UNITED STATES – TAX TREATMENT FOR "FOREIGN SALES CORPORATIONS"
Document: SECOND RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE EUROPEAN COMMUNITIES AB-2005-9
Date: 13 February 2006
Document codes: WT/DS108/AB/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

AB-2005-9

Report of the Appellate Body

APPELLATE BODY

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

United States, Appellant/Appellee
European Communities, Appellant/Appellee

Australia, Third Participant
Brazil, Third Participant
China, Third Participant
 AB-2005-9

 Present:

 Abi-Saab, Presiding Member
 Ganesan, Member
 Janow, Member

I. Introduction
1. The United States appeals certain issues of law and legal interpretations developed in the
Panel Report, United States – Tax Treatment for "Forei gn Sales Corporations", Second Recourse to
Article 21.5 of the DSU by the European Communities (the "Panel Report").
1 The Panel was
established to consider a complaint by the Eur opean Communities regarding the American Jobs
Creation Act of 2004 (the "Jobs Act") and the United States' compliance with the recommendations
and rulings of the Dispute Settlement Body (the "DSB") adopted on the basis of the Panel and
Appellate Body Reports in
("US – FSC ") 2 and United States – Tax Treatment for "Fo reign Sales Corporations", Recourse to
Article 21.5 of the DSU by the European Communities ("US – FSC (Article 21.5 – EC) ").3 Relevant
aspects of the Jobs Act are described in paragraph 6 below, as well as in paragr aphs 2.13 to 2.17 of
the Panel Report.
2. The panel in US – FSC (the "original panel") concluded that the "FSC measure", consisting of
Sections 921 to 927 of the United States Internal Revenue Code (the "IRC" ) and related measures
establishing special tax treatment for foreign sales co rporations ("FSC"), was inconsistent with the
United States' obligations under the Agreement on Subsidies and Countervailing Measures (the "SCM

1WT/DS108/RW2, 30 September 2005.
2WT/DS108/R; WT/DS108/AB/R.
3WT/DS108/RW; WT/DS108/AB/RW.

Agreement") and the Agreement on Agriculture .
4 The Appellate Body uphe ld the original panel's
finding that the FSC measure was inconsistent with the United States' obligations under the SCM
Agreement and modified the original panel's findings under the Agreement on Agriculture.
3. On 20 March 2000, the DSB adopted the reports of the original panel and the Appellate Body.
The DSB recommended that the United States bring the FSC measure into conformity with its
obligations under the covered agreements and that the FSC subsidies found to be prohibited export
subsidies within the meaning of the SCM Agreement be withdrawn without delay, pursuant to
Article 4.7 of the SCM Agreement, namely, "at the latest with effect from 1 October 2000". 5 At its
meeting held on 12 October 2000, the DSB agreed to a request made by the United States to modify
the time period to comply with the recommendati ons and rulings of the DSB so as to expire on
1 November 2000.
6 The United States promulgated on 15 November 2000, the FSC Repeal and
Extraterritorial Income ("ETI") Exclusion Act of 2000 (the "ETI Act") 7 in order to comply with the
recommendations and rulings of the DSB.8
4. The European Communities considered that the ETI Act did not comply with the DSB
recommendations and rulings in the original dispute, because the ETI Act was not consistent with the
United States' obligations under the SCM Agreement , the Agreement on Agriculture , and the
General Agreement on Tariffs and Trade 1994 (the "GATT 1994"). As a result, the European
Communities had recourse to Article 21.5 of the Understanding on Rules and Procedures Governing
the Settlement of Disputes (the "DSU"). 9 On 20 December 2000, the DSB referred the matter to a
panel under Article 21.5 of the DSU. 10 The first Article 21.5 panel report was circulated to the
Members of the World Trade Organization (the "WTO") on 20 August 2001.
5. The panel in the first Article 21.5 proceedings concluded that the ETI Act was inconsistent
with the United States' obligations under the SCM Agreement, the Agreement on Agriculture, and the
GATT 1994. In addition, it also held that, by maki ng available indefinitely the FSC tax benefit for
certain transactions by virtue of Section 5(c)(1)(B ) ("Section 5") of the ETI Act, the United States

4Original Panel Report, US – FSC, para. 8.1. A detailed description of the FSC measure is contained in
paragraphs 2.1-2.8 of the Original Panel Report, and in paragraphs 11-18 of the Original Appellate Body
Report, in US – FSC.
6WT/DSB/M/90, paras. 6-7. See also Panel Report, para. 1.1.
7United States Public Law 106-519, 114 Stat. 2423 (2000).
8Panel Report, US – FSC (Article 21.5 – EC) , para. 1.5. A detailed description of the ETI Act is
contained in paragraphs 2.2-2.8 of the Panel Report, and in paragraphs 15-25 of the Appellate Body Report, in
US – FSC (Article 21.5 – EC).
9WT/DS108/16.
10WT/DS108/19.

"ha[d] not fully withdrawn the FSC subsidies found to be prohibited export subsidies [in the original
proceedings] and ha[d] therefore failed to implement the recommendations and rulings of the DSB [in
the original proceedings] made pur suant to Article 4.7 [of the] SCM Agreement."11 The Appellate
Body upheld those findings of the first Article 21.5 panel. The Appellate Body also recommended
that the DSB "request the United States to brin g the ETI measure ... into conformity with its
obligations ... and ... to impl ement fully the recommendations and rulings of the DSB in US – FSC ,
made pursuant to Article 4.7 of the SCM Agreement."
12 On 29 January 2002, the DSB adopted the
reports of the first Article 21.5 panel and the Appellate Body.13
6. On 22 October 2004, the United States, with a view to bringing its measures into conformity
with its WTO obligations, enacted the Jobs Act, repealing the tax exclusion of the ETI Act. 14 The
Jobs Act applies from 1 January 2005. Section 101 of the Jobs Act is entitled "Repeal of exclusion
for extraterritorial income". Section 101(a) provides that "Section 114 [of the IRC] is hereby
repealed." Section 101(b) is entitled "Conforming Am endments" and provides, in sub-paragraph (1):
"Subpart E of Part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is
hereby repealed." At the same time, Section 101( d) contains a "transition provision", pursuant to
which the ETI tax scheme remains available, on a redu ced basis, for certain transactions in the period
between 1 January 2005 and 31 Dece mber 2006. Further, Section 101(f) contains a "grandfathering
provision", pursuant to which the ETI tax scheme remains available indefinitely with respect to
certain transactions. 15 Finally, Section 101 of the Jobs Act does not repeal or otherwise make
reference to Section 5 of the ETI Act, which "grand fathered" indefinitely FSC subsidies with respect
to certain transactions.16 A more detailed description of the Jobs Act is contained in paragraphs 2.13
to 2.17 of the Panel Report.

11Panel Report, US – FSC (Article 21.5 – EC), para. 9.1(e).
12Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257.
13On 17 November 2000, the European Communities had requested authorization to take "appropriate
countermeasures" and to suspend concessions pursuant to Article 4.10 of the SCM Agreement and Articles 22.2
and 22.7 of the DSU for an amount of US$ 4043 million per year. (WT/DS108/13) The United States objected
to the appropriateness of the countermeasures proposed by the European Communities, as well as to the level of
suspension of concessions proposed by the European Communities, and requested that the matter be referred to
arbitration. The arb itrator, acting pursuant to Article 4.11 of the SCM Agreement and Article 22.6 of the DSU,
determined that the countermeasures sought by th e European Communities "would constitute appropriate
countermeasures within the meaning of Article 4.10 of the SCM Agreement ". (Decision by the Arbitrator,
14Panel Report, para. 1.6.
15More specifically, to transactions made in the ordinary course of trade or business occurring pursuant
to a binding contract between the taxpayer and an unrelated person, which contract was in effect on
17 September 2003 and at all times thereafter. (Ibid., footnote 29 to para. 2.16)
16Ibid., para. 2.17. These transactions are transactions pursuant to a binding contract between the FSC
and an unrelated person, which contract was in effect on 30 September 2000. (Ibid., para. 2.12)

7. The European Communities considered that the United States had failed to withdraw its
prohibited subsidies as required by Article 4.7 of the SCM Agreement , had failed to bring its
scheme into conformity with its WTO obligations , and had therefore failed to implement the
recommendations and rulings of the DSB of 20 March 2000 and 29 January 2002. The European
Communities also considered that the United States continued to violate certain provisions of the
SCM Agreement , the Agreement on Agriculture , and the GATT 1994. The European Communities
therefore had recourse to Article 21.5 of the DSU for a second time.
17 On 20 December 2000, the
DSB referred the matter to a pane l under Article 21.5 of the DSU. 18 The Panel Report was circulated
to WTO Members on 30 September 2005.
8. The Panel found that:
The panel and Appellate Body findings in the first 21.5 compliance
proceedings, as adopted by the DSB, established that the ETI scheme
was in violation of Articles 3.1(a) and 3.2 of the SCM Agreement ,
Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article
III:4 of the GATT 1994. Pursuant to Articles 101(d) and (f) of the
Jobs Act, the ETI benefits remain available throughout 2005 and
2006 (albeit at reduced percentages) , and indefinitely (in the case of
certain transactions). The 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.
We further note the indefinite grandfathering of the original FSC
subsidies for certain transactions, through the continued operation of
[S]ection 5[] of the ETI Act. As confirmed by the United States in
response to Panel questioning, nothi ng in the legislative language of
the Jobs Act modifies, implicitly or explicitly, these transition rules
for the FSC subsidies.
19 (footnotes omitted)

9. The Panel concluded that:
... to the extent that the United St ates, by enacting Section 101 of the
Jobs Act, maintains prohibited FSC and ETI subsidies through the
transition and grandfathering measures at issue, it continues to fail to
implement fully the operative DSB recommendations and rulings to
withdraw the prohibited subsidies and to bring its measures into
conformity with its obligations under the relevant covered
agreements.
20

17Request for the Establishment of a Panel by the European Communities, WT/DS/108/29 (attached as
Annex III to this Report).
18WT/DS108/30.
19Panel Report, para. 7.60-7.61.
20Ibid., para. 8.1. See also para. 7.65.

10. The Panel also stated that:
Since the original DSB recommendations and rulings in 2000 remain
operative through the results of the compliance proceedings in 2002,
we make no new recommendation.
21

11. On 14 November 2005, the United States notified th e DSB of its intention to appeal certain
issues of law covered in the Panel Report and certa in legal interpretations developed by the Panel,
pursuant to Article 16.4 of the DSU, and filed a Notice of Appeal 22 pursuant to Rule 20 of the
Working Procedures for Appellate Review (the "Working Procedures").23 On 21 November 2005, the
United States filed an appellant's submission. 24 On 28 November 2005, the European Communities
notified the DSB of its intention to appeal certain issues of law covered in the Panel Report and
certain legal interpretations devel oped by the Panel, pursuant to Article 16.4 of the DSU, and filed a
Notice of Other Appeal 25 pursuant to Article 23(1) of the Working Procedures . On 29 November
2005, the European Communities filed an other appellant's submission. 26 On 9 December 2005, the
European Communities and the United States each filed an appellee's submission.27 On the same day,
Australia and Brazil each filed a third participant's submission 28 and China notified its intention to
appear at the oral hearing as a third participant. 29 On 16 December 2005, the Director of the
Appellate Body Secretariat informed the par ties that Mr. John Lockhart was prevented from
continuing to serve on the Division for serious pe rsonal reasons falling with in Rule 12 of the
Working Procedures. In accordance with Rule 13 of the Working Procedures, the Appellate Body
selected Ms. Merit E. Janow to replace Mr. Lockhart. The oral hearing in this appeal was held on
9 January 2006.

21Panel Report, para. 8.2.
22WT/DS108/32 (attached as Annex I to this Report).
23WT/AB/WP/5, 4 January 2005.
24Pursuant to Rule 21(1) of the Working Procedures.
25WT/DS108/33 (attached as Annex II to this Report).
26Pursuant to Rule 23(3) of the Working Procedures.
27Pursuant to Rules 22 and 23(4) of the Working Procedures.
28Pursuant to Rule 24(1) of the Working Procedures.
29Pursuant to Rule 24(2) of the Working Procedures.

II. Arguments of the Participants and the Third Participants
A. Claims of Error by the United States – Appellant
1. Panel's Terms of Reference

12. The United States requests the Appellate Body to reverse the Panel's finding that, through the
continued operation of Section 5 of the ETI Act, the "grandfathering" of the FSC tax exemption
remained in effect, and that nothing in the Jobs Act modified this grandfathering provision. The
United States argues that neither Section 5 of the ETI Act nor its continued operation was within the
Panel's terms of reference and that, therefore, the Pa nel's findings in this regard are inconsistent with
Articles 6.2 and 21.5 of the DSU.
13. According to the United States, Section 5 of th e ETI Act was not within the Panel's terms of
reference because it was not included in the European Communities' request for the establishment of a
panel. The only provisions identified by the Eur opean Communities in that request as the subject of
the dispute were Sections 101(d) and 101(f) of the J obs Act. Those provisions are, respectively, the
"transition provision" and the "grandfathering provisi on" for the ETI tax exclusion; those provisions
do not relate to the FSC tax exemption. Th e United States emphasizes that the European
Communities' panel request does not mention Section 5 of the ETI Act at all, "let alone a failure to
withdraw [S]ection 5[]".30
14. The Panel, according to the United States, provi ded four reasons for its conclusion that the
European Communities' panel request included Sec tion 5 of the ETI Act. The first was that
Section 101 of the Jobs Act "does not repeal [S]ection 5 of the ETI Act". 31 The United States points
out that the panel request defines Section 101 of th e Jobs Act, and its content, as the subject of the
dispute; the panel request does not define as the subject of the dispute what Section 101 does not
contain.
15. The second of the Panel's reasons, according to th e United States, is that "elsewhere in the
[European Communities'] panel request there are references to the ETI Act in its entirety, as well as to
the prior panel and Appellate Body reports adopted in this dispute."32 In the United States' view, these

31Ibid., para. 50.
32Ibid., para. 51. (footnote omitted)

overly broad references are not "particularly info rmative as to the scope of the matter before the
Panel".33
16. The third reason given by the Panel is that th e European Communities' panel request referred
to a failure to withdraw the prohibited subsidies and a failure to implement the recommendations and
rulings of the DSB in the original and first Ar ticle 21.5 proceedings. However, according to the
United States, "the mere reference to a failure to withdraw prohibited subsidies does not indicate
whether the alleged failure pertains to the FSC tax exemption, the ETI tax exclusion, or both."34
17. The fourth reason given by the Panel, according to the United States, is that Article 6.2 does
not require identification of specific aspects of a measure, and does not prescribe the manner for
identifying a specific measure at issue. The United States asserts that—even assuming that this
statement of the Panel is correct—"this does not me an that when a panel request expressly identifies
the 'subject of the dispute'", and subsequently defi nes the subject of the dispute by referring to the
specific provisions contained in a law, a panel may ignore the method actually used by the
complainant to identify the measures at issue.
35
18. The United States argues that, although the Panel pa id "lip service" to the requirement that a
panel request be read as a whole, in reality, it did not do so. 36 Instead, the Panel mechanically gave
equal weight to every word or every section of th e panel request. In the United States' view, the
section of the European Communities' panel request entitled "The Subject of the Dispute" was, by
virtue of its title, "more probative" than the other sections as to the measures covered by the panel
request. 37 Moreover, the Panel also ignored the fact th at Section 5 of the ETI Act was not mentioned
anywhere in the panel request.
19. Finally, the United States takes issue with th e Panel's conclusion that the United States was
not prejudiced by a lack of clarity in the Europ ean Communities' panel request. Where, as in this
case, a matter is not within a panel's terms of reference because it was not included in the panel
request, there is no need for a responding Member to demonstrate that it has suffered prejudice.

34Ibid., para. 52.
35Ibid., para. 53.
36Ibid., para. 54.
37Ibid.

2. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU

20. The United States requests the Appellate B ody to reverse the Panel's finding that
the United States did not implement fully the DSB recommendations and rulings in the previous
US – FSC and US – FSC (Article 21.5 – EC) disputes. The United States also requests the Appellate
Body to reverse, in particular, the Panel's conclu sion that the United Sates failed to comply with a
recommendation adopted by the DSB under Article 4.7 of the SCM Agreement to withdraw
prohibited subsidies. According to the United St ates, the Panel erred in making this conclusion
because there was no DSB recommendation under Article 4.7 of the SCM Agreement to withdraw
the ETI tax exclusion, while, in the case of the gra ndfathering provisions in Section 5 of the ETI Act,
the Panel's terms of reference did not include as a measure this Section.
21. In the United States' view, the Panel "impr operly equated the recommendation called for in
Article 4.7 with an obligation on Members under the covered agreements". 38 The United States
argues that the panel in the original US – FSC proceedings made a recommendation under
Article 4.7 of the SCM Agreement, which recommendation pertained to the FSC tax exemption. The
only reference to that provision in the first Ar ticle 21.5 proceedings was the Appellate Body's
reference to the FSC tax exemption as "grandfat hered" in the ETI Act. No recommendation was
made with respect to the ETI Act itself under Article 4.7 of the SCM Agreement.
22. According to the United States, the Panel erroneously "create[d] an obligation to withdraw the
ETI tax exclusion within the meaning of Article 4.7." 39 The Panel "essentially transform[ed] a DSB
recommendation and ruling under Article 4.7 to wit hdraw the measures giving rise to the FSC tax
exemption into a general obligation to withdraw prohibited subsidies." 40 Moreover, the Panel found
that the "withdrawal recommendation" made in the original panel proceedings is the "operative"
recommendation in respect of all future measures taken to comply with the recommendations and
rulings of the DSB.41
23. The United States disagrees with these findings of the Panel for two reasons. First, in the
United States' view, Article 4.7 of the SCM Agreement is directed to panels and not to WTO
Members. Secondly, Article 4.7 does not refer to an y "subsidy" but, rather, refers to "the measure in
question ... found to be a prohibited subsidy". 42 Thus, the "measure" subject to the Article 4.7

38United States' appellant's submission, heading III.A.
39Ibid., para. 20.
40Ibid., para. 21.
41Ibid.
42Ibid., para. 24.

withdrawal recommendation is the measure considered by the original panel, and not "any future
measure taken to comply that might be found to constitute a prohibited subsidy." 43 In the context of
the present dispute, "the measure in question" that had to be withdrawn was the FSC tax exemption. 44
The Panel therefore erred in finding that the adopted recommendation of the original panel under
Article 4.7 applies to measures other than the FSC tax exemption.
24. Another major error committed by the Panel, according to the United States, was to
"mischaracteriz[e]" its task under Article 21.5. 45 The United States takes issue with the Panel's
statement that its task under Article 21.5 was to determine whether a Member has "fixed the
problem".46 The United States argues that, under the terms of Article 21.5, a panel's task is simply to
determine whether measures taken to comply exist or not, and, when such measures do exist, whether
they comply with the rulings and recommendations of the DSB. By incorrectly characterizing its task
under Article 21.5 as ensuring that a "problem" is "f ixed", the Panel "appears to have conferred on
itself the authority to ignore the precise text of Article 4.7 of the SCM Agreement and Article 21.5 [of
the DSU], its terms of reference and the particul ar claims advanced by the complaining party". 47 In
the United States' view, Article 4.7 does not direct a panel to recommend that a Member refrain from
enacting any new provision that may provide a prohibited subsidy.48
25. According to the United States, the Panel moreover misinterpreted the findings and
recommendations of the panel and the Appellate Bo dy in the first Article 21.5 proceedings. The
Panel stated that the first Article 21.5 panel "expressly indicated the view that the original Article 4.7
recommendation 'remain[ed] operative'." 49 However, the first Article 21.5 panel made this statement
in response to a comment on the interim report in which the European Commu nities asserted that the
panel should not make new recommendations. The Un ited States argues that the only findings made
by the first Article 21.5 panel under Article 4.7 of the SCM Agreement pertained exclusively to the
FSC tax exemption and Section 5 of the ETI Act, wh ich deals with that FSC tax exemption, but not
with the ETI tax exclusion. For this reason, the United States disputes the view that the
recommendation under Article 4.7 adopted by the DSB in the original US – FSC proceedings is

43United States' appellant's submission, para. 24. (footnote omitted)
44Ibid. (referring to Article 4.7 of the SCM Agreement).
45Ibid., para. 26.
46Ibid.
47Ibid., para. 29.
48Ibid. The United States stated at the oral hearing that the "syste mic issue" as to whether an
Article 21.5 panel has the authority to make a new recommendation under Article 4.7 of the SCM Agreement, in
respect of the measure taken to comply before its consideration, need not be addressed in this dispute.

"operative" with respect to the ETI tax exclusion, "a tax exclusion provided by a legislation that did
not even exist at the time of the 2000 DSB recommendation."
50
26. The United States maintains that the first Artic le 21.5 proceedings resulted in two different
sets of findings and recommendations. One set of findings pertained to Section 5 of the ETI Act and
the transition provisions for the FSC tax exempti on. With respect to this finding, there was a
reference to the United States' failure to comply with previous recommendations and rulings made
pursuant to Article 4.7 of the SCM Agreement . The other set of findings pertained to the ETI tax
exclusion. Although there were findings of inconsistency of the ETI tax exclusion with the provisions
of several covered agreements, there was no finding or recommendation with respect to Article 4.7 of
the SCM Agreement.
27. The United States also argues that the Panel' s interpretations of Article 4.7 of the SCM
Agreement and Article 21.5 of the DSU were not necessary to avoid undermining the WTO dispute
settlement system. The Panel erroneously believe d that only an Article 4.7 recommendation could
create an obligation for a Member to withdraw a measure found to be a prohibited subsidy. The
United States accepts that when, as a result of proceedings under Article 21.5, the DSB makes a ruling
that a measure taken to comply is inconsistent w ith a covered agreement, "the Member maintaining
that measure must withdraw it or otherwise bri ng it into conformity with the relevant covered
agreement."
51 Thus, the United States does not dispute that it was under an obligation "to remedy
the[] inconsistencies [of the ETI Act] with its WTO ... obligations"; however, the United States
disagrees that "this obligation flowed from Article 4.7 of the SCM Agreement or the recommendation
made thereunder."52
B. Arguments of the European Communities – Appellee
1. Panel's Terms of Reference
28. The European Communities requests the Appellate Body to reject the United States' appeal
against the Panel's finding concerning its terms of reference.
29. The European Communities argues, first, that the Panel was correct in considering the
European Communities' panel request as a whole. The United States has not demonstrated why
panels should be required, on the basis of Article 6.2, to look at the text of only one particular part of
a panel request. Furthermore, reading Article 6. 2 of the DSU in the context of proceedings under

51Ibid., para. 40.
52Ibid., para. 41.

Article 21.5, the subject of the present proceedings "is primarily to review whether the 2004 Jobs Act
finally achieved compliance with inter alia the 2000 DSB recommendations and rulings." 53 Seen in
this way, section 2 of the European Communities' pa nel request described the relevant aspects of the
Jobs Act. Furthermore, section 3 of the panel request is "inextricably linked" 54 to section 2 and
contains a clear reference to the origin al recommendation under Article 4.7 of the SCM Agreement
and to the findings made in the first Article 21.5 proceedings with respect to the ETI Act. These latter
findings clearly include findings that the ETI Act partly keeps in force the FSC scheme through the
"grandfathering" provision. Finally, the Europ ean Communities argues that the panel request
explained why "pertinent aspects" 55 of the Jobs Act failed to implement the DSB recommendations,
namely, because these provisions maintained "the tax exemptions already found to be WTO
incompatible"
56; these tax exemptions include the ETI as well as the FSC scheme.
30. Secondly, the European Communities argues that the Panel correctly reviewed whether the
United States had suffered prejudice as a result of th e alleged failure by the European Communities to
identify Section 5 of the ETI Act correctly the measu re at issue. The Panel did not impose a burden
on the United States to demonstrate that the United States had suffered prejudice. Rather, the Panel
noted that whether the responding party has suffered prejudice is a pertinent issue to be examined in
deciding on an alleged violation of Article 6.2 of the DSU. Furthermore, the United States' arguments
before the Panel also demonstrate that the United States was not prejudiced; the United States did not
contest, but rather confirmed, that the Jobs Act did no t, in substance, affect Section 5 of the ETI Act.
Thus, the only defence put forward by the United States was "to acknowledge that there was nothing

to defend."57 This amounts to an admission that "in substa nce the Jobs Act did not affect Section 5[]
of the ETI Act [and] demonstrates that there cannot have been any adverse effects on [the] defence
opportunities of the United States."58
31. The European Communities also points out that (i) DSB rulings exist already to the effect that
Section 5 of the ETI Acts does not achieve wit hdrawal of the FSC tax exemption pursuant to
Article 4.7 of the SCM Agreement , resulting from the adoption of th e first Article 21.5 panel and
Appellate Body reports 59; (ii) the United States has confirme d that the Jobs Act does not modify

54Ibid., para. 66.
55Ibid., para. 70.
56Ibid., para. 71.
57Ibid., para. 77. (original underlining)
58Ibid., para. 78.
59This finding is contained in paragraph 9.1(e) of the Panel Report, and in paragraph 256(f) of the
Appellate Body Report, in US – FSC (Article 21.5 – EC).

Section 5 of the ETI Act; and (iii) the United Stat es does not contest that the Jobs Act and the ETI
Act constituted "measures taken to comply". The arguments of the United States—that the Panel
should have found that only Sections 101(d) and 101(f) of the Jobs Act, and not also Section 5 of the
ETI Act, were within its terms of reference—are therefore not well founded.
2. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU

32. The European Communities considers that the United States' arguments with respect to
Article 21.5 of the DSU and Article 4.7 of the SCM Agreement are without merit and should be
dismissed. First, the recommendation made by the original panel under Article 4.7 of the SCM
Agreement is relevant for the ETI Act, also with respect to the portion of the Act that introduced the
ETI tax or "FSC replacement" 60 scheme. The Panel did not invent a new obligation and did not
improperly equate a recommendation under Article 4.7 with an obliga tion to withdraw a prohibited
subsidy. Rather, the United States incorrectly attemp ts to limit Article 21.5 proceedings to "original"
panel proceedings. According to the European Co mmunities, the focus of Article 21.5 proceedings
"is to assess whether later measures taken to comp ly with earlier recommendations and rulings have
in fact achieved compliance with such recommendations and rulings." 61 As a result, Article 4.7 of the
SCM Agreement cannot be read in isolation.
33. Secondly, the European Communities argues that the Panel did not formulate an improper
"fixing the problem"62 standard. The Panel was correct in reviewing whether, inter alia, the violations
found to exist in the original and in the first Artic le 21.5 proceedings had been eliminated. To the
extent that the United States may be suggesting that Article 21.5 of the DSU "embodies a specific
requirement to plead alternatively either the non- existence or the non-cons istency of the measures
allegedly taken to comply", the European Communiti es disagrees and submits that this is "certainly
not the practice" 63 of requests for Article 21.5 panel establishment. Rather, these two elements are
"two different ways of looking at the same issue". 64 With respect to the United States' argument that
the Panel improperly blurred the distinction betwee n the original measure (that is, the FSC scheme)
and the measures taken to comply (that is, the ETI tax scheme and the Jobs Act), the European
Communities argues that the Appellate Body's finding in Canada – Aircraft (Article 21.5 – Brazil) ,
cited by the United States, does not support the Un ited States' argument that a measure taken to
comply cannot be reviewed against the original recommendation. The European Communities refers

61Ibid., para. 37.
62Ibid., para. 28.
63Ibid., para. 41.
64Ibid.

to the Appellate Body Report in Brazil – Aircraft (Article 21.5 – Canada) in support of its
argument.65
34. Thirdly, according to the European Communities, the Panel did not misinterpret the findings
and recommendations made in the first Article 21.5 proceedings. The European Communities
disagrees with the United States that the original recommendation applies only to the FSC scheme and
Section 5, but does not apply to the ETI tax scheme. Rather, according to the European Communities,
the original Article 4.7 recommendation does apply to the entirety of the ETI Act, including Section 5
thereof. The "fundamental" reason for this is th at the original recommendation represents the "very
benchmark" against which the measure taken to comp ly must be reviewed in order to assess whether
that measure has brought about compliance. 66 A new recommendation under Article 4.7 of the SCM
Agreement was not necessary in the first Article 21 .5 proceedings, because the main purpose of a
recommendation under Article 4.7 is to define the time period within which the subsidy found to be in
violation of Article 3.1 of the SCM Agreement must be withdrawn. The European Communities also
notes that the United States admits that, even in the absence of a recommendation under Article 4.7
pertaining specifically to the ETI tax scheme, it wa s obliged to withdraw the ETI tax scheme in its
entirety.
35. In this regard, the European Communities ar gues that the Appellate Body, in the first
Article 21.5 proceedings, made its recommendation with respect to the "ETI measure", which
included Section 5 of the ETI Act. 67 The Appellate Body also recalled that the "ETI measure" had
been found to be inconsistent with United States' obligations under the three Agreements in question,
and had recommended that the United States bring th e "ETI measure" into conformity with those
Agreements. The recommendation of th e Appellate Body thus included the SCM Agreement and, in
particular, Article 4.7 of that Ag reement. As a result, according to the European Communities, if, at
all, a new recommendation under Article 4.7 of the SCM Agreement were needed with respect to the
ETI tax scheme, it is contained in that Appellate Body recommendation.
36. In addition, the European Communities points to its panel request in the first Article 21.5
proceedings and argues that the enquiry of the pane l in those proceedings concerned the resolution of
a disagreement whether the ETI Act as a whole achieved compliance with earlier recommendations

65European Communities' appellee's submission, para. 43 (referring to Appellate Body Report, Brazil –
Aircraft (Article 21.5 – Canada), para. 82(a) and (b)).
66Ibid., para. 46.
67Ibid., para. 53 (referring to Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257).

and rulings. No distinction was made between pr ovisions creating a new subsidy regime and those
"perpetuating"
68 FSC benefits.
37. Finally, the European Communities supports the concern of the Panel that, if a new
Article 4.7 recommendation were necessary in ever y Article 21.5 proceeding, it might undermine the
effective operation of the dispute settlement syst em, because it would involve setting new time-limits
for compliance. The European Co mmunities also draws attention to the inconsistencies in the United
States' arguments that, on the one hand, no recommendation under Article 4.7 to withdraw the ETI tax
exclusion had been made in the first Article 21.5 proceedings and that, on the other hand, Article 21.5
compliance panels have no authority to make such recommendations under Article 4.7.
C. Claims of Error by the European Communities – Other Appellant
38. In the event that the Appellate Body endorses an y of the United States' claims on appeal, the
European Communities requests the Appellate Body to rule on certain claims that the European
Communities made before the Panel, which, acco rding to the European Communities, the Panel
decided only in part.
39. These claims were, first, that, by not entirely withdrawing FSC and ETI subsidies, the United
States has failed to comply with the recommenda tions and rulings of the DSB as well as with
Article 4.7 of the SCM Agreement. The European Communities submits that the Panel upheld this
claim only "insofar as it found that the United States had failed to comply with the operative
recommendations and rulings of the DSB." 69 However, the Panel did not expressly state whether a
violation of Article 4.7 of the SCM Agreement had occurred, nor did it say that it was exercising
judicial economy with regard to this claim of the European Communities.
40. Secondly, the European Communities argues that, by not entirely withdrawing FSC and ETI
subsidies, the United States has failed to comply with the recommendations and rulings of the DSB
and thereby its obligations under Articles 19.1 and 21. 1 of the DSU. The Panel exercised judicial
economy in respect of these claims . The European Communities argues that Article 19.1 of the DSU
contains an implicit obligation on WTO Members similar to that in Article 4.7 of the SCM
Agreement. Therefore, the European Communities cons iders that the United States is violating
Article 19.1 and Article 21.1 of the DSU and requests the Appellate Body to make such a finding, in
the event that it reverses any of the Panel's findings.

69European Communities' other appellant's submission, para. 6.

41. In addition, in the event that the Appellate Body considers that the Panel erred in holding that
"the original DSB recommendations a nd rulings in 2000 remain operative" 70, and that it did not
therefore need to issue a new recommendation under Article 4.7 of the SCM Agreement , the
European Communities requests the Appellate Body to make such a recommendation. The European
Communities explains that the reason why it requested the first compliance panel not to make an
Article 4.7 recommendation is that such a recomme ndation requires the fixing of a time period for
withdrawal of the subsidy found to be prohibited. Compliance with WTO obligations should not be
postponed through a "never-ending cycle" 71 of litigation and advancem ent of the time-limit for
compliance. The European Communities furthermor e argues that, in the event that the first and
second Article 21.5 panels erred in not making a recommendation in the first and second compliance
proceedings, the Appellate Body should complete the analysis and make such a recommendation.
42. The European Communities adds that recommendations under Article 4.7 of the SCM
Agreement and Article 19.1 of the DSU—in the event th ey are considered necessary by the Appellate
Body—must be made "irrespective of a speci fic request of the complaining party". 72 Accordingly,
these recommendations may be made by the Appellate Body when the Appellate Body considers it
necessary to complete the analysis in the ab sence of any such request. Such additional
recommendations should not, however, imply setti ng a new time period for withdrawing the
prohibited subsidies as that would undermine the effective operation of the dispute settlement system.
D. Arguments of the United States – Appellee
43. The United States requests the Appellate Body to reject the conditional claims of error raised
by the European Communities. The United States argu es that it could not have acted inconsistently
with Articles 19.1 and 21.1 of the DSU: Article 19. 1, first sentence, imposes an obligation on panels
and the Appellate Body to make recommendati ons and does not impose obligations on WTO
Members; Article 21.1 does not provide for any ob ligation. According to the United States, the
European Communities confuses the role of reco mmendations with that of obligations of WTO
Members. In the United States' view, any incons istency is an inconsiste ncy with the relevant
provision of a covered agreement, not an inconsistency with Article 19.1 or Article 21.1.
44. Secondly, the United States submits that, as with Articles 19.1 and 21.1 of the DSU,
Article 4.7 of the SCM Agreement does not impose obligations on WTO Members; rather,

70European Communities' other appellant's submission, para. 7 (referring to Panel Report, paras. 7.49
and 8.2).
72Ibid., para. 27.

Article 4.7 is addressed to panels. According to the United States, the Eu ropean Communities bases
its arguments not on the text of Article 4.7, but, ra ther, on its own interpretation of statements made
by the Appellate Body in US – FSC (Article 21.5 – EC).
73 In the United States' view, it is Article 3.2
of the SCM Agreement, rather than Article 4.7 of the SCM Agreement, that prohibits the granting or
maintenance of prohibited subsidies. Furthermore, the United States points out that neither the panel
nor the Appellate Body in US – FSC (Article 21.5 – EC) found a violation of Article 4.7; rather, the
panel found that the United States had "failed to implement the recommendations and rulings of the
DSB made pursuant to Article 4.7 of the SCM Agreement".74
45. Thirdly, the United States argues that the Appellate Body should reject the "contingency"75 on
which the European Communities' request for recommendations is premised. According to the United
States, it is "impossible" 76 that the contingency defined by the European Communities—namely,
should the Appellate Body find that the Panel erre d in concluding that no new recommendations were
necessary under Article 4.7 of the SCM Agreement—could arise. There "would be no basis for the
Appellate Body to find that the Panel erred by not making new recommendations" 77, because neither
the United States' Notice of Appeal, nor the Europ ean Communities' Notice of Other Appeal, contain
a claim that the Panel erred in concluding that no new recommendations were necessary.
46. Fourthly, according to the United States, the Eu ropean Communities failed to comply with
Rule 21 of the Working Procedures, because the European Communities' other appellant's submission
does not set out "a precise statement of the grounds for the appeal" or "a precise statement of the
provisions of the covered agreemen t and other legal sources relied on" 78 as required by Rule 21. In
particular, the United States' points to the statemen t in the European Communities' other appellant's
submission that "[t]he detailed arguments supporting [the European Communities'] claims can be
found in the [European Communities'] submissions be fore the Panel and are hereby incorporated by
reference."79 Although it "may perhaps be possible" 80 to comply with Rule 21 through incorporation
by reference, the United States contends the European Communities has not complied with Rule 21 in

73United States' appellee's submission, para. 17 (refe rring to European Communities' other appellant's
submission, para. 12, in turn quoting Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 229, which
reads: "Article 4.7 of the SCM Agreement requires prohibited subsidies to be withdrawn 'without delay', and
provides that a time-period for such withdrawal shall be specified by the panel.").
74Ibid., para. 20 (referring to Panel Report, US – FSC (Article 21.5 – EC), para. 9.1(e)).
75Ibid., para. 22.
76Ibid.
77Ibid.
78Ibid., para. 25.
79Ibid. (referring to European Communities' other appellant's submission, para. 6).
80Ibid., para. 27.

this particular instance. This is because th e European Communities' references are "vague" and
because the European Communitie s' approach ignores the interests of third parties. 81 As a result, the
United States asks the Appellate Body, pursuant to Rule 29 of the Working Procedures, to dismiss the
relevant portions of the European Communities' conditional appeal.
E. Arguments of the Third Participants
1. Australia
47. With respect to the Panel's terms of reference, Australia submits that the grandfathering and
exclusion provisions of Section 5 of the ETI Act c onstitute a measure already found to be inconsistent
prior to the second Article 21.5 panel proceedings. The fact that Section 5 of the ETI Act is not
explicitly cited in the panel request "does not serve to convert a WTO-inconsistent measure into a
WTO-consistent measure."82 Even if the Appellate Body were to reverse the Panel's ruing with regard
to its terms of reference, the United States continues to be under a "continuing obligation" 83 to bring
the measure at issue into conformity.
48. With respect to the United States' arguments regarding the ETI tax exclusion and the
implementation of DSB recommendations and rulings, Australia agrees with the Panel's findings and
argues that the United States is effectively seekin g to appeal the adopted recommendations of the
DSB in the first Article 21.5 proceedings. An Ar ticle 21.5 panel does not have a mandate to make
recommendations under Article 4.7 of the SCM Agreement. The recommendations of the DSB in the
original dispute have "continuing application" 84, given that the measures taken to comply continue to
operate and these very same measures were found to be inconsistent with WTO law. In Australia's
view, the United States' position woul d lead to a "legal absurdity" 85 concerning the legal effect of
DSB recommendations. Moreover, the United St ates is under an obligation to remedy the
inconsistencies, and a successful appeal by the United States "could not serve to convert a WTO-
inconsistent measure into a measure conforming to WTO obligations."86

81The United States submits, specifically, that the European Communities refers to submissions, oral
statements, and responses to Panel questions that were ne ver served on the third parties. Although the opening
statement of the European Communities was included as an annex to the Panel Report, the closing statement and
responses to questions were not. Nor were these materials posted on the European Communities' website.
82Australia's third participant's submission, para. 9.
83Ibid.
84Ibid., para. 6.
85Ibid., para. 7.
86Ibid.

2. Brazil

49. With respect to the Panel's terms of referenc e, Brazil submits that the United States is, in
effect, arguing that the European Communities attributed to one particular section of its panel request
greater importance than to other sections, because that section was entitled "The Subject of the
Dispute". In Brazil's view, the United Stat es' appeal elevates "form over substance". 87 By asking, in
the panel request, for a finding that the United Stat es had failed to withdraw its prohibited subsidies
and thus failed to implement the recommendati ons and rulings of the DSB, the European
Communities satisfied the requirement of Article 6. 2 of the DSU to present the problem clearly. The
references to the ETI Act in its entirety and to previous panel and Appella te Body reports were
sufficient to define the scope of the matter before the Panel. Moreover, the European Communities'
first submission to the Panel made explicit refere nce to the fact that Section 5 of the ETI Act
continued to be in force.
50. With respect to the United States' arguments regarding the ETI tax exclusion and the
implementation of DSB recommendations and rulings, Brazil submits that the "fixing the problem"
standard set forth by the Panel is "in line with a sound textual interpretati on of Article 21.5 of the
DSU".
88 Brazil also disagrees with the United States' argument that the "measure" subject to the
Article 4.7 withdrawal recommendation is the measure considered by the original panel, and not any
future measure taken to comply that might be fou nd to constitute a prohibited subsidy. Rather, Brazil
agrees with the Panel's finding that a Member’s ob ligation to withdraw a prohibited subsidy is "a
constant" and "remains until full implementation of DSB recommendations and rulings is
achieved".89 In addition, although the United States recognizes that it was under an obligation to
remedy the inconsistencies found with respect to th e ETI tax exclusion by the first compliance panel,
it has not clarified how and when it would comply. Finally, Brazil "strongly cautions" against any
interpretation by which the introduction of "new" inconsistencies
90, in the process of bringing a WTO-
inconsistent measure into conformity with the covered agreements, would prolong disputes.

87Brazil's third participant's submission, para. 19.
88Ibid., para. 9.
90Ibid., para. 17.

III. Issues Raised in This Appeal
51. The following two issues are raised in the appeal of the United States:
(a) whether the Panel erred in finding that Section 5(c)(1)(B) ("Section 5") of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000 (the "ETI Act") 91,
grandfathering prohibited foreign sales corpor ations ("FSC") subsidies, was within its
terms of reference92; and
(b) whether the Panel erred in finding that, to the extent the United States maintains
prohibited FSC and extraterritorial income ("ETI") subsidies through the transition
and grandfathering measures at issue, "it continues to fail to implement fully the
operative DSB recommendations and rulings to withdraw the prohibited subsidies and
to bring its measures into conformity with its obligations under the relevant covered
agreements."93

IV. Panel's Terms of Reference
52. We first address the issue raised by the Un ited States that the Panel's conclusion that
Section 5 of the ETI Act is within its terms of reference is inconsistent with Articles 6.2 and 7.1 of the
DSU.94
53. The Panel defined the issue before it as an alleged failure on the part of the European
Communities to identify the specific "measure at issue", namely, Section 5 of the ETI Act,
grandfathering prohibited FSC subs idies, as required by Article 6.2 .95 The Panel stated that this
measure would be within its terms of reference "to the extent that it is adequately identified in the
[European Communities'] request for the establishment of the Panel". 96 The Panel took the view that
the European Communities' panel request should be read "as a whole" 97, and noted that the text of the
panel request "refers to the ETI Act in its entir ety, and to the original DSB recommendations and
rulings and the DSB adoption of the 2002 Article 21 .5 panel and Appellate Body reports containing,

91United States Public Law 106-519, 114 Stat. 2423 (2000).
92Panel Report, para. 7.87.
93Ibid., para. 7.65. See also para. 8.1.
94United States' appellant's submission, para. 57; United States' Notice of Appeal, WT/DS108/32
(attached as Annex I to this Report), para. 2.
95Panel Report, para. 7.72.
96Ibid., para. 7.73. (original emphasis)
97Ibid., para. 7.76. (footnote omitted)

inter alia, findings of inconsistency of [Section] 5 of the ETI Act."
98 The Panel further noted that the
panel request identifies the "subject of the dispute" as Section 101 of the American Jobs Creation Act
of 2004 (the "Jobs Act"), which provision "repeals the ETI [tax] scheme, except those transactions
falling within the ETI transition and grandfathe ring provisions expressly cited, and the FSC
grandfathering provisions in [S]ection 5 of the ETI Act."99 The Panel stated:
Thus, we reject the [United States'] argument that our terms of
reference should be interpreted as excluding Section 5 of the ETI Act
because this provision bears on the sc ope of effective repeal of the
ETI Act: [S]ection 101 does not repeal the FSC grandfathering
provisions in [S]ection 5 of the ETI Act.
100

54. The Panel observed, moreover, that "[o]n a holistic basis, the text of the [European
Communities'] Panel request cites the ETI Act, in its entirety, as well as both the 2000 and 2002
(Article 21.5) panel and Appella te Body reports, including recomme ndations and rulings adopted by
the DSB" and that the panel request also refers to "a failure to withdraw prohibited subsidies and a
 failure to implement DSB recommendations and rulings from the original and first compliance
proceedings."101 The Panel declared that if the " content [of a specific measure] is adequately
described in the Panel request, then the partic ular measure may be adequately identified." 102 T h e
Panel concluded on this basis that:
... the textual references in th e [European Communities'] Panel
request embrace the ETI provisions grandfathering the original FSC
[tax] scheme, as well as Panel a nd Appellate Body findings of
inconsistency of Article 5 of the ETI Act, as adopted by the DSB. In
our view, this clearly meets the requirements of Article 6.2 of the
DSU.
 103 (original italics)

55. After reaching this conclusion, the Panel assessed whether the United States "may be
prejudiced by any apparent defects in the ... panel request". 104 The Panel recognized that defects in a
panel request cannot be "cured" 105 in a subsequent submission, but noted that, nevertheless, a
complainant's first written submission "may confir m the meaning of the words used in the panel

98Panel Report, para. 7.78.
99Ibid., para. 7.80.
100Ibid.
101Ibid., para. 7.82. (original emphasis)
102Ibid. (emphasis added)
103Ibid.
104Ibid., para. 7.83.
105Ibid. (referring to Appellate Body Report, EC – Bananas III, para. 143).

request"106. The Panel took the view that the European Communities, in its first written submission,
"clearly made the distinction" between the grandfathering of the FSC tax scheme and the
grandfathering of the ETI subsidies by the ETI Ac t and the Jobs Act, and that this first written
submission showed that the European Co mmunities "wishe[d] to challenge both". 107 The Panel
further noted that the original recommendations and rulings required withdrawal of the prohibited
subsidies by 1 October 2000, and that "[t]he Unite d States was well aware of its obligations since at
least that point in time."108 The Panel concluded that it did not believe that the United States had been
prejudiced in its ability to defend itself.109
56. On appeal, the United States argues that sec tion 2 of the European Communities' panel
request defines, as the subject of the dispute, only "what [S]ection 101 contains"110, and that this
Section does not address Section 5 of the ETI Act at all. The fact that the European Communities'
panel request refers "elsewhere" to the ETI Act in its entirety, as well as to the prior panel and
Appellate Body reports adopted in this dispute, is not "particularly informative as to the scope of the
matter before the Panel".111 Similarly, a mere reference to a "failure to withdraw prohibited subsidies"
does not indicate whether that alleged failure pe rtains to the FSC tax exemption, the ETI tax
exclusion, or to both, because this dispute involves "two different measures" 112 found to be prohibited
subsidies.
57. The United States further submits that the Panel erred in giving equal weight to "every word
or every section of the panel request" 113; rather, the Panel should have assigned "more probative" 114
value to section 2 of the panel request entitled "The Subject of the Dispute". Finally, the United
States disagrees with the Panel's finding on the issue of prejudice; it submits that, where, as here, a
matter is not within a panel's terms of reference because the measure at issue (Section 5 of the ETI
Act) is not included in the panel request, ther e is no need for a responding Member to show
prejudice.
115

106Panel Report, para. 7.83 (referring to Appellate Body Reports, US – Carbon Steel, para. 127).
107Ibid., para. 7.85.
108Ibid., para. 7.86.
109Ibid.
110United States' appellant's submission, para. 50. (original emphasis)
111Ibid., para. 51.
112Ibid., para. 52.
113Ibid., para. 54.
114Ibid.
115Ibid., para. 56.

58. We begin our analysis with the text of Article 21.5 of the DSU, which provides, in its relevant
part:
Where there is disagreement as to th e existence or consistency with
a covered agreement of measur es taken to comply with the
recommendations and rulings such dispute shall be decided through
recourse to these dispute settlement procedures , including wherever
possible resort to the original panel. (emphasis added)

59. The Appellate Body has, to date, not been ca lled upon to determine the precise scope of the
phrase "these dispute settlement procedures" in Arti cle 21.5 and how it relates to Article 6.2 of the
DSU.
116 We do not consider it necessary, for purposes of resolving the present dispute, to determine
the precise scope of this phrase. However, we are of the view that the phrase "these dispute
settlement procedures" does encompass Article 6.2 of the DSU, and that Article 6.2 is generally
applicable to panel requests under Article 21.5.
117 At the same time, given that Article 21.5 deals with
compliance proceedings, Article 6.2 needs to be inte rpreted in the light of Article 21.5. In other
words, the requirements of Article 6.2, as they apply to an original panel request, need to be adapted
to a panel request under Article 21.5.
60. We note that the purpose of Article 21.5 is to resolve a disagreement between the parties "as
to the existence or consistency with a covered agreement of measures taken to comply with the
recommendations and rulings" of the DSB. Thus , an Article 21.5 panel may be called upon to
examine either the "existence" of "measures ta ken to comply" with DSB recommendations and
rulings, or, when such measures exist, the "cons istency" of those measures with the covered
agreements, or a combination of both, in situa tions where the measures taken to comply, through
omissions or otherwise, may achieve only partial compliance.
61. It is important to note that the text of Ar ticle 21.5 expressly links the "measures taken to
comply" with the recommendations and rulings of th e DSB. Therefore, the "specific measures at
issue" to be identified in Article 21.5 proceedi ngs are measures that have a bearing on compliance
with the recommendations and rulings of the DSB. Th is, in our view, indicates that the requirements
of Article 6.2 of the DSU, as they apply to an Artic le 21.5 panel request, must be assessed in the light

116In Mexico – Corn Syrup (Article 21.5 – US) , the Appellate Body made certain findings assuming,
arguendo, that Article 6.2 applied in the context of Article 21.5 proceedings. The Appellate Body did not make
a finding whether Article 6.2 actually applied in the context of Article 21.5 proceedings and, if so, to what
extent. (See Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US), paras. 52-53 and 67)
117In response to questioning at the oral hearing, bo th participants explicitly agreed with the general
applicability of Article 6.2 in Article 21.5 proceedings, although they had some differences on the specific
details of the requirements of Article 6.2 in Article 21.5 proceedings.

of the recommendations and rulings of the DSB in th e original panel proceedings that dealt with the
same dispute.
62. Hence, in order to identify the "specific measures at issue" and to provide "a brief summary of
the legal basis of the complaint" in a panel requ est under Article 21.5, the complaining party must
identify, at a minimum, the following elements in its panel request. First, the complaining party must
cite the recommendations and rulings that the DSB made in the original dispute as well as in any
preceding Article 21.5 proceedings, which, according to the complaining party, have not yet been
complied with. Secondly, the complaining party mu st either identify, with sufficient detail, the
measures allegedly taken to comply with t hose recommendations and rulings, as well as any
omissions or deficiencies therein 118, or state that no such measures have been taken by the
implementing Member. Thirdly, the complaining part y must provide a legal basis for its complaint,
by specifying how the measures taken, or not taken, fail to remove the WTO-inconsistencies found in
the previous proceedings, or whether they have brought about new WTO-inconsistencies. We note
that this latter issue is not before us in this case.119
63. The participants agree that the case before us is not one of a complete absence of a "measure
taken to comply". Indeed, the European Communi ties stated at the oral hearing that the present
dispute concerned, in part, the existence of a me asure taken to comply, namely, with respect to
Section 5 of the ETI Act, as well as, in part, the consistency of a measure taken to comply, namely,
Section 101 of the Jobs Act. Moreover, we note that the issue before us is not the failure to state a
legal basis for the claims; rather, the issue before us is whether, with respect to Section 5 of the ETI
Act, the European Communities adequately identified the "specific measure at issue".
64. Turning to the European Communities' panel re quest in this dispute, we note that the
European Communities identified all the recommendations and rulings of the DSB in both the original
and the first Article 21.5 proceedings.120

118Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 67.
119In this respect, we recall that the Appellate Body stated, in EC – Bed Linen (Article 21.5 – India) ,
that the measure taken to comply may be inconsistent with WTO law "in ways different from" the original
measure. (Appellate Body Report, EC – Bed Linen (Article 21.5 – India) , para. 79) See also Appellate Body
Report, Canada – Aircraft (Article 21.5 – Brazil), para. 40.
120The European Communities' panel request explicitly refers to the DSB recommendations and rulings
in the original and first Article 21.5 disputes in secti on 1 ("The History of the Dispute"), in section 2 ("The
Subject of the Dispute"), and in section 3 ("Request for the Establishment of a Panel"). (Request for the
Establishment of a Panel by the European Communities, WT/DS/108/29 (attached as Annex III to this Report))

65. With respect to the "specific measures at i ssue", we note that the European Communities
explicitly referred to Section 101 of the J obs Act as a "measure taken to comply".
121 T h e U n i t e d
States does not contend that the European Communities has failed to identify adequately the Jobs Act,
or Section 101(d) and (f) thereof, as a measure at issue. 122 Rather, the contention of the United States
is that the European Communities' panel request is specifically and exclusively limited to Section 101
of the Jobs Act and that it does not extend to Sec tion 5 of the ETI Act. The question before us,
therefore, is whether the European Communities' panel request put the United States on sufficient
notice that a challenge was being brought against the continued operation of Section 5 of the ETI Act.
66. In our view, the European Communities has satisfi ed this requirement be cause, in its panel
request, the European Communities has explicitly referred to a " fail[ure by the United States] to
withdraw its prohibited subsidies as required by Article 4.7 of the SCM Agreement [and the] fail[ure]
to implement the DSB's recommendations and ru lings, as specified by the DSB on 20 March 2000
and on 29 January 2002". 123 This language clearly indicates that the European Communities was
referring to the entirety of the prohibited subsidies found to exist in the original and first Article 21.5
proceedings and covered by the DSB recommendations and rulings, which included Section 5 of the
ETI Act. Given that the Jobs Act does not apply to the prohibited FSC subsidies—because the Jobs
Act "neither repeals nor explicitly or implicitly aff ects the operation of [S]ection 5 of the ETI Act in
any way"124, a fact that the United States does not contest—the European Communities' panel request
is to be read as including the continued operation of Section 5 of the ETI Act.
67. We recall, as the Panel has done, that the Appe llate Body has previously stated that, "in
considering the sufficiency of a panel request, subm issions and statements made during the course of
the panel proceedings, in particular the first wr itten submission of the complaining party, may be
consulted in order to confirm the meaning of the words used in the panel request". 125 We note that,
in its first written submission to the Panel, th e European Communities drew a clear distinction
between "the grandfathering clause for FSC subsid ies contained in [S]ection 5[] of the ETI Act" 126

121In section 2 of the panel request ("The Subject of the Dispute"), the European Communities states:
"Section 101 of the JOBS Act purports to repeal the ETI Act (Section 101(a))".
122The United States' appeal concerning the Panel's terms of reference is limited to Section 5 of the ETI
Act. Furthermore, the United States submits: "Section 2 [of the European Communities' panel request] clearly
identifies as the subject of the dispute [S]ections 101(d) and (f) of the [Jobs Act]". (United States' appellant's
submission, para. 48) (emphasis added)
123Request for the Establishment of a Panel by the European Communities, section 3. (emphasis added)
124Panel Report, para. 7.68.
125Appellate Body Report, US – Carbon Steel, para. 127.
126European Communities' first written submission to the Panel, para. 58; Panel Report, p. A-14.

and "the transitional and grandfathering clauses in the Jobs Act" 127, and explicitly stated that it was
challenging both of these elements. 128 We also agree with the Pane l that the European Communities'
panel request should be read as a whole and that the assessment of the panel request should not be
confined to the content of its section 2 entitled "The Subject of the Dispute".
68. In the light of the above considerations, we conclude that the European Communities' panel
request does identify the continued operation of Section 5 of the ETI Act sufficiently to put the United
States on notice in this respect. 129 At the same time, we consider that it would have been preferable,
and would have better fulfilled th e requirements of Article 6.2 of the DSU, had the European
Communities explicitly articulated its challenge to the continued operation of Section 5 of the ETI
Act. The European Communities could have referr ed explicitly to the continued grandfathering of
FSC subsidies when it was explicitly challenging th e grandfathering of ETI subsidies under the Jobs
Act. Nevertheless, looking at the European Comm unities' panel request as a whole, and in the
specific circumstances of the present Article 21.5 dis pute, we consider that the panel request of the
European Communities satisfies the minimum requireme nts of Article 6.2, read in the light of
Article 21.5 of the DSU.130
69. We therefore uphold the Panel's finding, in paragraph 7.87 of the Panel Report, that
Section 5 of the ETI Act, grandfathering prohibite d FSC subsidies, was within the Panel's terms of
reference.

V. Article 4.7 of the SCM Agreement and Article 21.5 of the DSU
70. We now turn to the second issue raised on app eal by the United States. The United States
appeals the Panel's finding that the United States "c ontinues to fail to implement fully the operative
DSB recommendations and rulings to withdraw the prohibited [FSC and ETI] subsidies and to bring

127European Communities' first written submission to the Panel, para. 59; Panel Report, p. A-14.
128We wish to caution—as did the Panel in this case—that a panel examining a complaining party's
first written submission for purposes of confirming the mean ing of that party's panel request must bear in mind
that a deficient panel request cannot be "cured" subsequently in the first submission. (Appellate Body Report,
EC – Bananas III , para. 143 (referring to the requirement under Article 6.2 of the DSU to provide "a brief
summary of the legal basis of the complaint"))
129We also note that the European Communities argues that the responding party in compliance
proceedings may be expected to be aware of the measures that were co vered by the DSB recommendations or
rulings in the original or first Article 21.5 proceedings. (See also Panel Report, para. 7.86)
130Given our view that the European Communities satis fied the minimum requirement of Article 6.2,
read in the light of Article 21.5, we do not consider it necessary to address the issue whether the United States
may have been prejudiced by the alleged lack of clarity in the European Communities' panel request. In this
respect, we note that the United States agreed, at the or al hearing, with the proposition that, once a measure is
determined to properly fall within a panel's terms of refere nce, there is no need to de monstrate, in addition, the
presence or absence of prejudice to the responding party.

its measures into conformity with its obliga tions under the relevant covered agreements."
131 M o r e
specifically, the United States challenges the Panel's findi ng that there was a failure on the part of the
United States to withdraw the prohibited FSC and ETI subsides under Article 4.7 of the SCM
Agreement.132
71. The United States' appeal that the Panel e rroneously found non-compliance with the DSB's
recommendations under Article 4.7 of the SCM Agreement rests on two separate grounds. With
respect to the ETI subsidy, the United States argues that the Panel was in error "because there was no
recommendation by the DSB under Article 4.7 with respect to the ETI tax exclusion." 133 As to the
FSC subsidy, the Panel was in error because it "incorr ectly found that [S]ection 5[] of the ... 'ETI Act'
... was within the Panel's terms of reference" a nd "[t]his error, in turn, resulted in the Panel
erroneously making findings on a measure that was not within its terms of reference." 134 The United
States does not dispute that, with respect to the FSC subsidy, there was a DSB recommendation under
Article 4.7 that it be withdrawn, which made in th e original and first Article 21.5 panel and Appellate
Body proceedings.
72. In Section II above, we have upheld the finding of the Panel that Section 5 of the ETI Act was
within the Panel's terms of reference. We theref ore confine our analysis below to the United States'
challenge with respect to the ETI subsidy, namely, that there was no recommendation of the DSB
under Article 4.7 with respect to the ETI tax excl usion, and that a panel under Article 21.5 may not
make a new recommendation pursuant to Article 4.7 of the SCM Agreement.
73. We note that the original panel recommended, pursuant to Article 4.7 of the SCM Agreement,
that the United States withdraw the pr ohibited FSC subsidies by 1 October 2000.
135 The first
Article 21.5 panel concluded that the United States , through the ETI Act, had failed to bring itself
fully into conformity with its WTO obligations by not implementing the recommendations of the DSB
made under Article 4.7 of the SCM Agreement to withdraw completely the prohibited FSC
subsidies.
136 The Appellate Body upheld the findings of the original panel and recommended in the
first Article 21.5 proceedings that the DSB request the United States to bring its ETI measure into

134Ibid., para. 4.
 135Original Panel Report, US – FSC , paras. 8.3 and 8.8. At its meeting held on 12 October 2000, the
DSB agreed to modify the time period so that it expired on 1 November 2000. (Panel Report, para. 1.1)
 136Panel Report, US – FSC (Article 21.5 – EC), para. 8.170.

conformity with its WTO obligations as well as "to implement fully the recommendations and rulings
of the DSB in US – FSC, made pursuant to Article 4.7 of the SCM Agreement."137
74. In these second Article 21.5 panel proceedings , the European Communities claims that
Sections 101(d) and 101(f) of the Jobs Act are inc onsistent with the WTO obligations of the United
States because they continue to ma intain the prohibited ETI subsidies. 138 In addition, the European
Communities claims that the United States persists in failing to withdraw fully those prohibited FSC
subsidies that are grandfathered through Section 5 of the ETI Act. 139 The United States "does not ...
contest the substantive arguments of the European Communities"140 with respect to the grandfathering
and transition provisions related to the ETI and FSC subsidies. Nor does it contest the Panel's finding
that the transition and grandfathering provisions relating to the ETI subsidy (as contained in
Sections 101(d) and (f) of the Jobs Act) are inc onsistent with Articles 3. 1(a) and 3.2 of the
SCM Agreement, Articles 3.3, 8, and 10.1 of the Agreement on Agriculture , and Article III:4 of the
GATT 1994.141
75. The Panel concluded that:
... to the extent that the United St ates, by enacting Section 101 of the
Jobs Act, maintains prohibited FSC and ETI subsidies through these
transitional and grandfathering measures, it continues to fail to
implement fully the operative DSB recommendations and rulings to
withdraw the prohibited subsidies and to bring its measures into
conformity with its obligations under the relevant covered
agreements.
142

The Panel further concluded that it would not make a new recommendation under Article 4.7 "[s]ince
the original DSB recommendations and rulings in 2000 remain operative through the results of the
compliance proceedings in 2002".143

137Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257.
 138First, the "transition provision", which provides for a two-year continuation of a percentage of ETI
benefits (80 per cent in 2005 and 60 per cent in 2006); and secondly, the "grandfathering provision", which
exempts certain transactions indefinitely from the repeal of the ETI tax scheme.
139This grandfathering provision has not been repealed or modified by the Jobs Act. (Panel Report,
para. 7.80)
141Panel Report, para. 7.60; United States' response to questioning at the oral hearing.
142Panel Report, paras. 7.65 and 8.1.

76. The United States appeals these findings. Acco rding to the United States, there is no
recommendation of the DSB under Article 4.7 of the SCM Agreement resulting from the first
Article 21.5 proceedings (in 2002) with respect to the ETI tax exclusion.
144 The panel and the
Appellate Body in the first Article 21.5 proceedi ngs made such a recommendation only with respect
to Section 5 of the ETI Act. The United States argues that the Panel erroneously transformed the
original DSB recommendation under Article 4.7 to withdraw the FSC tax exemption into a general
obligation to withdraw any future prohibited subsidies. The United States does not dispute that it was
under an obligation to withdraw fully the WTO-incons istent FSC subsidy; however, this obligation,
in the United States' view, does not stem from Article 4.7 of the SCM Agreement, but, exclusively,
from Article 3 of that Agreement. Accordi ng to the United States, Article 4.7 of the SCM
Agreement—like its generic counterpart, Article 19.1 of the DSU—does not impose obligations on
Members.145 Finally, the United States argues that th e task of an Article 21.5 panel is not to
determine whether a Member has "fixed the problem" 146, but, rather, to determine whether measures
taken to comply exist or not, and, when such measu res do exist, whether they comply with the rulings
and recommendations of the DSB.
77. The United States points out that, when th e original panel made its Article 4.7
recommendation to withdraw the prohibited FSC subs idies by October 2000, the ETI Act was not in
existence. The Article 4.7 recommendation of th e original panel obviously did not relate to, and
therefore could not include, the ETI Act. 147 Subsequently, in 2002, although the first
Article 21.5 panel found the ETI Act to provide prohibited subsidies, it did not make any Article 4.7
recommendation with respect to the ETI subsidies. Consequently, the recommendations adopted by
the DSB did not include a recommendation pertaining to the withdrawal of the ETI subsidy under
Article 4.7, and the United States was therefore under no obligation to withdraw the ETI tax exclusion
by virtue of a recommendation under Article 4.7.
78. The European Communities responds that a new recommendation under Article 4.7 was not
necessary in the first Article 21.5 proceedings, because the main purpose of a recommendation under
Article 4.7 is to define the time period within whic h the subsidy found to be in violation of Article 3
of the SCM Agreement must be withdrawn. The original recommendation under Article 4.7
represents the "benchmark" against wh ich the measure taken to comply must be reviewed in order to
assess whether that measure has brought about compliance.
148 As a result, even in the absence of a

145United States' statement at the oral hearing.
147Ibid., paras. 10-11.

new Article 4.7 recommendation pertaining specifically to the ETI tax scheme, the United States was
obliged to withdraw the ETI tax scheme in its entirety without delay. If a new Article 4.7
recommendation were necessary in every Article 21.5 proceeding, that would undermine the effective
operation of the dispute settlement system, because it would involve extending the time-limits for
compliance through successive Article 21.5 proceed ings. The European Communities also argues
that the Panel did not invent an improper "fix ing the problem" standard, but, rather, correctly
reviewed whether the violations of WTO law found in the original and first Article 21.5 proceedings
had been eliminated.
79. The European Communities also draws attention to what it considers to be a contradiction in
the arguments of the United States. On the one hand, the United States argues that the first
Article 21.5 panel did not make a r ecommendation under Article 4.7 of the SCM Agreement with
respect to the ETI tax exclusion; on the ot her hand, the United States argues that the second
Article 21.5 Panel—the present Panel—was not entitled to make a new recommendation under
Article 4.7 with respect to the ETI tax exclusion. 149 Finally, the European Communities submits that
the recommendation of the Appellate Body in the first Article 21.5 proceedings relating to the
withdrawal of the FSC subsidy pursuant to Article 4.7 of the SCM Agreement 150 implicitly covers
also the withdrawal of the ETI subsidy under that provision.151
80. The United States' appeal thus raises the question whether a recommendation under
Article 4.7 made in the original proceedings re mains in effect until the implementing Member has
fully complied with the DSB recommendations and ru lings in the original proceedings as well as
subsequent Article 21.5 proceedings.
81. We begin our analysis with the text of Article 4.7 of the SCM Agreement, which provides:
If the measure in question is found to be a prohibited subsidy, the
panel shall recommend that the s ubsidizing Member withdraw the
subsidy without delay. In this re gard, the panel shall specify in its
recommendation the time period within which the measure must be
withdrawn.

82. It is clear from the text of Article 4.7 that, when a panel finds a measure at issue to be a
prohibited subsidy, the panel is required to make a recommendation with two components: (i) that the
subsidy be withdrawn "without delay"; and (ii) that the time period within which the subsidy must be

150Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257.

withdrawn be specified by the Panel. When such a recommendation is adopted by the DSB, it must
be, by virtue of Article 17.14 of the DSU, "unconditionally accepted by the parties to the dispute", and
it thus becomes effective and binding on the pa rties. Pursuant to Article 4.10 of the SCM Agreement,
if compliance with an Article 4.7 recommendation is not achieved within the time period specified,
the DSB may authorize the imposition of appropriate countermeasures upon the subsidizing Member.
83. We are of the view that the obligation of the subsidizing Member to withdraw the prohibited
subsidy "without delay", and within the time period specified, emanates from a finding of a violation
of Article 3 of the SCM Agreement and a consequent Article 4.7 recommendation once adopted by
the DSB. That recommendation under Article 4.7 remains in effect until the Member concerned has
fulfilled its obligation by fully withdrawing the prohibited subsidy.
152 Where a Member withdraws a
prohibited subsidy only in part, it has failed to comply fully with its WTO obligation and the Article
4.7 recommendation continues to be in effect with resp ect to the part of the subsidy that has not been
withdrawn. Similarly, full withdrawal of a prohibited subsidy within the meaning of Article 4.7 of
the SCM Agreement cannot be achieved by a "measure taken to comply" that replaces the original
subsidy with yet another subsidy found to be prohibited. In bot h instances, the Member cannot be
said to have complied with the obligation to withdraw fully the prohibited subsidy.153
84. As a result, if, in an Article 21.5 proceeding, a panel finds that the measure taken to comply
with the Article 4.7 recommendation made in the original proceedings does not achieve full
withdrawal of the prohibited subsidy—either because it leaves the entirety or part of the original
prohibited subsidy in place, or because it replaces that subsidy with another subsidy prohibited under
the SCM Agreement—the implementing Member continues to be under the obligation to achieve full
withdrawal of the subsidy. The obligation to co mply with an Article 4.7 recommendation remains in
effect, even if several proceedings under Article 21.5 become necessary, until the prohibited subsidy
is fully withdrawn.

152As noted earlier, Article 17.14 of the DSU provides that Appellate Body reports, including panel
findings upheld or modified by th e Appellate Body, are to be unconditi onally accepted by the parties to the
dispute upon adoption by the DSB.
153We recall that the Appellate Body has previously held that Article 21.5 proceedings involve not any
measure taken by a WTO Member, but rather "measures taken to comply with the recommendations and
rulings". (Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 36) We also recall the
findings of the Appellate Body and the criteria identif ied by the Appellate Body to determine when a measure
has a "particularly close relationship to the declared 'measure taken to comply'". (Appellate Body Report, US –
Softwood Lumber IV (Article 21.5 – Canada) , para. 77) There are a number of dimensions that would have to
be examined to determine whether a challenged subsidy falls within the scope of "measures taken to comply".
We note that the issue of what constitutes "measures take n to comply" that can be examined in an Article 21.5
proceeding is not before us in this appeal.

85. These second Article 21.5 proceedings before us concern a situation where the measure taken
to comply with the DSB recommendations from the original and first Article 21.5 proceedings—the
Jobs Act—has in large part w ithdrawn the prohibited subsidies. 154 However, to the extent that the
Jobs Act, by virtue of its transition and grandf athering provisions, does not fully withdraw the ETI
subsidies found in the previous pro ceedings to be prohibited under the SCM Agreement , it was
sufficient for the second Article 21.5 Panel to concl ude that the original Article 4.7 recommendation
adopted by the DSB has not been complied with entirely and remains in effect for the part that has not
been implemented.
86. Even if, arguendo, an Article 21.5 panel made a new Article 4.7 recommendation to
withdraw the prohibited subsidy "without delay", it would presumably also "specify ... the time period
within which the measure must be withdrawn". If th is were to result in an extension of the time
period set for withdrawal of the subsidy found to be prohibited in th e original proceedings,
compliance proceedings could have the effect of extending implementation periods through new
Article 4.7 recommendations in successive Article 21. 5 proceedings. This could lead to a potentially
"never-ending cycle"
155 of dispute settlement proceedings and inordinate delays in the implementation
of recommendations and rulings of the DSB.
87. We agree with the Panel that the relevant recommendations adopted by the DSB in the
original proceedings in 2000, and those in the first and these second Article 21.5 proceedings, form
part of a continuum of events relating to comp liance with the recommendations and rulings of the
DSB in the original proceedings. 156 The purpose of the first compliance proceedings in 2002 was to
determine whether the ETI Act, enacted by the Un ited States to comply with the recommendations
and rulings of the DSB in the original proceedings, did, in fact, bring about compliance pertaining to
the FSC subsidies. However, the first Article 21. 5 panel and Appellate Body reports adopted by the
DSB in 2002, pertaining to the ETI subsidies, found that the United States had not fully withdrawn the
FSC subsidies.157 In these second Article 21.5 proceedings, the Panel found that the Jobs Act has not
fully withdrawn the prohibited FSC and ETI subsidi es. This shows that the United States has not
implemented the totality of the findings and recommendations adopted by the DSB, has not met its
obligation to withdraw fully the prohibited subsidies, and continues to be under an obligation to do so.

154We note that Section 101(a) of the Jobs Act repeals the ETI Act.
155Panel Report, para. 7.46.
157Panel Report, para. 7.52.

88. We now turn to the issue of whether an Artic le 21.5 panel has the authority to make a new
recommendation pursuant to Article 4.7 of the SCM Agreement . At the oral hearing, the United
States confirmed that, upon further reflection, it withdrew its appeal concerning this issue.
158 T h e
United States further stated that it based its appeal on the other grounds it had advanced, namely, that
there was no Article 4.7 recommendation of the DSB in this case with respect to the ETI tax exclusion
and that, therefore, the United States was under no obligation to withdraw it by virtue of Article 4.7 of
the SCM Agreement.159
89. In our view, whether the first Article 21.5 pa nel made or could make a new Article 4.7
recommendation is not dispositive of the question whether the original Article 4.7 recommendation
continues to be in effect un til full compliance is achieved. 160 Like the Panel, we see "no material
significance in the purported lack of an explicit 'new' ... recommendation under Article 4.7 of the
SCM Agreement in the first [Article 21.5] compliance proceeding."161
90. Finally, we address the United States' claim that the Panel "mischaracterized[d]" its task
under Article 21.5 by stating that it was to determine whether a Member has "fixed the problem". 162
The United States argues that the task of an Article 21.5 panel is not to determine whether a Member
has "fixed the problem", but, rather, to determine whether measures taken to comply exist or not, and,
when such measures do exist, whet her they do comply with the rulings and recommendations of the
DSB. According to the United States, by following a "fixing the problem" standard, the Panel
"appears to have conferred on itself the authority to ignore the precise text of Article 4.7 of the SCM
Agreement and Article 21.5 [of the DSU], its terms of reference and the particular claims advanced by
the complaining party".163 The United States submits that Article 4.7 requires a panel to recommend
withdrawal of the measure "foun d to be a prohibited subsidy" 164, but does not go further and direct a
panel to recommend that a WTO Member refrain fro m enacting any new provisions that may provide
a prohibited subsidy.

158United States' appellant's submission, footnote 36 to para. 38. The United States confirmed this in
response to questioning at the oral hearing.
159The United States does not dispute that it is under an obligation to withdraw fully the ETI subsidy by
virtue of Articles 3.1(a) and 3.2 of the SCM Agreement.
160We note that the United States "does not contest that it was under an obligation [deriving from
Article 3 of the SCM Agreement ] to remedy these inconsistencies with its WTO Agreement obligations",
regardless of whether or not there is a specific Article 4.7 recommendation. (United States' appellant's
submission, para. 41)
161Panel Report, para. 7.55. See also Panel Report, US – FSC (Article 21.5 – EC) , para. 9.1(e)); and
Appellate Body Report, US – FSC (Article 21.5 – EC), para. 257.
163Ibid., para. 29.
164Ibid.

91. The European Communities responds that the task of an Article 21.5 panel "can be more fully
described as examining whether the previously foun d violations have been removed and whether in
doing so the implementing Member has fully respect ed its WTO obligations (and has not introduced
any new violations)."165 According to the European Communities, this is what the Panel meant by the
term "fixing the problem ... both literally and logically".166
92. The Panel noted:
Article 21.5 compliance proceedings form part of a continuum of
events flowing from the various steps in dispute settlement
proceedings, with the operative recommendations and rulings for the
purposes of Article 21.5 compliance proceedings being those adopted
by the DSB in the original proceedings. These remain operative
through compliance panel proceedings under Article 21.5 of the DSU
until the "problem" is entirely "fixed"
, in terms of full withdrawal of
the prohibited subsidy. 167 (original italics; underlining added;
footnote omitted)

93. In order to determine whether the Panel indeed "mischaracterized" its task under Article 21.5,
as alleged by the United States, we consider, firs t, the task of a panel under Article 21.5, and
secondly, we review the Panel's findings in this r espect. The task of an Article 21.5 panel is to
determine whether "measures taken to comply" implement the "recommendations and rulings"
adopted by the DSB in the original proceedings. 168 In doing so, an Article 21.5 panel may examine
either the "existence" of measures taken to comp ly with DSB recommendations and rulings, or, when
such measures exist, the "consistency" of tho se measures with the covered agreements, or a
combination of both in situations where the measu res taken to comply, through omissions or other
deficiencies, may achieve only partial compliance. As we noted earlier, the text of Article 21.5
expressly links the "measures taken to comply" and the recommendations and rulings of the DSB. 169
The determination of whether "measures taken to comply" challenged by the complaining party
implement fully, or only in part, the DSB recomme ndations and rulings requires a panel to examine
all of the previous DSB recommendations and rulin gs and the entire range of measures covered by
them.170 Hence, in compliance proceedings, an Article 21.5 panel may have to examine whether the

166Ibid.
167Panel Report, para. 7.36.
168Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil), para. 40.
169See supra, para. 61.
170Appellate Body Report, US – Softwood Lumber IV (Article 21.5 – Canada), para. 68.

"measures taken to comply" implement fully, or only partially, the recommendations and rulings
adopted by the DSB.
94. We now turn to examine how the Panel conducted its enquiry under Article 21.5 in this case.
The Panel stated that Article 21.5 compliance proceedings "form part of a continuum of events
flowing from the various steps in dispute settlement proceedings".
171 According to the Panel, the
original recommendations and rulings of the DS B "remain operative through compliance panel
proceedings under Article 21.5 of the DSU until the 'problem' is entirely 'fixed'" 172, that is, until the
prohibited subsidy is fully withdrawn. Subsequent ly, the Panel stated that it would examine whether
the measures taken by the United States to comply with the recommendations and rulings are
consistent with the relevant cove red agreements. The Panel, first, identified the "measures taken to
comply" and the recommendations and rulings at i ssue; secondly, it set out its view concerning
Article 4.7 of the SCM Agreement and the recommendations made thereunder by the original panel;
and, finally, it addressed the existence or consistency of the identified "measures taken to comply".
95. The Panel could have used language more preci se than "fixing the problem" in describing its
task under Article 21.5. On reading the Panel's anal ysis as a whole, we consider that the Panel did
adequately describe its task and, more importantly , did not exceed its authority under Article 21.5.
The Panel examined whether the United States had re moved fully the subsidies found in the original
and first Article 21.5 proceedings to be prohib ited as required by the recommendations and rulings
adopted by the DSB.
96. For the reasons set out above, we uphold the Panel's finding, in paragraph 7.65 of the Panel
Report, that "to the extent that the United States, by enacting Section 101 of the Jobs Act, maintains
prohibited FSC and ETI subsidies through [the] tran sitional and grandfathering measures, it continues
to fail to implement fully the operative DSB recomm endations and rulings to withdraw the prohibited
subsidies and to bring its measures into conformity with its obligations u nder the relevant covered
agreements."

VI. European Communities' Conditional Appeals
97. The European Communities makes two conditional appeals with respect to "certain claims
that [the European Communities] made before the Panel and which the Panel did not consider

171Panel Report, para. 7.36. (footnote omitted)
172Ibid. (original italics)

necessary to decide". 173 In the event that the Appellate Body should reverse "any of the Panel's
findings", the European Communities requests the Appellate Body to find that:
[b]y not entirely withdrawing FSC and ETI subsidies, the United
States has failed to comply with its obligations under Article 4.7 of
the SCM Agreement; [and that] [b]y not entirely withdrawing FSC
and ETI subsidies and maintaining the less favourable treatment of
imported as compared to domestic products, the United States has
failed to comply with its obligati ons under Articles 19.1 and 21.1 of
the DSU.
174 (original italics)

98. The European Communities confirmed at the or al hearing that these appeals are "conditional
in nature" and that it is "only if the Appellate Body were to reverse in full or in part the Panel Report
that it will need to consider these claims in order to complete the analysis and resolve the dispute."175
99. Having upheld both of the Panel's findings that are under appeal by the United States, the
condition on which the European Communities' conditi onal appeal is predicated does not arise, and
there is no need for us to examine these conditional appeals.

VII. Findings and Conclusions
100. For the reasons set forth in this Report, the Appellate Body:
(a) upholds the Panel's finding, in paragraph 7.87 of the Panel Report, that
Section 5(c)(1)(B) of the FSC Repeal and Extraterritorial Income Exclusion Act
of 2000, grandfathering prohibited FSC subsidies, was within its terms of
reference176; and
(b) upholds the Panel's finding and conclusion, in paragraphs 7.65 and 8.1 of the Panel
Report, that "to the extent that the United States, by enacting Section 101 of the
American Jobs Creation Act of 2004, main tains prohibited FSC and ETI subsidies
through [the] transitional and grandfathe ring measures, it continues to fail to
implement fully the operative DSB recomme ndations and rulings to withdraw the
prohibited subsidies and to bring its measur es into conformity with its obligations
under the relevant covered agreements."

173European Communities' other appellant's submission, para. 3.
174Ibid., para. 29.
175Ibid., para. 4; European Communities' response to questioning at the oral hearing.
176Panel Report, para. 7.87.

Signed in the original in Geneva this 26th day of January 2006 by:

Georges Abi-Saab
Presiding Member

 _________________________ _________________________
 A.V. Ganesan Merit E. Janow
 Member Member

ANNEX I

16 November 2005
 (05-5377)
 Original: English

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

Notification of an Appeal by the United States
under Article 16.4 and Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU),
and under Rule 20(1) of the Working Procedures for Appellate Review

 The following notification, dated 14 November 2005, from the Delegation of the United
States, is being circulated to Members.

 Pursuant to Article 16 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes ("DSU") and Rule 20 of the Working Procedures for Appellate Review , the
United States hereby notifies its decision to appeal to the Appellate Body certain issues of law
covered in the Report of the Panel on : Second Recourse to Article 21.5 of the DSU by the European Communities
(WT/DS108/RW2) ("Panel Report") and certain legal in terpretations developed by the Panel in this
dispute.

1. The United States seeks review of the Panel’s conclusion that the United States continues to
fail to implement fully the operative DSB recomme ndations and rulings to withdraw the prohibited
subsidies and to bring its measures into conformity with its obligations u nder the relevant covered
agreements. This conclusion is in error and is based on errone ous findings on issues of law and
related legal interpretations, including with respect to Articles 6.2 and 21.5 of the DSU and Article 4.7
of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement").
1 These erroneous
findings and related legal interpretations incl ude that there was a recommendation pursuant to
Article 4.7 of the SCM Agreement with respect to the Extraterritorial Income Exclusion Act ("ETI
Act") and that a panel established under Artic le 21.5 of the DSU may make a recommendation
pursuant to Article 4.7 of the SCM Agreement.

2. The United States seeks review of the Panel’s legal conclusion that section 5 of the ETI Act is
within the Panel’s terms of reference pursuant to Articles 6.2 and 7.1 of the DSU.
2 This conclusion is
in error and is based on erroneous findings on issues of law and related legal interpretations.

1See, for example, Panel Report, paragraphs 7.39, 7.41 - 7.44, 7.51 - 7.58, 7.62 - 7.65.
2See, for example, Panel Report, paragraphs 7.61, 7.68, 7.72 - 7.73, 7.76, 7.78 - 7.87.

ANNEX II

30 November 2005
 (05-5652)
 Original: English

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

Notification of an Other Appeal by the European Communities
under Article 16.4 and Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU),
and under Rule 23(1) of the Working Procedures for Appellate Review

 The following notification, dated 28 November 2005, from the Delegation of the European
Commission, is being circulated to Members.
Procedures for Appellate Review, the European Co mmunities submits its Notice of Other Appeal on
certain issues of law in the Report of the Panel on United States – Tax Treatment for “Foreign Sales
Corporations”: Second recourse to Article 21. 5 of the DSU by the European Communities
1 and
certain legal interpretations developed by the Panel.

2. The European Communities agrees with th e Panel’s findings of c ontinued violation and
inconsistency and its conclusion that there is a continuing failure to implement DSB recommendations
and rulings, as well as with the Panel’s rejection of the US procedural defences. However, if the
Appellate Body were to uphold any of the US cl aims on appeal, the European Communities considers
that it would become necessary for the Appellate Body to consider certain other issues in order to
resolve this dispute. For this reason, the Eur opean Communities requests the Appellate Body, in the
event that it should reverse any of the Panel’s findings, to consider the following claims:

(a) By not entirely withdrawing FSC and ETI subsidies, the United States has failed to
comply with its obligations under Article 4.7 of the SCM Agreement;2

(b) By not entirely withdrawing FSC a nd ETI subsidies and maintaining the less
favourable treatment of imported as compared to domestic products, the United States
has failed to comply with its obligations under Articles 19.1 and 21.1 of the DSU.3

3. Furthermore, for the case the Appellate B ody considered that the Panel was in error in
concluding that no new recommenda tions under Article 4.7 of the SCM Agreement or Article 19.1 of
the DSU are needed, 4 the European Communities respectfully requests the Appellate Body to correct
the error and issue the necessary recommendations.

1 WT/DS108/RW2, circulated on 30 September 2005.
2 Which the Panel did not address in its Report (see WT/DS108/29, 14 January 2005).
3 On which the Panel exercised judicial economy (see e.g. Panel Report, footnote 84).
4 See e.g. Panel Report, paras. 7.37-7.46, 7.49, 7.52-7.58, 8.2.

4. The European Communities considers that if the Appellate Body were to find that the Panel
had erred, this would mean that the Panel ha d not conducted its assessment of the matter in
accordance with Article 11 of the DSU and had not contributed to an effective resolution of the
dispute within the meaning of Article 3 of the DSU.

ANNEX III

14 January 2005

 (05-0183)
 Original: English

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

Request for the Establishment of a Panel

 The following communication, dated 13 January 2005, from the delegation of the European
Communities to the Chairperson of the Dispute Settlement Body, is circulated pursuant to Article 21.5
of the DSU.

 On 8 October 1999, the Panel in this dispute found that the United States of America's
"Foreign Sales Corporations" scheme violated Artic le 3.1(a) of the Agreement on Subsidies and
Countervailing Measures (the " SCM Agreement ") and Article 3.3 of the Agreement on Agriculture
[WT/DS108/R]. On 24 February 2000 the Appellate Body confirmed the findings of the Panel with
respect to the violations of the SCM Agreement and modified the findings concerning the Agreement
on Agriculture, concluding that the Foreign Sales Corporations scheme violated Articles 10.1 and 8 of
the Agreement on Agriculture [W T/DS108/AB]. On 20 March 2000, the Dispute Settlement Body
(the "DSB") adopted the Appellate Body report an d the report of the Panel, as modified by the
Appellate Body. The resulting DSB recommendations and rulings include the recommendation that
the United States bring its measures found to be inconsistent with the SCM Agreement and the
Agreement on Agriculture into conformity with th e provisions of those agreements, and that the
United States withdraw its export subsidies at the latest with effect from 1 October 2000.

 On 12 October 2000, at a special session, the DSB agreed to the United States' request to
allow it a time period expiring on 1 November 2000 to implement the DSB recommendations and
rulings.

 On 15 November 2000, the President of the Un ited States signed into law the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000, US Public law No 106-519 (the "ETI Act").

 On 20 December 2000, the matter was referred back to the Panel under Article 21.5 of the
DSU and on 29 January 2002 the DSB adopted th e Panel [WT/DS108/RW] and Appellate Body
[WT/DS108/AB/RW] reports declaring that the ETI Act violates Articles 3.1(a), 3.2 and 4.7 of the
SCM Agreement, Articles 8, 10.1 and 3.3 of the Agreemen t on Agriculture and Article III:4 of the
General Agreement on Tariffs and Trade 1994 (the " GATT 1994"), so that the US had failed to fully
withdraw its prohibited subsidy scheme and failed to implement DSB recommendations and rulings in
this dispute.

 On 22 October 2004, the United States enacted the "the American JOBS Creation Act of
2004" (the "JOBS Act"). In purported implementation of the above DSB recommendations and rulings

in case WT/DS108, the JOBS Act fails to properly implement them and is inconsistent with the same
provisions of the WTO Agreement as its predecessor legislation.

2. THE SUBJECT OF THE DISPUTE

 Section 101 of the JOBS Act purports to repeal the ETI Act (Section 101 (a)). However, at
the same time, it effectively maintains part of the ETI Act tax exemptions for a transitional period up
to the end of 2006 (Section 101 (d)). Furthermore, the repeal of the ETI Act does not apply to certain
contracts, without any time limits (Section 101(f)).

 In the light of the above, the European Communities considers that Section 101 of the JOBS
Act contains provisions which will allow 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 certa in contracts. Thus, the United States has failed to
implement the DSB's recommendations and rulings by failing to withdraw without delay schemes
found to be prohibited subsidies under the SCM Agreement and to bring its legislation into conformity
with its obligations under the SCM Agreement, the Agreement on Agriculture and the GATT 1994.

3. REQUEST FOR THE ESTABLISHMENT OF A PANEL

 On 5 November 2004, the European Communiti es requested consultations with the United
States of America with a view to reaching a mutually satisfactory solution of the matter. The request
was circulated in document WT/DS/108/27 dated 10 November 2004. Consultations were held on
11 January 2005 in Geneva. They have allowed a better understandi ng of the respective positions but
have not led to a satisfactory resolution of the matter.

 Therefore, there continues to be "a disagreem ent as to the existence or consistency with a
covered agreement of measures taken to comply w ith the recommendations and rulings" of the DSB
between the United States and the European Commun ities, within the meaning of Article 21.5 of the
DSU.

 Accordingly, pursuant to Articles 6 and 21.5 of the DSU, Article 4 of the SCM Agreement,
Article 19 of the Agreement on Agriculture a nd Article XXIII of the GATT 1994, the European
Communities hereby requests the establishment of a Pa nel. In particular, the European Communities
respectfully requests the Panel to find the following:

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

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

 In accordance with Article 21.5 of the DSU, the European Communiti es requests that this
matter be referred to the original Panel. It further requests that the Panel examines the matter above in
accordance with the standard terms of reference set out in Article 7 of the DSU.

 The European Communities asks that this request be placed on the agenda for the meeting of
the Dispute Settlement Body to be held on 25 January 2005.