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TWN Info Service on WTO and Trade Issues (Sept17/03)
8 September 2017
Third World Network

       
WTO Appellate Body rejects EU case over tax incentives to Boeing
Published in SUNS #8527 dated 6 September 2017


Geneva, 5 Sep (Kanaga Raja) - The Appellate Body (AB) of the World Trade Organisation (WTO) has handed down a ruling rejecting the claims put forward by the European Union that certain tax incentives provided by the US State of Washington to the aircraft manufacturer Boeing constitute prohibited subsidies.

In a ruling issued on 4 September (WT/DS487/AB/R), the AB reversed the Panel's finding (in paragraphs 7.369 and 8.1.c of the Panel Report) that the B&O (business and occupation) aerospace tax rate is de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM (Subsidies and Countervailing Measures) Agreement.

Accordingly, the AB also reversed the Panel's finding (in paragraph 8.2 of the Panel Report) that the United States has acted inconsistently with Article 3.2 of the SCM Agreement.

In light of its reversal of the Panel's finding that the B&O aerospace tax rate is de facto contingent upon the use of domestic over imported goods, the AB did not consider it necessary to address the remainder of the United States' claims and arguments relating to the Panel's analysis of de facto contingency in respect of the Second Siting Provision.

The AB also did not consider it necessary to address the European Union's claim that the Panel failed to make an objective assessment of the matter under Article 11 of the DSU (Dispute Settlement Understanding) with regard to its analysis of de facto contingency in respect of the First Siting Provision.

Having reversed the Panel's finding of inconsistency under Article 3.1(b) of the SCM Agreement, the AB made no recommendation in this dispute.

It said that the Panel's recommendation pursuant to Article 4.7 of the SCM Agreement, in paragraph 8.6 of the Panel Report, cannot stand.

[In its ruling, the Panel had found that the European Union had demonstrated that the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme, pursuant to ESSB 5952, is a subsidy contingent upon the use of domestic over imported goods, prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement.

[In paragraph 8.6 of the Panel Report, the Panel had said that taking into account the nature of the prohibited subsidy found in this dispute, it recommends that the United States withdraw it without delay and within 90 days.]

ISSUES RAISED IN APPEAL

According to the AB report, the United States and the European Union each appealed certain issues of law and legal interpretations developed in the Panel Report, United States - Conditional Tax Incentives for Large Civil Aircraft (WT/DS487/R).

Before the Panel, said the AB report, the European Union challenged certain tax-related measures provided by the state of Washington, as amended by Washington Engrossed Substitute Senate Bill 59523 (ESSB 5952), specifically:

(i) a reduction in the business and occupation (B&O) tax rate that applies to business activities concerning the manufacture and sale of commercial airplanes (B&O aerospace tax rate); and

(ii) a series of other tax credits or exemptions relating to product development activities, property and leasehold taxes, and sales and use taxes - collectively, the "aerospace tax measures".

The European Union claimed that these tax incentives are prohibited under Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) as subsidies contingent upon the use of domestic over imported goods.

The European Union had identified two "siting" provisions in ESSB 5952 that govern the availability of the challenged tax incentives.

The First Siting Provision pertains to all of the aerospace tax measures and states that the tax incentives will take effect "upon the siting of a significant commercial airplane manufacturing program" in Washington.

Both parties agreed that the First Siting Provision has been fulfilled in respect of Boeing's 777X aircraft program, and that the challenged tax incentives are therefore in effect.

The Second Siting Provision concerns the continued availability of the B&O aerospace tax rate only, and provides that the reduced tax rate will no longer apply if there is a determination by the Washington Department of Revenue "that any final assembly or wing assembly of any version or variant of a commercial airplane that is the basis of a siting of a significant commercial airplane manufacturing program" under the First Siting Provision has been sited outside of Washington.

In the Panel Report, circulated to Members of the World Trade Organization on 28 November 2016, the Panel found that each of the aerospace tax measures at issue constitutes a subsidy within the meaning of Article 1 of the SCM Agreement.

The Panel had also found that, although the European Union had not demonstrated that any of the aerospace tax measures are de jure contingent upon the use of domestic over imported goods with respect to the First or Second Siting Provisions in ESSB 5952, whether considered jointly or separately, the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under Boeing's 777X aircraft program is a subsidy de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement.

Accordingly, the Panel also found that the United States had acted inconsistently with Article 3.2 of the SCM Agreement.

According to the AB report, the following issues were raised in this appeal:

a. with respect to the Panel's interpretation of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analyses in respect of the First and Second Siting Provisions, and its de facto contingency analysis in respect of the First Siting Provision:

i. whether the Panel erred in articulating a legal standard requiring the use of domestic goods to the complete exclusion of imported goods (raised by the European Union);

b. with respect to the Panel's application of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analysis in respect of the First Siting Provision:

i. whether the Panel erred in finding that the First Siting Provision does not, expressly or by necessary implication from its words, require Boeing to use domestic over imported goods (raised by the European Union);

c. with respect to the Panel's application of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analysis in respect of the Second Siting Provision:

i. whether the Panel erred in its application of Article 3.1(b) by unduly restricting the scope of the evidence from which it assessed de jure contingency in respect of the Second Siting Provision (raised by the European Union); and

ii. whether the Panel failed to make an objective assessment of the matter under Article 11 of the DSU by providing an improper reading of the Second Siting Provision (raised by the European Union);

d. with respect to the Panel's de facto contingency analysis under Article 3.1(b) of the SCM Agreement:

i. whether the Panel erred in its interpretation and application of Article 3.1(b) in finding that the measure, in particular the Second Siting Provision, reflects a condition requiring the use of domestic over imported goods (raised by the United States); and

ii. whether the Panel failed to make an objective assessment of the matter under Article 11 of the DSU in respect of various aspects of the Panel's reasoning (raised by the United States and the European Union).

In its appeal, the European Union challenged the Panel's findings that the European Union did not demonstrate that the First and Second Siting Provisions, considered separately or jointly, make the United States' aerospace tax measures de jure contingent, or that the First Siting Provision makes such measures de facto contingent, upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement.

In particular, the European Union argued that the Panel erred: (i) in its interpretation and application of Article 3.1(b), in not finding that the First Siting Provision makes the aerospace tax measures de jure contingent upon the use of domestic over imported goods; (ii) in its interpretation of Article 3.1(b), and in failing to conduct an objective assessment of the matter under Article 11 of the DSU, in not finding that the First Siting Provision makes the aerospace tax measures de facto contingent upon the use of domestic over imported goods; and (iii) in its interpretation and application of Article 3.1(b), and in failing to conduct an objective assessment of the matter under Article 11 of the DSU, in not finding that the Second Siting Provision makes the B&O aerospace tax rate de jure contingent upon the use of domestic over imported goods.

For its part, the United States appealed the Panel's finding that, with respect to the First and Second Siting Provisions, considered jointly, the B&O aerospace tax rate is a subsidy de facto contingent upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement.

In particular, the United States argued that the Panel erred: (i) in interpreting and applying Article 3.1(b) as if it prohibits subsidies conditional upon the domestic siting of production activities; (ii) in its interpretation and application of Article 3.1(b), in finding that the B&O aerospace tax rate for Boeing's 777X aircraft program is contingent upon the "use" of wings for the 777X because Boeing does not and will not "use" wings to produce the 777X; and (iii) in its interpretation and application of Article 3.1(b), in finding that the subsidy is contingent upon the use of "domestic" over "imported" wings because it did not address the meaning of the terms "domestic" and "imported", or examine whether wings resulting from wing assembly in Washington would necessarily be "domestic".

Moreover, the United States claimed that the Panel failed to make an objective assessment of the matter under Article 11 of the DSU.

FINDINGS AND CONCLUSIONS

With respect to the Panel's interpretation of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analyses of the First and Second Siting Provisions, the AB considered that the Panel did not articulate a legal standard under Article 3.1(b) requiring the use of domestic goods to the complete exclusion of imported goods.

Instead, the Panel found that, by their terms, the First and Second Siting Provisions relate to the location of certain assembly operations within Washington and are silent as to the use of domestic or imported goods.

Therefore, in stating that these provisions do not "per se and necessarily exclude" the possibility for the airplane manufacturer to use inputs from outside Washington, the Panel was not articulating a legal standard, but was rather recognizing that, based on the necessary implications of the provisions' terms, no de jure requirement existed for Boeing to use domestic over imported goods.

Neither did the Panel articulate such a legal standard in assessing the de facto contingency of the First Siting Provision.

Rather, the Panel found that the additional evidence before it confirmed its understanding of the First Siting Provision in the context of its de jure contingency analysis that the measure does not require the use of domestic over imported goods as a condition for granting the subsidy.

The AB therefore rejected the European Union's claims that the Panel erred in its interpretation of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analyses of the First and Second Siting Provisions, as well as its de facto contingency analysis of the First Siting Provision.

With respect to the Panel's application of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analysis of the First Siting Provision, the AB considered that the relevant question in determining the existence of de jure contingency under Article 3.1(b) is not whether the production requirements under the First Siting Provision may result in the use of more domestic and fewer imported goods, but whether the measure, by its terms or by necessary implication therefrom, sets out a condition requiring the use of domestic over imported goods.

Therefore, even if, under the scenarios discussed by the Panel, Boeing would likely use some amount of domestically produced wings and fuselages, this observation is not in itself sufficient to establish the existence of a condition, reflected in the measure's terms or arising by necessary implication therefrom, requiring the use of domestic over imported goods.

The AB therefore rejected the European Union's claim that the Panel erred in its application of Article 3.1(b) of the SCM Agreement in finding that the First Siting Provision does not make the aerospace tax measures de jure contingent upon the use of domestic over imported goods.

With respect to the Panel's application of Article 3.1(b) of the SCM Agreement in the context of its de jure contingency analysis of the Second Siting Provision, the AB did not consider that the Panel erred by not examining the United States' responses to its questions in the context of that analysis.

In determining the existence of contingency, a panel should conduct a holistic assessment of all relevant elements and evidence on the record, and need not compartmentalize its de jure and de facto analyses in order to reach an overall conclusion as to whether a subsidy is contingent upon the use of domestic over imported goods, said the AB.

The United States' responses may have shed light on the necessary implication of the terms of the Second Siting Provision, but they may have been equally relevant for understanding the measure's design, structure, and modalities of operation in the context of the relevant factual circumstances.

"Therefore, we do not consider that the Panel erred by unduly restricting the scope of the evidence from which it assessed de jure contingency with respect to the Second Siting Provision."

The AB also did not consider that the Panel understood the scope of application of the Second Siting Provision as limited to the relocation of specific assembly operations that were the basis of a siting under the First Siting Provision.

Instead, the Panel was merely describing one possible situation under which the Second Siting Provision would be activated.

The AB therefore rejected the European Union's claim that the Panel erred in the application of Article 3.1(b) of the SCM Agreement in finding that the Second Siting Provision, considered separately or jointly with the First Siting Provision, does not make the B&O aerospace tax rate de jure contingent upon the use of domestic over imported goods.

The AB also rejected the European Union's claim that the Panel failed to make an objective assessment of the matter under Article 11 of the DSU in finding that the Second Siting Provision, considered separately or jointly with the First Siting Provision, does not make the B&O aerospace tax rate de jure contingent upon the use of domestic over imported goods.

With respect to the Panel's de facto contingency analysis under Article 3.1(b) of the SCM Agreement, the AB said "we do not see that the Panel properly established that the Second Siting Provision, in addition to the conditions relating to the siting of production activities, also entails a condition requiring the use of domestic over imported goods."

The United States' response to Panel question No. 80 regarding the Washington Department of Revenue's "likely" determination in the event that completed fuselages and wings were imported clarifies that it is the location of production activities, not the imported or domestic character of the goods produced, that triggers the Second Siting Provision.

In light of the various caveats to the United States' responses, the implications of which were neither mentioned nor reasoned in the Panel Report, "we do not consider that the Panel's analysis and reasoning provided a sufficient basis for its finding that the Second Siting Provision makes the B&O aerospace tax rate de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement," said the AB.

The AB therefore reversed the Panel's finding (in paragraphs 7.369 and 8.1.c of the Panel Report) 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) of the SCM Agreement.

Accordingly, the AB also reversed the Panel's finding (in paragraph 8.2 of the Panel Report) that the United States has acted inconsistently with Article 3.2 of the SCM Agreement.

The AB noted that the United States raised a number of additional claims concerning the Panel's interpretation and application of Article 3.1(b) of the SCM Agreement.

In particular, the United States takes issue with the Panel's finding that Boeing "uses" wings to manufacture the 777X and argues that the Panel did not conduct "a meaningful analysis" as to whether wings resulting from wing assembly in Washington would necessarily be "domestic".

The United States also submits that the Panel's evaluation of the operation of the Second Siting Provision in the context of its de facto analysis is inconsistent with the Panel's duty under Article 11 of the DSU to make an objective assessment of the matter.

Having 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) of the SCM Agreement, "we do not consider it necessary to address further the United States' other claims and arguments," said the AB.

The AB further noted the European Union's claim that the Panel failed to make an objective assessment of the matter under Article 11 of the DSU by treating as conclusive the language of the contingency described in the First Siting Provision and the Washington Department of Revenue's determination regarding Boeing's decision to locate "a significant commercial airplane manufacturing program" in Washington, and thereby "failing to properly consider the implications of that condition on Boeing's incentives to use domestic over imported 777X wings or 777X fuselages in its Washington State production of the 777X".

"In light of our reversal of the Panel's finding that the B&O aerospace tax rate is de facto contingent upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement, we do not consider it necessary to address the European Union's claim," said the AB.

Insofar as the Panel could not have relied on the mere implications of such a domestic siting condition for the importation of goods manufactured abroad, the AB did not consider that the European Union's argument could have altered the Panel's understanding that the activation of the First Siting Provision was based exclusively on Boeing's decision to locate a significant commercial airplane manufacturing program in Washington, and not on the particular use of goods of specific origins.

 


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