WTO Panel Report Faults US Tax Breaks for State Tax Break

Dispute Settlement: WTO Issues Panel Report Regarding US Tax Breaks for Civil Aircraft Production

On 28 November 2016, the WTO issued the panel report in the case brought by the European Union regarding “United States – Conditional Tax Incentives for Large Civil Aircraft” (DS487).

Summary of key findings

This dispute concerns legislation enacted in the state of Washington in the United States in November 2013 through Engrossed Substitute Senate Bill 5952 (ESSB 5952), which amended and extended various tax incentives for the aerospace industry. The European Union identified seven separate tax incentives, including a reduced business and occupation tax rate, credits against business taxation, and exemptions from various other taxes in the state of Washington.

The European Union claimed that those tax incentives are prohibited under Articles 3.1(b) and 3.2 of the SCM Agreement as subsidies that are contingent on the use of domestic over imported goods. According to the European Union, the contingency results from two siting provisions contained in ESSB 5952, namely a First Siting Provision and a Second Siting Provision.

In the European Union's view, the challenged aerospace tax measures are de jure contingent upon the use of domestic over imported goods inasmuch as the text of the relevant legislation sets out the prohibited contingency. The European Union also made a secondary claim that the aerospace tax measures are de facto contingent upon the use of domestic over imported goods.

The Panel found that, under each of the aerospace tax measures at issue, there is a financial contribution by the Washington State government and a benefit is thereby conferred. The Panel concluded therefore that each of the aerospace tax measures at issue constitutes a subsidy within the meaning of Article 1 of the SCM Agreement.

With respect to the European Union's de jure claim against the aerospace tax measures at issue, the Panel looked separately at the First Siting Provision and the Second Siting Provision contained in ESSB 5952, to assess whether the European Union had successfully demonstrated the existence of the prohibited contingency in either of the provisions. In this regard, the Panel concluded that the European Union had not demonstrated that, on their own, and based on their express terms, the First Siting Provision or the Second Siting Provision make the challenged aerospace tax measures de jure contingent upon the use of domestic over imported goods.

The Panel subsequently considered the two siting provisions acting jointly and concluded that the European Union had not demonstrated that, acting together, the First Siting Provision and the Second Siting Provision make the challenged aerospace tax measures de jure contingent upon the use of domestic over imported goods.

With respect to the European Union's de facto claim against the aerospace tax measures at issue, the Panel considered the joint operation of the First Siting Provision and the Second Siting Provision contained in ESSB 5952, to assess whether the European Union had successfully demonstrated the existence of the prohibited contingency.

The Panel concluded that the siting provisions in ESSB 5952, and in particular the prospective modalities of operation of Washington State Department of Revenue's discretion under the Second Siting Provision, make one of the challenged aerospace tax measures (namely, the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under the 777X programme) de facto contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement.

Having found that the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under the 777X programme is inconsistent with Article 3.1(b) of the SCM Agreement, the Panel also found that the United States has acted inconsistently with Article 3.2 of the SCM Agreement.

Click here for the full panel report (107 PDF pages) on the WTO website.

Click here for the report’s Addendum (86 PDF pages) on the WTO website.

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BRUSSELS --- The United States’ massive support for production of the Boeing 777X is in breach of international trade rules, according to today’s WTO panel report.

The WTO confirmed that the US 2013 decision to extend tax breaks for Boeing until the year 2040 goes against previous WTO rulings. By making these tax breaks depend on the use of domestically produced wings, the US also discriminated against foreign suppliers.

EU Trade Commissioner Cecilia Malmström said: "Today's WTO ruling is an important victory for the EU and its aircraft industry. The panel has found that the additional massive subsidies of USD 5.7 billion provided by Washington State to Boeing are strictly illegal. We expect the US to respect the rules, uphold fair competition, and withdraw these subsidies without any delay".

This is the second ruling concerning the US subsidies to Boeing. The American measures considered under this case alone amount to USD 5.7 billion, and have now been recognised by the WTO panel as subsidies that are illegal.

This is the first time in the history of Airbus/Boeing litigation that a WTO panel finds that one of the disputing parties has granted such outright prohibited subsidies that discriminate against foreign producers.

In the spring of 2017, the WTO is expected to issue a report on another long-standing case, which will confirm the extent of the US WTO-incompatible subsidies to Boeing.

Click here for more information, on the WTO website.

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