Dec. 5, 2016, © Leeham Co.: Far be it from me to say, I told you so.
But I did.
When Washington State extended the Boeing 787 tax breaks in November 2013 to the 777X through 2040, I wrote and told everyone who would listen (and even those who wouldn’t) that the 787 tax breaks had been found illegal. So extending them was extending illegal tax breaks.
State officials waved off the warning, responding that the World Trade Organization finding on the 787 tax breaks was under appeal.
They said the same thing to the two (only two) Seattle news media that inquired after my warning. Then the media dropped the issue.
The euphoria, and relief, over keeping the 777X assembly here and winning the site for 777X wing production overrode any concerns.
Either that, or state officials knew that the toothless WTO wouldn’t matter if it attacked the 777X subsidies.
But we don’t need to go down this path yet again.
When the WTO issued its ruling a week ago today that one of the tax breaks granted Boeing was a prohibited subsidy, the worst kind under WTO rules, Airbus crowed over a “knockout” victory.
Boeing, on the other hand, claimed it had won a “complete victory.”
How could there be two so completely different views of the same decision? Certainly PR spin is part of it, but this one was so completely at odds that even the tendencies of Airbus and Boeing to put the best face on things boggles the mind.
I’ll try to make sense of it all.
First, it’s necessary to identify the Washington tax breaks at issue.
The EU identified the following Washington tax breaks extended for the 777X.
It’s (1) above that was found by the WTO to be a prohibited subsidy. The rest were found to be other forms of subsidies.
The EU complained that the tax breaks were contingent upon Boeing committing to producing the 777X wings and assembling the airplane in Washington.
The legislation doesn’t specify the 777X by name; to do so would violate the State Constitution prohibiting such a specified benefit, a common restriction across the US states.
However, the legislation is worked in such a way that describes the production of new, composite wings for a new or derivative airplane; and that a manufacturer must decide between Nov. 1, 2013, and July 30, 2017, that it will produce the wings and assemble the airplane in Washington to be eligible for the tax breaks.
There are several provisions, as noted above, covering construction, research and development and production costs.
The legislation is broad enough that any manufacturer, including Airbus, could be eligible if it met that criteria within the timeline provided.
Boeing publicly stated during the course of the legislative deliberations that without the tax breaks, and labor concessions, the wings may be produced in Japan and shipped to wherever the Final Assembly Line (FAL) was located.
The Legislature enacted the tax breaks in November 2013. The IAM 751 labor union rejected concessions in one vote but narrowly approved them in a second vote in January 2014.
The EU found that all the tax breaks constitute subsidies, but only the B&O tax breaks relating to the assembly were prohibited.
What’s the difference?
The key provisions that ultimately tripped up at the WTO were the ones that said, essentially, if Boeing doesn’t produce the wings and assemble the 777X in Washington, there would be no tax breaks. The WTO nicknamed these the “Exclusive Production condition.” These applied to a reduction in the B&O taxes on revenues from the sale of the airplane, which are received upon delivery.
This was the prohibited subsidy.
The other tax breaks were found to be subsidies, but not ones that are prohibited. These fall into a different category, the most important of which is “actionable” subsidies.
The European Union must present a prima facie case that a subsidy is prohibited. If the US successfully refutes this, the subsidy isn’t prohibited.
Boeing already has benefited from the Washington tax breaks. Construction of the wing factory in Everett is a biggie.
The facility cost was publicly stated to be about $1bn. It’s not clear to LNC how much is the building and how much is the tooling.
The Washington sales tax is 6.2%. The tax breaks at issue here are only at the state level. Local taxes are additional and not part of the state tax breaks.
Components, research and development and other activities outlined above are also elements for which Boeing can claim tax credits.
In 2014-2015, Boeing reported to the state it received more than $500m in tax breaks from legislation. It’s not clear if all of this is related to the 777X or it also includes prior tax breaks.
Airbus claims Boeing already booked the full amount of the tax incentives into its program accounting for the 777X. However, Boeing’s filings with the US Securities and Exchange Commission clearly state the accounting block, which is an important element of program accounting, won’t be revealed until the first delivery of the 777X in 2020.
Airbus points to a Boeing note and a published newspaper report as evidence of its presumption that entire amount of the tax break benefits—whatever the amount—has been taken by Boeing, but LNC’s review of Boeing 10K SEC filings can’t substantiate the claim.
When the WTO made public its decision last Monday, the Airbus and Boeing corporate communications departments went into full spin mode, like the rinse cycle in a washing machine.
The companies (and their respective governments) were aware of the decision well ahead of the public release (which had to be translated from English into different languages and all commercially proprietary information redacted), so they had plenty of time to prepare. Boeing’s Corp Com made editorial board meetings in advance to discuss the case generally, without revealing the decision.
Airbus, which has been on the defensive throughout the original US complaint to the WTO about its subsidies, called this decision a “knockout.”
Boeing declared it a “complete victory.”
The spinning was enough to, well, make your head spin.
Boeing dismissed the importance of the actionable subsidies conclusion in this case. These have to be “market distorting,” Boeing says, and it claims the Washington tax breaks are not (in contrast, it claims, to the actionable subsidies granted Airbus, the subject of prior WTO complaints).
Airbus counters that even if, in this case, the provisions aren’t prohibited subsidies (a point the EU may appeal, Airbus says), they are in this case and in the previous WTO finding. The US appealed the latter and a decision is due this month, though it won’t be made public until early next year.
The prohibited subsidy in this case is (1) above, the reduced B&O tax rate for the manufacture and sale of commercial airplanes.
Airbus figures the value of the prohibited subsidy in this case is $5.7bn; Boeing claims it’s only $1bn. Boeing says this doesn’t kick in until the first 777X is delivered in 2020; this is when Boeing recognizes the sale. Deposits and progress payments, typically about 30% of the contract prices (plus escalation), aren’t recognized until then.
Boeing cited the $1bn and compared it with the $22bn it figures Airbus received in illegal subsidies in the prior WTO case. The Boeing figure pales in comparison, officials say. And it does. Except this is apples and oranges.
Boeing compares today’s case vs the prior Airbus case—but omits the WTO findings of the EU case against Boeing, in which the WTO ruled Boeing received illegal subsidies. Boeing previously pegged this number in the $5bn range, and used the same it-pales-vs-Airbus argument. Boeing omits this data from comparison today.
Airbus claims Boeing received $29bn in illegal subsidies, all-in.
The trouble is that in none of the cases does the WTO compute these figures. Airbus and Boeing did the calculations, making them both open to scrutiny, skepticism and criticism.
Boeing is extraordinarily effective at its messaging over the $22bn vs $1bn comparison. I received a call from a newspaper that should know better which bought into this apples-and-oranges comparison.
But as much effort as Boeing put into its spin on this one, watching the global headlines made it clear Airbus and the EU won the day on this decision.