## Facts

- U.S. tax law (I.R.C. §§ 921–927 and implementing rules) created “Foreign Sales Corporations” (FSCs) and excluded from U.S. income tax a portion of export-related income when routed through a qualifying FSC.
- The European Communities challenged the FSC regime as conferring substantial tax savings to U.S. exporters through foregone government revenue.
- A WTO panel found the FSC regime to be a prohibited export subsidy under SCM Agreement Article 3.1(a) and, for agricultural products, inconsistent with export-subsidy obligations under the Agreement on Agriculture.
- The United States appealed; the Appellate Body report was adopted by the Dispute Settlement Body on March 20, 2000.

## Issues

1. Whether the FSC income-tax exemptions constituted a “subsidy” under SCM Agreement Article 1.1 by involving government revenue foregone and conferring a benefit.
2. Whether the FSC subsidy was contingent on export performance and therefore a prohibited export subsidy under SCM Agreement Articles 3.1(a) and 3.2.
3. Whether, for agricultural products, the FSC regime breached Agreement on Agriculture Articles 3.3 and 8, including whether it fell within Article 9.1(d).
4. Whether pre-WTO GATT-era instruments (including the 1979 Subsidies Code and a 1981 GATT Council action) barred or limited the challenge to the FSC regime.

## Decision

- The Appellate Body upheld that the FSC regime involved government revenue foregone (a financial contribution) and conferred a benefit, satisfying SCM Agreement Article 1.1.
- The Appellate Body upheld that the FSC tax advantage was export-contingent and therefore a prohibited export subsidy under SCM Agreement Article 3.1(a).
- For agricultural products, the Appellate Body upheld the finding of inconsistency with Agreement on Agriculture Articles 3.3 and 8, but reversed the panel’s determination that the measure fell within Article 9.1(d).
- The Appellate Body rejected the argument that GATT-era instruments insulated the FSC regime from challenge under the WTO agreements.

## Legal Principles

- A tax exemption can constitute a “financial contribution” under SCM Agreement Article 1.1(a)(1)(ii) where it is government revenue foregone that would otherwise be due.
- A measure confers a “benefit” under SCM Agreement Article 1.1(b) when it provides an advantage to recipients relative to the applicable tax baseline.
- A subsidy is prohibited under SCM Agreement Article 3.1(a) when eligibility is contingent in law or fact on export performance, including where the tax advantage is limited to export-related transactions.
- WTO Members’ rights to bring disputes under the SCM Agreement and Agreement on Agriculture are not displaced by prior GATT-era arrangements unless incorporated into WTO-covered agreements.
- Under the Agreement on Agriculture, a measure may still breach export-subsidy commitment limits (Arts. 3.3, 8) even if it does not fit a particular illustrative category (such as Art. 9.1(d)).

## Conclusion

The Appellate Body held that the FSC tax regime granted export-contingent tax exemptions amounting to prohibited export subsidies under the SCM Agreement and that, for agricultural products, the United States acted inconsistently with its export-subsidy commitments under the Agreement on Agriculture, while narrowing the panel’s characterization under Agriculture Article 9.1(d) and rejecting any GATT-era “safe harbor” defense.


United States—Tax Treatment for “Foreign Sales Corporations”, WT/DS108/AB/R (WTO App. Body Feb. 24, 2000)