according to article 31:
(a)leaves the meaning ambiguous or obscure; or
(b)leads to a result which is manifestly absurd or unreasonable."
47 These proceedings are also framed by our terms of reference. We address our terms of reference,
infra.

7.24 For the purposes of this case, we see three relevant textual elements in Article 21.5 of the
DSU: i) "the existence or consiste ncy with a covered agreement of..." ; ii) "measures taken to comply
with"; and iii) "the recommendations and rulings”. We examine each in turn.
(b) "existence or consistency with a covered agreement"
7.25 An Article 21.5 panel adjudicates on disputes “as to the existence or consistency with a
covered agreement of measures taken to comp ly with the recommendations and rulings ...”.
48
Article 21.5 panels may assess whether "measures taken to comply" implement specific
"recommendations and rulings" adopted by the DSB in the original dispute
49,but must also examine
either the "existence" of "measures taken to comply" or the "consistency with a covered agreement" of
implementing measures.50
7.26 We also note that the expedited procedure in Article 21.5 of the DSU reinforces the principle
of "withdrawal" of an inconsistent measure 51 and the requirement of “prompt compliance” 52 with
recommendations and rulings, ma de under Article 19 of the DSU, as well as recommendations of
"withdrawal" of prohibited subsidies under Article 4.7 of the SCM Agreement.53

48 As already mentioned, this is also informed by the Panel's terms of reference, which we discuss
below.
49Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 40.
50Ibid., paras. 40-41. The panels in EC – Bananas III (Article 21.5 – Ecuador) (paras. 6.8-6.9) and
Australia – Salmon (Article 21.5 – Canada) (para. 7.10, subparagraph 9) reached essentially the same
conclusion.
51 See, e.g., Article 3.7 of the DSU, which states:
"In the absence of a mutually agreed solution, the first objective of the dispute settlement
mechanism is usually to secure the withdrawal of the measures concerned if these are found to
be inconsistent with the provisions of any of the covered agreements. The provision of
compensation should be resorted to only if the immediate withdrawal of the measure is
impracticable and as a temporary measure pending the withdrawal of th e measure which is
inconsistent with a covered agreement."
52 This is expressed in both Article 3.3 and Article 21.1 of the DSU. Article 3.3 of the DSU states:

"The prompt settlement of situations in which a Member considers that any benefits accruing
to it directly or indirectly under the covered agreements are being impaired by measures taken
by another Member is essential to the effect ive functioning of the WTO and the maintenance
of a proper balance between the rights and obligations of Members."

Article 21.1 provides:

"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."

See, for example, Panel Report, Australia – Salmon (Article 21.5 – Canada), paragraph 7.10,
subparagraph 9.
 53 That special and additional dispute settlement rule reads:

"If the measure in question is found to be a prohibited subsidy, the panel shall recommend that
the subsidizing Member withdraw the subsidy without delay. In this regard, the panel shall
specify in its recommendation the time-period within which the measure must be withdrawn."

Article 1.1 of the DSU applies the rules and procedures contained in the DSU to “disputes brought
pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1”. This
general rule is, under Article 1.2 of the DSU, subject to the special or additional rules and procedures on dispute
settlement identified in Appendix 2 to the DSU. See, for example, Appellate Body Report, US — Corrosion-
Resistant Steel Sunset Review , footnote 82 to para. 83. It is only where the provisions of the DSU and the

(c) "measures taken to comply"
7.27 We turn to the second textual element in Article 21.5 of the DSU: "measures taken to
comply".
7.28 Article 21.5 of the DSU does not refer to just any measure54 of a WTO Member, but rather to
a "measure taken to comply". However, it does not further define what a "measure taken to comply"
may be.
7.29 Read in its context, this term "measure taken to comply" is clearly informed by the particular
"recommendations and rulings" which it implements. We discuss this further below.
7.30 At this point, however, we observe that a "measure taken to comply" within the meaning of
Article 21.5 of the DSU may be different from the original me asure and inconsistent with WTO
obligations in ways different from the original measure.55
7.31 While the measures may change from the original to the compliance proceedings, the
obligation to implement DSB recommendations and rulings does not. A "measure taken to comply"
should be fully consistent with a Member's WTO obligations. In terms of prohibited subsidy
disputes, this requires the withdrawal of the prohibited subsidy. A Member's obligation to withdraw a
prohibited subsidy is a c onstant. It remains until full implementation of DSB recommendations and
rulings is achieved.
(d) "recommendations and rulings"
7.32 We turn to the third textual element we have identified in Article 21.5 of the DSU: the
"recommendations and rulings".
7.33 "Recommendations and rulings" are at the core of WTO dispute settlement. 56 As the title of
Article 21 of the DSU makes clear, panel proceedings under Article 21.5 form part of the process of
the “Surveillance of Implementation of the Recommendations and Rulings”.

special or additional rules and procedures of a covered agreement cannot be read as complementing each other
that the special or additional provisions are to prevail. See, for example, Appellate Body Report, Guatemala –
Cement I, para. 65.
54In US – Corrosion-Resistant Steel Sunset Review , para. 81, the Appellate Body addressed the concept
of "measure". It stated:
"... we start with the concept of "measure". Article 3.3 of the DSU refers to "situations in
which a Member consider s that any benefits accruing to it directly or indirectly under the
covered agreements are being impaired by measures taken by another Member ". (emphasis
added) This phrase identifies the relevant nexus, for purposes of dispute settlement
proceedings, between the "measure" and a "Mem ber". In principle, any act or omission
attributable to a WTO Member can be a measur e of that Member for purposes of dispute
settlement proceedings."
55 Appellate Body Report, Canada-Aircraft (Article 21.5 – Brazil), para. 36. The claims, arguments,
and factual circumstances relating to the "measure taken to comply" may thus not, necessarily, be identical to
those relating to the measure in the original dispute.
56 Article 19.1 of the DSU provides: "Where a panel or the Appellate Body concludes that a measure is
inconsistent with a covered agreement, it shall recomme nd that the Member concerned bring the measure into
conformity with that agreement". Article 19.2 DSU emphasizes that: "In accordance with paragraph 2 of
Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the
rights and obligations provided in the covered agreements". The special or additional rule in Article 4.7 of the
SCM Agreement requires that, upon finding a prohibited subsidy, the "panel shall recommend" that the
subsidizing Member withdraw the subsidy without delay.

7.34 The text of Article 21.5 of the DSU does not itself indicate which are the relevant
"recommendations and rulings". Several provisions of the covered agreements indicate that panels
and/or the Appellate Body make "recommendations".
57 We believe that, in its context 58, the text of
Article 21.5 of the DSU, refers to "recommendations and rulings" emanating from the DSB 59, as the
authority to articulate operative WTO recommendations and rulings.60
7.35 Recommendations by a panel and/or the A ppellate Body under Article 19 of the DSU (or
Article 4.7 of the SCM Agreement) become effective only upon their adoption by the DSB. Once the
DSB adopts a dispute settlement report, the findi ngs and recommendations in that report become
collective, operative DSB rulings and recommendati ons. The very notion of "measures taken to
comply with the recommendations and rulings" in the text of Article 21.5 of the DSU is predicated
upon DSB adoption of a panel/Appellate Body report. No compliance obligation would arise unless
and until panel and Appellate Body recommendations and rulings are adopted by the DSB to become
DSB recommendations and rulings. 61

57 For example: the title of Article 19 and Articles 19.1, 19.2 of the DSU, addressing "Panel and
Appellate Body Recommendations"; and the stipulation in Article 4.7 of the SCM Agreement that the " panel
shall recommend" (emphasis added). As mentioned, the latter is a special and additional rule in Appendix 2 of
the DSU. See supra, note 53. All such panel and Appellate Body "recommendations" are conditional upon a
finding of inconsistency with an obligation in the covered agreements. We do not consider that any of these
provisions conflict with the general proposition that it is the DSB that is the authority to articulate operative
WTO recommendations and rulings. We thus need not entertain the notion that the special or additional dispute
settlement provision in Article 4.7 of the SCM Agreement could prevail over the general dispute settlement
arrangements to the extent of obviating the need for DSB endorsement of any panel finding (or, where it exists,
recommendation), or, conversely, entirely undermin ing the ability of the DSB to adopt operative
recommendations and rulings in prohibited subsidy disputes. We recall the following statement in Appellate
Body Report, EC – Export Subsidies on Sugar , para. 334: "Upon adoption, this additional [panel Article 4.7
SCM] recommendation — that the subsidizing Member "w ithdraw the subsidy without delay" — will become a
recommendation or ruling of the DSB."

 58 We find contextual support in the covered agr eements for our view that recommendations and
rulings emanate from the DSB after their adoption. Fo r example: the reference in Article 4.10 of the SCM
Agreement to "...the recommendation of the DSB..."; the reference in Article 3.4 of the DSU to:
"Recommendations and rulings made by the DSB..."; the reference in Article 7.1 of the DSU stipulating the
standard terms of reference of panels to examine "the matter referred to the DSB by" the complaining party's
panel request and "to make such findings as will assist the DSB in making the recommendations or in giving the
rulings provided for in those agreements”; the reference in Article 11 of the DSU that panels should, inter alia
"make such other findings as will assist the DSB in making the recommendations or in giving the rulings
provided for in the covered agreements" (emphasis added);the DSU Article 21.1 statement: "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); and the DSU Article 21.3 reference to "intentions in respect of
implementation of the recommendations and rulings of the DSB"(emphasis added).
59 See, for example, Article 2.1 of the DSU.
60 We find further support for our view that the operative recommendations and rulings flow from the
DSB in prior (adopted) dispute settlement reports. For example, the Appellate Body has clarified that:
"Proceedings under Article 21.5 do not concern just any measure of a Member of the WTO; rather, Article 21.5
proceedings are limited to those “measures taken to comply with the recommendations and rulings” of the DSB"
(emphasis added) (Appellate Body Report, Canada — Aircraft (Article 21.5 — Brazil) , para. 36); and "As the
title of Article 21 makes clear, the task of panels un der Article 21.5 forms part of the process of the
“Surveillance of Implementation of the Recommendations and Rulings” of the DSB ." (emphasis added)
(Appellate Body Report, US — Shrimp (Article 21.5 — Malaysia) , paras. 86–88).
 61 This view is consistent with the letter and spirit of the original GATT dispute settlement provision,
Article XXIII:2 of the GATT 1947/1994 . We are well aware that the WTO Agreement is different from the
GATT system which preceded it, but that it contains many elements of continuity. The previous system was
made up of several agreements, understandings and legal instruments, the most significant of which were the
GATT 1947 and the nine Tokyo Round Agreements, including the Tokyo Round SCM Code . Each of these
major agreements was a treaty with different membership, an independent governing body and a separate

7.36 Article 21.5 compliance proceedings form part of a continuum of events 62 flowing from the
various steps in dispute settlement proceedings, w ith the operative recommendations and rulings for
the purposes of Article 21.5 compliance proceedi ngs being those adopted by the DSB in the original
proceedings. These remain operative through complian ce panel proceedings under Article 21.5 of the
DSU until the "problem" is entirely "fixed", in terms of full withdrawal of the prohibited subsidy.
(e) Does Article 21.5 of the DSU require a new recommendation?
7.37 Before us, the United States asserts:
"Any obligation to withdraw the ETI Act ta x exclusion, or to withdraw it within a
particular period of time, had to be tri ggered by a recommendation under Article 4.7.
Because no such recommendation was made, the United States was not under an
obligation to withdraw the ETI Act tax excl usion....Furthermore, there is no basis for
an Article 21.5 panel to make a finding of compliance or noncompliance with a DSB
recommendation or ruling 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."63

7.38 The United States also asserts th at its answer to "...the EC’s claim that the transition
provisions of the [Jobs Act] are inconsistent with Article 4.7 is premised on the notion that the ETI
Act tax exclusion was found to be inconsistent with the DSB recommendation under Article 4.7 to
withdraw the FSC subsidies .... is straightforward: no such finding was ever made, nor did the DSB
make a recommendation under Article 4.7 that the ETI Act tax exclusion be withdrawn."64
7.39 We understand the United States to argue that , in order for the European Communities'
Article 4.7 claim to prevail, and/or for the Unite d States to be under any obligation to withdraw the
relevant parts of the ETI Act, it would have been necessary for the 2002 Article 21.5 Panel to make a
new recommendation under Article 4.7 of the SCM Agreement that the United States withdraw the
ETI Act. 65 Recalling that an issue before us is whether there is an operative Article 4.7
recommendation in respect of a measure taken to comp ly, we therefore consider the issue whether an
Article 21.5 Panel is required to make a new recommendation under Article 19 of the DSU and/or
Article 4.7 of the SCM Agreement.
7.40 We note that the focus of Article 21.5 of the DSU is helping parties to resolve a dispute.
Article 21.5 of the DSU does not contain the terms "make recommendations". Nor, beyond the
reference to monitoring compliance with existi ng recommendations and rulings, does it contain an

dispute settlement mechanism. See, for example, Appellate Body Report, Brazil – Desiccated Coconut , p. 11.
The GATT 1947 was administered by the CONTRACTING PARTIES (acting collectively). The Tokyo Round
SCM Code was administered by the Tokyo Round SCM Committee, comprised of the signatories to that Code.
The GATT-era dispute settlement arrangements made it clear that the collectivity of the relevant Committee,
rather than the panel, was responsible for formulati ng operative recommendations. In the current institutional
framework of the WTO, the corresponding "collective" entity would be the DSB.
62 Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US) , para. 121.
63 United States first written submission, para. 19.
64 See United States oral statement at Panel meeting, para. 5:
65 We note with some surprise the additional United States view that an Article 21.5 panel does not
have any mandate to make a recommendation under Article 4.7 of the SCM Agreement. See US response to
Panel Question 24. The United States appears to be asser ting that it is not under any obligation to withdraw the
prohibited ETI subsidies because of the purported lack of a recommendation by the first compliance Panel that,
in the United States view, it had no mandate to make in the first place. We note that a logical extension of the
United States arguments would be that, in such a situa tion, a Member could enact a new prohibited subsidy as a
"measure taken to comply" and then never be under an obligation to withdraw that subsidy. We cannot
subscribe to these views of the United States.

explicit reference to the "recommendation" provisions of Article 19 of the DSU, or to Article 4.7 of
the SCM Agreement. We see no express requirement in the text of Article 21.5 of the DSU that a
compliance panel must formulate recommendations upon finding an inconsistency with a covered
agreement, including a recommendation under Article 4.7 upon a finding of inconsistency with
Article 3 of the SCM Agreement.
7.41 In particular, we see nothing in Article 21.5 of the DSU requiring a panel to make a
recommendation under Article 19 of the DSU or Article 4.7 of the SCM Agreement.
7.42 This flows from both the text and context of Article 21.5, in view of the object and purpose of
the DSU.
66 In particular, Article 21.5 comes after the "recommendation" provision in Article 19 of the
DSU, and the principle of "prompt compliance" in Ar ticle 21.1, as part of the WTO dispute settlement
process. The title of Article 21 -- "Surveillance of recommendations and rulings "-- is telling. It
informs us that the proceedings are to follow the implementation of recommendations and rulings that
have been made. This finds further suppor t in the particular nature and purpose of compliance panel
proceedings.
7.43 In this respect, an Article 21.5 compliance procedure occurs after the DSB has already made
recommendations and rulings based on Article 19.1 of the DSU (and/or Article 4.7 of the SCM
Agreement). It is linked to the post-recommenda tion implementation period envisaged in
Articles 21.1 and 21.3 of the DSU. This necessarily implies that th e textual reference in Article 21.5
of the DSU to have "recourse to these dispute settlement procedures" cannot include the requirement
to, once again, formulate additional recommendations under Article 19 of the DSU (and/or Article 4.7
of the SCM Agreement).67 Why would it be necessary for a pane l to again tell a Member to remove a
situation of WTO-inconsistency that it has already been told to remove?
7.44 If an Article 21.5 panel made a new reco mmendation under Article 19 which, upon adoption
by the DSB, required an additional time peri od for implementation, this would give an additional
period of time for the Member concerned to bring itsel f into conformity with the covered agreements.
Similarly, in a dispute involving a subsidy already found to be prohibited, if an Article 21.5 panel
made a recommendation under the first sentence of Article 4.7 of the SCM Agreement to withdraw the
prohibited subsidy "without delay", the panel woul d also presumably be required to “specify … the
time-period within which the measure must be withdrawn”. 68 This would, in effect, amount to giving
an additional period of time for the Member concerned to withdraw the prohibited subsidies.

66 We recall the principles of treaty interpretation, supra, para. 7.21, and incorporate our comments,
supra, paras. 6.11 - 6.13. In particular, we believe that Article 3.2 of the DSU articulates a fundamental tenet
relating to the object and purpose of the DSU, including its special and additional provisions, such as Article 4.7
of the SCM Agreement: "The dispute settlement system of the WTO is a central element in providing security
and predictability to the multilateral trading system." The DSU aims to achieve the fair, prompt and effective
resolution of trade disputes. See, for example, Original Appellate Body Report, US – FSC, para. 166. In respect
of the SCM Agreement, we recall and endorse the view of the 2002 Article 21.5 Panel that we must avoid an
interpretation that "is inherently contradictory to wh at may be viewed as the object and purpose of the SCM
Agreement in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of
expectations to Members." (para. 8.39) We consider th at our interpretation of the text of the relevant treaty
provisions, in their context, is reflective of their object and purpose. Moreover, this interpretation is entirely
consistent with, reflective of, and conf irmed by, the object and purpose of the DSU (and the SCM Agreement),
as a whole.
67 We disagree with the United States assertion that Article 4.7 of the SCM Agreement would not be
available to an Article 21.5 panel by virtue of the reference in Article 21.5 to "recourse to these dispute
settlement procedures", which the United States appears to understand refers only to the provisions of the DSU.
As already mentioned, Article 4.7 of the SCM Agreement is a special and additional dispute settlement rule in
Appendix 2 of the DSU. It applies as articulated in Article 1.2 of the DSU. See supra, note 53.
68 Pursuant to the second sentence of Article 4.7 of the SCM Agreement.

7.45 This would mean that Article 21.5 compliance proceedings should result in adding to the
"non-implementing" Member's rights under the covere d agreements through an extension of the time-
period for implementation. The Article 21.5 proceeding would thus risk undermining the
recommendations and rulings adopted by the DSB, by revisiting an issue already addressed and
definitively resolved by the DSB. We are also mi ndful that a compliance panel must take what has
been decided by the DSB as a given.
7.46 Nowhere do we find any indication in the text or context of Article 21.1/21.5 of the DSU or of
Article 4.7 of the SCM Agreement, nor in the object or purpose of the DSU (nor, for that matter, the
SCM Agreement )69 that would require repeated extens ions of the implementation period in
Article 21.5 DSU compliance proceedings. Indeed, such an interpretation would reduce the textual
treaty terms "prompt compliance" and "without delay" to redundancy and inutility. We are not
permitted to adopt such an interpretation. Such an approach might lead to a potentially never-ending
cycle, whereby a Member continues to adopt non-co mpliant measures in order to win more time to
comply with adopted DSB recommendations and rulings. This would entirely undermine the
effective operation of the WTO dispute settlement system.
70
3. Panel's application of guiding principles
(a) Panel's task under Article 21.5 of the DSU
7.47 The task of this Article 21.5 compliance Pane l is to examine whether measures that the
United States has taken to comply with the reco mmendations and rulings are consistent with the
relevant covered agreements.71 For this purpose, we first identify the "measures taken to comply" and
the "recommendations and rulings" at issue.
(b) "measures taken to comply with" "the recommendations and rulings"
7.48 The "measures taken to comply with" "the r ecommendations and rulings" for the purposes of
Article 21.5 of the DSU necessarily flow from the particul ar "recommendations and rulings" in
question.
7.49 As in the 2002 Article 21.5 case, we take th e view that the operative "recommendations and
rulings" within the meaning of Article 21.5 of the DSU are those adopted by the DSB in the original
dispute settlement proceedings, that is, the recommendations and rulings adopted by the DSB in 2000.
These remained operative through the findings of inconsistency established in the Article 21.5
compliance proceedings, as adopted by the DSB in 2002. These findings confirmed that the United
States had not "fixed the problem" of WTO-inconsis tency identified in the original proceedings by
withdrawing fully the prohibited subsidies.
7.50 The "measures taken to comply" with these recommendations and rulings are the ETI Act and
the subsequent Jobs Act.72 In particular, pursuant to the "transition provision" in section 101(d) of the
Jobs Act, for certain transactions in the pe riod between 1 January 2005 and 31 December 2006, a
percentage of ETI benefits remain available (80 per cent in 2005 and 60 per cent in 2006). In
addition, section 101(f) of the Jobs Act indefinitely grandfathers the ETI scheme in respect of certain

69 See supra, footnote 66.
70 By this, we do not mean to suggest that other elements outlined in the DSU, such as the possibility of
an appeal, would not apply in compliance proceedings under Article 21.5 of the DSU.
71 As indicated supra, footnotes 47 and 48, this task is also governed by our terms of reference. We
address our terms of reference below.
72 Neither party disagreed that the ETI Act and th e Jobs Act are "measures taken to comply with"
"recommendations and rulings" for the purposes of Article 21.5 of the DSU. See EC and US responses to Panel
Questions 16 and 17.

transactions.
73 Furthermore, Section 101 of the Jobs Ac t does not repeal section 5(c)(1) of the ETI
Act, indefinitely grandfathering FSC subsidies in respect of certain transactions.
(c) Article 4.7 of the SCM Agreement in the 2002 Article 21.5 proceedings
7.51 We recall our understanding of the United Stat es argument: in order for the European
Communities' Article 4.7 claim to prevail, and/or for the United States to be under any obligation to
withdraw the prohibited ETI scheme, it would have been necessary for the 2002 Article 21.5 Panel to
make a new recommendation under Article 4.7 of the SCM Agreement that the United States
withdraw the ETI Act.74
7.52 We disagree with the United States. This is simply because the operative “recommendations
and rulings” remain those adopted by the DSB in th e original proceedings in 2000. The purpose of
the 2002 Article 21.5 compliance proceeding was to decide whether the measures taken by the
United States to comply with these recommendations and rulings did, in fact, bring the United States
into a situation of consistency with its WTO obligations. The DSB found, inter alia , that the
United States had not fully withdrawn the prohibited subsidies.
7.53 This Panel is of the view that the United Stat es' obligation to withdraw the ETI scheme arises
from the fact that the original recommendations and rulings adopted by the DSB recommended
withdrawal without delay of the prohibited subsidies pursuant to Article 4.7 of the SCM Agreement;
and the 2002 Article 21.5 Panel and Appellate Body reports, as adopted by the DSB, found that the
ETI scheme was WTO-inconsistent in that, inter alia , it failed to fully withdraw the prohibited
subsidies.
7.54 Article 21.5 of the DSU indicates that there is a procedure to decide a disagreement as to
whether a Member has implemented DSB recommendati ons and rulings and "fixed the problem". It
seems to us that an Article 21.5 compliance panel in a prohibited subsidies dispute may basically find
one of two things. It may find that a Member has indeed "fixed the problem", as it has withdrawn the
prohibited subsidy. Or, it may decide that the Member has not withdrawn, or fully withdrawn, the
prohibited subsidy. We believe that either of th ese findings mark the completion of the task of an
Article 21.5 panel.
7.55 Thus, we see no material significance in the pu rported lack of an explicit "new" Panel
recommendation under Article 4.7 of the SCM Agreement in the first compliance proceeding.
7.56 In any event, the 2002 Article 21.5 Panel expres sly indicated the view that the original
Article 4.7 recommendation "remain[ed] operative". For its part, the Appellate Body recommended
"that the DSB request the United States to implem ent fully the recommendations and rulings of the
DSB in US – FSC , made pursuant to Article 4.7 of the SCM Agreement."
75 Furthermore, the
Appellate Body recommended that the United States bring the ETI measure into conformity with its
obligations under the rele vant covered agreements, including the SCM Agreement .76 These adopted
recommendations and rulings recognize the continui ng non-withdrawal of the prohibited subsidies
and the continuing obligation on the United States to w ithdraw them fully pursuant to Article 4.7 of
the SCM Agreement and to bring itself into conformity with the relevant covered agreements,
including the SCM Agreement. Thus, with our finding that Article 21.5 proceedings need not produce
new recommendations and rulings, we observe th at operative recommendations nonetheless persist.

73 We recall and incorporate our description of the factual aspects of these measures, supra.
74 We recall and incorporate our discussion of the US arguments, supra, paras. 7.37-7.39. We further
recall our view supra, note 65, that it is difficult to reconcile this United States argument with the United States
argument that the Article 21.5 panel had no mandate to make such a recommendation.
75 2002 Article 21.5 Appellate Body Report, US – FSC (Article 21.5 – EC), para.257.
76 2002 Article 21.5 Appellate Body Report, US – FSC (Article 21.5 – EC), para.257.

In light of the Panel's clear expression in the first compliance proceedings that the original
recommendation remained operative, the United States could not reasonably have been unaware that
operative withdrawal recommendations persisted.
7.57 The United States also asserts that the Appe llate Body recommendations in the first
compliance proceeding relating to Article 4.7 do not pertain to the ETI Act, as the Appellate Body in
the first compliance report referenced the recommenda tions and rulings in the original proceedings,
which were made before the ETI Act tax exclusion even existed.
7.58 We agree that the original recommendations and rulings predated the United States enactment
of the ETI Act, which was, indeed, a measure "taken to comply" with these recommendations and
rulings. However, we do not believe that this has the consequences advocated by the United States.
In a prohibited subsidies case, the obligation up on a WTO Member to implement original DSB
recommendations and rulings does not disappear un til that Member has fulfilled the obligation by
fully withdrawing a prohibited subsidy.
(d) existence or consistency of the measures taken to comply
7.59 We now address the existence or consistency of the identified "measures taken to comply".
We turn first to the provisions of the Jobs Act continuing for a transition period and indefinitely
grandfathering the ETI scheme in respect of certain transactions.77
7.60 The panel and Appellate Body findings in th e first 21.5 compliance proceedings, as adopted
by the DSB, established that the ETI scheme was in violation of Articles 3.1(a) and 3.2 of the SCM
Agreement, Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article III:4 of the GATT
1994. Pursuant to Articles 101(d) and (f) of the Jobs Act, the ETI bene fits remain available
throughout 2005 and 2006 (albeit at reduced percentages 78), and indefinitely (in the case of certain
transactions). The inconsistencies with Articles 3.1(a) and 3.2 of the SCM Agreement, Articles 10.1, 8
and 3.3 of the Agreement on Agriculture and Article III:4 of GATT 1994 remain.79
7.61 We further note the indefinite grandfathering of the original FSC subsidies for certain
transactions, through the continued operation of section 5(c)(1) of the ETI Act.80 As confirmed by the
United States in response to Panel questioning, noth ing in the legislative language of the Jobs Act
modifies, implicitly or explicitly, these transition rules for the FSC subsidies.81

77 This dispute may be viewed as one on the "exist ence" of a measure which in its substance complies
with prior recommendations and rulings. Nevertheless, this clearly can also be framed in terms of
"consistency". We recall that we have before us clai ms regarding a measure that does certain things (repeals
e.g. Sections 3 and 4 of the ETI Act, subject to transition and grandfatheri ng provisions) and omits to do other
things (i.e. affect the operation of the grandfathering of the original FSC). In any event, the result is unchanged
whether we frame this in terms of "existence" or "consistency".
78 Although the phased reduction in amount of subsidy available in 2005 and 2006 may be relevant in
another type of proceeding, such as an arbitration under Article 22.6 of the DSU or Article 4.10 and 4.11 of the
SCM Agreement , the fact that, in 2005 and 2006, the percentage of subsidy available is less than the entire
amount that was available under the ETI Act before 2005 is not material to our inquiry unde r the Article 21.5
DSU proceeding. The conditions and circumstances surrounding the granting of this subsidy remain otherwise
unaffected.
79 See 2002 Article 21.5 Panel and Appellate Body Reports, US – FSC (Article 21.5 – EC) , paras.
8.168, 8.170 and 9.1; and paras. 229-231 and 256-257, respectively.
80 In substance, these are the very same prohib ited export FSC subsidies already found to be
inconsistent with the United Stat es WTO obligations in the original dispute settlement proceedings.
Furthermore, in both substance and form, these are the very same ETI Act provisions grandfathering the original
prohibited export FSC subsidies already found to be inco nsistent with the United States WTO obligations in the
2002 Article 21.5 compliance proceedings.
81 See, for example, US response to Panel Question 2.

7.62 It is clear that continuing to grant subsidies f ound to be prohibited is not consistent with the
obligation to "withdraw" prohibited export subsidies, in the sense of "removing" or "taking away".
82
7.63 As stated in the prior Article 21.5 proceedings in this dispute 83, this WTO obligation to
withdraw prohibited subsidies is unaffected by c ontractual obligations that the Member itself may
have assumed under its applicable domestic legislation or regulation. Similarly, this obligation cannot
be affected by contractual arrangements which priv ate parties may have ma de in reliance on laws
conferring prohibited export subsidies.
7.64 Therefore, the United States obligation to implement the operative DSB recommendations
and rulings to withdraw fully the prohib ited subsidies under Article 4.7 of the SCM Agreement and to
bring its measures fully into conformity with the obligations under the releva nt covered agreements
remains.84
7.65 Accordingly, we find that, to the extent that the United States, by enacting Section 101 of the
Jobs Act, maintains prohibited FSC and ETI subs idies through these transitional and grandfathering
measures, it continues to fail to implement fully the operative DSB recommendations and rulings to
withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under
the relevant covered agreements.
4. Panel's terms of reference
7.66 The United States alleges that Section 5 of the ETI Act, indefinitely grandfathering the
original FSC scheme in respect of certain transactions, is not within this Panel's terms of reference.
The European Communities disagrees.
7.67 We recall that the terms of reference dictate th e scope of a panel's ma ndate and determine its
task. This obviously holds true in these Article 21.5 compliance proceedings.85
7.68 We first observe that, irrespective of whether or not section 5 of the ETI Act is within our
terms of reference, it is a matter of fact that the Jobs Act neither repeals nor explicitly or implicitly
affects the operation of section 5 of the ETI Act in any way. The United States remains under an

82 See, for example, Appellate Body Report, EC – Export Subsidies on Sugar, paras. 333-335.
83 See 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 – EC) , para. 8.168, and 2002
Article 21.5 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 230.
84 Having made these findings, it is not necessary for us, for the purposes of resolving this dispute, to
consider whether or not Articles 19.1 and 21.1 of the DSU embody implicit obligations on Members.
Accordingly, we exercise judicial economy with resp ect to the "claims" of the European Communities under
those provisions. We note that the European Communities conceded that such an ex ercise of judicial economy
would be appropriate. See EC response to Panel Question 10.
 85 We find support for this proposition in, inter alia, the following Appellate Body statements:

"the task of a panel under Article 21.5 is to examine the “consistency with a covered
agreement of measures taken to comply with the recommendations and rulings” of the DSB.
That task is circumscribed by the specific clai ms made by the complainant when the matter is
referred by the DSB for an Article 21.5 proceeding."

Appellate Body Report, US — Shrimp (Article 21.5 — Malaysia) , paras. 86–88.

"As in original dispute settlement proceedings, the "matter" in Article 21.5 proceedings
consists of two elements: the specific measures at issue and the legal basis of the complaint
(that is, the claims). "

Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 78.

obligation to withdraw the prohibited subsidi es without delay as a result of the original
recommendations and rulings and the first compliance proceedings in this dispute.
7.69 In addition, and in any event, we examin e whether or not section 5 of the ETI Act,
grandfathering the original FSC subsidies, is within our terms of reference.
7.70 It is well established that a panel's terms of reference are governed by a complainant's panel
request, and that a panel request must satisfy Article 6.2 of the DSU. Article 6.2 of the DSU reads:
"The request for the establishment of a pane l shall be made in writing. It shall
indicate whether consultations were held, identify the specific measures at issue and
provide a brief summary of the legal basis of the complaint sufficient to present the
problem clearly. In case the applicant re quests the establishment of a panel with
other than standard terms of reference, th e written request shall include the proposed
text of special terms of reference."
7.71 There are two distinct requirements in this provision, namely identification of the specific
measures at issue, and the provision of a brief summary of the legal basis of the complaint. Together,
they comprise the “matter referred to the DSB”, which forms the basis for a panel’s terms of reference
under Article 7.1 of the DSU.
7.72 The issue before us does not involve the omissi on of a legal basis for a claim. Rather, it
concerns an alleged failure to identify a measure at issue (Section 5 of the ETI Act, grandfathering
original FSC subsidies).
7.73 This measure would be within our terms of reference to the extent that it is adequately
identified in the EC request for the establishment of the Panel, as required by Article 6.2 of the DSU.
7.74 In general, when faced with a question relating to the scope of its terms of reference, a panel
must "examine the request for the establishment of the panel very carefully to ensure its compliance
with both the letter and the spirit of Article 6.2 of the DSU."86 The task of assessing the sufficiency of
a panel request for the purpose of Article 6.2 may be undertaken on a case-by-case basis, in
consideration of the panel request as a whole, a nd in the light of the attendant circumstances. 87 There
may be a need to consider whether the defendant's ability to defend itself was prejudiced in light of
the text of the panel request.88
7.75 We thus begin our analysis by closely examining the text of the EC Panel request.89
7.76 First, we consider that the EC Panel request should be read as a whole.90

86 Appellate Body Report, EC – Bananas III, para. 142.
87 Appellate Body Report, US – Carbon Steel, para. 127.
88 A defending party is entitled to know what case it must answer and what violations have been
alleged in order that it may begin preparing its defence. This fundamental due process requirement ensures a
fair and orderly conduct of dispute settleme nt proceedings. Appellate Body Report, Thailand-H-Beams,
para. 88. An inadequate panel request may prejudice a defendant's ability to defend itself, given the actual
course of the panel proceedings. This consideration may be among the attendant circumstances entering into a
panel's inquiry under Article 6.2 of the DSU. See for example, Appellate Body Report, Korea-Dairy, para. 127.
89 The text of the EC Panel request, document WT/DS108/29, is attached to this report (Annex E).
90 The EC Panel request contains three sections: "The history of the dispute"; "The subject of the
dispute"; and "Request for establishment of a Panel". Given that there are no requirements as to the precise
formatting (as opposed to the content) of Panel requests, we do not consider that these titles are dispositive.
Thus, we reject the United States argument that our terms of reference should be limited to that part of the
document entitled "subject of the dispute".

7.77 It begins with an overview of developments in this dispute since the original panel
proceedings (including the DSB recommendations a nd rulings arising from the original proceedings
and the 2002 Article 21.5 proceedings, and the enact ment of the Jobs Act). This includes the
following statements:
"On 15 November 2000, the President of the United States signed into law the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000, US Public law No 106-
519 (the "ETI Act")."
"On 20 December 2000, the matter was referre d back to the Panel under Article 21.5
of the DSU and on 29 January 2002 the DSB adopted the Panel [WT/DS108/RW] and
Appellate Body [WT/DS108/AB/RW] reports declaring that the ETI Act violates
Articles 3.1(a), 3.2 and 4.7 of the SCM Agreement, Articles 8, 10.1 and 3.3 of the
Agreement on Agriculture and Article III:4 of the General Agreement on Tariffs and
Trade 1994 (the "GATT 1994"), so that the US had failed to fully withdraw its
prohibited subsidy scheme and failed to implement DSB recommendations and
rulings in this dispute."
7.78 Therefore, the text of the Panel request refers to the ETI Act in its entirety, and to the original
DSB recommendations and rulings and the DSB adoption of the 2002 Article 21.5 panel and
Appellate Body reports containing, inter alia, findings of inconsistency of Article 5 of the ETI Act.
7.79 As to the subject of the dispute, the EC Panel request states:
"Section 101 of the JOBS Act purports to repeal the ETI Act (Section 101 (a)).
However, at the same time, it effectiv ely maintains part of the ETI Act tax
exemptions for a transitional period up to the end of 2006 (Section 101 (d)).
Furthermore, the repeal of the ETI Act do es not apply to certain contracts, without
any time limits (Section 101(f))."
It continues:
"In the light of the above, the European Communities considers that Section 101 of the
JOBS Act contains provisions which will a llow US exporters to continue benefiting
from the tax exemptions already found to be WTO incompatible (a) in the years 2005
and 2006 with respect to all transactions, and (b) for an indefinite period with respect
to certain contracts. Thus, the United States has failed to implement the DSB's
recommendations and rulings by failing to withdraw without delay schemes found to
be prohibited subsidies under the SCM Agreement and to bring its legislation into
conformity with its obligations under the SCM Agreement , the Agreement on
Agriculture and the GATT 1994."
7.80 The EC Panel request thus presents the "subject" of the dispute as Section 101 of the Jobs
Act. That provision repeals the ETI scheme, except those transactions falling within the ETI
transition and grandfathering provisions expressly c ited, and the FSC grandf athering provisions in
section 5 of the ETI Act. Thus, we reject the US argument that our terms of reference should be
interpreted as excluding Section 5 of the ETI Act because this provision bears on the scope of
effective repeal of the ETI Act: section 101 does not repeal the FSC grandfathering provisions in
section 5 of the ETI Act.
7.81 The EC Panel request further refers to the procedural circumstances of this Article 21.5
proceeding and requests the Panel to find the following:

 – "that the United States has failed to wit hdraw its prohibited subsidies as required by
Article 4.7 of the SCM Agreement, has failed to bring its scheme into conformity with
its WTO obligations and has thus failed to implement the DSB's recommendations
and rulings, as specified by the DSB on 20 March 2000 and on 29 January 2002, as
required by Articles 19.1 and 21.1 of the DSU.

 – that the United States continues to violate Articles 3.1(a) and 3.2 of the SCM
Agreement, Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article III:4
of the GATT 1994."

7.82 On a holistic basis, the text of the EC Panel request cites the ETI Act, in its entirety, as well as
both the 2000 and 2002 (Article 21.5) panel and Ap pellate Body reports, in cluding recommendations
and rulings adopted by the DSB. Th e Panel request also refers to a failure to withdraw prohibited
subsidies and a failure to implement DSB recommendations and rulings from the original and first
compliance proceedings. Article 6.2 of the DSU requires identification of the specific measure at
issue, but not specific aspec ts of a specific measure.
91 We find no specific requirement in Article 6.2
concerning the manner or method for identifying a specific measure at issue. If its content is
adequately described in the Panel request, then the particular measure may be adequately identified.
Together, we believe that the text ual references in the EC Panel request embrace the ETI provisions
grandfathering the original FSC scheme, as well as Panel and Appellate Body findings of
inconsistency of Article 5 of the ETI Act, as adopted by the DSB. In our view, this clearly meets the
requirements of Article 6.2 of the DSU.
7.83 In assessing whether the United States may be prejudiced by any apparent defects in the EC's
panel request, we consider whether the EC Pane l request identified the measures with sufficient
clarity to allow the United States to defend itself.
92 In this regard, we are mindful that defects in a
panel request cannot be "cured" in a subsequent submission of a complainant during a panel
proceeding.93 Nevertheless, a complainant's first written submission may confirm the meaning of the
words used in the panel request.94
7.84 In its first written submission, the European Communities states:
"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 [of] Article 4.7 of the SCM Agreement
subsists....the transitional and grandfathering clauses in the Jobs Act are identical in
all material respects to those in the ETI Ac t, except that they provide for continued
availability of ETI subsidies rather than FSC subsidies."
7.85 We are satisfied that the European Communiti es clearly made the distinction between the
grandfathering of the FSC scheme for certain transa ctions by the ETI Act and the grandfathering of
ETI subsidies for certain transactions by the Jobs Act, and that it wishes to challenge both.
7.86 In this connection, we recall that the or iginal recommendations and rulings required
withdrawal of the prohibited subsidies by 1 October 2000. 95 The United States was well aware of its
obligations since at least that point in time. While it is clear to us that we , as an Article 21.5 panel,
may not address claims that are not in the Panel requ est, we recall that the prohibited, grandfathered,

91 Panel Report, EC – Trade Marks and Geographical Indications (US) , p. 14, para. 11 of the
Preliminary Ruling.
92 Appellate Body Report, Thailand – H-Beams, para. 95.
93 Appellate Body Report, EC – Bananas III, para. 143.
94 Appellate Body Report, US –Carbon Steel, para. 127.
95 As indicated in para. 1, supra, on 12 October 2000, at a special session, the DSB agreed to the
United States' request to allow it a time period expiring on 1 November 2000 to implement the DSB
recommendations and rulings.

FSC subsidies are before us for a second Article 21.5 Panel proceedings as part of a continuum of
events flowing from the original and subsequent co mpliance proceedings. Consequently, we do not
believe that the United States has been prejudiced in its ability to defend itself before us.
7.87 For these reasons, we find that section 5 of the ETI Act, grandfathering prohibited FSC
subsidies, is within the terms of reference of this second Article 21.5 compliance Panel.
VIII. CONCLUSION
8.1 In light of the findings contained in Section VII above, we conclude that, to the extent that the
United States, by enacting Section 101 of the Jobs Act, maintains prohibited FSC and ETI subsidies
through the transition and grandfathering measures at issue, it continues to fail to implement fully the
operative DSB recommendations and rulings to wit hdraw the prohibited subsidies and to bring its
measures into conformity with its obligations under the relevant covered agreements.
8.2 Since the original DSB recommendations and ru lings in 2000 remain operative through the
results of the compliance proceedings in 2002, we make no new recommendation.