United States: State Incentives Provided To Companies May Be Subject To International Trade Requirements

 A recent determination by the World Trade Organization (WTO) serves as a reminder that incentives that states provide to attract businesses are subject to potentially restrictive international trade requirements.1 In late 2016, a WTO panel determined that a conditional tax incentive that Washington was providing to Boeing was a prohibited subsidy under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) because Boeing was required to use domestic goods. States and companies that receive substantial incentives should be aware of the WTO requirements.

SCM Agreement Requirements

The SCM Agreement outlines rules regarding whether a WTO member such as the United States may provide a given subsidy. Under the SCM Agreement, a subsidy exists where "there is a financial contribution by a government or any public body within the territory of a Member."2 Due to this provision, the SCM Agreement applies to state and local governments. The agreement allows most WTO members to receive subsidies, but Article 3 of the SCM Agreement describes the subsidies which are prohibited. Specifically, Article 3.1(b) prohibits "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods."3 Subsidies are administered throughout the world as a tool for recognizing government policies, in the form of grants, tax exemptions, low-interest financing, investments and export credits.4 In fact, it is common practice for companies within the United States to receive benefits through the use of grants, tax exemptions and credits. States authorizing and companies receiving these benefits may need to consider whether the benefit is in fact a subsidy that is subject to WTO requirements.

Two Types of Subsidies

The SCM Agreement creates two basic, exclusive categories of subsidies: those that are prohibited and those that are actionable.5

Prohibited Subsidies

There are two categories of prohibited subsidies.

  • Export subsidies: These are contingent subsidies, in law or fact, whether wholly or as one of several conditions, on export performance. A detailed list of export subsidies is annexed to the SCM Agreement.6
  • Local content subsidies: This category consists of subsidies that are contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

The above-listed subsidies are prohibited because they are designed to directly affect trade and are most likely to have adverse effects on the interest of other WTO members.

Actionable Subsidies

Most subsidies are considered to be actionable subsidies and are not prohibited.7 However, these subsidies may be challenged, either through multilateral dispute settlement or through countervailing action, if they cause adverse effects to another WTO member.8

WTO Panel Determined Washington Subsidy Was Prohibited

The European Union (EU) alleged that legislation enacted by Washington relating to the development, manufacture and sale of large civil aircraft constituted prohibited subsidies.9 In its complaint, the EU listed "seven separate tax incentives, including a reduced business and occupation tax rate, credits against business taxation, and exemptions from other taxes in the state of Washington"10 as incentives that were prohibited subsidies. On November 28, 2016, a panel formed by the WTO Dispute Settlement Body (DSB) issued a report concluding that one of the tax incentives alleged by the EU, the Business and Occupation (B&O) tax rate reduction, which Boeing received for manufacturing and selling commercial planes under the 777X program, was a prohibited subsidy because it was contingent on the use of domestic goods over imported goods. Specifically, the lower tax rate was contingent on Boeing using plane wings that were manufactured in Washington. The panel recommended that the subsidy be withdrawn within 90 days. The panel report has been appealed by the United States and currently is being considered by the Appellate Body.11


Due to the broad implications of government subsidies, states and companies must be aware of the international trade requirements. When a government subsidizes projects, the benefits may extend well beyond the industry directly concerned. For example, companies that supply materials and components to the targeted industry may also benefit. The WTO panel found a Washington B&O tax reduction that was granted to Boeing was a prohibited subsidy because of a requirement that domestic goods be used. The total tax incentives package that Boeing received has been reported to be $8.7 billion,12 but the subsidy that was found to be prohibited would only be a portion of this amount.

The WTO has specific procedures for settling disputes.13 If a country that is the subject of the complaint loses, the country is required to follow the recommendations of the panel report or appeals report. The country must state its intent to comply at a DSB meeting within 30 days or request additional time if necessary. If the country does not comply within the prescribed period, it is required to negotiate with the complaining country or countries to determine compensation that is mutually acceptable. In situations where compensation is not agreed upon within 20 days, the complaining countries may request the DSB for permission to retaliate. The DSB monitors the implementation of its rulings. In the Boeing dispute, if the Appellate Body affirms the panel recommendation, Washington presumably would be required to withdraw the prohibited subsidy and Boeing would return the funds to the state.

Prospectively, states should consider the WTO requirements when enacting legislation or entering into agreements that provide substantial incentives to a company. Similarly, companies receiving large incentives or subsidies from a state should be cognizant of this potential issue. Though incentives are used throughout the United States and in other countries to encourage development within certain areas, states and companies must evaluate whether or not the agreement is considered either a prohibited or actionable subsidy as the incentives from states may result in WTO challenges.


 1 DS487: United States – Conditional Tax Incentives for Large Civil Aircraft, Word Trade Organization Panel Report, Nov. 28, 2016, https://www.wto.org/english/news_e/news16_e/487r_e.htm. Note that this decision is being appealed. As described on its Web site, "the World Trade Organization (WTO) deals with global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible." See www.wto.org.

2 Agreement on Subsidies and Countervailing Measures, World Trade Organization, https://www.wto.org/english/docs_e/legal_e/24-scm.pdf.

3 DS487: United States – Conditional Tax Incentives for Large Civil Aircraft, Word Trade Organization Panel Report, Nov. 28, 2016.

4 Agreement on Subsidies and Countervailing Measures, World Trade Organization.

5 Overview of Agreement on Subsidies and Countervailing Measures, World Trade Organization, https://www.wto.org/english/tratop_e/scm_e/subs_e.htm.

6 For example, prohibited export subsidies include: (i) "[c]urrency retention schemes or any similar practices which involve a bonus on exports;" (ii) "[i]nternal transport and freight charges on export shipments, provided or mandated by governments, on terms more [favorable] than for domestic shipments;" and (iii) "[t]he allowance of special deductions directly related to exports or export performance, over and above those granted in respect to production for domestic consumption, in the calculation of the base on which direct taxes are charged." Annex I, Agreement on Subsidies and Countervailing Measures, World Trade Organization.

7 For example, a production subsidy.

8 There are three types of adverse effects: (i) injury to a domestic industry that is caused by subsidized imports in the complaining country's territory; (ii) serious prejudice (usually a result of adverse effects such as export displacement in the market of a subsidizing member); and (iii) nullification or impairment of benefits accruing under the General Agreement on Tariffs and Trade (GATT) 1994 (typically arises where improved market access that is presumed to flow from a bound tariff reduction is undercut due to the subsidy).

9 DS487: United States – Conditional Tax Incentives for Large Civil Aircraft, Word Trade Organization Panel Report, Nov. 28, 2016. The challenged Washington provisions were enacted by S.B. 5952, Laws 2013.

10 Summary of Key Findings, DS487: United States – Conditional Tax Incentives for Large Civil Aircraft, World Trade Organization Panel Report, Nov. 28, 2016.

11 On December 16, 2016, the United States notified the DSB that it had decided to appeal certain issues of law and legal interpretations in the panel report to the Appellate Body. On January 17, 2017, the EU notified the DSB that it intended to cross-appeal the decision. On February 10, 2017, the Appellate Body announced that it would not be able to release its decision within the 60-day or 90-day period required by Article 17.5 of the Dispute Settlement Understanding.

12 Paul Shukovsky, Washington State to "Wait-and-See" on WTO Boeing Ruling, BLOOMBERG BNA WEEKLY STATE TAX REPORT, Dec. 1, 2016.

13 For a discussion of WTO dispute settlement, see https://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions