Compliance with Article III, GATT - consideration of fiscal/non-fiscal issues for Alcohol Excise in Thailand Hafiz Choudhury Program Advisor, ITIC
Summary 1. Overview of WTO regime - Article III of GATT 1994 in drafting taxes/measures impacting imports and like domestic products. 2. Scope of Article III 3. Key concepts for Article III purposes - application of principles in tax measures on alcohol and other excisable goods in case law 4. Overview of other relevant principles 5. Examination of dispute and post dispute resolution Japan 6. Consideration of possible exemptions under Art. XX. 7. Options and issues for Thailand to consider in new Liquor Law.
1. Obligations of WTO membership "A Member which accepts this Agreement. shall implement. those obligations." (Article XIV, paragraph 2 of the WTO Agreement) "Each member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements" (Article XVI paragraph 4 of the WTO Agreement) Historic context- GATT 1947: members are entitled to any advantage, favour, privilege or immunity granted with respect to internal taxes
Sources of tax rules within WTO/GATT Understanding of tax rules under WTO Agreement comes from a variety of sources, including many "Sub" - Agreements : GATT 1994; Agreement on Subsidies and Countervailing Measures Understanding on Rules and Procedures Governing the Settlement of Disputes Case Law before Dispute Settlement Body and Appellate Body. Principles of WTO relevant to tax National treatment: Cannot treat imported products less well than national producers Most-favoured nation: Cannot treat products from one WTO member less favourably than products from another WTO member No tax subsidies: SCM agreement prevents use of tax measures to support domestic industries Transparency: Rules and regulations must be published and available. No secret rules Controlling language in GATT is Art. III (National Treatment on Internal Taxation and Regulation)
2. Scope of Art. III Overall scope Potentially applies to all taxes/laws and administrative arrangements Affects imported and like domestic goods. Imposes obligations on a WTO member state t which h is drafting/amending: national/local fiscal laws which may apply to imported goods; non-fiscal national/state laws/regulations/administrative arrangements which might discriminate against imported goods in respect of their: internal sale; offering for sale; purchase; transportation, distribution or use
Article III The relevant provisions of Art III of GATT 1994 are : 1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations, should not be applied to imported or domestic products so as to afford protection to domestic production. 2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles i set forth in paragraph 1. 3... 4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.
Obligations under Article III Main purpose: avoid protectionism in the application of internal tax and regulatory measures. Ensures that t "internal measures" are not applied to imported or domestic products so as to afford protection to domestic production. In practical terms this means discrimination through indirect taxes such as sales tax/vat, or through excise duties; some expansion of scope to direct taxes can also be seen. Protection of domestic industry has to be undertaken mainly through the customs duty mechanisms, within the bound maximum levels. WTO does not address questions regarding g the rate of taxation, nor does it prescribe model tax structures (e.g., a specific rather than an ad valorem tax system). WTO is concerned only with questions of discrimination between imported and domestic products. WTO rules apply to substance of the rules applicable; e.g. marketing mechanisms for specific products must still to conform to the tax rules in Art. III.
3. Key Concepts from Art. III National treatment obligation is a general prohibition on the use of internal taxes and other internal regulatory measures so as to afford protection to domestic production. (Japan Alcoholic Beverages II ) Key Concepts like product not similarly taxed so as to affect protection affecting their internal sale internal taxes
Like Product Principle: there can be no differential treatment for imported goods as compared to like domestic goods. Definition Like products needs to be construed narrowly for III-2, first sentence. (Japan Alcoholic Beverages II, Appellate Body) But if imported products and the domestic products fall within a broader "directly competitive or substitutable t bl products" " category, (ie. they have common end uses) Art. III-2, second sentence, still applies. Application Directly competitive or substitutable imported and domestic products are "not similarly taxed"; Dissimilar taxation of imported and domestic products is "applied so as to afford protection to domestic production". (Japan Alcoholic Beverages, Panel Report on US - Section 337) Analysis - on a case by case basis, covering: the product s end-uses in a given market; consumers tastes and habits; and the product s properties, nature and quality;
Not similarly taxed Principle: differential taxation of imported goods has to exist The tax burden on imported products must be heavier than on 'directly competitive or substitutable' domestic products, and, must be more than de minimis levels Test is how a measure is applied and its ultimate effect. Tax differentials are themselves not prohibited however, such differentials must not result in protection of domestic producers. Intentions of a government could be a factor in whether a measure Intentions of a government, could be a factor in whether a measure actually provided protection to domestic firms (Canadian Periodicals case)
Affecting their internal sale Principle: measures are caught if they impact the sale of the imported goods Scope: The term affecting covers not only laws and regulations which directly regulates transactions, but also any laws and regulations which might adversely modify the conditions of competition (Panel Report: Italian Agricultural Machinery) Distribution and market access: When a state trading enterprise has a monopoly over both importation and distribution of goods, a blurring might occur on the distinction i i between measures affecting imported products and measures affecting importation (Panel report: Korea Various Measures on Beef) Potentially broad application: Non fiscal measures are brought into the scope of Art. III; potential areas are advertizing rules, distribution, domestic trade policies, etc.
So as to afford protection Principle: Measures that actually result in protection of domestic industry are caught. Scope: WTO members are obliged to provide equality of competitive conditions for imported products in relation to domestic products (Canada Periodicals). Impact: Not concerned with the policy goals of measures, but with their economic impact on the competitive opportunities of imported and like domestic products (Argentina Hides and Leather)
Internal taxes Principle: what taxes are covered. Scope of term thought to be mainly on indirect taxation, as direct tax, e.g. income tax, is not normally levied on products. The mechanism of collection does not affect the character of an internal tax : tax collected at import stage is still an internal tax. The FSC/ETI decisions seem to have extended the concept of internal taxes to cover direct taxes on profits arising from international trade transactions. Argued that a levy that is a direct tax in form, but in effect is a tax upon the product itself, could be included within internal taxes e.g. a presumptive tax on imported goods purportedly a collection of income tax, could be subject to the rules of Art. III. Internal taxes imposed by local governments and authorities within the territory of a contracting party are similarly bound by Article III through the national contracting WTO Member (Article XXIV GATT and Interpretative Note, Annex 1 GATT).
Scope: internal tax laws/measures affected Examples of tax measures GST/VAT; Transport tax on carriage of goods within a country; Cigarettes/Liquor taxes; Other measures Import quota/licensing regimes; Inspection fees; Distribution arrangements; for example on beef, periodicals. Administrative rules: a mechanism for the collection of certain taxes are included (Panel Report: Argentina Hides and Leather)
4. Other important principles: MFN/SCM The MFN provision: obliges Members to impose the same tax burden on imports of like products, irrespective of origin. Broad remit any advantage, favour, privilege or immunity issues may arise in actual application of rules Has exceptions for developing countries and for economic groupings, and for specific areas SCM Agreement prohibits subsidies that directly or indirectly increase exports Indirect tax incentives may yqualify as a subsidy if they constitute a financial contribution by the government and confer a benefit. A financial contribution is present when Government revenue that is otherwise due is not collected. The rules are widely defined but are applied on a case to case basis.
Transparency and administration Limited explicit transparency requirements exist in WTO arrangements. E.g. Art. X of GATT requires Members to publish trade-related related legislation and agreements Generally accepted that trade related rules must be transparent to both taxpayers and to other Members. Transparency is vital in indirect tax administration - e.g. application of administrative guidelines or other supplementary rules should not be more onerous for imported goods over domestic products. Emphasizes the substance principle: discriminatory treatment Emphasizes the substance principle: discriminatory treatment through administrative rules and practice are similarly prohibited.
5. Dispute and post dispute implementation Breaches of obligations under Art III can be brought to formal proceedings before a WTO Dispute Settlement Panel. Leading cases in alcoholic drinks are those related to protection of domestic liquors by Chile, Japan and Korea; earlier cases concerned Canada, US. Cases considered whether domestic liquors were like or more broadly directly competitive or substitutable products
Japan case: Japan Alcoholic Beverages II Appellate Body held that shochu and vodka were like products shochu and other distilled spirits and liqueurs listed in HS 2208, except for vodka, are "directly competitive or substitutable products", and Japan, in the application of the Liquor Tax Law taxed imported products in excess of like domestic products, in violation of its obligations under Article III:2
Resolution of Japan case Implementation of award by mutual agreement, recorded in exchange of letters Japan undertook to revise the liquor tax scheme through amendments to the Liquor tax law. Japan also undertook to carry out tariff eliminations and reductions on an agreed applied rate basis Further, as compensation for the longer implementation period in the amended Liquor Tax Law, Japan agreed to apply reduced tariff rates and in some cases zero tariffs on some items. Large scale transition towards a specific system to taxation took place, as seen in alcohol tax collection statistics published.
Japan: Transition regime after dispute Categor Alcohol < 30 Sept 1 Oct 1997 y content t 1997 * 30 Apr 1998 * 1 May 1998 30 Sep 1998 * 1 Oct 1998 30 Sep 2000 * 1 Oct 2000 * Shoch 25 155,700 201,900 248,100 248,100 248,100 u degree A s Shoch u B Whisk ies 25 degree s 40 degree s Spirits 37 degree s 102,100 150,700 150,700 199,400 248,100 982,300 651,000 409,000 409,000 409,000 367,300 367,300 367,300 367,300 367,300 Lique 12 98,600 119,088 119,088 119,088 119,088 ur degree s s
Current tax rates in Japan Categories Degree of Rateyear: 2006 (in Tax/additional Alcohol JPY/kl) 1% of alcohol Sake 120,000.00 Sake compound 100,000.00000 Shochu 20 25 200,000.00 10,000 Mirin (rice cooking wine) 20,000.00000 00 Beer 80,000 178,125 Wines 80,000 120,000 Whisky & Brandy 37 40 370,000.00 10,000 Sparkling liquor 20 220,000.00 11,000 Spirits and alcohol for material 37 370,000.00 10,000 Liqueurs 12 120,000.00 10,000 Other brewed liquors Powder liquor and miscellaneous liquor 390,000.00 10,000
Japan: Impact of revised regime: Consumption of alcohol in post dispute years Year 2002 2003 2004 2005 2006 2007 Sake 633 601 524 499 513 505 Sake compound 40 34 38 34 49 53 Shochu 827 923 1,043 1,042 1020 999 Mirin (rice cooking wine) 100 105 103 86 113 116 Beer 4,300 3,959 3,844 3,650 3,536 3,470 Fruit wine 89 80 70 94 75 73 Whisky & Brandy 89 80 72 69 68 62 Alcohol and spirits for material 53 47 76 76 114 157 Liqueurs 558 595 714 742 755 1,025 Sparkling liquor 1,594 1,528 Other brewed liquors Powder liquor and miscellaneous liquor 2,626 2,549 2,564 2,737 1,056 835 Consumption in thousand kl; Source: Japan National Tax Agency annual reports.
Implementation of WTO rulings Member states are allowed to have a reasonable period of time for implementation of rulings. Choosing the means of implementation is mainly for implementing state to choose, as long as the means chosen are consistent with the recommendations and rulings of the DSB (European Communities Hormones quoted in Salmon case and Korea Alcoholic Beverages case arbitration) Provision is made for 15 months from decision, but "does not mean... that the arbitrator is obliged to grant 15 months in all cases. (Australia Salmon) In principle the shortest period possible within the legal system of the Member state to implement the recommendations and rulings of the DSB Indonesia automobiles case Does not require a Member state to utilize an extraordinary legislative l i procedure, rather than the normal legislative procedure, in every case.
6. Application of exemptions under Art. XX Can an internal law, e.g. the new Liquor Law, contain special measures to protect public health GATT Art. XX: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health. d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies.
Possible application of exemptions under Art. XX US Gasoline case: Art. XX does apply to NT and MFN provisions of Art. III. US Shrimp case: Balance must be struck between the right of a Member to invoke an exception under Article XX and its duty to respect the treaty rights of the other Members. Two tier test under US-Gasoline case first, provisional justification by reason of characterization of the measure under the relevant sub clause (XX (g) in that case) second, appraisal of the same measure under the introductory clauses of Article XX. In general, Art XX should not be so applied as to frustrate or defeat the obligations of membership EC Asbestos case: Panel pointed out that it is not its function to settle a EC Asbestos case: Panel pointed out that it is not its function to settle a scientific debate; it would base its evaluation of a public health risk on the scientific evidence put forward by the parties.
7. WTO Considerations for Thailand Liquor Law Guiding principles; "Members of the WTO are free to pursue their own domestic goals through internal taxation or regulation so long as they do not do so in a way that violates Article III or any of the other commitments they have made in the WTO Agreement" the policy purpose of a tax measure (the "aim" of a measure) was not relevant for the purpose of Article III:2 first sentence Argentina Hides and Leather case An overall review should test whether there is potential exposure to Article III obligations. Could be considered similar to risk management strategies increasingly being adopted by the private sector.
A risk management strategy to consider Consider whether the overall impact of indirect tax policies and other regulations in the Law result in imported products being taxed differently than competitive or substitutable domestic products. Review must take into account the practical impact of tax differentials and market access issues in making policy choices. E.g. do current advertising rules give equal access to imported products. Econometric analysis to show impact of measures, and defend d against allegations of illegal tax subsidies. Engagement with the taxpayer community, and feedback on the practical impact of policies A holistic approach in considering conformity with WTO encompassing taxation, distribution arrangements, and other factors. A process for ensuring adherence to the transparency principle. E.g. this issue has been raised in the current WTO dispute regarding g cigarettes.
Conclusion and next steps Consideration of Art III compliance has to be borne in mind in reforms in legislation and rules. Non-compliance is measured in the actual substance of the change, rather than the formal words in legislation. E.g. new Liquor Law is understood to consider the use of retail prices consideration must be given in the actual application of retail prices and differences between imported and domestic product. Recommend A modelling exercise on the impact of proposed measures A matrix of WTO relevant factors and a compliance check against such factors.