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United States – Conditional Tax Incentives for Large Civil Aircraft (US–Tax Incentives), DS487

Published online by Cambridge University Press:  06 February 2018

Kholofelo Kugler
Kholofelo Kugler*
Affiliation:
Works in the Advisory Centre on WTO Law (ACWL), but writes in a personal capacity
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Extract

The dispute concerns tax incentives granted by the state of Washington in the United States (US) pursuant to the tax-related provisions of the Revised Code of Washington. Nine tax-related provisions incentives were adopted to attract the production of large civil aircraft in that state. The State of Washington adopted seven aerospace measures corresponding to the nine tax-related provisions. The aerospace measures fell into three general categories of measures: a reduced tax rate, tax credits, and tax exemptions, which included the following (i) reduced corporate tax rates for aircraft manufacturers and retailers (B&O aerospace rate); (ii) tax credits for property and leasehold excise taxes on computer manufacturing facilitates and aerospace product development; and (iii) exemptions of sales and use tax for certain computer hardware, software and peripherals and construction services and materials, and leasehold excise tax and leaseholder property tax. According to the European Union (EU), the measures at issue are prohibited under Article 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) because they are contingent on the use of domestic over imported goods. This contingency results from two siting provisions: the First Siting Provision and the Second Siting Provision, which are contained in Engrossed Substitute Senate Bill 5952 (ESSB 5952).

Information

Type
Case Summaries
Information
World Trade Review , Volume 17 , Issue 1 , January 2018 , pp. 169 - 172
Copyright
Copyright © Kholofelo Kugler 2018 

  • Adopted   22 September 2017

  • Complainant   European Union

  • Respondent   United States

  • Third Parties   Argentina, Brazil, Canada, China, India, Japan, Korea, Russia

  • Third Participants   Argentina, Brazil, Canada, China, Japan, Korea, Russia

Measure at Issue

The dispute concerns tax incentives granted by the state of Washington in the United States (US) pursuant to the tax-related provisions of the Revised Code of Washington. Nine tax-related provisions incentives were adopted to attract the production of large civil aircraft in that state. The State of Washington adopted seven aerospace measures corresponding to the nine tax-related provisions. The aerospace measures fell into three general categories of measures: a reduced tax rate, tax credits, and tax exemptions,Footnote 1 which included the following (i) reduced corporate tax rates for aircraft manufacturers and retailers (B&O aerospace rate); (ii) tax credits for property and leasehold excise taxes on computer manufacturing facilitates and aerospace product development; and (iii) exemptions of sales and use tax for certain computer hardware, software and peripherals and construction services and materials, and leasehold excise tax and leaseholder property tax.Footnote 2 According to the European Union (EU), the measures at issue are prohibited under Article 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) because they are contingent on the use of domestic over imported goods. This contingency results from two siting provisions: the First Siting Provision and the Second Siting Provision, which are contained in Engrossed Substitute Senate Bill 5952 (ESSB 5952).Footnote 3

Main Adopted Findings of the Panel and Appellate Body

Threshold Issue: Are the Measures at Issue Subsidies within the Meaning of Article 1 of the SCM Agreement

The Panel analysed all the seven measures under Article 1 of the SCM Agreement and concluded that the three categories of measures provided by the government of the State of Washington constituted a ‘financial contribution’ within the meaning of Article 1.1.(a)(1)(ii) because they constituted ‘government revenue that is otherwise due, is foregone, or not collected’.Footnote 4 The Panel also concluded that the recipients of the tax exemptions obtained a benefit within the meaning of Article 1.1(b) of the SCM Agreement.Footnote 5 The benefit existed in the form of tax exemptions which conferred an ‘“advantage” in comparison to market conditions where such advantages do not otherwise exist’.Footnote 6

Articles 3.1(b) and 3.2 of the SCM Agreement

The EU's primary claim with regard to the ‘contingency’ was that the First Siting Provision and the Second Siting Provision, considered individually or together, constitute subsidies that are de jure and de facto contingent on the use of domestic over imported products.Footnote 7 The Panel analysed the siting provisions in ESBB 5952 separately and jointly. In its analysis of the siting provisions separately, the Panel concluded that the EU did not demonstrate that the First Siting Provision and the Second Siting Provision on their own and based on their ‘express terms’, make the challenged measures de jure contingent on the use of domestic over imported products.Footnote 8

In its analysis of the First Siting Provision and the Second Siting Provisions jointly, the Panel also concluded that the EU failed to demonstrate that the siting provisions ‘acting together’ make the challenged measures de jure contingent on the use of domestic over imported goods.Footnote 9

In its analysis of de facto contingency, the Panel concluded that the siting provisions in ESBB 5952, particularly the prospective modalities of operation of the Department of Revenue's discretion under the Second Siting Provision make the B&O aerospace rate de facto contingent on the use of domestic over imported products within the meaning of Article 3.1(b) of the SCM Agreement.Footnote 10 Specifically, the Panel found that facts showed that the Department of Revenue would continue to provide the subsidy as long as a manufacturer used domestic goods. However, the same subsidy would be terminated if a manufacture used the same goods of a foreign source.Footnote 11 Having found the de facto contingency under Article 3.1(b), the Panel concluded that the US also acted inconsistently with Article 3.2 of the SCM Agreement.Footnote 12

The EU and the US Appealed Different Findings of the Panel

On appeal, the Appellate Body rejected the EU's claims that the Panel erred in its interpretation of Article 3.1(b) of the SCM Agreement with respect to the de jure contingency analysis of the siting provisions in ESBB 5952 and the de facto contingency analysis of the First Siting Provision.Footnote 13 The Appellate Body also rejected the EU's claim of error with regard to the Panel's application of Article 3.1(b) of the SCM Agreement in finding that the First Siting Provision does not make the B&O aerospace tax de jure contingent upon the use of domestic over imported products.Footnote 14 Further, the Appellate Body rejected the EU's claim that the Panel erred in its application of Article 3.1(b) of the SCM Agreement by finding that the siting provisions in ESBB 5952, considered separately or jointly, do not make the B&O aerospace tax de jure contingent upon the use of domestic over imported goods. Furthermore, the Appellate Body rejected the EU's claim under Article 11 of the DSU that the Panel failed to make an objective assessment by finding that the Second Siting Provision does not make the B&O aerospace tax rate de jure contingent upon the use of domestic over imported products.Footnote 15

Finally, the Appellate Body reversed the Panel's finding that the B&O aerospace tax rate is de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) and consequently reversed the Panel's finding of inconsistency with Article 3.2 of the SCM Agreement.Footnote 16

Article 4.7 of the SCM Agreement/ Article 19 of the DSU

The Panel found that the fact that the EU has demonstrated that the B&O aerospace tax is a subsidy contingent upon the use of domestic over imported goods, which is prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement. The Panel recommended the US to withdraw the subsidy ‘without delay’ within 90 days. The Panel refrained from making any suggestions concerning the steps that the US may take to implement the recommendation.Footnote 17

As the Appellate Body reversed the Panel's finding of inconsistency under Article 3.1(b) of the SCM, it made no recommendation in the current dispute. The Appellate Body thus finding that the Panel's recommendation under Article 4.7 of the SCM Agreement ‘cannot stand’.Footnote 18

The report was adopted on 22 September 2017. The US was not required to take any further action.

Footnotes

Case Summaries: WTO Disputes

The following summaries provide a brief factual background and describe the key findings of recent WTO panel and Appellate Body reports.

References

1 Panel Report, US–Tax Incentives, para. 7.2 fn. 54.

2 Ibid. para. 7.15.

3 Ibid. para. 7.3.

4 Ibid. para. 7.157.

5 Ibid. para. 7.164.

6 Ibid. para. 7.163.

7 Ibid. paras. 7.168, 7.172, 7.173.

8 Ibid. paras. 7.297, 7.311.

9 Ibid. para. 7.317.

10 Ibid. para. 7.369.

11 Ibid. para. 7.365.

12 Ibid. para. 8.2.

13 Appellate Body Report, US–Tax Incentives, para. 5.35.

14 Ibid. para. 5.45.

15 Ibid. para. 5.58.

16 Ibid. para. 5.82.

17 Panel Report, US–Tax Incentives, paras. 8.5–8.7.

18 Appellate Body Report, US–Tax Incentives, para. 6.7.