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.

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