|
XXXIII. Relationship with other WTO Agreements
back to top
A. GATT 1994
1. Article III
(a) Absence of conflict between the SCM
Agreement and Article III of the GATT 1994
408. Considering whether there is a general
conflict between the SCM Agreement and Article III of the GATT
1994, the
Panel on Indonesia — Autos stated:
“As was the case under GATT 1947, we think
that Article III of GATT 1994 and the WTO rules on subsidies remain
focused on different problems. Article III continues to prohibit
discrimination between domestic and imported products in respect of
internal taxes and other domestic regulations, including local content
requirements. It does not ‘proscribe’ nor does it ‘prohibit’ the
provision of any subsidy per se. By contrast, the SCM Agreement
prohibits subsidies which are conditional on export performance and on
meeting local content requirements, provides remedies with respect to
certain subsidies where they cause adverse effects to the interests of
another Member and exempts certain subsidies from actionability under
the SCM Agreement. In short, Article III prohibits discrimination
between domestic and imported products while the SCM Agreement regulates
the provision of subsidies to enterprises.
…
Accordingly, we consider that Article III and
the SCM Agreement have, generally, different coverage and do not impose
the same type of obligations. Thus there is no general conflict between
these two sets of provisions.”(569)
409. The Panel on Indonesia
— Autos further
acknowledged that while Article III of the GATT 1994 and the SCM
Agreement may overlap to a certain extent, the two sets of provisions
serve different purposes:
“[T]he only subsidies that would be affected
by the provisions of Article III are those that would involve
discrimination between domestic and imported products. While Article III
of GATT and the SCM Agreement may appear to overlap in respect of
certain measures, the two sets of provisions have different purposes and
different coverage. Indeed, they also offer different remedies,
different dispute settlement time limits and different implementation
requirements. Thus, we reject … [the] argument that the application of
Article III to subsidies would reduce the SCM Agreement to ‘inutility’.
…
[T]he obligations contained in the WTO
Agreement are generally cumulative, can be complied with simultaneously
and … different aspects and sometimes the same aspects of a
legislative act can be subject to various provisions of the WTO
Agreement.”(570)
(b) Absence of conflict between the SCM
Agreement and Article III:2 of the GATT 1994
410. The Panel on Indonesia
— Autos rejected
the argument that “the obligations contained in Article III:2 of GATT
and the SCM Agreement are mutually exclusive”(571) because “the SCM
Agreement ‘explicitly authorizes’ Members to provide subsidies that
are prohibited by Article III:2 of GATT”.(572) The Panel stated:
“We also recall that the obligations of the
SCM Agreement and Article III:2 are not mutually exclusive. It is
possible … to respect … obligations under the SCM Agreement without
violating Article III:2 since
Article III:2 is concerned with
discriminatory product taxation, rather than the provision of subsidies
as such. Similarly, it is possible … to respect the obligations of
Article III:2 without violating … obligations under the SCM Agreement
since the SCM Agreement does not deal with taxes on products as such but
rather with subsidies to enterprises. At most, the SCM Agreement and
Article III:2 are each concerned with different aspects of the same
piece of legislation.“(573)
411. As regards the relationship with
Article
27.3 on a transition period for developing countries and least
developing countries and Article III:2 of the GATT 1994, see also
paragraph 346 above.
2. Article VI
412. In the Brazil — Desiccated Coconut
dispute, the Panel was faced with the question “whether Article VI
creates rules which are separate and distinct from those of the SCM
Agreement, and which can be applied without reference to that Agreement,
or whether Article VI of GATT 1994 and the SCM Agreement represent an
inseparable package of rights and disciplines that must be considered in
conjunction”.(574) In phrasing this issue, the Panel on Brazil — Desiccated Coconut made clear that the
SCM Agreement did not supersede
Article VI of the GATT 1994 as the basis for the regulation by the
WTO
Agreement of countervailing measures. In making this finding, the Panel
relied on the existence of the general interpretive note to Annex 1A of
the WTO Agreement and on the fact that certain provisions of
Article VI
are not “replicated or elaborated” in the SCM Agreement.(575) The
Appellate Body on Brazil — Desiccated Coconut confirmed the statement by
the Panel that the SCM Agreement did not supersede Article VI of the
GATT 1994.(576) In making this finding, the Appellate Body emphasized the
integrated nature of the WTO Agreement and the annexed agreements. More
specifically, the Appellate Body found that although the provisions of
the GATT 1947 were now incorporated into the GATT 1994, they did not
represent the totality of rights and obligations of WTO Members in a
given subject area:
“The relationship between the GATT 1994 and the
other goods agreements in Annex 1A is complex and must be examined on a
case-by-case basis. Although the provisions of the GATT 1947 were
incorporated into, and became a part of, the GATT 1994, they are not the
sum total of the rights and obligations of WTO Members concerning a
particular matter. For example, with respect to subsidies on
agricultural products, Articles II,
VI and XVI of the GATT 1994 alone do
not represent the total rights and obligations of WTO Members. The
Agreement on Agriculture and the SCM Agreement reflect the latest
statement of WTO Members as to their rights and obligations concerning
agricultural subsidies. The general interpretative note to Annex 1A was
added to reflect that the other goods agreements in Annex
1A, in many
ways, represent a substantial elaboration of the provisions of the GATT
1994, and to the extent that the provisions of the other goods
agreements conflict with the provisions of the GATT 1994, the provisions
of the other goods agreements prevail. This does not mean, however, that
the other goods agreements in Annex
1A, such as the SCM Agreement,
supersede the GATT 1994.”(577)
413. The Appellate Body on Brazil
— Desiccated
Coconut noted that “The relationship between the SCM Agreement and
Article VI of GATT 1994 is set out in Articles 10 and
32.1 of the SCM
Agreement.”(578) Apart from the integrated structure of the WTO
Agreement and the annexed agreements, the Appellate Body therefore
focused on these two provisions of the SCM Agreement. The Appellate Body
then explicitly agreed with the Panel’s statement that:
“Article VI of GATT 1994 and the SCM
Agreement represent a new and different package of rights and
obligations, as among WTO Members, regarding the use of countervailing
duties. Thus, Article VI and the respective SCM Agreements impose
obligations on a potential user of countervailing duties, in the form of
conditions that have to be fulfilled in order to impose a duty, but they
also confer the right to impose a countervailing duty when those
conditions are satisfied. The SCM Agreements do not merely impose additional
substantive and procedural obligations on a potential user of
countervailing measures. Rather, the SCM Agreements and Article VI
together define, clarify and in some cases modify the whole package of rights
and obligations of a potential user of countervailing measures.”(579)
414. The Appellate Body on Brazil
— Desiccated
Coconut then proceeded to find that:
“[C]ountervailing duties may only be imposed
in accordance with Article VI of the GATT 1994 and the SCM
Agreement. A countervailing duty being a specific action against a
subsidy of another WTO Member, pursuant to Article
32.1, it can only be
imposed ‘in accordance with the provisions of GATT 1994, as
interpreted by this Agreement’. The ordinary meaning of these
provisions taken in their context leads us to the conclusion that the
negotiators of the SCM Agreement clearly intended that, under the
integrated WTO Agreement, countervailing duties may only be imposed in
accordance with the provisions of Part V of the SCM Agreement and
Article VI of the GATT 1994, taken together. If there is a conflict
between the provisions of the SCM Agreement and Article VI of the
GATT 1994, furthermore, the provisions of the SCM Agreement would
prevail as a result of the general interpretative note to Annex
1A.
…
The fact that Article VI of the GATT 1947
could be invoked independently of the Tokyo Round SCM Code under the
previous GATT system does not mean that Article VI of GATT 1994 can be
applied independently of the SCM Agreement in the context of the WTO.
The authors of the new WTO regime intended to put an end to the
fragmentation that had characterized the previous system.”(580)
3. Article XVI
415. With respect to the relationship with
Article XVI:4 of the GATT 1994, see paragraphs
82-83 above.
B. TRIMS Agreement
416. The Panel on Indonesia
— Autos considered
the issue of whether a measure covered by the SCM Agreement can also be
subject to the obligations contained in the TRIMs Agreement. The Panel
first noted that the general interpretive note to Annex 1A of the WTO
Agreement did not apply in this context and opined that it had to resort
to the relevant provision of general international law. In so doing, the
Panel emphasized the general international law presumption against
conflicts:
“We note first that the interpretive note to
Annex IA of the WTO Agreement is not applicable to the relationship
between the SCM Agreement and the TRIMs Agreement. The issue of whether
there might be a general conflict between the SCM Agreement and the
TRIMs Agreement would therefore need to be examined in the light of the
general international law presumption against conflicts and the fact
that under public international law a conflict exists in the narrow
situation of mutually exclusive obligations for provisions that cover
the same type of subject matter.
In this context the fact that the drafters
included an express provision governing conflicts between GATT and the
other Annex 1A Agreements, but did not include any such provision
regarding the relationship between the other Annex 1A
Agreements, at a
minimum reinforces the presumption in public international law against
conflicts. With respect to the nature of obligations, we consider that,
with regard to local content requirements, the SCM Agreement and the
TRIMs Agreement are concerned with different types of obligations and
cover different subject matters. In the case of the SCM Agreement, what
is prohibited is the grant of a subsidy contingent on use of domestic
goods, not the requirement to use domestic goods as such. In the case of
the TRIMs Agreement, what is prohibited are TRIMs in the form of local
content requirements, not the grant of an advantage, such as a subsidy.”(581)
417. The Panel on Indonesia
— Autos proceeded
to emphasize the different types of obligations and the different
subject matters covered by the SCM Agreement on the one hand and the
TRIMs Agreement on the other. It explored how bringing a national
measure into consistency with one of the agreements could nevertheless
fail to remove the incompatibility with the other agreement. The Panel
ultimately concluded that both the TRIMs Agreement and the SCM Agreement
were applicable to the dispute before it:
“A finding of inconsistency with Article
3.1(b) of the SCM Agreement can be remedied by removal of the subsidy,
even if the local content requirement remains applicable. By contrast, a
finding of inconsistency with the TRIMs Agreement can be remedied by a
removal of the TRIM that is a local content requirement even if the
subsidy continues to be granted. Conversely, for instance, if a Member
were to apply a TRIM (in the form of local content requirement), as a
condition for the receipt of a subsidy, the measure would continue to be
a violation of the TRIMs Agreement if the subsidy element were replaced
with some other form of incentive. By contrast, if the local content
requirements were dropped, the subsidy would continue to be subject to
the SCM Agreement, although the nature of the relevant discipline under
the SCM Agreement might be affected. Clearly, the two agreements
prohibit different measures. We note also that under the TRIMs
Agreement, the advantage made conditional on meeting a local content
requirement may include a wide variety of incentives and advantages,
other than subsidies. There is no provision contained in the SCM
Agreement that obliges a Member to violate the TRIMs Agreement, or vice
versa.
We consider that the SCM and TRIMs Agreements
cannot be in conflict, as they cover different subject matters and do
not impose mutually exclusive obligations. The TRIMs Agreement and the
SCM Agreement may have overlapping coverage in that they may both apply
to a single legislative act, but they have different foci, and they
impose different types of obligations.
…
We find that there is no general conflict
between the SCM Agreement and the TRIMs Agreement. Therefore, to the
extent that the … programmes are TRIMs and subsidies, both the TRIMs
Agreement and the SCM Agreement are applicable to this dispute.
We consider … that the obligations contained
in the WTO Agreement are generally cumulative, can be complied with
simultaneously and that different aspects and sometimes the same aspects
of a legislative act can be subject to various provisions of the WTO
Agreement.”(582)
C. DSU
1. Article 3.8
418. Most panel reports on subsidy disputes
contain a paragraph in their recommendations providing that the findings
at issue constitute a case of prima facie nullification or impairment of
benefits pursuant to Article 3.8 of the DSU.(583)
419. Regarding the different disciplines
applicable to prohibited subsidies and other illegal measures as regards
compliance with panel recommendations, see paragraphs 177 and
181 above.
2. Article 4
420. With respect to the relationship between
Article 4.4 of the SCM Agreement and Article 4 of the DSU, see
paragraphs 155-156 above.
3. Article 11
421. With respect to the relationship between
Article 4.2 of the SCM Agreement and Article 11 of the DSU, see
paragraph 149 above.
4. Article 13.2
422. With respect to the relationship between
Article 4.2 of the SCM Agreement and Article 13.2 of the DSU, see
paragraph 150 above.
5. Article 23.1
423. In Canada — Aircraft Credits and
Guarantees, the Panel recalled the prospective nature of WTO dispute
settlement remedies and that such an approach was also applicable to the
SCM Agreement:
“In any event, even if the WTO dispute
settlement mechanism does only provide for prospective remedies, we note
that it does so in respect of all cases, and not only those involving
prohibited export subsidies. Article 23.1 of the DSU provides that
Members shall resolve all disputes through the multilateral dispute
system, to the exclusion of unilateral self-help. Thus, to the extent
that the WTO dispute settlement system only provides for prospective
remedies, that is clearly the result of a policy choice by the WTO
Membership. Given this policy choice, and given the fact that Article
23.1 of the DSU applies to all disputes, including those involving
(alleged) prohibited export subsidies, we see no reason why the
(allegedly) prospective nature of WTO dispute settlement remedies should
impact on our interpretation of the second paragraph of item (k).”(584)
D. Agreement on Agriculture
424. The Appellate Body on Canada
— Dairy
(Article 21.5 — New Zealand and US) noted that the WTO-consistency of an
export subsidy for agricultural products has to be examined, in the
first place, under the Agreement on Agriculture. In this case, the
Appellate Body considered that it was unable to determine whether the
measures at issue “conform[] fully” to Articles 9.1(c) or
10.1 of
the Agreement on Agriculture and therefore declined to examine the claim
under Article 3.1(a) of the SCM Agreement.(585) See
paragraphs 126-128 above.
E. GATT Subsidies Code
425. The Panel on Canada — Aircraft Credits
and Guarantees held that it did not consider that the object and purpose
of the SCM Agreement was necessarily the same as the object and purpose
of the GATT Subsidies Code. For the Panel, the SCM Agreement provides
for more extensive special and differential treatment for developing
countries than the GATT Subsidies Code did. In addition, the preamble to
the Marrakesh Agreement Establishing the World Trade Organization, of
which agreement the SCM Agreement is an integral part, recognizes “that
there is need for positive efforts designed to ensure that developing
countries, and especially the least developed among them, secure a share
in the growth in international trade commensurate with the needs of
their economic development”. No such “need” was identified in the
GATT Subsidies Code. In addition, all WTO Members are bound by the SCM
Agreement, whereas only a number of GATT Contracting Parties were
signatories of the GATT Subsidies Code. Furthermore, the provisions of
the SCM Agreement — unlike those of the GATT Subsidies Code
— are
subject to binding dispute settlement under the DSU.(586)
XXXIV. Relationship with Ministerial
Decisions and Declarations back to top
A. Text of Declaration
Declaration on Dispute Settlement Pursuant to
the Agreement on Implementation of Article VI of the General Agreement
on Tariffs and Trade or Part V of the Agreement on Subsidies and
Countervailing Measures
Ministers,
Recognize, with respect to dispute settlement
pursuant to the Agreement on Implementation of Article VI of GATT 1994
or Part V of the Agreement on Subsidies and Countervailing
Measures, the
need for the consistent resolution of disputes arising from anti-dumping
and countervailing duty measures.
B. Interpretation and Application
1. Standard of review
426. The Appellate Body on US
— Lead and
Bismuth II rejected the argument that, “by virtue of the Declaration,
the standard of review specified in Article 17.6 of the Anti-Dumping
Agreement also applies to disputes involving countervailing duty
measures under Part V of the SCM Agreement”.(587) The Appellate Body
emphasized the hortatory language of the Declaration and the fact that
the Declaration does not provide for the application of any particular
standards of review to be applied. See also Section XI.B.6(d) of the
Chapter on the DSU.
427. With respect to this issue, see also
paragraph 390 above.
XXXV. Annex I
back to top
A. Text of Annex I
Annex I: Illustrative List of Export Subsidies
(a) The provision by governments of direct
subsidies to a firm or an industry contingent upon export performance.
(b) Currency retention schemes or any similar
practices which involve a bonus on exports.
(c) Internal transport and freight charges on
export shipments, provided or mandated by governments, on terms more
favourable than for domestic shipments.
(d) The provision by governments or their
agencies either directly or indirectly through government-mandated
schemes, of imported or domestic products or services for use in the
production of exported goods, on terms or conditions more favourable
than for provision of like or directly competitive products or services
for use in the production of goods for domestic consumption, if (in the
case of products) such terms or conditions are more favourable than
those commercially available(57) on world markets to their exporters.
(footnote original) 57 The term “commercially
available” means that the choice between domestic and imported
products is unrestricted and depends only on commercial considerations.
(e) The full or partial exemption, remission,
or deferral specifically related to exports, of direct taxes(58) or social
welfare charges paid or payable by industrial or commercial
enterprises.(59)
(footnote original) 58 For the purpose of
this Agreement:
The term “direct taxes” shall mean taxes
on wages, profits, interests, rents, royalties, and all other forms of
income, and taxes on the ownership of real property;
The term “import charges” shall mean
tariffs, duties, and other fiscal charges not elsewhere enumerated in
this note that are levied on imports;
The term “indirect taxes” shall mean
sales, excise, turnover, value added, franchise, stamp, transfer,
inventory and equipment taxes, border taxes and all taxes other than
direct taxes and import charges;
“Prior-stage” indirect taxes are those
levied on goods or services used directly or indirectly in making the
product;
“Cumulative” indirect taxes are
multi-staged taxes levied where there is no mechanism for subsequent
crediting of the tax if the goods or services subject to tax at one
stage of production are used in a succeeding stage of production;
“Remission” of taxes includes the refund
or rebate of taxes;
“Remission or drawback” includes the full
or partial exemption or deferral of import charges.
(footnote original) 59 The Members recognize
that deferral need not amount to an export subsidy where, for example,
appropriate interest charges are collected. The Members reaffirm the
principle that prices for goods in transactions between exporting
enterprises and foreign buyers under their or under the same control
should for tax purposes be the prices which would be charged between
independent enterprises acting at arm’s length. Any Member may draw
the attention of another Member to administrative or other practices
which may contravene this principle and which result in a significant
saving of direct taxes in export transactions. In such circumstances the
Members shall normally attempt to resolve their differences using the
facilities of existing bilateral tax treaties or other specific
international mechanisms, without prejudice to the rights and
obligations of Members under GATT 1994, including the right of
consultation created in the preceding sentence.
Paragraph (e) is not intended to limit a
Member from taking measures to avoid the double taxation of
foreign-source income earned by its enterprises or the enterprises of
another Member.
(f) The 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.
(g) The exemption or remission, in respect of
the production and distribution of exported products, of indirect taxes
in excess of those levied in respect of the production and distribution
of like products when sold for domestic consumption.
(h) The exemption, remission or deferral of
prior-stage cumulative indirect taxes(60) on goods or services used in the
production of exported products in excess of the exemption, remission or
deferral of like prior-stage cumulative indirect taxes on goods or
services used in the production of like products when sold for domestic
consumption; provided, however, that prior-stage cumulative indirect
taxes may be exempted, remitted or deferred on exported products even
when not exempted, remitted or deferred on like products when sold for
domestic consumption, if the prior-stage cumulative indirect taxes are
levied on inputs that are consumed in the production of the exported
product (making normal allowance for waste). This item shall be
interpreted in accordance with the guidelines on consumption of inputs
in the production process contained in Annex II.
(footnote original) 60
Paragraph (h) does not
apply to value-added tax systems and border-tax adjustment in lieu
thereof; the problem of the excessive remission of value-added taxes is
exclusively covered by paragraph (g).
(i) The remission or drawback of import
charges in excess of those levied on imported inputs that are consumed
in the production of the exported product (making normal allowance for
waste); provided, however, that in particular cases a firm may use a
quantity of home market inputs equal to, and having the same quality and
characteristics as, the imported inputs as a substitute for them in
order to benefit from this provision if the import and the corresponding
export operations both occur within a reasonable time period, not to
exceed two years. This item shall be interpreted in accordance with the
guidelines on consumption of inputs in the production process contained
in Annex II and the guidelines in the determination of substitution
drawback systems as export subsidies contained in Annex
III.
(j) The provision by governments (or special
institutions controlled by governments) of export credit guarantee or
insurance programmes, of insurance or guarantee programmes against
increases in the cost of exported products or of exchange risk
programmes, at premium rates which are inadequate to cover the long-term
operating costs and losses of the programmes.
(k) The grant by governments (or special
institutions controlled by and/or acting under the authority of
governments) of export credits at rates below those which they actually
have to pay for the funds so employed (or would have to pay if they
borrowed on international capital markets in order to obtain funds of
the same maturity and other credit terms and denominated in the same
currency as the export credit), or the payment by them of all or part of
the costs incurred by exporters or financial institutions in obtaining
credits, in so far as they are used to secure a material advantage in
the field of export credit terms.
Provided, however, that if a Member is a party
to an international undertaking on official export credits to which at
least twelve original Members to this Agreement are parties as of 1
January 1979 (or a successor undertaking which has been adopted by those
original Members), or if in practice a Member applies the interest rates
provisions of the relevant undertaking, an export credit practice which
is in conformity with those provisions shall not be considered an export
subsidy prohibited by this Agreement.
(l) Any other charge on the public account
constituting an export subsidy in the sense of Article XVI of GATT
1994.
B. Interpretation and Application of Annex I
1. Items (c), (d), (j) and (k)
(a) “Provided or mandated by governments”
428. The Appellate Body on Canada
— Dairy
(Article 21.5 — New Zealand and US) after observing that Article 9.1(c)
of the Agreement on Agriculture does not require that payments be
financed by virtue of government “mandate”, or other “direction”,
but rather government “action”, noted that in comparison, items
(c), (d), (j) and (k) of the Illustrative List seemed to imply the need to
find some type of government mandate in the context of determining the
existence of a subsidy. The Appellate Body stated:
“Article 9.1(c) of the Agreement on
Agriculture may be contrasted with Article 9.1(e) of the Agreement on
Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM
Agreement,
and items (c), (d), (j), and
(k) of the Illustrative List of Export
Subsidies (the ‘Illustrative List’) of the SCM Agreement. In these
provisions, some kind of government mandate, direction, or control is an
element of a subsidy provided through a third party.”(588)
2. Item (d)
429. The Panel on Brazil —
Aircraft, in a
finding not subsequently addressed by the Appellate Body, described the
test whether a measure is a prohibited export subsidy under item (d) as
“a comparison of the terms and conditions of the goods or services
being provided by the government with the terms and conditions that
would otherwise be available to the exporters receiving the alleged
export subsidy”.(589) As a consequence, the Panel rejected the argument
that the relevant test depends upon “whether the measure merely
offsets advantages bestowed on competing products from another Member”.
The Panel noted that “the fact that a foreign competitor had access to
the same goods or services on better terms than those available to the
exporters in question would not be a defense”.(590)
3. Items (e), (f), (g), (h) and (i)
430. Similarly to its finding with respect to
item (d), the Panel on Brazil — Aircraft, in the context of
items (e),
(f), (g), (h) and (i), rejected the argument that whether a measure is
a prohibited export subsidy should be decided based on whether the
measure at issue merely serves to offset advantages bestowed on
competing products from another Member.(591) Regarding
items (e) to (i),
the Panel stated that “there is no hint that a tax advantage would not
constitute an export subsidy simply because it reduced the exporter’s
tax burden to a level comparable to that of foreign competitors”.(592)
4. Footnote 59 of Item (e)
(a) Fifth Sentence: “double taxation of
foreign-source income”
(i) Scope of application
431. In the context of
footnote 59, the
Appellate Body in US — FSC (Article 21.5 — EC) considered that the fifth
sentence of footnote 59 applies to measures taken by a Member to avoid
taxation of income earned by a taxpayer of that Member in a foreign
state:
“‘[D]ouble taxation’ occurs when the
same income, in the hands of the same taxpayer, is liable to tax in
different States. The fifth sentence of footnote 59 applies to a measure
taken by a Member to avoid such double taxation of ‘foreign-source
income’. In examining the phrase ‘foreign-source income’, we
observe that, in ordinary usage, the word ‘source’ can refer to the
place where a thing originates, and that the words ‘source’ and ‘origin’
can be synonyms. We consider, therefore, that the word ‘source’, in
the context of the fifth sentence of footnote 59, has a meaning akin to
‘origin’ and refers to the place where the income is earned. This
reading is supported by the combination of the words ‘foreign’ and
‘source’ as ‘foreign’ also refers to the place where the income
is earned. Used in this way, the word ‘foreign’ indicates a source
which is external to the Member adopting the measure at stake. Footnote
59, therefore, applies to measures taken by a Member to avoid the double
taxation of income earned by a taxpayer of that Member in a ‘foreign’
State.”(593)
(ii) Scope of discretion to avoid double
taxation
432. The Appellate Body on US
— FSC considered
that Members have a discretion to avoid double taxation:
“[I]t is ‘implicit’ in the requirement
to use the arm’s length principle that Members of the WTO are not
obliged to tax foreign-source income, and also that Members may tax such
income less than they tax domestic-source income. We would add that,
even in the absence of footnote 59, Members of the WTO are not obliged,
by WTO rules, to tax any categories of income, whether foreign-or
domestic-source income. The United States argues that, since there is no
requirement to tax export related foreign-source income, a government
cannot be said to have ‘foregone’ revenue if it elects not to tax
that income. It seems to us that, taken to its logical conclusion, this
argument by the United States would mean that there could never be a
foregoing of revenue ‘otherwise due’ because, in principle, under
WTO law generally, no revenues are ever due and no revenue would, in
this view, ever be ‘foregone’. That cannot be the appropriate
implication to draw from the requirement to use the arm’s length
principle.”(594)
433. The Appellate Body on US
— FSC (Article
21.5 — EC) noted that Members have the authority to determine their
rules of taxation, provided they comply with WTO obligations. The
Appellate Body upheld the Panel’s findings that footnote 59 does not
require Members to adopt particular legal standards to define when
income is foreign-source for the purposes of their double
taxation-avoidance measures and noted that footnote 59 does not give
Members an unlimited discretion to avoid double taxation of “foreign-source
income” through the grant of export subsidies. Accordingly, for the
Appellate Body, the term “foreign-source income”, as used in
footnote 59, cannot be interpreted solely by reference to the rules of
the Member taking the measure to avoid double taxation of foreign-source
income:
“It is, however, no easy matter to determine
in every situation when income is susceptible of being taxed in two
different States and, thus, when a Member may properly regard income as
‘foreign-source income’. We have emphasized in previous appeals that
Members have the sovereign authority to determine their own rules of
taxation, provided that they respect their WTO obligations. Thus,
subject to this important proviso, each Member is free to determine the
rules it will use to identify the source of income and the fiscal
consequences — to tax or not to tax the income — flowing from the
identification of source. We see nothing in footnote 59 to the SCM
Agreement which is intended to alter this situation. We, therefore,
agree with the Panel that footnote 59 does not oblige Members to adopt
any particular legal standard to determine whether income is
foreign-source for the purposes of their double taxation-avoidance
measures.
At the same time, however, footnote 59 does
not give Members an unfettered discretion to avoid double taxation of
‘foreign-source income’ through the grant of export subsidies. As
the fifth sentence of footnote 59 to the SCM Agreement constitutes an
exception to the prohibition on export subsidies, great care must be
taken in defining its scope. If footnote 59 were interpreted to allow a
Member to grant a fiscal preference for any income that a Member chooses
to regard as foreign source, that reading would seriously undermine the
prohibition on export subsidies in the SCM Agreement. That would allow
Members, relying on whatever source rules they adopt, to grant fiscal
export subsidies for income that may not actually be susceptible of
being taxed in two jurisdictions. Accordingly, the term ‘foreign-source
income’, as used in footnote 59 cannot be interpreted by reference
solely to the rules of the Member taking the measure to avoid double
taxation of foreign-source income.”(595)
(iii) Design, structure and architecture of
double taxation to target foreign-source income
434. The Appellate Body on US
— FSC (Article
21.5 — EC) also considered that measures falling under footnote 59
should not necessarily be “perfectly tailored” to the actual double
tax burden, but that such measures must target “foreign-source income”.
Following the Panel’s approach, the Appellate Body also examined the
“design, structure and architecture” of the measures under
consideration to determine if they fell under footnote
59.(596)
“The avoidance of double taxation is not an
exact science. Indeed, the income exempted from taxation in the State of
residence of the taxpayer might not be subject to a corresponding, or
any, tax in a ‘foreign’ State. Yet, this does not necessarily mean
that the measure is not taken to avoid double taxation of foreign-source
income. Thus, we agree with the Panel, and the United States, that
measures falling under footnote 59 are not required to be perfectly
tailored to the actual double tax burden.
However, the fact that measures falling under
footnote 59 to the SCM Agreement may grant a tax exemption even for
income that is not taxed in another jurisdiction does not mean that such
tax exemptions may be granted, under the fifth sentence of footnote
59,
for any income. Footnote 59 prescribes that the income benefitting from
a double taxation-avoidance measure must be ‘foreign-source’ and, as
we have said, that means that the income must have links with a “foreign”
State such that it could properly be subjected to tax in that State, as
well as in the Member taking the double taxation-avoidance measure.
We also recognize that Members are not obliged
by the covered agreements to provide relief from double taxation.
Footnote 59 to the SCM Agreement simply preserves the prerogative of
Members to grant such relief, at their discretion, for ‘foreign-source
income’. Accordingly, we do not believe that measures falling under
footnote 59 must grant relief from all double tax burdens. Rather,
Members retain the sovereign authority to determine for themselves
whether, and to what extent, they will grant such relief.”(597)
(b) “foreign-source income”
435. The Appellate Body on US
— FSC analysed
footnote 59 and rejected the argument that since there is no requirement
to tax export-related foreign-source income, a decision not to tax that
income cannot be said to constitute revenue “foregone.” The
Appellate Body noted that if it was to follow this approach, there could
never be “a foregoing of revenue ‘otherwise due’” because WTO
law does not require the collection of any particular category of
revenue. The Appellate Body considered that the arm’s-length
requirement in footnote 59 does not provide a solution because this
principle operates independently of the choice that a Member makes on
what categories of foreign-sourced income it will not tax or will tax
less. The Appellate Body held:
“Furthermore, we do not believe that the
requirement to use the arm’s length principle resolves the issue that
arises here. That issue is not, as the United States suggests, whether a
Member is or is not obliged to tax a particular category of
foreign-source income. As we have said, a Member is not, in general,
under any such obligation. Rather, the issue in dispute is whether,
having decided to tax a particular category of foreign-source income,
namely foreign-source income that is ‘effectively connected with a
trade or business within the United States’, the United States is
permitted to carve out an export contingent exemption from the category
of foreign-source income that is taxed under its other rules of taxation. Unlike the United States, we do not believe that the second
sentence of footnote 59 addresses this question. It plainly does not do
so expressly; neither, as far as we can see, does it do so by necessary
implication. As the United States indicates, the arm’s length
principle operates when a Member chooses not to tax, or to tax less,
certain categories of foreign-source income. However, the operation of
the arm’s length principle is unaffected by the choice a Member makes
as to which categories of foreign-source income, if any, it will not
tax, or will tax less. Likewise, the operation of the arm’s length
principle is unaffected by the choice a Member might make to grant
exemptions from the generally applicable rules of taxation of
foreign-source income that it has selected for itself. In short, the
requirement to use the arm’s length principle does not address the
issue that arises here, nor does it authorize the type of export
contingent tax exemption that we have just described. Thus, this
sentence of footnote 59 does not mean that the FSC subsidies are not
export subsidies within the meaning of Article 3.1(a) of the SCM
Agreement.” (598) (emphasis original)
436. For the Appellate Body in US
— FSC
(Article 21.5 — EC) the notion of “‘foreign-source income’, in
footnote 59 to the SCM Agreement, refers to income generated by
activities of a non-resident taxpayer in a ‘foreign’ State which
have such links with that State so that the income could properly be
subject to tax in that State”.(599) The Appellate Body considered that
the existence of a “foreign element” in itself does not necessarily
indicate that “all” income from transactions covered by the measures
under consideration constitute “foreign-source income”. The
Appellate Body concluded that in this case the methodology used did not
accurately allocate covered income as foreign or domestic, with the
result that the measure at stake “improperly combines domestic-source
income and foreign-source income” in the calculation, causing it to
“systematically” misallocate this income.(600) The Appellate Body
held:
“[T]he fact that a transaction involves some
foreign element, such as the ‘foreign economic process’, does not
necessarily mean that all of the income generated by such a transaction
will be ‘foreign-source income’ within the meaning of footnote 59 to
the SCM Agreement…. In our view, under footnote 59 to the SCM
Agreement, the ‘foreign-source income’ arising in such a transaction
is only that portion of the total income which is generated by and
properly attributable to activities that do occur in a ‘foreign’
State.(601)
…
This reinforces our view that the approach
embodied in the ETI measure can lead to very different allocations of
income between domestic and foreign-source in respect of precisely the
same transaction. This implies to us that the different formulae for
calculating QFTI result in a misallocation of income as between the
domestic and foreign-source and, through the election which the
taxpayer can make between these formulae, allows the taxpayer to obtain
the maximum benefit from the misallocation.” (602)
(i) Recourse to international tax law
437. The Appellate Body on US
— FSC (Article
21.5 — EC) acknowledged that in international tax law there is no agreed
meaning for the term “foreign-source income” but that, on the basis
of its recourse to international legal principles and its review of a
number of bilateral and multilateral tax agreements, the term “foreign-source
income” may be interpreted as follows:
“Although there is no universally agreed
meaning for the term ‘foreign-source income’ in international tax
law, we observe that many States have adopted bilateral or multilateral
treaties to address double taxation….
Although these instruments do not define ‘foreign-source
income’ uniformly, it appears to us that certain widely recognized
principles of taxation emerge from them. In seeking to give meaning to
the term ‘foreign-source income’ in footnote 59 to the SCM
Agreement, which is a tax-related provision in an international trade
treaty, we believe that it is appropriate for us to derive assistance
from these widely recognized principles which many States generally
apply in the field of taxation. In identifying these principles, we bear
in mind that the measure at issue seeks to address foreign-source income
of United States citizens and residents — that is, income earned by
these taxpayers in ‘foreign’ States where the taxpayers are not
resident.
We recognize, of course, that the detailed
rules on taxation of non-residents differ considerably from State to
State, with some States applying rules which may be more likely to tax
the income of non-residents than the rules applied by other States.
However, despite the differences, there seems to us to be a widely
accepted common element to these rules. The common element is that a ‘foreign’
State will tax a non-resident on income which is generated by activities
of the non-resident that have some link with that State. Thus, whether a
‘foreign’ State decides to tax non-residents on income generated by
a permanent establishment or whether, absent such an establishment, it
decides to tax a non-resident on income generated by the conduct of a
trade or business on its territory, the ‘foreign’ State taxes a
non-resident only on income generated by activities linked to the
territory of that State. As a result of this link, the ‘foreign’
State treats the income in question as domestic-source, under its source
rules, and taxes it. Conversely, where the income of a non-resident does
not have any links with a ‘foreign’ State, it is widely accepted
that the income will be subject to tax only in the taxpayer’s State of
residence, and that this income will not be subject to taxation by a ‘foreign’
State.”(603)
(ii) Link between income of taxpayers and
their activities in a foreign State
438. The Appellate Body on US
— FSC (Article
21.5 — EC) noticed the need for a link between the taxpayer’s income
and their activities in a foreign State to establish whether there is a
foreign source of income. The Appellate Body examined rules on foreign
leasing and rental income and referred to additional aspects of the
measures under consideration and considered that domestic-source income
was improperly treated as exempt foreign-source income.(604) The Appellate
Body took the view that:
“[I]n the absence of an established link
between the income of such taxpayers and their activities in a ‘foreign’
State, we do not believe that there is ‘foreign-source income’
within the meaning of footnote 59 of the SCM Agreement.
… In our view, however, sales income cannot
be regarded as ‘foreign-source income’, under footnote
59, for the
sole reason that the property, subject-matter of the sale, is exported
to another State, for use there. The mere fact that the buyer uses
property outside the United States does not mean that the seller
undertook activities in a ‘foreign’ State generating income there.
Such an interpretation of footnote 59 would, in effect, allow Members to
grant a tax exemption in favour of export-related income on the ground
that the exportation by itself of the property renders the income ‘foreign-source’.
In our view, this reading would allow Members easily to evade the
prohibition on export subsidies in Article 3.1(a) of the SCM Agreement
and render this prohibition meaningless.”(605)
439. The Appellate Body, in US
— FSC (Article
21.5 — EC), considered that the flexibility under footnote 59 does not
properly extend to allowing Members to adopt allocation rules that
systematically result in a tax exemption for income that has no
connection with a “foreign” country and that would not be regarded
as foreign-source:
“We have said that avoiding double taxation
is not an exact science and we recognize that Members must have a degree
of flexibility in tackling double taxation. However, in our view, the
flexibility under footnote 59 to the SCM Agreement does not properly
extend to allowing Members to adopt allocation rules that systematically
result in a tax exemption for income that has no link with a ‘foreign’
State and that would not be regarded as foreign-source under any of the
widely accepted principles of taxation we have reviewed.”(606)
(c) Burden of proof
440. The Appellate Body on US
— FSC (Article
21.5 — EC) addressed the issue of the burden of proof under the fifth
sentence of footnote 59 and upheld the findings of the Panel in this
regard. In reviewing the Panel’s findings, the Appellate Body
considered whether the footnote provides the “proper scope” of the
Article 3.1(a) obligations, or whether it determines an “exception”
for a measure that is otherwise an export contingent subsidy.(607) The
Appellate Body concluded that footnote 59 does not modify the scope of
the definition of a “subsidy” in Article
1.1, the scope of item 1(e)
of the Illustrative List, nor the meaning of export contingent subsidies
under Article 3.1(a). The Appellate Body thus concluded that: (i)
measures falling within the scope of footnote 59 may continue to be
export subsidies under Article
1.1; and (ii) the fifth sentence of
footnote 59 is an “exception” to the legal regime applicable to
export subsidies under Article
3.1(a), by allowing Members to take or
adopt measures to avoid the double-taxation of foreign-source income,
while the latter may continue to be considered as export subsidies,
within the meaning of Article
3.1(a). The Appellate Body also concluded
that footnote 59 is an “affirmative defence” that may justify a
prohibited export subsidy, and that the burden of proof is on the party
invoking the exception:
“We recall that, in the original proceedings
in this dispute, we said that the fifth sentence of footnote 59 ‘does
not purport to establish an exception to the general definition of a “subsidy”
…’. Thus, a measure taken to avoid the double taxation of
foreign-source income, falling within footnote 59, may be a ‘subsidy’
under the SCM Agreement.
Article 3.1 of the SCM Agreement provides
specific obligations with respect to two types of subsidy: subsidies
contingent upon export performance and subsidies contingent upon the use
of domestic over imported goods. Subsidies of these defined types are
prohibited under Article 3 of the SCM Agreement.
Item (e) of the
Illustrative List identifies a particular measure which is deemed to be
a prohibited export subsidy under Article
3.1(a).
The fifth sentence of footnote 59 provides
that item (e) ‘is not intended to limit a Member from taking measures
to avoid the double taxation of foreign-source income earned by its
enterprises or the enterprises of another Member.’ In the same way
that we do not see the fifth sentence of footnote 59 as altering the
scope of the definition of a ‘subsidy’ in Article 1.1 of the SCM
Agreement, we do not see it as altering either the scope of item (e) of
the Illustrative List or the meaning to be given to the term ‘subsidies
contingent … upon export performance’ in Article 3.1(a) of the SCM
Agreement. Thus, measures falling within the scope of this sentence of
footnote 59 may continue to be export subsidies, much as they may
continue to be subsidies under Article 1.1 of the SCM Agreement.
The import of the fifth sentence of footnote
59 is that Members are entitled to ‘take’, or ‘adopt’ measures
to avoid double taxation of foreign-source income, notwithstanding that
they may be, in principle, export subsidies within the meaning of
Article 3.1(a). The fifth sentence of footnote
59, therefore,
constitutes an exception to the legal regime applicable to export
subsidies under Article 3.1(a) by explicitly providing that when a
measure is taken to avoid the double taxation of foreign-source income,
a Member is entitled to adopt it.
Accordingly, as we indicated in US — FSC, the
fifth sentence of footnote 59 constitutes an affirmative defence that
justifies a prohibited export subsidy when the measure in question is
taken ‘to avoid the double taxation of foreign-source income’.(608)
In such a situation, the burden of proving that a measure is justified
by falling within the scope of the fifth sentence of footnote 59 rests
upon the responding party.”(609)
(d) Relationship with other Articles
441. With respect to the relationship between
footnote 59 and Article
3.1(a), see paragraphs 118 and
120 above.
5. Item (j)
442. In Canada — Aircraft Credits and
Guarantees, the Panel concluded that in its view, “item (j) sets out
the circumstances in which the grant of loan guarantees is per se deemed
to be an export subsidy … Item (j) certainly does not provide … that
all loan guarantees are per se prohibited by item
(j).”(610)
6. Item (k)
(a) First paragraph of item (k) — “material
advantage” clause
(i) General
443. In both Brazil — Aircraft and
Brazil — Aircraft (Article 21.5 — Canada), Brazil asserted that the
first
paragraph of item (k) could be interpreted in an a contrario manner, so
as to establish that subsidies constituting “payments”, “of all or
part of the costs incurred by exporters or financial institutions in
obtaining credits”, but which were not “used to secure a material
advantage in the field of export credit terms”, would not be
prohibited export subsidies within the meaning of Article
3.1(a). The
Appellate Body on Brazil — Aircraft did not follow the Panel’s
findings to the extent that it did not make an explicit finding on
whether or not it was permissible to use item (k) in an a contrario
manner. Rather, the Appellate Body found that Brazil had not met its
burden of proof of showing that the PROEX payments were not used to
secure a material advantage in the field of export credit terms. In
Brazil — Aircraft (Article 21.5 — Canada), the Appellate Body made the
same finding about the revised PROEX programme. In this report, however,
the Appellate Body made an additional statement:
“If Brazil had demonstrated that the
payments made under the revised PROEX were not ‘used to secure a
material advantage in the field of export credit terms’, and that such
payments were ‘payments’ by Brazil of ‘all or part of the costs
incurred by exporters or financial institutions in obtaining credits’,
then we would have been prepared to find that the payments made under
the revised PROEX are justified under item (k) of the Illustrative
List.
However, Brazil has not demonstrated that those conditions of item (k)
are met in this case. In making this observation, we wish to emphasize
that we are not interpreting footnote 5 of the SCM Agreement, and we do
not opine on the scope of footnote
5, or on the meaning of any other
items in the Illustrative List.
However, we do not believe it is necessary for
us to rule on these general questions in order to resolve this dispute.
We, therefore, hold that the Article 21.5 Panel’s finding that ‘the
first paragraph of item (k) cannot be used to establish that a subsidy
which is contingent upon export performance within the meaning of
Article 3.1(a) is “permitted”’ is moot, and, thus, is of no legal
effect.”(611)
(ii) “payments of all or part of the costs
incurred by exporters or financial institutions in obtaining credits”
444. In interpreting the phrase “payments of
all or part of the costs incurred by exporters or financial institutions
in obtaining credits”, the Panel on Brazil — Aircraft (Article 21.5
— Canada) started with the ordinary meaning of the terms and opined that
“the word ‘credits’ refers to ‘export credits’ as used earlier
in the paragraph. Next, it also found that the costs involved must
relate to obtaining export credits, not to providing them.”(612)
Finally, the Panel rejected an argument by Brazil that cost incurred by
a financial institution in raising capital could be equated with the
cost of “obtaining” export credits.(613) The Appellate Body on Brazil
— Aircraft (Article 21.5 — Canada) did not believe that it was necessary
to examine this issue (the Appellate Body had found that Brazil had not
proven that the PROEX interest equalization payments were not used to
secure a material advantage) and therefore did not address the Panel’s
findings. The Appellate Body stated that “These findings of the
Article 21.5 Panel are moot, and, thus, of no legal effect.”(614) The
Panel on Brazil — Aircraft (Article 21.5 — Canada II) reached the same
conclusion as the Panel on Brazil — Aircraft (Article 21.5 — Canada) on
this matter.(615)
445. With respect to the term “export credit
practice” under the second paragraph of item (k), see
paragraph 460 below.
(iii) “used to secure a material advantage”
General
446. The Panel on Brazil — Aircraft opined
that a payment is used to “secure a material advantage in the field of
export credit terms” when it provides the recipient with export
credits on terms which are more favourable than those available in the
absence of such payments, i.e. in the “marketplace”. The Panel
considered it “evident that PROEX payments result in the availability
of export credit for Brazilian regional aircraft on terms which are more
favourable than the terms that would otherwise be available with respect
to the transaction in question”.(616) In this context, the Panel on
Brazil — Aircraft also recalled a statement by Brazil to the effect that
PROEX would presumably always be more favourable to the purchaser than
the terms it could obtain on its own.(617) However, the Appellate Body in
Brazil — Aircraft rejected this interpretation by the Panel of the
phrase “used to secure a material advantage”.
“material”
447. More specifically, the Appellate Body in
Brazil — Aircraft criticized the Panel for not adequately considering
the term “material” and disagreed with equating the term “material
advantage” under item (k) of the Illustrative List to the term “benefit”
under Article 1.1(b):
“We agree with the Panel’s statement that
the ordinary meaning of the word ‘advantage’ is ‘a more favorable
or improved position’ or a ‘superior position’. However, we note
that item (k) does not refer simply to ‘advantage’. The word ‘advantage’
is qualified by the adjective ‘material’. As mentioned before, in
its ultimate interpretation of the phrase ‘used to secure a material
advantage’ which the Panel finally adopted and applied to the export
subsidies for regional aircraft under PROEX, the Panel read the word ‘material’
out of item (k). This we consider to be an error.
…
We note that the Panel adopted an
interpretation of the ‘material advantage’ clause in item (k) of the
Illustrative List that is, in effect, the same as the interpretation of
the term ‘benefit’ in Article 1.1(b) …. If the ‘material
advantage’ clause in item (k) is to have any meaning, it must mean
something different from ‘benefit’ in Article
1.1(b). It will be
recalled that for any payment to be a ‘subsidy’ within the meaning
of Article 1.1, that payment must consist of both a ‘financial
contribution’ and a ‘benefit’. The first paragraph of item (k)
describes a type of subsidy that is deemed to be a prohibited export
subsidy. Obviously, when a payment by a government constitutes a ‘financial
contribution’ and confers a ‘benefit’, it is a ‘subsidy’ under
Article 1.1. Thus, the phrase in item (k), ‘in so far as they are used
to secure a material advantage’, would have no meaning if it were
simply to be equated with the term ‘benefit’ in the definition of
‘subsidy’. As a matter of treaty interpretation, this cannot be so.
Therefore, we consider it an error to interpret the ‘material
advantage’ clause in item (k) of the Illustrative List as meaning the
same as the term ‘benefit’ in Article 1.1(b) of the SCM
Agreement.”(618)
Commercial Interest Reference Rate (CIRR) as
market benchmark
448. Rather than considering the terms of
export credits available to a purchaser in the absence of the PROEX
interest equalization payments, the Appellate Body in Brazil — Aircraft
held that the determination of whether a payment is “used to secure a
material advantage” implies a comparison between the export credit
terms available under the measure at issue and some other “market
benchmark”. The Appellate Body further viewed the second paragraph of
item (k) as “useful context for interpreting the ‘material advantage’
clause in the text of the first paragraph”.(619) In this respect, the
Appellate Body stated that the Commercial Interest Reference Rate (the
“CIRR”), defined in the Arrangement on Guidelines for Officially
Supported Export Credits (the “OECD Arrangement”), could be “appropriately
viewed as … a market benchmark” for assessing whether a payment “is
used to secure a material advantage”.(620)
449. The Appellate Body on Brazil
— Aircraft
(Article 21.5 — Canada) agreed with the Panel that a Member may under
the first paragraph of item (k), as interpreted by the Appellate Body,
establish that a payment is not used to secure a material advantage in
the field of export credit terms, even if it resulted in a below
CIRR
interest rate.(621) The Appellate Body then set forth the manner in which
Brazil could prove that the PROEX interest equalization payments did not
secure a material advantage to Brazilian exporters:
“To establish that subsidies under the
revised PROEX are not ‘used to secure a material advantage in the
field of export credit terms’, Brazil must prove either: that the net
interest rates under the revised PROEX are at or above the relevant CIRR,
the specific ‘market benchmark’ we identified in the original
dispute as an ‘appropriate’ basis for comparison; or, that an
alternative ‘market benchmark’, other than the CIRR, is appropriate,
and that the net interest rates under the revised PROEX are at or above
this alternative ‘market benchmark’.
… Brazil contends … that the revised PROEX
is not ‘used to secure a material advantage in the field of export
credit terms’ within the meaning of the first paragraph of item (k) of
the Illustrative List.
To prove this argument, Brazil must establish
both of two elements: first, Brazil must prove that it has identified an
appropriate ‘market benchmark’; and, second, Brazil must prove that
the net interest rates under the revised PROEX are at or above that
benchmark.”(622)
450. The Panel on Brazil — Aircraft (Article
21.5 — Canada II), first interpreted the “material advantage” clause
by referring to the Appellate Body report in Brazil — Aircraft (Article
21.5 — Canada) (see paragraph 449 above). The Panel concluded that if
Brazil wanted to establish that the programme’s payments were not used
to secure a “material advantage”, by reference to the CIRR, Brazil
must show that export credits supported by PROEX III respect the CIRR
and the applicable rules of the OECD Arrangement which relate to the
application of the CIRR.(623) The Panel further held:
“It could be argued that this interpretation
of the ‘material advantage’ clause in effect re-creates in the first
paragraph of item (k) the standard already provided for in the second
paragraph of item (k), at least insofar as the interest rate benchmark
used under the first paragraph of item (k) is the CIRR.(624) However, this
is an unavoidable implication of the Appellate Body’s adoption of the
CIRR as an appropriate benchmark for determining the existence of a
material advantage…. To the extent that the first paragraph of item (k) could be used a contrario to establish that a payment that is not
used to secure a material advantage is not prohibited — an issue
addressed below — we would, in other words, not only have re-created a
safe haven in the first paragraph, but, in fact, would have deprived the
second paragraph of all useful effect with respect to the export credit
practices at issue in the first paragraph.”(625)
451. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) found that given the nature of the CIRR as a
constructed interest rate, a Member may also attempt to demonstrate that
a rate below the CIRR would, at a particular point in time, constitute a
more appropriate benchmark.(626) In Brazil — Aircraft (Article 21.5
— Canada II), the Panel further indicated that “to establish that PROEX
III is not used to secure a material advantage in the field of export
credit terms, Brazil must either: (i) demonstrate conformity with the
relevant CIRR as well as with all those rules of the 1998 OECD
Arrangement which operate to support or reinforce the CIRR; or (ii)
identify an appropriate ‘market benchmark’, other than the CIRR, and
establish that net interest rates resulting from PROEX III support are
at or above that alternative ‘market benchmark’”.(627)
(b) First paragraph of item (k) as an
affirmative defence
452. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) incorporated by reference its reasoning in Brazil
— Aircraft (Article 21.5 — Canada) into its analysis and remained of the
view that the relationship between the Illustrative List and Article
3.1(a) is governed by footnote 5 to the SCM Agreement, and that the
first paragraph of item (k) does not “refer to” any measures as “not
constituting export subsidies” within the meaning of the footnote as
an affirmative defence. On this basis, the Panel concluded that the
first paragraph of item (k) cannot, as a legal matter, provide an
affirmative defence to a violation of Article
3.1(a).(628) As regards the
use of the second paragraph see paragraph 472 below.
(c) Second paragraph of item (k) — “the safe
haven”
(i) General
453. The Panel on Canada — Aircraft (Article
21.5 — Brazil) set forth the propositions that a Member would need to
prove in order to qualify, with respect to specific individual
transactions, for the “safe haven” provided under the second
paragraph of item (k):
“[F]irst, it would need to be determined
that the transaction was in the form of either direct credits/financing,
refinancing or interest rate support with repayment terms of at least
two years, at fixed interest rates, and therefore was subject to the
Arrangement generally and to the CIRRs (or a sector-specific minimum
interest rate, if applicable) specifically. Second, it would need to be
determined whether the interest rate was at or above the CIRR (or the
applicable sector-specific rate). Third, it would need to be determined
which of the other provisions of the Arrangement that operate to
reinforce the minimum interest rate rule applied to that particular
transaction (a determination that would need to be made on a
case-by-case, transaction-specific basis). Fourth, the details of the
transaction would need to be examined to determine whether or not it
respected all such additional provisions, and did not involve any
derogations or matching of derogations.”(629)
(d) “in the field of export credit terms”
454. With respect to the phrase “in the
field of export credit terms”, the Panel on Brazil — Aircraft held
that in its ordinary meaning, that phrase would refer to “items
directly related to export credits, such as interest rates, grace
periods, transaction costs, maturities and the like”.(630) Furthermore,
the Panel opined that the term “field of export credit terms” did
not encompass the price at which a product is sold.(631) Although the
Appellate Body in Brazil — Aircraft made no specific reference to this
statement by the Panel, it rejected the Panel’s interpretation of the
phrase “used to secure a material advantage”(632) which was made in
the same context as the above statements on the term “in the field of
export credit terms”.(633)
(e) “international undertaking on official
export credits”
455. In Canada — Aircraft (Article 21.5
— Brazil), Canada claimed that as part of the revision of its subsidies
programmes following the Appellate Body Report on Canada —
Aircraft, it
had implemented a new policy guideline for its Canada Account financing
under which “any financing which does not comply with the OECD
Arrangement would not be in the national interest”. Canada argued that
compliance with the OECD Arrangement meant that such financing would not
be a prohibited export subsidy, according to the second paragraph of
item (k). Although the Panel — whose report was not appealed — ultimately found against Canada, it did agree that the OECD Arrangement
was an “international undertaking on official export credits” within
the meaning of item (k):
“[I]t is well accepted that the OECD
Arrangement is an ‘international undertaking on official export
credits’ in the sense of the second paragraph of item
(k). Moreover,
in practice the OECD Arrangement is at present the only international
undertaking that fits this description. Thus, we understand the essence
of the second paragraph of item (k) at least at present to be that ‘an
export credit practice’ which is in ‘conformity’ with ‘the
interest rates provisions’ of the OECD Arrangement ‘shall not be
considered an export subsidy prohibited by’ the SCM Agreement.”(634)
(f) “a successor undertaking”
456. In Brazil — Aircraft (Article 21.5
— Canada II), the Panel had to decide which was the “successor
undertaking” to the 1979 OECD Arrangement, i.e. the 1992 or 1998
version. The Panel started by interpreting the terms of “has been
adopted” and concluded that it referred to the present of the
addressees of the SCM Agreement rather than to an act of adoption prior
to the entry into force of the SCM Agreement:
“The parties differ, however, regarding
whether the relevant ‘successor undertaking’ is the 1992 version of
the OECD Arrangement or the 1998 version.
…
In interpreting the phrase ‘a successor
undertaking which has been adopted […]’, we focus first on the
language ‘has been adopted’. Brazil attaches great importance to the
fact that that language is in the present perfect tense. The present
perfect tense, Brazil maintains, refers to a time regarded as present.
We agree. Brazil goes on to argue, however, that the relevant present is
the time when the SCM Agreement entered into force. From this Brazil
concludes that only those successor undertakings which had been adopted
before the entry into force of the SCM Agreement are, textually, within
the scope of the second paragraph of item (k). We are not persuaded by
that view.
It should be noted, moreover, that, on our
interpretation, the language ‘has been adopted’ retains meaning and
effect. Thus, the use of the present perfect tense tells Members that
any time they seek to determine the relevant successor undertaking, they
should consider only those successor undertakings which, at that time,
have been adopted by the relevant OECD Members. In other words, Members
are not allowed to rely on, nor are they bound by, the relevant
provisions of a successor undertaking which has not yet been formally
accepted by the relevant OECD Members. A successor undertaking which is
merely being proposed for adoption or which exists only in draft form
could not, therefore, constitute a successor undertaking which ‘has
been adopted’.
On the basis of the foregoing considerations,
we find that the phrase ‘has been adopted’ is properly read as
referring to the present of its addressees rather than as referring to
an act of adoption prior to the entry into force of the SCM
Agreement,
i.e. prior to 1 January 1995.”(635)
457. In Brazil — Aircraft (Article 21.5
— Canada II), the Panel continued its analysis by interpreting the term
“successor undertaking” and concluded that the relevant successor
undertaking was the most recent one, provided that it had been adopted.
The Panel then found that the most recent adopted successor undertaking
was the 1998 OECD Arrangement:
“Turning next to the term ‘successor
undertaking’, we note that, in its ordinary meaning, this term refers
to an undertaking which ‘succeeds [i.e. follows] another in […]
function’. (636) There can be no question, in our view, that both the
1992 and the 1998 version of the OECD Arrangement constitute ‘successor’
undertakings to the OECD Arrangement in effect in 1979.(637) It should be
pointed out, in this regard, that the 1998 OECD Arrangement is the
latest adopted version of the OECD Arrangement and, as such, is
currently in effect, whereas the 1992 OECD Arrangement is no longer in
effect. This raises the question of which successor undertaking is the
relevant successor undertaking if there is more than one. The text of
the second paragraph of item (k) does not explicitly answer that
question.(638)
We consider that the relevant successor
undertaking is the most recent successor undertaking which has been
adopted. It would not, in our view, have been rational for the drafters
to consider, without specifying so, that, say, the fifth successor
undertaking should be the relevant one. Indeed, the fact that the
drafters used the simple and unqualified term “a successor undertaking”
strongly suggests to us that they intended to incorporate, and thus give
effect to, the relevant provisions of all adopted successor
undertakings. This, however, would not logically be possible, unless
effect is given also to the changes introduced by the most recent
successor undertaking. On that basis, we find that, in the absence of
other textual directives, the most recent successor undertaking is the
relevant benchmark undertaking for purposes of the second paragraph of
item (k), subject to the one condition that it must have been adopted.
…
In view of the foregoing, we conclude that the
‘successor undertaking’ at issue in the second paragraph of item (k)
is the most recent successor undertaking which has been adopted prior to
the time that the second paragraph is considered. For purposes of these
proceedings, we conclude that the most recent successor undertaking
which has been adopted is the 1998 OECD Arrangement.(639)”(640)
(g) OECD Arrangement
458. Considering that “in practice
eligibility for item (k)’s safe haven from the prohibition on export
subsidies is defined entirely in terms of the OECD Arrangement, at least
for the time being”,(641) the Panel on Canada — Aircraft (Article 21.5
— Brazil) stated the following:
“We take note of the reference to ‘a
successor undertaking’ in the second paragraph of item
(k). In this
regard, first, it is clear from this reference that to the extent that
the [OECD] Arrangement today is the only undertaking of the kind
referred to in the second paragraph of item (k), if in the future a ‘successor
undertaking’ were to take effect, export credit practices conforming
with the interest rate provisions of that undertaking also would be
eligible for the safe haven in that paragraph. Thus, our detailed
analysis of the Arrangement in its present form is not in any way
intended to exclude this possibility. Second, for purposes of our
analysis of the Arrangement, we assume that the Sector Understandings on
Export Credits for Ships, for Nuclear Power Plant, and for Civil
Aircraft, contained in Annexes I-III of the Arrangement, form an
integral part of the Arrangement itself. Even if in the strict sense
this were not the case (an issue that we do not here decide), in our
view these Sector Understandings at a minimum would constitute ‘successor
undertakings’ in the sense of the second paragraph of item
(k), as the
Arrangement as originally implemented in 1979 did not contain these
Annexes…. The Sector Understandings were negotiated and implemented
later, and incorporate by reference provisions of the Arrangement. Thus,
if they are not formally integral to the Arrangement, there is no doubt
that these Understandings at a minimum constitute successor
undertakings, and thus, conformity with the ‘interest rates provisions’
of the Understandings would qualify an export credit practice for the
safe haven in the second paragraph of item (k).”(642)
459. As regards the discussion on whether the
relevant successor undertaking to the 1979 OECD Arrangement was the 1992
or 1998 version, see paragraphs 456-457 above.
(h) “export credit practice”
460. In the context of Canada’s defence
under the second paragraph of item (k), the Panel on Canada — Aircraft
(Article 21.5 — Brazil) considered that the phrase “export credit
practice”, must, in its ordinary meaning, be a relatively broad term.(643) The Panel, whose report was not appealed, continued:
“[T]his term on its own suggests any
practices that might be associated in some way with export credits
(i.e., export financing). This certainly would involve export credits as
such, but presumably other sorts of practices as well. The first
paragraph of item (k) provides useful context in this regard. In
particular, we note that the first paragraph refers exclusively to ‘export
credits’ and ‘credits’, in contrast to the second paragraph’s
reference to ‘export credit practices’. This supports the conclusion
that the second paragraph of item (k) concerns a broader range of ‘practices’
than export credits as such.”(644)
461. Following an analysis of the provisions
of the OECD Arrangement, the Panel on Canada — Aircraft (Article 21.5
— Brazil) concluded that at the time of the dispute, only export credit
practices in certain forms qualified for the “safe haven” under the
second paragraph of item (k). Specifically, the Panel held that
practices involving floating interest rates or support for export
credits with shorter maturity were not eligible for this exception:
“[T]he safe haven in the second paragraph of
item (k) at present is potentially available only to export credit
practices in the form of direct credits/financing, refinancing, and
interest rate support at fixed interest rates with repayment terms of
two years or more. In other words, any such practices involving floating
interest rates, as well as official support for export credits with
shorter maturity or in the forms of guarantees and insurance, because
none are subject to the Arrangement’s ‘interest rates provisions’,
most especially the CIRR but also the sector-specific minimum interest
rates in the Sector Understandings, would not be eligible for the safe
haven, as it simply would not be possible to judge their ‘conformity’
with the relevant interest rate provisions of the Arrangement, all of
which pertain exclusively to fixed rates.”(645)
462. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) held that based on “a reading which gives meaning to
all of the terms used, the second paragraph suggests that export credit
practices which are in conformity with the interest rates provisions of
the relevant international undertaking are export subsidies — and, as
such, would normally be prohibited under the provisions of Article 3 of
the SCM Agreement —, but that they are nevertheless not prohibited under
the SCM Agreement”.(646)
463. The Panel on Brazil — Aircraft (Article
21.5 — Canada II), in a finding upheld by the Appellate Body, considered
that if “the second paragraph of item (k) makes available an
exception, it must be possible to invoke it as an affirmative defence to
a claim of violation. (647)”(648) See also
paragraph 472 below.
(i) “in conformity” with “interest rates
provisions”
(i) “interest rate provisions”
464. In Brazil — Aircraft (Article 21.5
— Canada II), the Panel recalled that the only export credit practices
that are subject to the OECD Arrangement are those which take the form
of “official financing support”, i.e., “direct credits/financing,
refinancing and interest rate support”. Therefore, the Panel
considered whether PROEX III payments are “official financing support”.
In this regard, the Panel noted that the OECD Arrangement does not
define the term “interest rate support”, but merely states that “interest
rate support” is a form of official financing support. It concluded
that official interest rate support will normally involve government
payments to providers of export credits, and that for such payments to
amount to “support”, they need to be made with the “aim or effect
of securing net borrowing rates for the recipients of export credits
which are below those that they would have been without an official
financing support”:
“The Panel notes that the 1998 OECD
Arrangement does not define the term ‘interest rate support’. It
merely states that ‘interest rate support’ is a form of official
financing support. Since the 1998 OECD Arrangement does not give a
special meaning to the term ‘interest rate support’, we must read it
in accordance with its ordinary meaning in context.
We consider that, in its ordinary meaning, the
term ‘interest rate support’ relates broadly to official support for
one particular export credit term, namely the interest rate to be paid
in connection with export credits. Moreover, as a matter of relevant
context, it is clear from the 1998 OECD Arrangement that interest rate
support is distinct from direct credits/financing, refinancing, export
credit insurance and guarantees. From this it may be deduced that
official interest rate support will normally involve government payments
to providers of export credits. For such payments to amount to ‘support’,
we think they need to be made with the aim or effect of securing net
borrowing rates for the recipients of export credits which are lower
than they would have been in the absence of official financing support.”(649)
465. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) followed the interpretation of the Panel on Canada
— Aircraft (Article 21.5 — Brazil) (see paragraph 466 below) and concluded
that certain provisions of the OECD Arrangement explicitly pertain to
interest rates as such. The Panel observed that the programme under
consideration provided, inter alia, support for interest rates (“financing
costs”), involved payments by the Brazilian Government to commercial
providers of export credits, and was framed to lower the net interest
rates charged by commercial lenders so that they were compatible with
the interest rates in the international market. The Panel concluded that
the programme support constituted “interest rate support”, and was
therefore an export credit practice subject to the interest rates
provisions of the OECD Arrangement.(650)
(ii) “in conformity”
General
466. With respect to conformity with the
interest rate provisions of export credit practices under the OECD
Arrangement, the Panel on Canada — Aircraft (Article 21.5 — Brazil)
concluded that “full conformity with the ‘interest rates provisions’
— in respect of ‘export credit practices’ subject to the CIRR — must
be judged on the basis not only of full conformity with the CIRR but in
addition full adherence to the other rules of the [OECD] Arrangement
that operate to support or reinforce the minimum interest rate rule by
limiting the generosity of the terms of official financing support”.(651),-(652)
“Concept of conformity” under the OECD
Arrangement
467. The Panel on Canada — Aircraft (Article
21.5 — Brazil) considered that the text of the OECD Arrangement provides
the following guidance on how the term “conformity” should be
understood:
“In the first place, the Arrangement text
provides explicitly that derogations from provisions of the Arrangement,
and the matching of such derogations, do not ‘conform’ with the
provisions of the Arrangement. Thus, any transaction that involves
derogations or matching of derogations by definition cannot be in
conformity with the interest rate provisions of the Arrangement, as …
conformity with the interest rate provisions requires conformity not
just with the minimum interest rate rule but also with the other
provisions that support/reinforce that rule. As such, an otherwise
eligible transaction involving derogations or matching of derogations
could not qualify for the safe haven of the second paragraph of item
(k). On the other hand, the Arrangement explicitly defines permitted
exceptions and the matching of permitted exceptions, within the allowed
limits, to be in compliance, i.e., in conformity with the relevant
provisions of the Arrangement. Therefore, … making use of permitted
exceptions, within the specified limits, would not disqualify an
eligible transaction from the safe haven, so long as the transaction
conformed with the minimum interest rate and all of the other applicable
disciplines.”(653)
468. The Panel on Canada — Aircraft (Article
21.5 — Brazil) found that the Canadian Policy Guideline did not qualify
for the “safe haven” under the second paragraph of item (k) of the
Illustrative List. The Panel first held that it was “incumbent upon
Canada to provide an explanation not only of what in its view
constituted conformity with the interest rate provisions of the OECD
Arrangement, but also how the Policy Guideline ensured such conformity”.(654)
The Panel then turned to the Policy Guideline and found:
“[E]ven if the Policy Guideline contained
all of the details that Canada has provided in its arguments concerning
‘conformity’ with the ‘interest rates provisions’ of the Arrangement, we would find on substantive grounds that it would not
ensure that future Canada Account transactions would so conform. We
note, however, that in fact the Policy Guideline contains no details at
all, but simply indicates that transactions that ‘do not comply’
with ‘the OECD Arrangement’ will not be considered to be in the
national interest. Thus, we find that the Policy Guideline is
insufficient to accomplish what Canada says it will accomplish, namely
to ‘ensure that any future Canada Account financing transactions will
be in conformity with the interest rate provisions of the [OECD]
Arrangement and therefore the provisions referred to in the second
paragraph of item (k)’.
In particular, the Policy Guideline is both
generally worded and worded in the negative. In both of these aspects it
seems to fall considerably short of what might reasonably be considered
the minimum sufficient assurance which Canada wishes to provide.
Concerning the generality of the wording, as just noted, the Policy
Guideline simply refers to compliance with the OECD Arrangement. As has
been discussed in detail, however, general conformity with whichever
provisions of the Arrangement happen to apply to a given transaction
would not appear to be sufficient to qualify for the relatively narrow
safe haven in the second paragraph of item (k). Rather, only conformity
with the Arrangement’s interest rate provisions, which presupposes
that those provisions apply (i.e., that the practice in question is in
the form of official financing support at fixed interest rates), along
with conformity with the Arrangement’s other disciplines on financing
terms, would qualify a practice for the safe haven.”(655)
(j) Burden of proof
469. The Appellate Body Report on Brazil
— Aircraft (Article 21.5 — Canada) found that “Brazil’s argument under
item (k) constituted an alleged ‘affirmative defence’ for which
Brazil bore the burden of proof”.(656) Referring to its report on US
— Wool Shirts and Blouses, the Appellate Body confirmed that Brazil, as
the party asserting a defence, bore the burden of proof of proving that
the revised PROEX was justified under the first paragraph of item
(k).
(However, as noted in paragraph 443 above, the Appellate Body in Brazil
— Aircraft (Article 21.5 — Canada) did not make a finding on whether the
first paragraph of item (k) could in fact be used in an a contrario
manner as an affirmative defence.) The Appellate Body then set forth in
what manner Brazil could successfully prove that the revised subsidies
scheme was not “used to secure a material advantage in the field of
export credit terms”:
“To establish that subsidies under the
revised PROEX are not ‘used to secure a material advantage in the
field of export credit terms’, Brazil must prove either: that the net
interest rates under the revised PROEX are at or above the relevant CIRR,
the specific ‘market benchmark’ we identified in the original
dispute as an ‘appropriate’ basis for comparison; or, that an
alternative ‘market benchmark’, other than the CIRR, is appropriate,
and that the net interest rates under the revised PROEX are at or above
this alternative ‘market benchmark’.”(657)
470. The Panel on Canada — Aircraft (Article
21.5 — Brazil) did not state explicitly that Canada bore the burden of
proving that its measure qualified for the “safe haven” clause under
the second paragraph of item (k) of the Illustrative
List. However, the
Panel termed Canada’s invocation of the second paragraph of item (k) a
“defence to Brazil’s claim”.(658)
471. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) concluded that, while the programme as such allows the
Member to make payments in such a way that they do not secure a material
advantage in the field of export credit terms, payments under the
programme are not the payment by the Member of “all or part of the
costs incurred by exporters or financial institutions in obtaining
credits”. Therefore, the Panel considered that the Member failed to
demonstrate the required elements for its defence under the first
paragraph of item (k):
“[W]hile PROEX III, as such, allows Brazil
to make PROEX III payments in such a way that they do not secure a
material advantage in the field of export credit terms, PROEX III
payments are not the payment by Brazil of ‘all or part of the costs
incurred by exporters or financial institutions in obtaining credits’.
Brazil has, therefore, failed to demonstrate the required elements for
its defence under the first paragraph of item (k). We have further
concluded that, in any event, the first paragraph of item (k) cannot, as
a legal matter, be invoked as an affirmative defence.”(659)
(i) Second paragraph of item (k) as an
affirmative defence
472. In Brazil — Aircraft (Article 21.5
— Canada II), the Panel noted that the second paragraph of item (k)
provides for an “exception” from any prohibition on export
subsidies, such that it may be invoked as an affirmative defence to a
claim of violation:
“On a reading which gives meaning to all of
the terms used, the second paragraph suggests that export credit
practices which are in conformity with the interest rates provisions of
the relevant international undertaking are export subsidies — and, as
such, would normally be prohibited under the provisions of Article 3 of
the SCM Agreement —, but that they are nevertheless not prohibited under
the SCM Agreement.
This interpretation leads us to the conclusion
that the second paragraph of item (k) provides for an exception from any
prohibition on export subsidies laid down elsewhere in the SCM
Agreement. The fact that the second paragraph does not, itself, impose
obligations supports that conclusion.
Consistently with our view that the second
paragraph of item (k) makes available an exception, it must be possible
to invoke it as an affirmative defence to a claim of violation. As is
clear from relevant WTO jurisprudence, the burden of establishing an
affirmative defence rests with the party raising it.(660)”(661)
(ii) “Matching of a derogation”
General
473. The Panel on Canada — Aircraft (Article
21.5 — Brazil) considered that:
“Members’ conformity with GATT/WTO
rules [should not be] defined by the behaviour of non-Members”. The
Panel considered that this concern would arise even if the inclusion of
the matching of a derogation in the item (k) safe haven would mean that
matching Members were acting in accordance with their WTO obligations.
This is because the inclusion of the matching of a derogation in the
item (k) safe haven would not establish any objective benchmark against
which to determine whether or not a Member is in accordance with its WTO
obligations. In any given case, the benchmark would be set by reference
to the terms and conditions of the non-conforming offer. To the extent
that the non-conforming offer were made by a non-WTO Member, the
benchmark for determining whether or not a matching Member acts in
accordance with its WTO obligations would therefore be the
non-conforming terms and conditions offered by the non-Member. Thus, the
fact that the matching of a derogation is included in the second
paragraph of item (k) would not remove the potential for a “Member’s
conformity with GATT/WTO rules [to be] defined by the behaviour of
non-Members”.(662)
474. The Panel on Canada — Aircraft Credits
and Guarantees concluded that, as a matter of law, the matching of a
derogation is not “in conformity with” the interest rates provisions
of the OECD Arrangement and therefore cannot fall within the scope of
the item (k) safe haven.(663) The Panel held:
“Indeed, if one were to accept that the
matching of a derogation could fall within the item (k) safe haven, one
would effectively be accepting that a Member could be ‘in conformity
with’ the ‘interest rates provisions’ of the OECD Arrangement even
though that Member failed to respect the CIRR (or a permitted
exception). In our view, such an interpretation would be unjustified.”(664)
475. For the Panel on Canada
— Aircraft
Credits and Guarantees, the fact that the OECD Arrangement allows
matching of derogations, or the fact that participants’ view matching
of derogations as a means of disciplining export credits, does not
necessarily mean that the SCM Agreement should allow matching of
derogations. The Panel considered that unlike the OECD Arrangement, the
SCM Agreement is not an “informal” “gentleman’s agreement”.
The SCM Agreement therefore does not need to allow recourse to the
matching of derogations in order to instil discipline. The SCM Agreement
is a binding instrument, and is therefore enforceable through the WTO
dispute settlement mechanism.(665)
476. The Panel on Brazil — Aircraft (Article
21.5 — Canada II) recalled that practices that follow “permitted
exceptions” under the OECD Arrangement are “in conformity” with
the interest rates provisions, whereas practices pursuant to “derogations”
are not. The Panel on Brazil — Aircraft (Article 21.5 — Canada II)
stated that “to accept, for purposes of the SCM Agreement, that even
non-conforming departures from the provisions of the OECD Arrangement
were covered by the safe haven, would, in effect, remove any disciplines
on official financing support for export credits”. For the Panel:
“[T]he fact that the OECD Arrangement allows
matching of derogations does not logically imply that it should also be
allowed under the SCM Agreement. Indeed, the OECD Arrangement and the
SCM Agreement are very different … In those circumstances, matching
may serve an important deterrent and enforcement function and that
rationale for matching does not apply to the SCM Agreement because the
SCM Agreement is a binding instrument, and it is enforceable through the
WTO dispute settlement mechanism.”(666)
Burden of proof in the framework of a
derogation
477. The Panel on Canada — Aircraft Credits
and Guarantees considered that the transaction under consideration could
not be justified under the safe haven and that consequently such
financing is a prohibited export subsidy, contrary to Article 3.1(a) of
the SCM Agreement because Canada has failed to establish that the
matching of a derogation could, as a matter of law, be “in conformity
with” the “interest rates provisions” of the OECD Arrangement.(667)
For the Panel, the burden is on the Member affirming that the matching
of a derogation from the OECD Arrangement could, as a “matter of law”,
be “in conformity with” the “interest rates provisions” of the
OECD Arrangement, pursuant to the safe haven. Only if the Member
demonstrates this would the Panel then examine whether it had, in fact,
complied with the “matching” requirement of the OECD Arrangement:
“In order to avail itself of the item (k)
safe haven, Canada must first establish that the matching of a
derogation could, as a matter of law, be ‘in conformity with’ the
‘interest rates provisions’ of the OECD Arrangement. Only if Canada
establishes that this is possible as a matter of law, will we need to
consider whether Canada has met its burden of establishing that the
Canada Account financing to Air Wisconsin is matching according to the
provisions of the OECD Arrangement. Similarly, only if Canada
establishes that matching a derogation could, as a matter of law, fall
within the item (k) safe haven, will we need to address Brazil’s
arguments regarding Canada’s alleged failure to comply with the
procedural requirements of Articles 47(a) and 53 of the OECD
Arrangement.”(668)
(iii) Mandatory/discretionary distinction in
the context of an affirmative defence under item (k) second paragraph
478. In Brazil — Aircraft (Article 21.5
— Canada II), the Panel recalled that the programme had been challenged
“as such”, and that the mandatory/discretionary distinction was
therefore relevant. Accordingly, the Panel considered whether the Member
was required to apply the programme under consideration “in a manner
that gives rise to a prohibited export subsidy”. In doing so, the
Panel first dealt with the preliminary issue of whether the distinction
between mandatory and discretionary legislation is applicable in the
context of an affirmative defence under the second paragraph of item
(k):(669)
“[T]he distinction between mandatory and
discretionary legislation is applicable in the context of the second
paragraph of item (k). It is of course correct that, in the present
context, we are concerned not with conformity with a WTO obligation, but
with conformity with conditions attached to a WTO exception. This fact
alone does not, however, render the GATT/WTO distinction between
mandatory and discretionary legislation inapplicable or inappropriate.
In our understanding, the rationale
underpinning the traditional GATT/WTO distinction between mandatory and
discretionary legislation is that, when the executive branch of a Member
is not required to act inconsistently with requirements of WTO law, it
should be entitled to a presumption of good faith compliance with those
requirements. We consider that that rationale is no less valid in the
context of WTO exceptions than it is in the context of WTO obligations.
We have stated above that the Member invoking
an exception as an affirmative defence has the burden of establishing
it. In our view, the allocation of the burden of proof is a procedural
issue which is distinct from the substantive standard to be applied in
assessing the conformity of legislation with a particular provision of
the WTO Agreement.
Accordingly, the task before us is to examine
whether, under PROEX III, Brazil is required to act in a manner that is
not in conformity with the interest rates provisions of the 1998 OECD
Arrangement or, expressed otherwise, whether PROEX III allows compliance
with the interest rates provisions.”(670)
479. In Canada — Aircraft Credits and
Guarantees, the Panel found that the fact that export credit agencies
provide export subsidies does not answer the question of mandatory
subsidization and that “the existence of item (k) does not eliminate
the requirement for a complaining party to prove the mandatory nature of
the programme in order to prevail on an ‘as such’ claim”.(671)
480. As regards the relevance of the
mandatory/ discretionary distinction when challenging subsidy programmes
“as such,” see paragraphs 56-64 above.
(k) Relationship with other Articles
481. With respect to the relationship with
Article 1.1(b), see paragraph 76 above.
XXXVI. Annex II
back to top
A. Text of Annex II
Annex II: Guidelines on Consumption of Inputs In
The Production Process(61)
(footnote original) 61 Inputs consumed in the
production process are inputs physically incorporated, energy, fuels and
oil used in the production process and catalysts which are consumed in
the course of their use to obtain the exported product.
I
1. Indirect tax rebate schemes can allow for
exemption, remission or deferral of prior-stage cumulative indirect
taxes levied on inputs that are consumed in the production of the
exported product (making normal allowance for waste). Similarly,
drawback schemes can allow for the remission or drawback of import
charges levied on inputs that are consumed in the production of the
exported product (making normal allowance for waste).
2. The Illustrative List of Export Subsidies
in Annex I of this Agreement makes reference to the term “inputs that
are consumed in the production of the exported product” in paragraphs
(h) and (i). Pursuant to paragraph
(h), indirect tax rebate schemes can
constitute an export subsidy to the extent that they result in
exemption, remission or deferral of prior-stage cumulative indirect
taxes in excess of the amount of such taxes actually levied on inputs
that are consumed in the production of the exported product. Pursuant to
paragraph (i), drawback schemes can constitute an export subsidy to the
extent that they result in a remission or drawback of import charges in
excess of those actually levied on inputs that are consumed in the
production of the exported product. Both paragraphs stipulate that
normal allowance for waste must be made in findings regarding
consumption of inputs in the production of the exported product.
Paragraph (i) also provides for substitution, where appropriate.
II
In examining whether inputs are consumed in
the production of the exported product, as part of a countervailing duty
investigation pursuant to this Agreement, investigating authorities
should proceed on the following basis:
1. Where it is alleged that an indirect tax
rebate scheme, or a drawback scheme, conveys a subsidy by reason of
over-rebate or excess drawback of indirect taxes or import charges on
inputs consumed in the production of the exported product, the
investigating authorities should first determine whether the government
of the exporting Member has in place and applies a system or procedure
to confirm which inputs are consumed in the production of the exported
product and in what amounts. Where such a system or procedure is
determined to be applied, the investigating authorities should then
examine the system or procedure to see whether it is reasonable,
effective for the purpose intended, and based on generally accepted
commercial practices in the country of export. The investigating
authorities may deem it necessary to carry out, in accordance with
paragraph 6 of Article 12, certain practical tests in order to verify
information or to satisfy themselves that the system or procedure is
being effectively applied.
2. Where there is no such system or procedure,
where it is not reasonable, or where it is instituted and considered
reasonable but is found not to be applied or not to be applied
effectively, a further examination by the exporting Member based on the
actual inputs involved would need to be carried out in the context of
determining whether an excess payment occurred. If the investigating
authorities deemed it necessary, a further examination would be carried
out in accordance with paragraph 1.
3. Investigating authorities should treat
inputs as physically incorporated if such inputs are used in the
production process and are physically present in the product exported.
The Members note that an input need not be present in the final product
in the same form in which it entered the production process.
4. In determining the amount of a particular
input that is consumed in the production of the exported product, a “normal
allowance for waste” should be taken into account, and such waste
should be treated as consumed in the production of the exported product.
The term “waste” refers to that portion of a given input which does
not serve an independent function in the production process, is not
consumed in the production of the exported product (for reasons such as
inefficiencies) and is not recovered, used or sold by the same
manufacturer.
5. The investigating authority’s
determination of whether the claimed allowance for waste is “normal”
should take into account the production process, the average experience
of the industry in the country of export, and other technical factors,
as appropriate. The investigating authority should bear in mind that an
important question is whether the authorities in the exporting Member
have reasonably calculated the amount of waste, when such an amount is
intended to be included in the tax or duty rebate or remission.
B. Interpretation and Application of Annex II
1. Footnote 61
482. On 15 December 2000, the General Council
adopted a decision that mandates the SCM Committee to examine as an
important part of its work the issues of aggregate and generalized rates
of remission of import duties and the definition of “inputs consumed
in the production process”, taking into account the particular needs
of developing country Members.(672)
483. According to the SCM Committee Chairman’s
Reports to the General Council, reflecting the work undertaken pursuant
to this mandate in relation to the issues of aggregate and generalized
rates of remission of import duties, Members have engaged constructively
with proponents including through sharing information on various Members’
domestic duty drawback procedures. This said, for a number of Members,
the system proposed represented an unworkable framework, due to its
technical complexity as well as the general complexity of the issue of
duty drawback, and their concerns over the accuracy and transparency of
the proposed system.(673)
484. The said Reports indicate, in relation to
the definition of inputs consumed in the production process, that
divergent views remained and it is SCM Chairman’s view that consensus
could not be reached in the Committee, not because of lack of political
will but because of an enormous amount of technical problems which could
not be resolved in that process.(674)
XXXVII. Annex III
back to top
A. Text of Annex III
Annex III: Guidelines In The Determination of
Substitution Drawback Systems As Export Subsidies
I
Drawback systems can allow for the refund or
drawback of import charges on inputs which are consumed in the
production process of another product and where the export of this
latter product contains domestic inputs having the same quality and
characteristics as those substituted for the imported inputs. Pursuant
to paragraph (i) of the Illustrative List of Export Subsidies in Annex
I, substitution drawback systems can constitute an export subsidy to the
extent that they result in an excess drawback of the import charges
levied initially on the imported inputs for which drawback is being
claimed.
II
In examining any substitution drawback system
as part of a countervailing duty investigation pursuant to this
Agreement, investigating authorities should proceed on the following
basis:
1. Paragraph
(i) of the Illustrative List
stipulates that home market inputs may be substituted for imported
inputs in the production of a product for export provided such inputs
are equal in quantity to, and have the same quality and characteristics
as, the imported inputs being substituted. The existence of a
verification system or procedure is important because it enables the
government of the exporting Member to ensure and demonstrate that the
quantity of inputs for which drawback is claimed does not exceed the
quantity of similar products exported, in whatever form, and that there
is no drawback of import charges in excess of those originally levied on
the imported inputs in question.
2. Where it is alleged that a substitution
drawback system conveys a subsidy, the investigating authorities should
first proceed to determine whether the government of the exporting
Member has in place and applies a verification system or procedure.
Where such a system or procedure is determined to be applied, the
investigating authorities should then examine the verification
procedures to see whether they are reasonable, effective for the purpose
intended, and based on generally accepted commercial practices in the
country of export. To the extent that the procedures are determined to
meet this test and are effectively applied, no subsidy should be
presumed to exist. It may be deemed necessary by the investigating
authorities to carry out, in accordance with paragraph 6 of Article
12,
certain practical tests in order to verify information or to satisfy
themselves that the verification procedures are being effectively
applied.
3. Where there are no verification procedures,
where they are not reasonable, or where such procedures are instituted
and considered reasonable but are found not to be actually applied or
not applied effectively, there may be a subsidy. In such cases a further
examination by the exporting Member based on the actual transactions
involved would need to be carried out to determine whether an excess
payment occurred. If the investigating authorities deemed it necessary,
a further examination would be carried out in accordance with paragraph
2.
4. The existence of a substitution drawback
provision under which exporters are allowed to select particular import
shipments on which drawback is claimed should not of itself be
considered to convey a subsidy.
5. An excess drawback of import charges in the
sense of paragraph (i) would be deemed to exist where governments paid
interest on any monies refunded under their drawback schemes, to the
extent of the interest actually paid or payable.
B. Interpretation and Application of Annex III
1. Relationship with other Articles
(a) Article 3.1(a)
485. With respect to export subsidies of
Article 3.1(a), see paragraphs 88-128 above.
(b) Article 27.2(a)
486. With respect to the exceptions for
developing and least-developed countries in Article
27.2(a), see
paragraphs 338-345 above.
XXXVIII. Annex IV
back to top
A. Text of Annex IV
Annex IV: Calculation of The Total AD Valorem
Subsidization (Paragraph 1(a) of Article 6)(62)
(footnote original) 62 In cases where the
existence of serious prejudice has to be demonstrated.
1. Any calculation of the amount of a subsidy
for the purpose of paragraph 1(a) of Article 6 shall be done in terms of
the cost to the granting government.
2. Except as provided in paragraphs 3 through
5, in determining whether the overall rate of subsidization exceeds 5
per cent of the value of the product, the value of the product shall be
calculated as the total value of the recipient firm’s(63) sales in the
most recent 12-month period, for which sales data is available,
preceding the period in which the subsidy is granted.(64)
(footnote original) 63 The recipient firm is
a firm in the territory of the subsidizing Member.
(footnote original) 64 In the case of
tax-related subsidies the value of the product shall be calculated as
the total value of the recipient firm’s sales in the fiscal year in
which the tax-related measure was earned.
3. Where the subsidy is tied to the production
or sale of a given product, the value of the product shall be calculated
as the total value of the recipient firm’s sales of that product in
the most recent 12-month period, for which sales data is available,
preceding the period in which the subsidy is granted.
4. Where the recipient firm is in a start-up
situation, serious prejudice shall be deemed to exist if the overall
rate of subsidization exceeds 15 per cent of the total funds invested.
For purposes of this paragraph, a start-up period will not extend beyond
the first year of production.(65)
(footnote original) 65 Start-up situations
include instances where financial commitments for product development or
construction of facilities to manufacture products benefiting from the
subsidy have been made, even though production has not begun.
5. Where the recipient firm is located in an
inflationary economy country, the value of the product shall be
calculated as the recipient firm’s total sales (or sales of the
relevant product, if the subsidy is tied) in the preceding calendar year
indexed by the rate of inflation experienced in the 12 months preceding
the month in which the subsidy is to be given.
6. In determining the overall rate of
subsidization in a given year, subsidies given under different
programmes and by different authorities in the territory of a Member
shall be aggregated.
7. Subsidies granted prior to the date of
entry into force of the WTO Agreement, the benefits of which are
allocated to future production, shall be included in the overall rate of
subsidization.
8. Subsidies which are non-actionable under
relevant provisions of this Agreement shall not be included in the
calculation of the amount of a subsidy for the purpose of paragraph 1(a)
of Article 6.
B. Interpretation and Application of Annex IV
1. Expiry
487. Article 6.1(a) of the SCM
Agreement,
which refers to Annex IV in footnote 14, has lapsed pursuant to
Article 31. See paragraphs 198 and
391 above. See also information under the
Informal Group of Experts under Article 24 in
paragraph 326 above.
2. Relationship with other Articles
488. With respect to the relationship with
Article 1.1(b), see paragraph 78 above.
XXXIX. Annex V
back to top
A. Text of Annex V
Annex V: Procedures For Developing Information
Concerning Serious Prejudice
1. Every Member shall cooperate in the
development of evidence to be examined by a Panel in procedures under
paragraphs 4 through 6 of Article
7. The parties to the dispute and any
third-country Member concerned shall notify to the DSB, as soon as the
provisions of paragraph 4 of Article 7 have been invoked, the
organization responsible for administration of this provision within its
territory and the procedures to be used to comply with requests for
information.
2. In cases where matters are referred to the
DSB under paragraph 4 of Article
7, the DSB shall, upon request,
initiate the procedure to obtain such information from the government of
the subsidizing Member as necessary to establish the existence and
amount of subsidization, the value of total sales of the subsidized
firms, as well as information necessary to analyse the adverse effects
caused by the subsidized product.(66) This process may include, where
appropriate, presentation of questions to the government of the
subsidizing Member and of the complaining Member to collect information,
as well as to clarify and obtain elaboration of information available to
the parties to a dispute through the notification procedures set forth
in Part VII.(67)
(footnote original) 66 In cases where the
existence of serious prejudice has to be demonstrated.
(footnote original) 67 The
information-gathering process by the DSB shall take into account the
need to protect information which is by nature confidential or which is
provided on a confidential basis by any Member involved in this process.
3. In the case of effects in third-country
markets, a party to a dispute may collect information, including through
the use of questions to the government of the third-country Member,
necessary to analyse adverse effects, which is not otherwise reasonably
available from the complaining Member or the subsidizing Member. This
requirement should be administered in such a way as not to impose an
unreasonable burden on the third-country Member. In particular, such a
Member is not expected to make a market or price analysis specially for
that purpose. The information to be supplied is that which is already
available or can be readily obtained by this Member (e.g. most recent
statistics which have already been gathered by relevant statistical
services but which have not yet been published, customs data concerning
imports and declared values of the products concerned, etc.). However,
if a party to a dispute undertakes a detailed market analysis at its own
expense, the task of the person or firm conducting such an analysis
shall be facilitated by the authorities of the third-country Member and
such a person or firm shall be given access to all information which is
not normally maintained confidential by the government.
4. The DSB shall designate a representative to
serve the function of facilitating the information-gathering process.
The sole purpose of the representative shall be to ensure the timely
development of the information necessary to facilitate expeditious
subsequent multilateral review of the dispute. In particular, the
representative may suggest ways to most efficiently solicit necessary
information as well as encourage the cooperation of the parties.
5. The information-gathering process outlined
in paragraphs 2 through 4 shall be completed within 60 days of the date
on which the matter has been referred to the DSB under paragraph 4 of
Article 7. The information obtained during this process shall be
submitted to the panel established by the DSB in accordance with the
provisions of Part X. This information should include, inter alia, data
concerning the amount of the subsidy in question (and, where
appropriate, the value of total sales of the subsidized firms), prices
of the subsidized product, prices of the non-subsidized product, prices
of other suppliers to the market, changes in the supply of the
subsidized product to the market in question and changes in market
shares. It should also include rebuttal evidence, as well as such
supplemental information as the panel deems relevant in the course of
reaching its conclusions.
6. If the subsidizing and/or third-country
Member fail to cooperate in the information-gathering process, the
complaining Member will present its case of serious prejudice, based on
evidence available to it, together with facts and circumstances of the
non-cooperation of the subsidizing and/or third-country Member. Where
information is unavailable due to non-cooperation by the subsidizing
and/or third-country Member, the panel may complete the record as
necessary relying on best information otherwise available.
7. In making its determination, the panel
should draw adverse inferences from instances of non-cooperation by any
party involved in the information-gathering process.
8. In making a determination to use either
best information available or adverse inferences, the panel shall
consider the advice of the DSB representative nominated under paragraph
4 as to the reasonableness of any requests for information and the
efforts made by parties to comply with these requests in a cooperative
and timely manner.
9. Nothing in the information-gathering
process shall limit the ability of the panel to seek such additional
information it deems essential to a proper resolution to the dispute,
and which was not adequately sought or developed during that process.
However, ordinarily the panel should not request additional information
to complete the record where the information would support a particular
party’s position and the absence of that information in the record is
the result of unreasonable non-cooperation by that party in the
information-gathering process.
B. Interpretation and Application of Annex V
1. Relationship with other WTO Agreements
489. With respect to the drawing of adverse inferences, see also
Section XI.B.3(d) of the Chapter on the DSU.
XL. Annex VI
back to top
A. Text of Annex VI
Annex VI: Procedures For on The Spot
Investigations Pursuant To Paragraph 6 of Article 12
1. Upon initiation of an investigation, the
authorities of the exporting Member and the firms known to be concerned
should be informed of the intention to carry out on-the-spot
investigations.
2. If in exceptional circumstances it is
intended to include non-governmental experts in the investigating team,
the firms and the authorities of the exporting Member should be so
informed. Such non-governmental experts should be subject to effective
sanctions for breach of confidentiality requirements.
3. It should be standard practice to obtain
explicit agreement of the firms concerned in the exporting Member before
the visit is finally scheduled.
4. As soon as the agreement of the firms
concerned has been obtained, the investigating authorities should notify
the authorities of the exporting Member of the names and addresses of
the firms to be visited and the dates agreed.
5. Sufficient advance notice should be given
to the firms in question before the visit is made.
6. Visits to explain the questionnaire should
only be made at the request of an exporting firm. In case of such a
request the investigating authorities may place themselves at the
disposal of the firm; such a visit may only be made if (a) the
authorities of the importing Member notify the representatives of the
government of the Member in question and (b) the latter do not object to
the visit.
7. As the main purpose of the on-the-spot
investigation is to verify information provided or to obtain further
details, it should be carried out after the response to the
questionnaire has been received unless the firm agrees to the contrary
and the government of the exporting Member is informed by the
investigating authorities of the anticipated visit and does not object
to it; further, it should be standard practice prior to the visit to
advise the firms concerned of the general nature of the information to
be verified and of any further information which needs to be provided,
though this should not preclude requests to be made on the spot for
further details to be provided in the light of information obtained.
8. Enquiries or questions put by the
authorities or firms of the exporting Members and essential to a
successful on-the-spot investigation should, whenever possible, be
answered before the visit is made.
B. Interpretation and Application of Annex VI
No jurisprudence or decision of a competent
WTO body.
XLI. Annex VII
back to top
A. Text of Annex VII
Annex VII: Developing Country Members Referred
To In Paragraph 2(a) of Article 27
The developing country Members not subject to
the provisions of paragraph 1(a) of Article 3 under the terms of
paragraph 2(a) of Article 27 are:
(a) Least-developed countries designated as
such by the United Nations which are Members of the WTO.
(b) Each of the following developing countries
which are Members of the WTO shall be subject to the provisions which
are applicable to other developing country Members according to
paragraph 2(b) of Article 27 when GNP per capita has reached $1,000 per
annum:(68) Bolivia, Cameroon, Congo, Côte d’Ivoire, Dominican Republic,
Egypt, Ghana, Guatemala, Guyana, India, Indonesia, Kenya, Morocco,
Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka and
Zimbabwe.
(footnote original) 68 The inclusion of
developing country Members in the list in paragraph (b) is based on the
most recent data from the World Bank on GNP per capita.
B. Interpretation and Application of Annex VII
1. Annex VII(b)
(a) Rectification to include Honduras
490. On 15 December 2000, the General Council
adopted a decision to include Honduras in Annex VII(b):
“Taking into account the unique situation of
Honduras as the only original Member of the WTO with a GNP per capita of
less than US $1,000 that was not included in Annex
VII(b) to the
Agreement on Subsidies and Countervailing Measures (SCM Agreement),
Members call upon the Director-General to take appropriate steps, in
accordance with WTO usual practice, to rectify the omission of Honduras
from the list of Annex VII(b) countries.”(675)
(b) Graduation methodology
491. With regard to the graduation methodology
from Annex VII(b), paragraph 10.1 of the Doha Ministerial Decision on
Implementation-Related Issues and Concerns provides for a modification
of a consecutive three-year period where the US$ GNP per capita
requirement must be fulfilled accordingly:
“Agree[d] that Annex VII(b) to the Agreement
on Subsidies and Countervailing Measures includes the Members that are
listed therein until their GNP per capita reaches US $1,000 in constant
1990 dollars for three consecutive years. This decision will enter into
effect upon the adoption by the Committee on Subsidies and
Countervailing Measures of an appropriate methodology for calculating
constant 1990 dollars. If, however, the Committee on Subsidies and
Countervailing Measures does not reach a consensus agreement on an
appropriate methodology by 1 January 2003, the methodology proposed by
the Chairman of the Committee set forth in G/SCM/38, Appendix 2 shall be
applied. A Member shall not leave Annex VII(b) so long as its GNP per
capita in current dollars has not reached US $1,000 based upon the most
recent data from the World Bank.”(676)
492. As of 1 January 2003, because no
alternative methodologies were proposed, the methodology set out in
Annex 2 of G/SCM/38 applies.
493. In 2002, four Members listed in
Annex
VII(b) (677) reserved rights, as provided for in G/SCM/39, to seek
extensions of the transition period for the exemption from the
prohibition on export subsidies in Article
3.1(a), in the event that
they graduate from Annex VII during the period in which other Members
have extensions in effect pursuant to G/SCM/39. See “Extension of
Article 27.4 transition period” in paragraph 492 above.
494. As foreseen in
paragraph 10.1 of the
Doha
Ministerial Decision on Implementation-Related Issues and Concerns, and
in application of the methodology in G/SCM/38, the Secretariat has
informed the Committee of updated calculations reflecting: (i) GNI per
capita in constant 1990 dollars covering the three most recent years for
which data are available; and (ii) GNI per capita in current dollars for
the years 2001 and 2002 (see documents G/SCM/110 and /Add.1). In the
most recent note, the Secretariat indicated that Annex VII(b) to the SCM
Agreement includes the following Members that are listed therein until
their GNP per capita reaches US $1,000 in constant 1990 dollars for
three consecutive years: Bolivia, Cameroon, Congo, Côte d’Ivoire,
Egypt, Ghana, Guyana, Honduras, India, Indonesia, Kenya, Nicaragua,
Nigeria, Pakistan, Philippines, Senegal, Sri Lanka and Zimbabwe.
(c) Re-inclusion of Member in Annex VII(b)
495. With regard to re-inclusion in
Annex
VII(b), paragraph 10.4 of the Doha Ministerial Decision on
Implementation-Related Issues and Concerns provides that “if a Member
has been excluded from the list in paragraph (b) of Annex VII to the
Agreement on Subsidies and Countervailing Measures, it shall be
re-included in it when its GNP per capita falls back below US $1,000”.(678)
XLII. Other Issues(679) back to top
A. Object and Purpose of the SCM Agreement
496. In Brazil — Aircraft, the Panel
considered that the object and purpose of the SCM Agreement is to impose
multilateral disciplines on subsidies which distort international trade:
“In our view, the object and purpose of the
SCM Agreement is to impose multilateral disciplines on subsidies which
distort international trade. It is for this reason that the SCM
Agreement prohibits two categories of subsidies — subsidies contingent
upon exportation and upon the use of domestic over imported goods — that
are specifically designed to affect trade.”(680)
497. In Canada — Aircraft, the Panel stated
that “the object and purpose of the SCM Agreement could more
appropriately be summarized as the establishment of multilateral
disciplines ‘on the premise that some forms of government intervention
distort international trade, [or] have the potential to distort
[international trade]’”.(681)
498. In US — Export
Restraints, the Panel
indicated its agreement with the Panels on Brazil — Aircraft and
Canada — Aircraft with regard to their statements on the object of the
SCM
Agreement (see paragraphs 496-497 above).(682) The Panel concluded,
however, that not every government action or intervention is to be
considered as a subsidy that may distort trade and that, accordingly,
the object and purpose of the SCM Agreement can only be in respect of
‘subsidies’ as defined in the Agreement:
“It does not follow from those statements,
however, that every government intervention that might in economic
theory be deemed a subsidy with the potential to distort trade is a
subsidy within the meaning of the SCM Agreement. Such an approach would
mean that the ‘financial contribution’ requirement would effectively
be replaced by a requirement that the government action in question be
commonly understood to be a subsidy that distorts trade.
[W]hile the object and purpose of the
Agreement clearly is to discipline subsidies that distort trade, this
object and purpose can only be in respect of ‘subsidies’ as defined
in the Agreement. This definition, which incorporates the notions of ‘financial
contribution’, ‘benefit’, and ‘specificity’, was drafted with
the express purpose of ensuring that not every government intervention
in the market would fall within the coverage of the Agreement.”(683)
499. In US — Carbon Steel, the Appellate Body
agreed with the Panel that the objectives and purposes of the SCM
Agreement include “the establishment of a framework of rights and
obligations relating to countervailing duties, and the creation of a set
of rules which WTO Members must respect in the use of such duties”.(684)
The Appellate Body stated:
“[W]e turn to the object and purpose of the
SCM Agreement. We note, first, that the Agreement contains no preamble
to guide us in the task of ascertaining its object and purpose. In
Brazil — Desiccated Coconut, we observed that the ‘SCM Agreement
contains a set of rights and obligations that go well beyond merely
applying and interpreting Articles
VI, XVI and
XXIII of the GATT
1947.’(685)
The SCM Agreement defines the concept of ‘subsidy’, as well as the
conditions under which Members may not employ subsidies. It establishes
remedies when Members employ prohibited subsidies, and sets out
additional remedies available to Members whose trading interests are
harmed by another Member’s subsidization practices. Part V of the SCM
Agreement deals with one such remedy, permitting Members to levy
countervailing duties on imported products to offset the benefits of
specific subsidies bestowed on the manufacture, production or export of
those goods. However, Part V also conditions the right to apply such
duties on the demonstrated existence of three substantive conditions
(subsidization, injury, and a causal link between the two) and on
compliance with its procedural and substantive rules, notably the
requirement that the countervailing duty cannot exceed the amount of the
subsidy. Taken as a whole, the main object and purpose of the SCM
Agreement is to increase and improve GATT disciplines relating to the
use of both subsidies and countervailing measures.
We thus believe that the Panel properly
identified, as among the objectives of the SCM Agreement, the
establishment of a framework of rights and obligations relating to
countervailing duties,(686) and the creation of a set of rules which WTO
Members must respect in the use of such duties.(687)
Part V of the
Agreement is aimed at striking a balance between the right to impose
countervailing duties to offset subsidization that is causing injury,
and the obligations that Members must respect in order to do so.”(688)
500. In the same vein, the Panel on
US — FSC
(Article 21.5 — EC) concluded that the United States’ argument that a
government could choose to bestow financial contributions in the form of
fiscal incentives by, for example, manipulating the definition of the
tax base to accommodate “exemptions” so that there would not be a
foregoing of revenue “otherwise due”, would have the effect of
reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to “redundancy
and inutility” and “[a]s such, it is inherently contradictory to
what may be viewed as the object and purpose of the SCM Agreement in
terms of disciplining trade-distorting subsidies in a way that provides
legally binding security of expectations to Members”.(689) The Panel
found that:
“In this regard, it is evident that the
interpretation advanced by the United States would be irreconcilable
with that object and purpose, given that it would offer governments
‘carte-blanche’ to evade any effective disciplines, thereby creating
fundamental uncertainty and unpredictability. In short, such an approach
would eviscerate the subsidies disciplines in the SCM Agreement.”(690)
501. In US — Softwood Lumber IV the Appellate
Body, upholding the Panel’s finding, rejected Canada’s
interpretation of the definition of “goods” as it excluded standing
timber from the term, on the ground that such a narrow reading of
Article 1.1(a)(1)(iii) would undermine the object and purpose of the SCM
Agreement. The Appellate Body opined:
“[T]o accept Canada’s interpretation of
the term ‘goods’ would, in our view, undermine the object and
purpose of the SCM Agreement, which is to strengthen and improve GATT
disciplines relating to the use of both subsidies and countervailing
measures, while recognizing, at the same time, the right of Members to
impose such measures under certain conditions. It is in furtherance of
this object and purpose that Article 1.1(a)(1)(iii) recognizes that
subsidies may be conferred, not only through monetary transfers, but
also by the provision of non-monetary inputs. Thus, to interpret the
term ‘goods’ in Article 1.1(a)(1)(iii) narrowly, as Canada would
have us do, would permit the circumvention of subsidy disciplines in
cases of financial contributions granted in a form other than money,
such as through the provision of standing timber for the sole purpose of
severing it from land and processing it.”(691)
Footnotes:
569. Panel Report on Indonesia —
Autos, paras. 14.33 and 14.36. back to text
570. Panel Report on Indonesia — Autos, paras. 14.39 and
14.56. back to text
571. Panel Report on Indonesia — Autos, para. 14.97. back to text
572. Panel Report on Indonesia — Autos, para. 14.98. back to text
573. Panel Report on Indonesia — Autos, paras. 14.98-14.99.
back to text
574. Panel Report on Brazil — Desiccated Coconut, para.
227. back to text
575. Panel Report on Brazil — Desiccated Coconut, para.
227. back to text
576. Appellate Body Report on Brazil — Desiccated Coconut,
p. 14. back to text
577. Appellate Body Report on Brazil — Desiccated Coconut,
p. 15. back to text
578. Appellate Body Report on Brazil — Desiccated Coconut,
p. 16. back to text
579. Panel Report on Brazil — Desiccated Coconut, para.
246; Appellate Body Report on Brazil — Desiccated Coconut, p.
17. back to text
580. Appellate Body Report on Brazil — Desiccated Coconut,
pp. 16 and 18. back to text
581. Panel Report on Indonesia — Autos, para. 14.50. back to text
582. Panel Report on Indonesia — Autos, paras. 14.51-14.52
and 14.55-14.56. back to text
583. For instance, the following cases have made a reference to
Article 3.8 of the DSU: Panel Report on Brazil — Aircraft, para.
8.3; Panel Report on Indonesia — Autos, para. 15.2; Panel
Report on Canada — Aircraft, para. 10.2; Panel Report on Canada
— Dairy, para. 8.2; Panel Report on US — FSC, para. 8.2;
Panel Report on Australia — Automotive Leather II, para. 10.2;
Panel Report on US — Lead and Bismuth II, para. 7.2; Panel
Report on Canada — Autos, para. 11.2; Panel Report on Canada
— Aircraft Credits and Guarantees, para. 8.2; Panel Report on US
— Softwood Lumber III, para. 8.4. Panel Report on US — Export
Restraints; Panel Report on US — Carbon Steel; and Panel
Report on US — Section 129(c)(1) URAA do not make any reference
to Article 3.8 of the DSU. back to text
584. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.170. back to text
585. Appellate Body Report on Canada — Dairy (Article 21.5 —
New Zealand and US), para. 125. back to text
586. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.171. back to text
587. Appellate Body Report on US — Lead and Bismuth II,
para. 48. back to text
588. Appellate Body Report on Canada — Dairy (Article 21.5 —
New Zealand and US II), footnote 113. back to text
589. Panel Report on Brazil — Aircraft, para. 7.25. back to text
590. Panel Report on Brazil — Aircraft, para. 7.25. back to text
591. Panel Report on Brazil — Aircraft, para. 7.25. back to text
592. Panel Report on Brazil — Aircraft, para. 7.25. back to text
593. Appellate Body Report on US — FSC (Article 21.5 — EC),
para. 137. back to text
594. Appellate Body Report on US — FSC, para. 98. back to text
595. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 139-140. back to text
596. The Panel on US — FSC (Article 21.5 — EC) held that
the relationship between the measure and the purpose of avoiding the
double taxation of foreign-source income must be “reasonably
discernible”. Panel report on US — FSC (Article 21.5 — EC),
para 8.95. back to text
597. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 146-148. back to text
598. Appellate Body Report on US — FSC, paras. 98-99. back to text
599. Appellate Body Report on US — FSC (Article 21.5 — EC),
para. 145. back to text
600. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 154-156, 165-167, and 177-179. back to text
601. (footnote original) We note that Isenbergh states that,
in the case of sale of goods by a producer, the income generated by the
sales transaction is attributable to “easily distinguishable
activities” which are “often combined”, namely “production and
sale” activities. Isenbergh indicates that in an international sales
transaction, these production and sales activities may take place “in
different countries”. These activities, therefore, generate income
that has different sources which are “compounded” unless the income
from the different sources is separated. Isenbergh states that “ideally”
the different “elements of the transaction” would be “disengaged”
using arm’s length pricing rules. The manufacturer would be treated as
if it had sold the goods to an independent distributor at arm’s length
prices, who in turn resold the goods. This would “dissect” the
transaction on the basis of the place where the different activities
occurred. (J. Isenbergh, supra, footnote, Vol. I, para. 10.9, p.
10:16.) back to text
602. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 154 and 168. back to text
603. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 141-143. back to text
604. Appellate Body Report on US — FSC (Article 21.5 — EC),
para. 169. back to text
605. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 175-176. back to text
606. Appellate Body Report on US — FSC (Article 21.5 — EC),
para. 185. back to text
607. Appellate Body Report on US — FSC (Article 21.5 — EC),
para. 128. back to text
608. (footnote original) Appellate Body Report, supra,
footnote, para. 101. back to text
609. Appellate Body Report on US — FSC (Article 21.5 — EC),
paras. 129-133. back to text
610. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.395. back to text
611. Appellate Body Report on Brazil — Aircraft (Article 21.5
— Canada), paras. 80-81. back to text
612. Panel Report on Brazil — Aircraft (Article 21.5 —
Canada), para. 6.71. back to text
613. Panel Report on Brazil — Aircraft (Article 21.5 —
Canada), para. 6.72. back to text
614. Appellate Body Report on Brazil — Aircraft (Article 21.5
— Canada), para. 78. back to text
615. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.274-5.275. back to text
616. Panel Report on Brazil — Aircraft, para. 7.34. back to text
617. Panel Report on Brazil — Aircraft, para. 7.34. back to text
618. Appellate Body Report on Brazil — Aircraft, paras. 177
and 179. back to text
619. Appellate Body Report on Brazil — Aircraft, paras. 177
and 179. back to text
620. Appellate Body Report on Brazil — Aircraft, para. 181.
back to text
621. Appellate Body Report on Brazil — Aircraft (Article 21.5
— Canada), para. 63. See also Panel Report on Brazil —
Aircraft (Article 21.5 — Canada), paras. 6.84 and 6.92. back to text
622. Appellate Body Report on Brazil — Aircraft (Article 21.5
— Canada), paras. 67-69. back to text
623. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.234-5.252 back to text
624. (footnote original) See Article 21.5 Panel Report on Brazil
— Aircraft, supra, para. 6.87. Of course, the second paragraph of
item (k) is broader in scope than the first paragraph of item
(k), which
only refers to two types of export credit practices. To that extent, the
second paragraph of item (k) retains independent meaning also on our
interpretation of the “material advantage” clause. back to text
625. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.251. back to text
626. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.265. back to text
627. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.266. back to text
628. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.272-5.275. back to text
629. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.153. back to text
630. Panel Report on Brazil — Aircraft, para. 7.28. back to text
631. Panel Report on Brazil — Aircraft, para. 7.28. back to text
632. Appellate Body Report on Brazil — Aircraft, para. 186.
back to text
633. Appellate Body Report on Brazil — Aircraft, para. 286.
back to text
634. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.78. back to text
635. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), paras. 5.73 and 5.75-5.79. back to text
636. (footnote original) The New Shorter Oxford English
Dictionary, Vol. II, Oxford (1993), pp. 3127 and 3128. back to text
637. (footnote original) For the 1998 OECD Arrangement,
see its Introduction, p. 7 (“Status”). back to text
638. (footnote original) It is clear to us, however, that the
drafters could not have left the addressees of the second paragraph free
to choose among different successor undertakings. Were it otherwise,
complainants could select the strictest successor undertaking with as
much justification as respondents could select the most generous
successor undertaking. The second paragraph would then fail to do what
it is there to do, i.e. to inform Members regarding what their rights
and obligations are. back to text
639. (footnote original) It should be reiterated here that
the 1992 OECD Arrangement is no longer in effect. back to text
640. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.80-5.81 and 5.83. back to text
641. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.79. back to text
642. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.78, footnote 69. back to text
643. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.80. back to text
644. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.80. See also Panel Report on Canada — Aircraft
(Article 21.5 — Canada II), paras. 5.65-5.66. back to text
645. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.106. back to text
646. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.61. back to text
647. (footnote original) See the Appellate Body Report on United
States — Measure Affecting Imports of Woven Wool Shirts and Blouses
from India, adopted 23 May 1997, WT/DS33/AB/R, p. 16; Article 21.5
Appellate Body Report on Brazil — Aircraft, supra, para. 66. back to text
648. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.63. back to text
649. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.131-132. back to text
650. Brazil — Aircraft (Article 21.5 — Canada II), paras.
5.133-134. back to text
651. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.114. back to text
652. The Panel on Brazil — Aircraft (Article 21.5 — Canada
II) followed the interpretation of the Panel in Canada —
Aircraft (Article 21.5 — Brazil). back to text
653. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.126. back to text
654. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.142. back to text
655. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), paras. 5.143-5.144. back to text
656. Appellate Body Report on Brazil — Aircraft, para. 65. back to text
657. Appellate Body Report on Brazil — Aircraft (Article 21.5
— Canada), paras. 66-67. back to text
658. Panel Report on Canada — Aircraft (Article 21.5 —
Brazil), para. 5.73. back to text
659. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.276. back to text
660. (footnote original) See the Appellate Body Report on United
States — Measure Affecting Imports of Woven Wool Shirts and Blouses
from India, adopted 23 May 1997, WT/DS33/AB/R, p. 16; Article 21.5
Appellate Body Report on Brazil — Aircraft, supra, para. 66. back to text
661. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.61-5.63. back to text
662. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.177. back to text
663. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.164. back to text
664. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.165. back to text
665. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.176. back to text
666. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), para. 5.115. back to text
667. Panel Report on Canada — Aircraft Credits and Guarantees,
paras. 7.180-7.181. back to text
668. Panel Report on Canada
— Aircraft Credits and Guarantees,
para. 7.161. back to text
669. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.119-5.120. back to text
670. Panel Report on Brazil — Aircraft (Article 21.5 — Canada
II), paras. 5.123-5.126. back to text
671. Panel Report on Canada — Aircraft Credits and Guarantees,
para. 7.82. back to text
672. See paragraph 6.3 of the General Council Decision of 15
December 2000 (WT/L/384). back to text
673. G/SCM/34, p. 2; G/SCM/36, p. 9 and G/SCM/38, p. 23. back to text
674. G/SCM/34, p. 2; G/SCM/36, p. 10 and G/SCM/38, p. 23. back to text
675. Paragraph 6.1 of the General Council Decision of 15 December
2000 (WT/L/384). See Procès-Verbal of Rectification of the Agreement on
Subsidies and Countervailing Measures, rectifying the text of Annex
VII(b) to include Honduras in the list of countries (WT/LET/371, 20
January 2001). back to text
676. (WT/MIN(01)/17). back to text
677. Bolivia, Honduras, Kenya and Sri Lanka. back to text
678. (WT/MIN(01)/17). back to text
679. The SCM Agreement has no preamble. back to text
680. Panel Report on Brazil — Aircraft, para. 7.26. back to text
681. Panel Report on Canada — Aircraft, para. 9.119. back to text
682. Panel Report on US — Exports Restraints, para. 8.62. back to text
683. Panel Report on US — Exports Restraints, para. 8.63. back to text
684. Appellate Body Report on US — Carbon Steel, para. 74. back to text
685. (footnote original) Appellate Body Report on Brazil
— Desiccated Coconut, at 181. back to text
686. (footnote original) Panel Report, para. 8.32. back to text
687. (footnote original) Ibid., para. 8.68. back to text
688. Appellate Body Report on US — Carbon Steel, paras.
73-74. back to text
689. Panel Report on US — FSC (Article 21.5 — EC), para.
8.39. back to text
690. Panel Report on US — FSC (Article 21.5 — EC), para.
8.39. back to text
691. Appellate Body Report on US — Softwood Lumber IV, para.
64. back to text
|
