World Trade
Organization |
WT/DS108/AB/RW
14 January 2002
Original: English |
UNITED STATES – TAX TREATMENT FOR "FOREIGN SALES CORPORATIONS"
RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE EUROPEAN COMMUNITIES
AB-2001-8
Report of the Appellate Body
I. Introduction
II. Background
A. Overview of United States Rules of
Taxation
B. ETI Act
III. Arguments of the
Participants and Third Participants
A. Claims of Error by the United States
– Appellant
1. Subsidies Contingent Upon Export under the SCM
Agreement
2. Export Subsidies under the Agreement on Agriculture
3. Article III:4 of the GATT 1994
4. Withdrawal of the FSC Subsidies
B. Arguments of the European Communities – Appellee
1. Subsidies Contingent Upon Export under the SCM
Agreement
2. Export Subsidies under the Agreement on Agriculture
3. Article III:4 of the GATT 1994
4. Withdrawal of the FSC Subsidies
C. Claims of Error by the European
Communities – Appellant
1. Article 10.3 of the DSU: Third Party
Rights
2. Conditional Appeals
D. Arguments of the United States – Appellee
1. Article 10.3 of the DSU: Third Party
Rights
2. Conditional Appeals
E. Arguments of the Third Participants
1. Australia
2. Canada
3. India
4. Japan
IV. Issues
Raised in this Appeal
V. Article 1.1 of the SCM Agreement:
"Foregoing Revenue" that is "Otherwise Due"
VI. Article 3.1(a) of the SCM Agreement:
Export Contingency
VII. Footnote 59 to the SCM Agreement:
Avoiding Double Taxation of Foreign-Source Income
VIII. Article 10.1 of the Agreement on
Agriculture: Export Subsidies
IX. Article III: 4 of the GATT 1994
A. Law, Regulation or Requirement
Affecting the Internal Use of Imported and Like Domestic Products
B. "Less Favourable Treatment"
X. Article 4.7 of the SCM Agreement: Withdrawal of FSC
Subsidies
XI. Article 10.3 of the DSU
XII. Conditional Appeals
XIII. Findings and Conclusions
WORLD TRADE
ORGANIZATION
Appellate Body |
United States – Tax
Treatment For "Foreign Sales Corporations"
Recourse To Article 21.5 of the DSU by the European
Communities
|
AB-2001-8 |
United States,
Appellant/Appellee
|
Present:
|
European Communities,
Appellant/Appellee
|
Feliciano, Presiding
Member
|
Australia, Third
Participant
Canada, Third Participant
India, Third Participant
Japan, Third Participant |
Ganesan, Member
Taniguchi, Member |
I. Introduction
1. The United States appeals certain issues of law and legal
interpretations in the Panel Report, United States – Tax Treatment for
"Foreign Sales Corporations" – 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 European Communities concerning the
consistency of the United States FSC Replacement and Extraterritorial
Income Exclusion Act (the "ETI Act")2 with the Agreement on Subsidies and
Countervailing Measures (the "SCM Agreement"), the Agreement on
Agriculture, and the General Agreement on Tariffs and Trade 1994 (the
"GATT 1994"). The ETI Act is a measure taken by the United States with a
view to complying with the recommendations and rulings of the Dispute
Settlement Body (the "DSB") in United States – Tax Treatment for "Foreign
Sales Corporations" ("US – FSC ").3 Pertinent aspects of the ETI Act are
described in Section II below, as well as in paragraphs 2.1-2.8 of the
Panel Report.
2. In US – FSC, the original panel concluded that the "FSC measure",
consisting of Sections 921-927 of the United States Internal Revenue Code
(the "IRC") and related measures establishing special tax treatment for
foreign sales corporations, was inconsistent with the United States'
obligations under the SCM Agreement and under the Agreement on
Agriculture.4 The Appellate Body upheld the original panel's finding that
the FSC measure was inconsistent with United States' obligations under the
SCM Agreement and modified the 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, namely, "at the latest with effect from 1 October 2000." At its
meeting on 12 October 2000,5 the DSB acceded to a request made by the
United States to modify the time-period for complying with the DSB's
recommendations and rulings in this dispute so as to expire on 1 November
2000.6 On 15 November 2000, with a view to such compliance, the United
States promulgated the ETI Act.7 The background of this dispute is set out
in further detail in the Panel Report.8
4. The European Communities considered that the ETI Act did not comply
with the recommendations and rulings of the DSB and that it was not
consistent with the United States' obligations under the SCM Agreement,
the Agreement on Agriculture, and the GATT 1994. The European Communities
therefore requested that the matter be referred to the original panel
pursuant to Article 21.5 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (the "DSU").9 On 20 December 2000, in
accordance with Article 21.5 of the DSU, the DSB referred the matter to
the original panel.10 The Panel Report was circulated to the Members of the
World Trade Organization (the "WTO") on 20 August 2001.
5. The Panel concluded that:
(a) the [ETI] Act is inconsistent with Article 3.1(a) of the SCM Agreement
as it involves subsidies "contingent… upon export performance" within the
meaning of Article 3.1(a) of the SCM Agreement by reason of the
requirement of "use outside the United States" and fails to fall within
the scope of the fifth sentence of footnote 59 of the SCM Agreement
because it is not a measure to avoid the double taxation of foreign-source
income within the meaning of footnote 59 of the SCM Agreement;
(b) the United States has acted inconsistently with its obligation under
Article 3.2 of the SCM Agreement not to maintain subsidies referred to in
paragraph 1 of Article 3 of the SCM Agreement;
(c) the [ETI] Act, by reason of the requirement of "use outside the United
States", involves export subsidies as defined in Article 1(e) of the
Agreement on Agriculture for the purposes of Article 10.1 of the Agreement
on Agriculture and the United States has acted inconsistently with its
obligations under Article 10.1 of the Agreement on Agriculture by applying
the export subsidies, with respect to both scheduled and unscheduled
agricultural products, in a manner that, at the very least, threatens to
circumvent its export subsidy commitments under Article 3.3 of the
Agreement on Agriculture and, by acting inconsistently with Article 10.1,
the United States has acted inconsistently with its obligation under
Article 8 of the Agreement on Agriculture;
(d) the [ETI] Act is inconsistent with Article III:4 of the GATT 1994 by
reason of the foreign articles/labour limitation as it accords less
favourable treatment within the meaning of that provision to imported
products than to like products of US origin; and
(e) the United States has not fully withdrawn the FSC subsidies found to
be prohibited export subsidies inconsistent with Article 3.1(a) of the SCM
Agreement and has therefore failed to implement the recommendations and
rulings of the DSB made pursuant to Article 4.7 SCM Agreement.11
6. The Panel also concluded that to the extent the United States had acted
inconsistently with the SCM Agreement, the Agreement on Agriculture and
the GATT 1994, the United States had nullified or impaired benefits
accruing to the European Communities under those agreements.12
7. On 15 October 2001, the United States notified the DSB of its intention
to appeal certain issues of law covered in the Panel Report and legal
interpretations developed by the Panel, pursuant to paragraph 4 of Article
16 of the DSU, and filed a Notice of Appeal pursuant to Rule 20 of the
Working Procedures for Appellate Review (the "Working Procedures").13
8. By letter of 22 October 2001, the United States requested the Appellate
Body pursuant to Rule 16(2) of the Working Procedures to modify the
timetable set out in the Working Schedule for Appeal for the filing of the
appellant's submissions by the United States. The United States stated
that suspected bioterrorist attacks had compromised the ability of the
United States to conduct the necessary consultations with the United
States Congress with regard to this appeal.14 According to the United
States, the effect of these circumstances was such that adhering to the
original timetable would result in manifest unfairness to the United
States. In its letter of 23 October 2001, the European Communities did not
object to the request made by the United States, but requested that, in
order to preserve the balance of procedural rights afforded to the
participants in this appeal, the Appellate Body extend the deadline for
the filing of the European Communities' appellee's submission by 14 days.
In a letter dated 23 October 2001, the Division of the Appellate Body
hearing the appeal accepted that the circumstances identified by the
United States constituted "exceptional circumstances" within the meaning
of Rule 16(2) of the Working Procedures and that maintaining the deadline
for submission of the appellants' submission would result in "manifest
unfairness" to the United States. Accordingly, the Division agreed to
modify the Working Schedule for this appeal to allow the United States an
additional seven days for the filing of its appellant's submission. In the
same letter, the Division also extended by seven days the deadlines for
the filing of the other appellant's submissions, the appellee's
submission, and the third participants' submissions.
9. On 1 November 2001, the United States filed its appellant's submission.15
On 6 November 2001, the European Communities filed its other appellant's
submission.16 On 16 November 2001, the European Communities and the United
States each filed an appellee's submission.17 On the same day, Australia,
Canada, India and Japan each filed a third participant's submission.18
10. The oral hearing in this appeal was held on 26 and 27 November 2001.
The participants and third participants presented oral arguments and
responded to questions put to them by the Members of the Division hearing
the appeal.
11. At the oral hearing, the Division requested the United States to
reduce to writing, by 28 November 2001, certain of its responses to
questioning.19 The Division also authorized the European Communities and the
third participants, if they wished, to respond in writing by 30 November
2001.20 In response to this request, the United States filed an additional
written memorandum on 28 November 2001. The European Communities filed a
response to this additional written memorandum on 30 November 2001.
II. Background
A. Overview of United States Rules of Taxation
12. In our Report in US – FSC, we provided certain general background
information relating to United States rules of taxation. We said:
For United States citizens and residents, the tax laws of the United
States generally operate "on a worldwide basis". This means that,
generally, the United States asserts the right to tax all income earned
"worldwide" by its citizens and residents. A corporation organized under
the laws of one of the fifty American states or the District of Columbia
is a "domestic", or United States, corporation, and is "resident" in the
United States for purposes of this "worldwide" taxation system. …
The United States generally taxes any income earned by foreign
corporations within the territory of the United States. The United States
generally does not tax income that is earned by foreign corporations
outside the United States. However, [under Section 882(a) IRC], such
"foreign-source" income of a foreign corporation generally will be subject
to United States taxation when such income is "effectively connected with
the conduct of a trade or business within the United States". … 21(footnotes
omitted)
13. This statement continues to describe the United States tax system and
is relevant for the purposes of this appeal also. In addition, we note
that, under Sections 1 and 11 IRC, the United States imposes a tax on the
"taxable income" of its citizens and residents. According to Section 63(a)
IRC, taxable income is equal to "gross income minus the deductions
allowed" under the IRC. Section 61(a) IRC provides that gross income is
"all income from whatever source derived". When a United States citizen or
resident is subject to tax, in the United States, on income which is also
subject to tax in a foreign State, the United States grants the taxpayer
tax credits, subject to certain limitations, in respect of the amount of
foreign taxes paid.22
14. The provisions of the IRC relating to these rules of taxation have not
been modified by the ETI Act, although the application of these rules has
been altered by the adoption of the ETI Act.
B. ETI Act
15. A detailed description of the measure at issue in this appeal is
contained in paragraphs 2.2 to 2.8 of the Panel Report. Nevertheless, we
consider it useful, at this stage, to provide an overview of the
fundamental aspects and key provisions of the ETI Act.
16. The ETI Act consists of five sections. At issue in this dispute are,
first, certain elements of Sections 2 and 5, which relate to foreign sales
corporations and, second, certain elements of Section 3. Section 3,
entitled "Treatment of Extraterritorial Income", amends the IRC by
inserting into it a new Section 114, as well as a new Subpart E, which is
in turn composed of new Sections 941, 942 and 943. The remaining sections
of the ETI Act are not relevant for purposes of this dispute.23
17. As we have said, the ETI Act was promulgated by the United States with
a view to complying with the recommendations and rulings of the DSB in US
– FSC. Section 2 of the ETI Act repeals the provisions of the IRC relating
to FSCs.24 Section 5(b) prohibits foreign corporations from electing to be
treated as FSCs after 30 September 2000 and provides for the termination
of inactive FSCs. Nevertheless, Section 5(c) creates a "transition period"
for certain transactions of existing FSCs. Specifically, under Section
5(c)(1) of the ETI Act, the repeal of the provisions of the IRC relating
to FSCs "shall not apply" to transactions of existing FSCs which occur
before 1 January 2002 or to any other transactions of such FSCs which
occur after 31 December 2001, pursuant to a binding contract between the
FSC and an unrelated person which is in effect on 30 September 2000. These
provisions are the subject of the European Communities' claim that the
United States has not fully withdrawn the FSC subsidies, in accordance
with Article 4.7 of the SCM Agreement.
18. Sections 114, 941, 942 and 943 IRC were inserted into the IRC by
virtue of Section 3 of the ETI Act, and create new rules under which
certain income is excluded from United States taxation. We refer to these
new rules as the "ETI measure" (or sometimes simply as the "measure"),
which we outline below. In these proceedings, the claims brought by the
European Communities under Article 3.1 of the SCM Agreement, Articles 3.3,
8 and 10.1 of the Agreement on Agriculture and Article III:4 of the GATT
1994 contest various elements of this measure.
19. The tax treatment provided by the ETI measure is available to United
States' citizens and residents, including natural persons, corporations
and partnerships. In addition, the provisions of the ETI measure also
apply to foreign corporations which elect to be treated, for tax purposes,
as United States corporations.25 The ETI measure permits all these taxpayers
to elect to have qualifying income taxed in accordance with the provisions
of that measure. This election may be made by taxpayers on a
transaction-by-transaction basis.
20. Generally, income from specific transactions will qualify for
treatment in accordance with the provisions of the ETI measure if it is
income attributable to gross receipts: (i) from specific types of
transaction; (ii) involving "qualifying foreign trade property" ("QFTP");
and (iii) if the "foreign economic process requirement" is fulfilled with
respect to each such transaction. Turning to the first of these
conditions, the rules contained in the ETI measure apply, in particular,
to income arising from sale, lease or rental transactions.26 The ETI measure
also applies to income earned from the performance of services "related or
subsidiary to" qualifying sales or lease transactions, as well as to
income earned from the performance of certain other services.27
21. The second condition is that these transactions involve QFTP. Section
943(a)(1) IRC defines QFTP as property which is: (A) manufactured,
produced, grown or extracted within or outside the United States; (B) held
primarily for sale, lease or rental, in the ordinary course of business,
for direct use, consumption, or disposition outside the United States; and
(C) not more than 50 percent of the fair market value of which is
attributable to: (i) articles manufactured, produced, grown, or extracted
outside the United States; and (ii) direct costs for labour performed
outside the United States.28
22. The third condition is that the "foreign economic process requirement"
must be fulfilled with respect to each individual transaction.29 This
requirement is fulfilled if the taxpayer (or any person acting under
contract with the taxpayer) participated outside the United States in the
solicitation, negotiation, or making of the contract relating to the
transaction. Furthermore, a specified portion of the "direct costs" of the
transaction must be attributable to activities performed outside the
United States.30
23. Section 942(a) IRC designates as "foreign trading gross receipts" the
receipts generated in transactions satisfying all three of these
conditions. Under Section 114(e) IRC, "extraterritorial income" is the
gross income attributable to foreign trading gross receipts and, under
Section 941(b) IRC, "foreign trade income" is the taxable income
attributable to foreign trading gross receipts.
24. Section 114(a) IRC provides that a taxpayer's gross income "does not
include extraterritorial income". Section 114(b) IRC adds that this
exclusion of extraterritorial income from gross income "shall not apply"
to that portion of extraterritorial income which is not "qualifying
foreign trade income" ("QFTI"). Accordingly, the only portion of
extraterritorial income which is excluded from gross income – and,
thereby, from United States taxation – is QFTI.
25. QFTI is an amount which, if excluded from the taxpayer's gross income,
will result in a reduction of the taxable income of the taxpayer from the
qualifying transaction.31 Pursuant to Section 941(a)(1) and (2) IRC, QFTI is
calculated as the greatest of, or the taxpayer's choice of, the following
three options: (i) 30 percent of the foreign sale and leasing income
derived by the taxpayer from such transaction ; (ii) 1.2 percent of the
foreign trading gross receipts derived by the taxpayer from the
transaction 32; or (iii) 15 percent of the foreign trade income derived by
the taxpayer from the transaction.33
III. Arguments of the Participants and Third Participants
A. Claims of Error by the United States – Appellant
1. Subsidies Contingent Upon Export under the SCM Agreement
(a) Article 1.1(a)(1)(ii) of the SCM Agreement: Revenue Foregone that is
"Otherwise Due"
26. The United States requests us to reverse the Panel's finding that the
ETI Act confers a subsidy within the meaning of Article 1.1(a)(1)(ii) of
the SCM Agreement. More specifically, the United States contends that the
Panel "misapplied" the comparison test established in the original
Appellate Body Report.34
27. The United States argues, first, that the Panel ignored the fact that
the definition of "gross income" is not contained in Section 61 of the IRC
alone, but depends also on other sections of the IRC and, more
particularly, on Section 114(a) and (b) IRC. Second, the Panel erroneously
created a distinction between a "specific" and a "general" tax exclusion.
The Panel stated that a Member may exclude a category of income from
taxation only if it excludes "all of the income" in that category. The
United States contends that such an analysis improperly incorporates the
concept of specificity, found in Article 2 of the SCM Agreement, into the
definition of "subsidy" in Article 1. Third, the Panel created another
erroneous standard by stating that a tax exclusion must have "some kind of
overall rationale and coherence" if it is to avoid foregoing revenue that
is otherwise due. Such a proposition is inconsistent with the Appellate
Body’s prior statement that a Member is free to tax or not tax the
categories of revenues that it chooses. Fourth, the United States appeals
what it considers to be a failure by the Panel to apply the original
panel's "but for" test, a test which the Appellate Body had upheld. The
United States submits that "but for" the exclusion of qualifying foreign
trade income, all extraterritorial income would be excluded from "gross
income". Finally, the Panel erred in finding that extraterritorial income
excluded by the ETI Act necessarily would be taxed if the ETI Act did not
exist. The United States submits that merely classifying income as "gross
income" does not per se mean that it would necessarily be taxed, since
"gross income" may also be subject to deferral, deductions or foreign tax
credits.
28. In its additional written memorandum, the United States emphasizes
that, in determining the relevant benchmark rules of taxation in this
case, the "basic issue … is the allocation of income earned in an
international transaction between the domestic and foreign portions of
such income."35 The longstanding "normative" principles of the United States
permit taxpayers "to structure their affairs in a manner that separates
the foreign-allocated portion of foreign sales income from the domestic
portion and subjects only the domestic portion to domestic taxation."36
Traditionally, the United States has permitted the foreign portion of such
income to be allocated outside its taxing jurisdiction through the use of
a foreign-incorporated subsidiary of a United States taxpayer. The foreign
portion of the income earned by such subsidiaries is not subject to United
States taxation.37 The direct allocation, under the ETI Act, of income
earned in an international transaction between the domestic and foreign
portions of such income simplifies the method for allocating such income
outside United States' taxing jurisdiction. The ETI Act allows such
allocation to be made in respect of transactions carried out directly by a
United States taxpayer – without the use of a foreign subsidiary. Thus,
while the ETI Act reformulates, through a fundamental revision of Sections
61 and 114 of the IRC, the method by which the United States implements
its normative benchmark principles, it is consistent with such principles.
(b) Article 3.1(a) of the SCM Agreement: Export Contingency
29. The United States also asks us to reverse the Panel's finding that the
ETI Act involves a subsidy contingent upon export performance within the
meaning of Article 3.1(a) of the SCM Agreement. The United States argues
that the Panel incorrectly transformed Article 3.1(a) into a "reverse
national treatment" requirement under which domestic sales must be
afforded no less favourable treatment than exports or other foreign sales.38
However, no such requirement is present in the text of Article 3.1(a) and
the availability of a subsidy to purely domestic transactions is
irrelevant under Article 3.1(a).
30. According to the United States, the Panel artificially bifurcated and
improperly examined the ETI Act as if it had one category of treatment for
United States-produced goods and a different one for foreign-produced
goods. In so doing, the Panel created a distinction not found in the ETI
Act, which was purposefully drafted to provide tax relief based on
export-neutral criteria.
31. The United States maintains that the ETI Act is export-neutral in that
it permits income to be earned without exporting. Article 3.1(a) does not
prohibit subsidies that benefit exporters if conferred through
export-neutral principles. In finding the ETI Act to be export-contingent,
the Panel improperly held that a measure violates Article 3.1(a) if
exportation is one way of obtaining a subsidy. However, exportation
constitutes a prohibited contingency only where exportation is a mandatory
condition. Finally, according to the United States, the Panel erroneously
found that an export-contingent subsidy cannot be cured by expanding the
universe of eligible recipients.
(c) Footnote 59 to the SCM Agreement: Double Taxation of Foreign-Source
Income
32. The United States further requests us to set aside the Panel's
findings that the ETI Act is not a measure to avoid double taxation under
the fifth sentence of footnote 59 to the SCM Agreement. The Panel
erroneously created detailed criteria for a measure to qualify under the
fifth sentence of footnote 59 and, in so doing, improperly established "a
new double taxation avoidance code".39
33. At the outset, the United States submits that the Panel incorrectly
imposed on the United States the burden of proving that the ETI Act is a
measure to avoid double taxation. The Panel ignored the Appellate Body’s
finding in EC Measures Concerning Meat and Meat Products (Hormones) ("EC –
Hormones")40 that related provisions which define key elements of the
violations alleged form part of the elements of the prima facie case that
a complainant must make.
34. The United States alleges that in finding that the ETI Act is not a
measure to avoid double taxation, the Panel articulated four new
principles that cannot be found in the fifth sentence of footnote 59.
First, the Panel incorrectly stated that such a measure must apply to all
income that is potentially subject to double taxation. Second, the Panel
found that such a measure cannot encompass income that might not be
treated as taxable in other jurisdictions. Third, the Panel held that a
bona fide measure to avoid double taxation must contain a "permanent
establishment" requirement. Fourth, the Panel erred in stating that a
country which has an extensive system of bilateral tax treaties could not
adopt a measure to avoid double taxation.
35. The United States claims that in addition, the Panel wrongly created a
new standard for reviewing conformity with the fifth sentence of footnote
59: the "reasonable legislator" standard. The United States sees this as a
substitution by the Panel of its judgment for that of a national
legislature as to whether a measure is intended to avoid double taxation.
36. In the view of the United States, the fifth sentence of footnote 59
does not define "double taxation" or indicate the types of measure that
are permissible to "avoid" double taxation. The sentence also does not
define "foreign-source income". Two general categories of measures are
nevertheless well-accepted and used throughout the world for the avoidance
of double taxation: the exemption (or non-taxation) method and the tax
credit method. The United States emphasizes that international tax
conventions recognize that countries are free to use one or the other or
both methods, and that the methods used vary from country to country.
37. The United States submits that the ETI Act achieves avoidance of
double taxation through the exclusion of extraterritorial income from
gross income. The ETI Act’s legislative history expressly identifies
double taxation avoidance as a primary objective of the ETI Act, and the
ETI Act was designed to parallel certain aspects of the territorial
systems of many member States of the European Communities.
"Extraterritorial income" under the ETI Act is income derived from foreign
transactions, and, as such, it falls within the ordinary meaning of the
phrase "foreign-source income" under footnote 59 to the SCM Agreement.
38. Should we reverse the Panel's finding and hold that the ETI Act is a
measure to avoid double taxation within the meaning of the fifth sentence
of footnote 59, the United States requests us to complete the analysis and
find that, by virtue of footnote 5 to the SCM Agreement, the ETI Act is
not a prohibited export subsidy.
2. Export Subsidies under the Agreement on Agriculture
39. The United States also asks us to reverse the Panel's finding that the
ETI Act is inconsistent with the United States' obligations under Articles
8 and 10.1 of the Agreement on Agriculture. The Panel’s finding that the
ETI Act constitutes an export subsidy under Article 1(e) of the Agreement
on Agriculture is based entirely on its finding under the SCM Agreement.
Because the Panel’s finding of an export subsidy under the SCM Agreement
is in error, the United States submits that the Panel’s finding of an
export subsidy under the Agreement on Agriculture is also in error.
Continue on to:
3. Article III:4 of the GATT 1994
Notes
1
WT/DS108/RW, 20 August 2001.
2
United States Public Law 106-519, 114 Stat. 2423 (2000).
3
The recommendations and rulings of the DSB resulted from the adoption, by
the DSB, of the Appellate Body Report in US – FSC, WT/DS108/AB/R, adopted
20 March 2000 (the "original Appellate Body Report"). In this Report, we
refer to the panel that considered the original complaint brought by the
European Communities as the "original panel" and to its report as the
"original panel report".
4
Original Panel Report, US – FSC, WT/DS108/R, adopted 20 March 2000, as
modified by the Appellate Body Report, WT/DS108/AB/R, para. 8.1.
5
Ibid., para. 8.8.
6
WT/DSB/M/90, paras. 6-7. See also Panel Report, para. 1.3.
7
Panel Report, para. 1.5.
8
Ibid., paras. 1.1-1.13.
9
WT/DS108/16, 8 December 2000.
10
WT/DS108/19, 5 January 2001.
11
Panel Report, para. 9.1.
12
Ibid., para. 9.2.
13
WT/DS108/21, 15 October 2001.
14
In its letter, the United States explained that, due to the delivery of
the bacterium anthrax to the United States Congress, several buildings had
been temporarily closed, including buildings housing the offices of United
States Senate officials with jurisdiction over the issues arising in this
appeal.
15
Pursuant to Rule 21(1) of the Working Procedures.
16
Pursuant to Rule 23(1) of the Working Procedures.
17
Pursuant to Rules 22 and 23(3) of the Working Procedures.
18
Pursuant to Rule 24 of the Working Procedures.
19
Pursuant to Rule 28(1) of the Working Procedures.
20
Pursuant to Rule 28(2) of the Working Procedures.
21
Appellate Body Report, supra, footnote 3, paras. 6-7.
22
Section 901(a) IRC.
23
Section 1 relates to the short title of the ETI Act, while Section 4 sets
forth a number of "technical and conforming" amendments.
24
Subpart C of part III of Subchapter N of chapter 1, consisting of Sections
921-927 IRC.
25
Section 3 of the ETI Act, Section 943(e) IRC.
26
Under the ETI Act, the need to satisfy these three conditions is subject
to a number of exceptions. We examine certain of these exceptions below,
to the extent that they are pertinent to our analysis of the issues on
appeal.
27
The detailed rules of the ETI measure provide that foreign trading gross
receipts may be earned through (i) any sale, exchange, or other
disposition of qualifying foreign trade property; (ii) any lease or rental
of qualifying foreign trade property; (iii) any services which are related
and subsidiary to (i) and (ii); (iv) for engineering or architectural
services for construction projects located (or proposed for location)
outside the United States; and (v) for the performance of managerial
services for a person other than a related person in furtherance of
activities under (i), (ii) or (iii). (Section 3 of the ETI Act, Section
942(a) IRC) We will generally refer to sale and lease transactions as a
shorthand reference to the transactions described in (i) and (ii) of this
footnote.
28
Section 3 of the ETI Act, Section 943(a)(1) IRC. Section 943(a)(3) and (4)
IRC set forth specific exclusions from this general definition.
29
Section 3 of the ETI Act, Section 942(b) IRC.
30
The relevant activities are: (i) advertising and sales promotion; (ii)
processing of customer orders and arranging for delivery; (iii)
transportation outside the United States in connection with delivery to
the customer; (iv) determination and transmittal of final invoice or
statement of account or the receipt of payment; and (v) assumption of
credit risk. A taxpayer will be treated as having satisfied the foreign
economic process requirement when at least 50 percent of the total costs
attributable to such activities is attributable to activities performed
outside the United States, or, for at least two of these five categories
of activity, when at least 85 percent of the total costs attributable to
such category of activity is attributable to activities performed outside
the United States. (Section 3 of the ETI Act, Section 942(b)(2)(A)(ii),
(b)(2)(B) and (b)(3) IRC)
31
Foreign sales and leasing income is defined in Section 941(c)(1) IRC.
32
Foreign trading gross receipts are defined in Section 942(a) IRC.
33
Foreign trade income is defined in Section 941(b) IRC.
34
United States' appellant's submission, para. 107.
35
United States' additional written memorandum, p. 1.
36
Ibid., p. 3.
37
Subject to the anti-abuse rules contained in Subpart F of the IRC. (United
States' additional written memorandum, p. 2)
38
United States' appellant's submission, para. 142.
39
United States' appellant's submission, para. 173.
40
Appellate Body Report, WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February
1998, DSR 1998:I, 135. |