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Complainant - European Communities. Filed 18 th November 1997

DS 108 -- Tax Treatment for Foreign Sales Corporations. Complainant - European Communities. Filed 18 th November 1997 http://homepage.mac.com/kchester/itrn603/. DSU Procedures. History and Context of the Case. The United States provides export-related benefits under its tax law.

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Complainant - European Communities. Filed 18 th November 1997

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  1. DS 108 -- Tax Treatment for Foreign Sales Corporations. Complainant - European Communities. Filed 18th November 1997 http://homepage.mac.com/kchester/itrn603/

  2. DSU Procedures

  3. Historyand Context of the Case • The United States provides export-related benefits under its tax law. • The United States provided export-related tax benefits through the DSIC regime “domestic international sales corporations” (“DISCs”) prior to the enactment of the FSC regime. • The European Communities (“EC”) argued that the DISC regime constituted an illegal export subsidy.

  4. Historyand Context of the Case Cont. • In 1984, the FSC regime replaced the DISC regime. • The new FSC regime was thought to be GATT compliant. • On 18 November 1997, the EC requested consultations with the US in respect of Sections 921-927 of the US Internal Revenue Code (“USIRC”) and related measures, establishing special tax treatment for “Foreign Sales Corporations” (FSC).

  5. The EC contended that these provisions were inconsistent with US obligations under Articles III:4 and XVI of the GATT 1994, Articles 3.1(a) and (b) of the Subsidies Agreement, and Articles 3 and 8 of the Agreement on Agriculture. On 1 July 1998, the EC requested the establishment of a Panel. The DSB established a panel at its meeting on 22 September 1998. Barbados, Canada and Japan reserved their third-parties rights. Historyand Context of the Case Cont.

  6. Historyand Context of the Case Cont. • WTO panel agreed with the EC that the FSC regime constituted a prohibited export subsidy under the relevant WTO agreements. The panel report was circulated to Members on 8 October 1999. • On 28 October 1999, the US notified its intention to appeal certain issues developed by the panel. • The US withdrew its notice of appeal and filed a new appeal on 26 November 1999.

  7. Historyand Context of the Case Cont. • The report of the Appellate Body was circulated to Members on 24 February 2000. • The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, at its meeting on 20 March 2000. • In an effort to comply with these rulings the United States repealed the FSC regime and enacted the FSC Repeal and Foreign Income Tax Exclusion Act of 2000 effective on transactions after September 30, 2000.

  8. Historyand Context of the Case Cont. • Two days after the President signed the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 into law, the EC brought its case against the ETI regime in the WTO. • On 7 December 2000, the EC requested the establishment of a compliance panel pursuant to Article 21.5 of the DSU. • 20 December 2000, the third parties reserved their rights. On 5 January 2001, the compliance panel was composed.

  9. Historyand Context of the Case Cont. • On 20 August 2001, the Compliance Panel Report was circulated to the Members. • On 15 October 2001, the US notified its decision to appeal against the Compliance Panel Report. • On 14 January 2002, the Appellate Body circulated its Report to the Members. • At its meeting on 29 January 2002, the DSB adopted the Appellate Body Report and the Panel Report.

  10. Historyand Context of the Case Cont. • On 13 January 2005, the EC requested the establishment of a panel pursuant to Article 21.5 of the DSU. • 17 February 2005, the DSB agreed to refer the matter to the original panel. • On 2 May 2005, the Director-General composed the panel. • On 30 September 2005, the Panel Report was circulated to the members.

  11. Historyand Context of the Case Cont. • On 24 November 2005, the United States notified its intent to appeal. • The Appellate Body requested additional time to submit the report which was submitted on 13 February 2006.  • The Appellate Body upheld the Panel’s findings. • At its meeting on 14 March 2006, the DSB adopted the Appellate Body Report and the Panel Report .

  12. EC vs. US Interpretation

  13. Impact of US Interpretation

  14. Challenges and Rulings of US Obligations Throughout the Process

  15. Challenges to US Law

  16. US Law and Violations

  17. Position of Main Parties • European Communities (plaintiff) • Challenged the U.S. Internal Revenue Code 921-927 • Claimed the U.S. violated sections of the Agreement on Agriculture and the Subsidies Agreement

  18. Position of Main Parties cont. • The United States (defendant) • Protect United States tax codes from outside entities • Surprised the United States

  19. Decisions of Panel and Appellate Body • Panel Report: October 8, 1999 • Found the U.S. had acted inconsistently with Article 3.1(a) of the Subsidies Agreement and Article 3.3 of the Agreement of Agriculture • Appellate Body Report: February 24, 2000 • Upheld the Panel’s finding that the U.S. had violated Article 3.1(a) • Reversed the Panel’s finding that the U.S. had acted inconsistently with its obligations under Article 3.3 • Found the U.S. had acted inconsistently with its obligations under Articles 10.1 and 8 of the Agriculture Agreement • Emphasized that it was not ruling that a Member must choose one kind of tax system over another so as to be consistent with that Member’s WTO obligations

  20. Compliance Reports of Panel and Appellate Body • Article 21.5 Panel Report: Aug. 20, 2001 • Concluded that the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (the amended FSC legislation) was still inconsistent • Article 21.5 Appellate Body Report: Jan. 14, 2002 • Upheld the Panel’s findings that the US acted inconsistently with its obligations

  21. Sanctions • The EC was awarded sanctions in excess of $4 billion. • The sanctions were applied from 1 March 2004 to 31 January 2006. • The sanctions were removed pending the February 2006 Compliance Panel Report and were to be imposed if the US was not in compliance.. • The latest data available on TARIC does not indicate the sanctions are currently being applied.

  22. Final Implementation? • With the transition and grandfathering provisions, the United States has still not yet met its obligations as a member of the WTO • The U.S. appealed this report on November 14, 2005 • On February 13, 2006 the Appellate Body has since circulated a new report

  23. Resolving the Issue • Avoid grandfathering additional clauses • Focus on the heart of the argument, return to the original complaint • Understand the differences in the tax codes of member countries

  24. Resolving the Issue Cont. • Have the US interpretation of the fifth sentences of Footnote 59 argued within the procedural rules. • US should stop pursuing some minor cases which may be harmful to its negotiating position with respect to the FSC. • Choose cases solely on the grounds of sanctions potential in sanctions potential to improve negotiating position.

  25. Interests • US Business Interests • EC Business Interests • Third Parties to the Case: Australia, Canada, India, Jamaica and Japan

  26. Sources • Langberi, Stanley. “United States Tax Treatement for “Foreign Sales Corporations”. The American Journal of International Law Vol 94, No 3, (July 2000) 546-555. • DS108 and applicable documents available through http://www.wto.org • US Code available through http://thomas.loc.gov/

  27. Sources Cont. • Additional Information Available: • http://trade-info.cec.eu.int/wtodispute/show.cfm?id=152&code=1 • http://www.eurunion.org/news/press/2004/20040032.htm • http://www.house.gov/jct/x-70-04.pdf

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