The World Trade Organisation (WTO) has published its latest ruling on whether conditional tax incentives established by the state of Washington for aircraft manufacturers favoured local supplier Boeing over international competitors and has found some grounds to support the EU’s complaint of unlawful state aid
The WTO panel was considering legislation enacted in Washington state in November 2013 which amended and extended various tax incentives for the aerospace industry. The EU 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, all of which it claimed broke state aid rules.
In its report the WTO concludes that only one of the challenged aerospace tax measures (namely, the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under Boeing’s 777X programme) contravenes agreements over illegal subsidies. It was deemed unlawful because it hinged on the aeroplane company being required to use local rather than imported materials - the wings - which in turn would distort trade.
In its ruling the WTO stated: ‘The panel has found that the EU has demonstrated that the business and occupation aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme... is a subsidy contingent upon the use of domestic over imported goods [and is] prohibited.
‘Accordingly, taking into account the nature of the prohibited subsidy found in this dispute, the panel recommends that the US withdraw it without delay and within 90 days.’
The requirement to withdraw the subsidy is not backed by a legal requirement to do so, but the EU immediately put out a statement saying the decision was a ‘major win’.
Cecilia Malmström, EU trade commissioner, 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 $5.7bn 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.’
The dispute has been running for over ten years, and the EU claimed 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.
However, Boeing has put out an equally bullish statement on the ruling, saying the WTO had rejected virtually all of the EU's challenges to the Washington state tax incentives.
The aircraft manufacturer said the WTO rejected entirely the EU's challenge to six of the seven incentives and rejected most of the challenge to the seventh. It claimed the WTO held only and narrowly that a reduction in Washington state's business and occupancy (B&O) tax rate for future 777X revenues is inconsistent with the WTO agreements.
Boeing said WTO threw out all of the EU's other challenges to various incentive programs and left untouched even the B&O tax rate as it applies to revenue from the other Boeing models produced in Washington state--the 737, 747, 767, 777 (current model) and 787.
In total, the EU claimed that Boeing had received $8.7bn in subsidies, but Boeing said this figure was rejected by the WTO, which found future incentives totaling no more than $50m a year to be impermissible.
The WTO found that to date Boeing has received no benefit from the 777X rate incentive, and will not until 2020, because the first airplane will not be delivered until then.
Michael Luttig, Boeing's general counsel, said: ‘Today's decision is a complete victory for the US, Washington State and Boeing. The WTO found in September that Airbus has received $22bn in illegal subsidies from the EU and that without these subsidies neither Airbus itself nor any of its airplanes would even exist today.
‘By contrast, in rejecting virtually every claim made by the EU in this case, the WTO found today that Boeing has not received a penny of impermissible subsidies.
‘The WTO has repeatedly found that Airbus is entirely a creature of government, and they must now bring themselves into compliance with the international laws or risk massive sanctions.’
In the spring of 2017, the WTO is expected to issue a report on another long- standing case raised by the EU concerning tax breaks worth $19bn offered to Boeing’s large civil aircraft division by a number of US states and government departments.
The WTO panel decision is here.
