TWN Info Service on WTO and Trade Issues (Dec16/01)
2 December 2016
Third World Network

Boeing found getting seven WTO-illegal subsidies (tax incentives)
Published in SUNS #8366 dated 30 November 2016

Geneva, 29 Nov (Kanaga Raja) -- A dispute panel at the World Trade Organisation (WTO) has handed down a ruling that each of the seven aerospace tax measures provided by the state of Washington in the United States to the civil aircraft manufacturer Boeing constitutes a subsidy within the meaning of Article 1 of the Subsidies and Countervailing Measures (SCM) Agreement.

In a ruling issued on 28 November, in a dispute brought by the European Union against the US, the Panel said that having found that the B&O (business and occupation) aerospace 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, it also found that the United States has acted inconsistently with Article 3.2 of the SCM Agreement.

The Panel concluded that, to the extent that the United States has acted inconsistently with the SCM Agreement, it has nullified or impaired benefits accruing to the European Union under that Agreement.

The Panel has found that the EU has 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.

Accordingly, taking into account the nature of the prohibited subsidy found in this dispute, the Panel recommended that the United States withdraw it without delay and within 90 days.

The Panel noted that the rules contained in Part II of the SCM Agreement do not require a panel to specify how the implementation of recommendations under Article 4.7 should be effected by the subsidizing Member.

In this context, the second sentence of Article 19.1 of the Dispute Settlement Understanding provides that a panel may suggest ways in which a recommendation could be implemented.

In this case, in the absence of any request from the parties, the Panel refrained from making any suggestions concerning steps that might be taken to implement its recommendation.

[Both the EU and the US can appeal the panel's findings within 60 days. A compliance panel proceeding is on-going in the dispute brought by the EU concerning US measures affecting trade in large civil aircraft (DS353, second complaint). The tax incentives were enacted during that proceeding and the compliance panel considered these measures to fall outside its terms of reference. The EU then raised these measures in this separate dispute.]

In a European Commission news release, the EU claimed a "major win" in its dispute with the US, saying that the WTO confirmed that the decision by the US in 2013 to extend tax breaks for Boeing until the year 2040 goes against previous WTO rulings.

"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," said EU Trade Commissioner Cecilia Malmstrom in the news release.

According to the panel report, the claims brought by the European Union concern tax-related provisions for civil aircraft provided by the state of Washington in the United States, as amended by Engrossed Substitute Senate Bill 5952 (ESSB 5952).

Specifically, this dispute concerns the following tax-related provisions contained in the Revised Code of Washington (RCW):

(a) a 0.2904% business and occupation tax rate with respect to the manufacture or sale of commercial airplanes, contained in RCW Section 82.04.260(11);

(b) tax credits for property taxes and leasehold excise taxes on commercial airplane manufacturing facilities, contained in RCW Section 82.04.4463;

(c) tax credits for aerospace product development, contained in RCW Section 82.04.4461;

(d) sales tax exemption for computer hardware, software, and peripherals, contained in RCW Section 82.08.975;

(e) sales tax exemption for construction services and materials, contained in RCW Section 82.08.980;

(f) use tax exemption for computer hardware, software, and peripherals, contained in RCW Section 82.12.975;

(g) use tax exemption for construction services and materials, contained in RCW Section 82.12.980;

(h) leasehold excise tax exemption, contained in RCW Section 82.29A. 137; and

(i) leaseholder property tax exemption, contained in RCW Section 84.36.655.

The European Union claims that the availability of the above tax incentives is subject to the conditions in Sections 2, 5, and 6 of ESSB 5952 (as codified at RCW Sections 82.32.850 and 82.04.260(11)(e)(ii)).

These conditions relate to a decision on the initial siting of a "significant commercial airplane manufacturing program" (as defined in the relevant legislation) in the state of Washington, as well as to the future siting outside the state of Washington of "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".

The European Union challenges seven aerospace tax measures, namely:

(i) a reduced business and occupation (B&O) tax rate for the manufacture and sale of commercial airplanes;

(ii) a credit for the B&O tax for pre-production development of commercial airplanes and components;

(iii) a credit for the B&O tax for property taxes on commercial airplane manufacturing facilities;

(iv) an exemption from sales and use taxes for certain computer hardware, software, and peripherals;

(v) an exemption from sales and use taxes for certain construction services and materials;

(vi) an exemption from leasehold excise taxes on port district facilities used to manufacture super-efficient airplanes; and

(vii) an exemption from property taxes for the personal property of port district lessees used to manufacture super-efficient airplanes.

The European Union identifies two "siting" provisions that govern the availability of the above aerospace tax measures, namely a First Siting Provision relating to all of the aerospace tax measures, and a Second Siting Provision relating only to the B&O aerospace tax rate.

Each of the above aerospace tax measures is extended, and certain others are also amended, by ESSB 5952, which, according to the First Siting Provision in Section 2 of ESSB 5952, "takes effect contingent upon the siting of a significant commercial airplane manufacturing program in the state of Washington".

The Second Siting Provision specifically pertains to the siting of "any final assembly or wing assembly" of that commercial airplane.

As agreed by the parties, the Boeing 777X is the relevant version or variant of commercial airplane that served as the basis for fulfilment of the First Siting Provision.

CONCLUSIONS ON FINANCIAL CONTRIBUTION

In its conclusions on financial contribution, the Panel said the United States has submitted that aerospace activity until 1 July 2024 would have qualified for certain tax treatment under legislation pre-dating ESSB 5952, and that the extent of any financial contribution in this dispute would be limited to revenue foregone at some point in the future.

In this regard, the Panel recalled its determination that the aerospace tax incentives at issue are those as currently codified and in effect until 2040 by virtue of ESSB 5952.

Thus, the preceding analysis of a financial contribution under each of the aerospace tax measures does not refer to a future window of time during which pre-existing tax treatment was extended.

Rather, the analysis of government revenue foregone has been conducted in regard to the currently codified tax provisions, which reflect and incorporate a series of earlier legislative acts, in addition to incorporating new substantive provisions created by ESSB 5952.

The Panel further noted the European Union's clarification that its claim is directed at the aerospace tax measures "as such", and thus is "not directed against the application of these measures during any given point in time or in any specific instance".

The Panel considered this an important distinction from the claim made in US - Large Civil Aircraft (2nd complaint), in which arguments were presented and assessed in relation to Boeing-specific subsidies and their alleged causation of adverse effects under Part III of the SCM Agreement.

Thus, although evidence of actual use of certain fiscal incentives may support or confirm a finding that government revenue is foregone that is otherwise due, the Panel said that it does not consider this to be required for the purposes of Article 1.1(a)(1)(ii) of the SCM Agreement, particularly where a claim is made that the challenged measures "as such" make a financial contribution.

In the same vein, the Panel noted the issue raised by the United States of whether it is possible to establish a financial contribution (and benefit) for tax incentives that legally are mutually exclusive according to their own explicit terms, as is the case for the B&O tax credit for property and leasehold excise taxes on the one hand, and the tax exemptions related to leasehold excise taxes and leaseholder property taxes on the other hand.

The Panel said that it does not consider that any such mutual exclusivity should prevent simultaneous challenge, or a finding that each tax incentive, on its own and "as such", represents the foregoing of revenue otherwise due.

The fact that a taxpayer can in the future choose between tax incentives does not render the one that ultimately is not chosen to be less of a foregoing of revenue.

Furthermore, said the Panel, for measures such as those at issue where there may be multiple potential recipients of the financial contribution, certain taxpayers may be eligible for, and may use, one incentive, while others may be eligible for, and may use, the other at any given moment during the period of availability of the tax measures (in this case, until the expiration of the aerospace tax measures in 2040).

The Panel noted the United States' reiteration that the European Union has failed to meet its burden of proof in respect of any financial contribution made by the aerospace tax measures, and that this burden cannot be met by substituting the findings made in the context of US - Large Civil Aircraft (2nd complaint) regarding different claims and measures.

The Panel agreed that its terms of reference are confined to the aerospace tax measures identified in the European Union's panel request in the present case, which are formally and substantively distinct from those considered in US - Large Civil Aircraft (2nd complaint).

The Panel said its assessment is based upon arguments and evidence on the record of this dispute, with careful regard for the principle that it is the complaining party's burden to establish a prima facie case which, in the absence of adequate refutation, requires the Panel to rule in favour of the complaining party.

A significant amount of evidence was placed before the Panel by the European Union, and its submissions led the Panel to various relevant aspects of that evidence.

Brevity in the European Union's submissions did not prejudice its satisfaction of the burden of proving facts to establish that the measures involved a foregoing of revenue otherwise due within the terms of Article 1.1(a)(1)(ii) of the SCM Agreement, said the Panel.

The Panel said that the case put in rebuttal by the United States did not reverse the European Union's satisfaction of its burden.

The Panel concluded that none of these arguments disturbs the Panel's above analysis of the aerospace tax measures.

Accordingly, the Panel found that each aerospace tax measure constitutes a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement because "government revenue that is otherwise due is foregone or not collected".

The Panel also found that each of the aerospace tax measures at issue confers a benefit within the meaning of Article 1.1(b) of the SCM Agreement.

Having concluded that there is a financial contribution by the Washington State government under each of the aerospace tax measures at issue, and that a benefit is thereby conferred, 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.

OTHER FINDINGS

Regarding the European Union's claim that the aerospace tax measures at issue are subsidies de jure contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement, the Panel concluded that:

(i) The European Union has not demonstrated that the aerospace tax measures are de jure contingent upon the use of domestic over imported goods with respect to the First Siting Provision in ESSB 5952 considered separately;

(ii) The European Union has not demonstrated that the reduced business and occupation (B&O) tax rate for the manufacture and sale of commercial airplanes (B&O aerospace tax rate) is de jure contingent upon the use of domestic over imported goods with respect to the Second Siting Provision in ESSB 5952 considered separately;

(iii) The European Union has not demonstrated that the aerospace tax measures are de jure contingent upon the use of domestic over imported goods with respect to the First Siting Provision and the Second Siting Provision considered jointly.

With respect to the First Siting Provision and the Second Siting Provision in ESSB 5952, considered jointly, the Panel concluded that the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme 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. +