## Facts

- The European Communities challenged U.S. tax rules for “Foreign Sales Corporations” (FSCs) in Internal Revenue Code §§ 921–927 that excluded certain export-related income from U.S. taxation.
- A WTO panel and the Appellate Body found the FSC regime to be a prohibited export subsidy under SCM Agreement Article 3.1(a).
- The Dispute Settlement Body adopted those reports and set a deadline for U.S. implementation; the EC asserted the United States did not withdraw the subsidy within the implementation period.
- The EC requested authorization to impose countermeasures for continued non-compliance under SCM Agreement Article 4.10 and DSU Article 22.
- The United States objected to the level of countermeasures sought and requested arbitration under DSU Article 22.6 and SCM Agreement Article 4.11.
- The arbitration addressed only the permissible level of countermeasures, not whether the United States had achieved compliance.

## Issues

1. How should “appropriate countermeasures” in SCM Agreement Article 4.10 be interpreted for a prohibited export subsidy?
2. What maximum annual level of countermeasures is permissible, given DSU Article 22’s equivalence requirement and the quantified nullification or impairment caused by the FSC measure?
3. What measure and time period should be used to calculate nullification or impairment for purposes of setting the countermeasures ceiling?

## Decision

- The arbitrator determined that countermeasures authorized under SCM Agreement Article 4.10 must be “appropriate” and, as a ceiling, not exceed a level equivalent to the nullification or impairment under DSU Article 22.4.
- The arbitrator set a maximum annual level of countermeasures the EC could request authorization to impose, based on a quantified estimate of nullification or impairment attributable to the FSC export subsidy.
- The arbitrator selected the FSC mechanism previously found inconsistent as the relevant measure and calculated effects for the period after the reasonable implementation period during which the subsidy was not withdrawn.
- The arbitrator rejected speculative or overly expansive estimates and relied on a net subsidy-based methodology tied to export transactions benefiting from FSC treatment and the tax advantage conferred.

## Legal Principles

- In prohibited subsidy disputes, SCM Agreement Article 4 supplies “special and additional” remedial rules aimed at prompt withdrawal of the subsidy; countermeasures may be used to induce compliance.
- “Appropriate countermeasures” under SCM Agreement Article 4.10 are disciplined by DSU Article 22, including the requirement that the level of suspension of concessions be equivalent to the level of nullification or impairment (DSU Article 22.4) as a general upper limit.
- The arbitration under DSU Article 22.6 and SCM Agreement Article 4.11 is limited to determining the permissible level of countermeasures and does not re-decide compliance with substantive rulings.
- The proponent of a specific countermeasures level bears the burden to substantiate its calculation; the opposing party may rebut with evidence and alternative calculations.
- Quantification should focus on the trade impact attributable to the subsidy element (the tax benefit), distinguishing the value of affected exports from the net advantage conferred by the measure.

## Conclusion

The arbitrator authorized the EC to seek DSB approval for annual countermeasures up to a quantified ceiling reflecting the nullification or impairment caused by the FSC prohibited export subsidy, interpreting “appropriate countermeasures” as compliance-inducing yet bounded by DSU equivalence limits and grounded in a net subsidy-based economic assessment.


United States—Tax Treatment for “Foreign Sales Corporations” (Article 22.6 Arbitration), WT/DS108/ARB (WTO Aug. 30, 2002)