III. MAIN ARGUMENTS

3.1 The United States asked the Panel to find that:

(a) Tariff Code 9958 is inconsistent with Article XI of GATT 1994;

(b) Part V.I of the Excise Tax Act is inconsistent with Article III:2 of GATT 1994, or in the alternative, Article III:4 of GATT 1994; and


(c) The application by Canada Post of lower postal rates to domestically-produced periodicals under the "funded" and "commercial" rate systems is inconsistent with Article III:4 of GATT 1994, and is not a domestic subsidy within the meaning of Article III:8 of GATT 1994.

3.2 Canada asked the Panel to find that:

(a) Tariff Code 9958 is justifiable under Article XX(d) of the GATT 1994;


(b) Article III of GATT 1994 does not apply to Part V.I of the Excise Tax Act, and if the Panel decides that it does apply, Part V.I is consistent with Article III of GATT 1994;


(c) Article III:4 of GATT 1994 does not apply to the commercial rates charged by Canada Post, and the funds paid by the Department of Canadian Heritage to Canada Post for the "funded" rates are allowable subsidies pursuant to Article III:8(b) of GATT 1994.

A. Tariff Code 9958 - Import Prohibition

(i) Article XI:1

3.3 The United States argued that the Canadian import prohibition on the products listed in Tariff Code 9958 is a violation of Article XI:1 of GATT 1994, which prohibits quantitative restrictions on imports. By its terms, Tariff Code 9958 applies both to special Canadian editions of magazines that are also published in versions targeted at readers in other countries (i.e. split-runs) and to magazines produced solely for the Canadian market. In either case, the import ban applies if the periodical contains even a small amount of advertising directed primarily at Canadian readers - single advertisement in the case of split-runs and five per cent or more of the advertising space in the case of magazines generally. The ban eliminates these magazines from the Canadian magazine market, and ensures that only Canadian magazines can compete for domestically-oriented advertising. Canada did so for the specific purpose of ensuring that Canadian magazines can enjoy a monopoly on the sale of magazines containing such advertisements. Advertising is an important source of revenue for magazine publishers. Thus, granting domestic magazines a monopoly on local advertising provides them a competitive advantage over foreign-produced magazines that are denied the right to carry such advertisements.

3.4 Canada argued that the United States claim that the Canadian legislation creates a "monopoly" for Canadian publishers of advertisements directed at the Canadian market is inconceivable in the North American environment. The existence of "spillover" advertising, whereby advertisements for generally-available products in wide-circulation US magazines automatically reach the Canadian public, with very significant consequences for the competitiveness of the Canadian industry, is sufficient by itself to prevent the creation of any true monopoly. The "monopoly" effect complained of by the United States has nothing to do with the first part of the Code, dealing with split-runs, or with the Excise Tax Act. It is true that the second part of the Tariff Code prevents the entry of foreign magazines with substantial amounts of advertising directed specifically at Canadian, as a means of preventing an easy way to get around the split-run prohibition. However, the 5 per cent rule applies only to a limited type of advertising with Canadian addresses and phone numbers, and this aspect of the policy has not been carried forward to the excise tax provisions, which are strictly limited to the split-run phenomenon.

(ii) Article XX(d)

3.5 Canada added that Tariff Code 9958 is a measure intended to secure the attainment of the objectives of Section 19 of the Income Tax Act. The issue is whether Tariff Code 9958 can be justified as a necessary measure within the meaning of Article XX(d). Because it forms an integral part of a package of measures with a single objective, it can be so justified on a natural and reasonable reading of the treaty language. Canadian public policy for the magazine industry is designed to provide Canadians with a distinctive vehicle for the expression of their own ideas and interests. Such a vehicle faces enormous competition from foreign magazines for both advertising and readership. Public policy measures aim to balance the need to establish and maintain a place for Canadian periodicals in their own domestic market while at the same time ensuring that Canadians have unrestricted access to foreign periodicals. To achieve this long-standing policy objective, government policy has focused on two areas: advertising and distribution. The Government of Canada has introduced a series of measures to ensure that magazines with editorial content developed for the Canadian market can compete for the limited advertising revenues. These measures include Tariff Code 9958, Sections 35-41 of the Excise Tax Act and Section 19 of the Income Tax Act. Section 19 of the Income Tax Act allows a deduction for advertising directed at the Canadian market. Tariff Code 9958 restricts the importation into Canada of periodicals whose advertising has been purchased especially to reach a Canadian audience. The general objective of these measures is to help the Canadian periodical industry raise advertising revenues. Tariff Code 9958 ensures the achievement of this goal, with Section 19 of the Income Tax Act.

"Secure compliance"

3.6 The United States referred to the panel on United States - Standards for Reformulated and Conventional Gasoline ("US - Standards for Gasoline") which states that a party invoking an exception under Article XX(d) has to demonstrate the following elements:

"(1) that the measures for which the exception are being invoked - that is, the particular trade measures inconsistent with the General Agreement - secure compliance with laws or regulations themselves not inconsistent with the General Agreement;


(2) that the inconsistent measures for which the exception is being invoked are necessary to secure compliance with those laws or regulations; and


(3) that the measures are applied in conformity with the requirements of the introductory clause of Article XX.

In order to justify the application of Article XX(d), all the above elements have to be satisfied".³⁵

3.7 Canada's import prohibition fails to meet any of these requirements. With respect to the first requirement, Canada has failed to demonstrate that its import ban secures compliance with Section 19 of the Income Tax Act. Canada has not claimed that the import ban is meant to enforce the income tax provisions, only that the import ban and the income tax measures advance the same objective (through different means), which is to channel all domestic advertising to domestic magazines.

3.8 Canada noted that the conformity of the Income Tax Act with GATT 1994 is not being challenged. Tariff Code 9958 and Section 19 of the Income Tax Act are conceived to deal with the problem of split-runs with inserted Canadian advertising. The idea is that the income tax provision would cover magazines printed in Canada and the border measure would cover magazines printed outside the country. The effectiveness of the non-deductibility provision standing by itself would obviously be very limited. The problem is that of foreign companies that sold into the Canadian market but are not subject to Canadian income tax. This would be more than a loophole, given the open nature of the Canadian economy and the degree of import penetration. It would largely destroy the effectiveness of the income tax measures.

3.9 Canada drew the Panel's attention to the panel report on EEC - Regulations on Parts and Components³⁶ ("EEC - Parts and Components") which introduces a very stringent test for the application of Article XX(d), under which the non-conforming measures have to be necessary for the enforcement of another law, and not merely in order to ensure that the objectives of that law be fulfilled. This test is entirely appropriate where the issue is the enforcement of regulatory statutes and ordinary fiscal measures designed to raise revenue, where compliance with the statute is virtually synonymous with the attainment of its objectives. If, for example, an environmental measure is complied with, its objective is ipso facto attained.

3.10 The EEC - Parts and Components panel interpreted Article XX(d) in terms of enforceability as opposed to measures designed to ensure that the objectives of another measure are not undermined. Canada is not challenging that decision or its reasoning. It makes sense in the context of regulatory statutes with prohibitions or even tax statutes that are designed to raise revenue and prevent tax evasion. It is doubtful, on the other hand, that an enforceability test is meaningful in the case of a fiscal or other economic incentive where formal compliance is not the real object, and substantial compliance can not be separated from the underlying social and economic objectives the measure is designed to secure. In the case of a fiscal incentive whose sole purpose is to influence business decisions in a certain direction, compliance has to be judged in terms of effectiveness. Canada suggests, therefore, that the application of the exception in Article XX(d) should take account of the nature of the measures under consideration, and that the test in the EEC - Parts and Components panel decision should not be rigidly applied without taking account of these circumstances.

3.11 Further, the US consideration that compliance is always a matter of enforceability, no more no less, may be a valid proposition, as held in EEC - Parts and Components, for mandatory legislation based on prohibitions or exactions. Compliance and effectiveness are synonymous in the case of the vast majority of legislative measures. But Section 19 is not an ordinary tax measure, designed to raise revenue for the public purse or prevent tax evasion. In the case of a fiscal or other economic incentive whose sole purpose is to influence business decisions in a certain direction, compliance has to be judged in terms of effectiveness as well as enforceability. The distinction is between formal compliance and real or substantial compliance, which in this case has nothing to do with whether deductions are properly claimed but with the policy behind this entire set of measures.

3.12 The United States argued that the panel on EEC - Parts and Components dismisses the argument that Article XX(d) permits governments to maintain GATT-inconsistent measures to "ensure the attainment of the objectives of [GATT-consistent] laws and regulations" rather than to prevent violations of the GATT-consistent laws or regulations.³⁷ That panel stated that the interpretation it rejects would make the function of Article XX(d) "substantially broader" and would not be consistent with the fact that Article XX(d) applies only in the specific circumstances set out in that paragraph - namely, to secure compliance with GATT-consistent laws or regulations.

3.13 Canada's claim that the import ban does not seek "formal compliance" with Section 19 of the Income Tax Act, but rather "real or substantial compliance", which Canada admits "has nothing to do with whether deductions are properly claimed", is simply another way of stating that the import ban helps advance the same overall (protectionist) aim as Section 19. However, the import ban does not "secure compliance" with Section 19, and thus does not fall within the purview of Article XX(d). If accepted, Canada's view of Article XX(d) would allow WTO Members to adopt all manner of GATT-inconsistent measures on the ground that they further the same objectives as other protectionist legislation. As the EEC - Parts and Components panel makes clear, the phrase "secure compliance" does not reach measures that merely help ensure that domestic policy goals are realized.

"Necessary"

3.14 The United States noted that the panel report on United States - Section 337 of the Tariff Act of 1930 ("US - Section 337") observed that :

"[A] contracting party cannot justify a measure inconsistent with another GATT provision as 'necessary' in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it".³⁸

The normal way for tax authorities to enforce income tax provisions is to audit the relevant tax returns, and to make adjustments to those returns where necessary to secure compliance. Tax, civil, or criminal penalties may be imposed where warranted in individual cases. Such measures would normally be entirely consistent with GATT and in any event would be applied to particular taxpayers, not to imports. It is extraordinary for income tax enforcement measures to take the form of restrictions on trade in goods. Canada has demonstrated no basis for why, of all possible measures, it is necessary to impose a blatantly GATT-inconsistent import ban to secure compliance with Section 19 of the Income Tax Act nor why normal tax enforcement procedures were insufficient.

3.15 Canada stated that the panel in US - Section 337³⁹ held that the term "necessary" required the use of the least trade-restrictive measure available. Canada submits that there are no other measures, less restrictive or otherwise, that would accomplish the objective. If split-runs could be imported, with Canadian advertisements often placed by businesses for which Canadian tax liability is irrelevant, the program would simply no longer work.

3.16 Canada therefore reiterates its suggestion that the application of the exception in Article XX(d) should take account of the nature of the measures under consideration, and that the test in the EEC -Parts and Components and the US - Section 337 panel decisions should not be rigidly applied without taking account of these circumstances. The Panel should recall that Code 9958 and the income tax provision have always been considered part of a single, indivisible package of complementary, indivisible measures and should be treated as such for the purposes of Article XX(d).

3.17 The United States stated that even if one were to credit Canada's argument that Article XX(d) covers measures necessary to secure the attainment of the domestic policy goals embedded in other laws, the import ban would still not be "necessary" for such a purpose. The objective of Section 19 is to support Canada's magazine industry. Canada has not shown why GATT-consistent measures (such as subsidies paid directly to producers) would not reasonably be available to it for advancing this objective.

(iii) Chapeau to Article XX

3.18 Canada noted that each term of Article XX(d), including its Preamble, should be given consideration when examining whether Tariff Code 9958 could be justified as a necessary measure within the meaning of the treaty. Since Tariff Code 9958 is a "measure" directed against imports from all foreign countries and not only the United States, it is "not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail", as stated in the preamble to Article XX. Similarly, having regard to the application of Tariff Code 9958 since its adoption, it could not be claimed that it has been "applied in a manner which would constitute ... a disguised restriction on international trade". Tariff Code 9958 is not applied in such a way as to constitute a restriction on international trade, as the evidence so strongly demonstrates, nor does it prohibit the importation of foreign periodicals into Canada or threaten their dominant position in the English-Canadian market place.

3.19 The United States considered that because the import ban does not satisfy the terms of paragraph (d) of Article XX, the Panel does not need to ascertain whether or not it is in conformity with the introductory clause of Article XX. However, were the Panel to reach this issue, it should find that Canada's import ban does not meet the requirements of the introductory clause, because the import ban constitutes "a means of arbitrary and unjustifiable discrimination between countries where the same conditions prevail," and is also "a disguised restriction on international trade." In the US - Standards for Gasoline case, the Appellate Body states that whatever else the term "disguised restriction on international trade" means, it could be read to encompass any " . . . restrictions amounting to arbitrary or unjustifiable discrimination in international trade taken under the guise of a measure formally within the terms of an exception listed in Article XX".⁴⁰ The import ban's "arbitrary" and "unjustifiable" nature is apparent from the very structure of Tariff Code 9958. Application of the import ban depends on advertising content and on sales in more than one country - factors that are relevant only for purposes of distinguishing between those categories of foreign-produced magazines that compete with Canadian magazines for Canadian advertising revenues and those that do not. The import ban therefore constitutes a "disguised restriction on international trade".

3.20 Moreover, the expression "between countries" in the chapeau to Article XX includes a comparison between Canada and other countries as well as between countries other than Canada. The import prohibition bars only magazines produced outside Canada, thus discriminating in favour of magazines produced in Canada. There are no relevant conditions prevailing in Canada or elsewhere that would justify the discrimination imposed on foreign-produced split-runs. Thus, for the reasons discussed above, the import ban constitutes "arbitrary or unjustifiable discrimination between countries where the same conditions prevail".

3.21 Canada considered that the United States argued that the prohibition on arbitrary or unjustifiable discrimination requires a comparison between other countries and Canada, and not just between countries other than Canada. This, in effect turns this Article into a national treatment proviso. An import prohibition or restriction could never meet this test. The effect would be to remove Article XI almost completely from the range of measures that can potentially be subject to Article XX derogations. The interpretation suggested here is novel. It does not correspond to the way the chapeau to Article XX has been interpreted in the past, as shown by the 1982 decision on United States - Prohibition on Imports of Tuna and Tuna Products from Canada⁴¹, and the 1983 decision on United States - Imports of Certain Automotive Spring Assemblies.⁴² In both those decisions, a US import prohibition was held not to be discriminatory within the meaning of the chapeau to Article XX, because it applied equally to all foreign countries exporting to the United States.

B. Part V.I of the Excise Tax Act

3.22 The United States argued that the excise tax was designed specifically to shore up Canada's GATT-inconsistent import prohibition. Canada did not deny that this is so, or that the tax was designed to eliminate the competition between split-run magazines and domestically produced magazines. The purpose of the tax is protectionist - namely, to ensure that only Canadian magazine producers capture all of the revenues associated with advertisements directed specifically at Canadian readers. The Canadian magazine tax is designed to ensure that foreign-based publishers forego the commercially attractive option of publishing a split-run edition of an existing magazine for the Canadian market. Any such edition will be hit with a prohibitive 80 per cent excise tax. This means that foreign magazine producers contemplating sales in the Canadian market can not make use of the economies of scale that split-run editions provide. Split-run editions drive down per unit production costs by spreading the expense of producing articles and photographs over a greater number of magazines. The Canadian tax ensures that no foreign-based publisher can take advantage of those lower costs to compete in the Canadian market against wholly Canadian-produced magazines.

3.23 Canada's policy of protecting its domestic publishing industry from import competition is long-standing. Since the early 1900s, Canada has provided subsidized, lower postal rates exclusively to Canadian-produced magazines.⁴³ More recently, Canada sought to protect its industry by targeting imported periodicals sold into Canada as "split-run" or "regional" editions. A publisher produces a "split-run" edition of a single issue of a magazine by separating ("splitting") the editorial content (articles, photographs, artwork, etc.) and the advertising content of the magazine. The publisher then produces two or more separate regional editions of the issue of the magazine. Each edition shares some or all of the editorial content, but the advertising content in each edition may differ, because each edition is distributed in a different geographic market and the advertising is directed at that specific market.

3.24 Concerned that imported split-run editions of magazines would divert advertising revenues from domestic competitors, Canada enacted Tariff Code 9958 in 1965 specifically to prohibit the importation of split-run editions as well as any other magazine containing a more than a de minimis amount of advertising directed at the Canadian public, and in 1976 prohibited income tax deductions for advertisements placed in foreign-owned publications. Within a matter of a few decades, however, technological advances made it practical for foreign-based publishers to transmit editorial material electronically across the border into Canada and to publish split-run editions in Canada, thus avoiding the application of Tariff Code 9958. To plug this perceived loophole - and ensure that split-run editions could not compete in the domestic marketplace - Canada enacted a punitive excise tax on split-run editions in December 1995.

3.25 In an opinion dated 15 August 1990, Investment Canada advised Time Canada Ltd., a company controlled by Time Warner, Inc. of New York, N.Y., that its proposal to publish a Canadian edition of Sports Illustrated was not inconsistent with Section 15 of the Investment Canada Act. Based on that opinion, on 11 January 1993, Time-Warner announced plans to publish in Canada a special Canadian edition of Sports Illustrated magazine. Recognizing that Tariff Code 9958 could not be relied upon to keep a Canadian-produced version of Sports Illustrated or other foreign-based magazines out of the Canadian market, the Canadian Government responded to Time's announcement on 26 March 1993, by establishing a Task Force on the Canadian Magazine Industry whose mandate was "to recommend ways in which the current measures [supporting the Canadian magazine industry] could be brought up-to-date".⁴⁴

3.26 The Task Force concluded that it in the absence of additional legislation it was highly likely that a significant number of US split-runs would be sold in Canada. The Task Force estimated that there were 53 potential US consumer magazine entrants into the Canadian market, and 70 potential US business and trade magazine entrants, and that the majority of these would actually enter the Canadian market.⁴⁵ In December 1994, the Canadian Government announced its intention to implement the Task Force's recommendation to implement a new excise tax on all split-run magazines that contain ads directed at Canadians.⁴⁶ On 25 September 1995, the Government formally introduced Bill C-103, the excise tax bill, in the Canadian House of Commons. In introducing Bill C-103, Minister of Canadian Heritage Dupuy stated: "Sports Illustrated Canada managed to get around custom tariff 9958, because most of its content was sent electronically from the United States. It was simply a loophole in the tariff laws since electronic transmission made it possible to avoid tariff regulations. . . . Task Force members explored several avenues and finally concluded that the proposed excise tax was the best solution. It could be designed and implemented in order to avoid split-run editions".⁴⁷ In the Parliamentary debate, one Member described the bill in the following terms:

"[I]t is important to be very clear about the nature of the bill. In essence it is designed to kill international competition between magazines, more specifically magazines which come into Canada. The killing of that competition kills a lot of good things which flow from competition".⁴⁸

3.27 Canada argued that the excise tax measure is designed to prevent the diversion of advertising to low-cost publications reproducing recycled editorial content, at the expense of publications created for Canadians. The Excise Tax Act is carefully designed to deal with a particular combination of circumstances. What it targets is the combination of recycled editorial content plus Canadian advertisements. Magazines derive their revenues predominantly from the sale of advertising space and from the circulation of the magazine. Advertising revenue is by far the most important revenue stream for Canadian magazines, accounting for 60 per cent of total revenue. Circulation revenue accounts for 33 per cent of total revenue, or $287 million. Advertising revenue is crucial for the Canadian magazine industry, allowing the publisher to provide the magazine at an affordable cost or, in some cases, free of charge.

3.28 Canada explained that there is a direct correlation between circulation, advertising revenue and editorial content. The larger the circulation, the more advertising a magazine can attract. With greater advertising revenue, a publisher can afford more to spend on editorial content. The more a publisher spends, the more attractive the magazine is likely to be to its readers, resulting in circulation growth. Similarly, a loss of advertising revenue will produce a "downward spiral". Less advertising entails less editorial, a reduction in readership and circulation and a diminished ability to attract advertising. Magazines can be sold on newsstands, or through subscriptions, or distributed at no cost to selected consumers. The Canadian market is not large, particularly when compared to the US market. It is also highly fragmented from a language perspective. There are two official languages in Canada as well as a number of other languages. Canadian English-language publications face tough competition on newsstands; they account for only 18.5 per cent of English-language periodicals distributed on newsstands, where space is dominated by foreign publications. Subscriptions are the main source of circulation revenue for most Canadian magazines.

3.29 The constraints imposed by the demographics of the Canadian market have a significant impact on the ability of a magazine primarily addressed to Canadian interests to obtain the broad base of circulation that is necessary to achieve economic viability. Canadian magazine publishers compete with other media for the same limited amount of advertising dollars in the Canadian market. Magazines have been losing market share to other media forms such as direct mail and television. It is unlikely that the share held by magazines will increase. The amount of money spent by advertisers to reach Canadian consumers is also not likely to grow. In addition, "spillover" advertising (the ability of advertisers of internationally distributed products to reach Canadian consumers through US magazines) is a further limitation on the competitive position of the Canadian industry. Canadian periodical publishers face a major competitive challenge in their business environment that is not common to their counterparts in countries with a larger population to serve. The pivotal fact is the penetration of the Canadian market by foreign magazines. Canadian readers have unrestricted access to imported magazines. At the same time, Canadian readers have demonstrated that they value magazines that address their distinct interests and perspectives. However, foreign magazines dominate the Canadian market. They account for 81.4 per cent of all newsstand circulation and slightly more than half (50.4 per cent) of the entire circulation of English-language magazines destined for the general public in Canada.

3.30 Magazines are a particularly good medium for advertisers wishing to reach a specific market defined by regional location. Both Canadian and foreign magazines currently have regional editions in their respective home markets. Publishers and advertisers recognize the importance of regional editions as an advertising vehicle. The marketing strategy behind regional editions is that they allow publishers to offer very specific advertising vehicles for advertisers interested in targeting a particular audience, hence they maximize advertising revenues. Some foreign publishers view Canada as a separate "region" within their own national market. The "Canadian" regional edition produced by such publishers generally contains the same editorial content as the other editions but different advertising content, reflecting the addition of advertisements from Canadian advertisers. The term "split-run" is used in Canada to refer to such a Canadian regional edition. For a foreign publisher, the incentive to produce a Canadian regional edition of its magazine containing advertising directed at Canadians is, of course, profit. A profit for the foreign publisher only requires that the incremental revenue from advertising in the regional edition exceeds the costs of producing the split-run. Since its fixed costs have already been recovered in the larger home market, this offers an inviting prospect for a foreign magazine.

3.31 The Task Force on the Canadian Magazine Industry was established as a result of the anticipated publication of Sports Illustrated Canada. Sports Illustrated Canada was a split-run edition that was printed in Canada using text that was electronically transmitted from the United States. The editorial content of Sports Illustrated Canada was largely the same as the content in the American editions of Sports Illustrated but it contained advertisements that had been specifically purchased to reach a Canadian audience. Tariff Code 9958 was not applicable to Sports Illustrated Canada because it was printed in Canada rather than being imported. The emergence of Sports Illustrated Canada as a new split-run edition revealed the limitations of Canada's existing policy instruments. Accordingly, the Task Force was created to recommend ways to bring these policy instruments up to date. The Task Force's main recommendation was that an excise tax be imposed on advertising contained in split-run editions of periodicals that are distributed in Canada. The object of the excise tax is not to discourage readership of foreign magazines, but to maintain an environment in which Canadian magazines can exist in Canada alongside with imported magazines. It is also intended to foster conditions in which indigenous magazines can be published, distributed and sold in Canada on a commercial basis. The tax is consistent with the broad principles of the cultural and media policies of successive federal governments.

(i) Article III:2 versus coverage under the General Agreement on Trade in Services (GATS)

Applicability of Article III of GATT 1994

3.32 The United States argued that Canada's 80 per cent excise tax on split-run editions is inconsistent with Article III:2, first sentence, of GATT 1994 because it creates an artificial distinction between "split-run" magazines and all other types of magazines and applies the 80 per cent tax solely to split-runs. It therefore applies a higher tax to certain types of imported magazines than to "like" domestic magazines.

3.33 Canada argued that this dispute concerns the provision of advertising services to Canadian advertisers and that Part V.I of the Excise Tax Act was a measure pertaining to advertising services. A magazine publisher derives revenue from both the sale of the magazine to consumers and from the sale of advertising space to advertisers. The sale of the right to advertise to a magazine's audience is an advertising service. As the tax imposed by the Excise Tax Act is imposed on the revenues earned through the provision of advertising services by a magazine publisher, it is a tax in respect of the provision of an advertising service. Multilateral trade disciplines on advertising services fall within GATS and not GATT 1994; Article III of GATT 1994 does not apply to Part V.I of the Excise Tax Act. However, the terms of reference direct the Panel to examine only trade matters within the purview of GATT 1994. Thus, the examination of Part V.I of the Excise Tax Act in light of GATS is not covered by the terms of reference. The first distinctive aspect of a magazine is its character as a public good which is largely defined by its content. The second distinctive feature is the magazine's dual nature in that it is both a consumer good and an advertising service with two distinct revenue streams. The two separate revenue streams are circulation revenue, which is derived from the sale of a good, and advertising revenue, which is derived from the sale of a service. The two consumers are readers and advertisers. All magazines exhibit this essential duality, which represents two distinct economic outputs.

3.34 GATT 1994 establishes the standards that govern international trade in goods. The central obligations of GATT 1994 are the tariff concessions by which WTO Members commit themselves (in Article II and the Schedules) to limit the level of tariffs they will impose on imports from other Members. A second obligation is that of the most-favoured-nation ("MFN") obligation in Article I. Articles III through XVII comprise most of the other substantive obligations of GATT 1994. These obligations apply to goods only. Article III of GATT 1994 sets out the national treatment obligation pertaining to treatment of imported goods. The Uruguay Round has produced a similar framework for trade in services. Specific commitments are recorded in national schedules that are attached to, and form an integral part of, the GATS. Every undertaking contained in a schedule to GATS is a binding commitment to allow the supply of the service in question on the terms and conditions specified and to not impose any new measures that would restrict entry into the market or the operation of the service. In the absence of any scheduled commitments, there are no disciplines on the introduction or the maintenance of measures of any type, even those that may be inconsistent with market access or national treatment commitments. Advertising services appear on the Services Sectoral Classification List of the Secretariat under the business sector.⁴⁹ The provision of advertising services is consequently a GATS matter, not a GATT matter.⁵⁰ Canada has not undertaken any commitments in respect of the provision of advertising services in its Schedule of Specific Commitments. In the absence of any scheduled commitments, there are no restrictions on Canada in respect of the introduction of measures concerning the provision of advertising services. In particular, Canada is not bound, nor in any way obliged, to provide national treatment to Members of the WTO in respect of the provision of advertising services in the Canadian market.

3.35 This challenge in respect of the Excise Tax Act measures is an indirect attempt by the United States to obtain trading benefits that it has been unable to obtain directly. In the guise of a GATT goods argument, the United States now attempts to persuade the Panel to allow it to have access to a service sector to which, in full accordance with the terms of international trade law, it is presently not entitled. Should the Panel agree that a Member can obtain benefits under a covered agreement that have been expressly precluded under another covered agreement, the Panel risks introducing uncertainty into the relationship between GATS and GATT disciplines.

3.36 The United States argued that the Canadian argument was baseless because: (1) nothing in GATS purports to reduce or eliminate the obligations that GATT has imposed since 1947; (2) GATS does not have primacy over GATT with respect to measures affecting trade in goods; and (3) Canada can observe its obligations under GATT Article III consistently with the provisions of GATS. There is no indication in the Agreement Establishing the WTO, GATT, or GATS, that adoption of GATS was intended as a limitation on the scope of GATT 1994. Had the negotiators intended to adopt a principle as fundamental as the one Canada now puts forward, they certainly would have provided for it in the text of GATT, GATS or WTO Agreement. In the absence of such an indication, or an irreconcilable conflict - neither of which Canada can point to here - GATT and GATS must be applied according to their terms. (It is theoretically possible that the same measure may be covered by, and may even violate, both agreements. Indeed, a measure may violate more than one goods agreement as well, provided the measure is within the scope of each agreement and is inconsistent with the provisions of each.) By contrast, the negotiators of the WTO did establish a rule for addressing conflicts between GATT 1994 and the multilateral agreements on trade in goods in Annex 1A to the WTO Agreement.⁵¹ By their terms, GATT Article III:2 covers taxes applied to products "directly or indirectly", and GATT Article III:4 applies even to measures affecting services connected to goods, such as "distribution" and "transportation".

3.37 Canada's decision not to inscribe relevant commitments on advertising services in its GATS schedule of specific commitments means that Canada is not assuming certain GATS obligations as to those services. Canada does not thereby insulate all measures having any connection to advertising from review under any other WTO agreement. Such a result would improperly exalt GATS over GATT and other WTO agreements. Canada's view would open a huge hole in GATT because there is no shortage of "service-related" measures that could be used to discriminate against imported goods. Under Canada's interpretation, a Member could, consistently with GATT: tax the rental of foreign cars, place a prohibitive surcharge on telecommunication services that are carried out using imported equipment, or impose a room tax on persons staying at hotels that were built using imported construction materials. Although each of these measures relates to the provision or consumption of a service, each also obviously imposes a competitive disadvantage on imported products and provides protection to domestic production, and each would be within the scope of GATT Article III. It is irrelevant whether or not the excise tax could be a measure affecting trade in advertising services. The excise tax is a direct or indirect tax on a product, split-run magazine editions, within the meaning of Article III:2.

3.38 Canada noted that it does not claim that there is a conflict between GATT 1994 and GATS in this case. The two treaties may very well apply in their own respective jurisdiction. GATS does not have as its object, and does not result in, the carving out of part of the jurisdiction of GATT 1994. The negotiators of GATS have merely developed new rules for a sector of international trade to which the existing rules did not apply. They have not, in doing so, redefined the scope of Article III of GATT 1994. The interpretation suggested by Canada of the area of application of Article III with respect to the provisions relating to services would have been the same in 1993 before the GATS treaty came into force. The interpretation is autonomous and based on specific terms of Article III:2 as well as on its intent and its original scope. The issue of overlapping obligations or conflicts arises because of the existence of two treaties, GATT 1994 and GATS, which contain different sanctions with respect to the provisions relating to services. Because of the existence of these two treaties which may apply to a given measure, it is necessary to interpret the scope of application of each such as to avoid any overlap. Such overlaps between the areas of GATT 1994 and GATS could lead to conflicts in the application of the treaties which should be resolved on the basis of the rules of interpretation of public international law.

3.39 The Canadian interpretation of the scope of Article III:2 of GATT 1994 and Article I:1 of GATS avoids such overlaps, respects the autonomy of each treaty and ensures the harmonious application thereof. It is not necessary in the instant case to determine the primacy of one treaty over the other. The Panel does not have to decide this question since there is no conflict. What must be decided is the individual scope of Article III:2 of GATT 1994 and Article I:1 of GATS. Part V.1 of the Excise Tax Act is a measure regarding the provision of services which is dealt with by Article I:1 of GATS. It is on the basis of an interpretation of the specific terms of Article III:2 of GATT 1994 and of Article I:1 of GATS, made in accordance with Article 31 of the Vienna Convention on the Law of Treaties, that the scope of application of each of the two treaties must be determined. The analysis of the measure which is the subject of the dispute leads to the determination of which of the two treaties apply. Canada does not rely on the rules of conflict to resolve the question of the applicability of Article III:2 of GATT to Part V.I of the Act. It is the interpretation of the word "indirectly" in Article III:2 which enables Canada to conclude that the Article does not apply to this measure.

3.40 To determine which disciplines apply to a given measure, one must examine not only the object of the tax and the fiscal mechanism used, but most of all one must examine the effects of the tax, by distinguishing between principal and incidental effects. Some relevant factors for such a determination are: the nature of the economic activity covered by the measure, the structure and effects of the measure and the intention of the measure. A measure may have different aspects and may, as a result, attract different disciplines under different agreements, but no single aspect of a measure should be subject to both disciplines at the same time. In any case at the margins of the two disciplines, Canada suggests that the dominant or essential characteristics of the economic activity at issue should control the determination of whether GATT or GATS is applicable. In the case of the excise tax on split­run periodicals, the principal effect is to restrict the access of foreign publishers to the Canadian advertising market since, in principle the periodical could very well be sold on the Canadian market with advertising not specifically addressed to Canada. This is evidenced by the fact that plans for prospective split­runs for the Canadian market are based on actual sales in Canada of the original version of the magazine which does not contain specific advertising for that market.

3.41 The tax is intended to prevent the penetration of the Canadian advertising market by publishers who sell their advertising services in association with split-run magazines. It is clear that the measure pertains to the supply of a service and as such is a measure that WTO Members intended to be disciplined under GATS. This was recognized by the United States Trade Representative, in the 1995 National Trade Estimate Report on Foreign Trade Barriers (NTE), where Canada's practices with respect to split-run advertising were listed and described under the heading Services Barriers.⁵²

3.42 The United States responded that Canada's suggestion that GATT or GATS should apply based on the "dominant or essential characteristics of the economic activity at issue" was simply a test Canada had invented. Like Canada's other assertions relating to the GATS, it found no support in any of the WTO Agreements or their negotiating history. Adoption of such a test would alter the rights and obligations of WTO Members, in violation of Article 3.2 of the DSU. The United States submitted that whereas Canada referred to the need to avoid conflicts between GATT and GATS, it had failed to identify exactly what those conflicts were. A true "conflict" between two agreements arose only where compliance with one agreement necessarily resulted in non-compliance with the other. This simply was not the case with respect to the excise tax. Applying taxes to imported split-run magazines in a GATT-consistent manner (i.e., at a rate no higher for split-run than for non-split-run magazines) in no way requires Canada to breach its GATS obligations with regard to advertising services or any other service sector. Moreover, there is nothing that is even "inconsistent" about the obligations that the two agreements impose on Canada. The United States also asserted that, although USTR's 1995 NTE Report listed the excise tax and other similar Canadian barriers under the heading of "services barriers", the report noted that these practices "restrict US access to the Canadian market for publications and media advertising" (emphasis added). In the 1996 NTE report, the United States discussed Canadian restriction on US publications under the heading "Import Policies", not "Services Barriers".

"Taxes applied directly or indirectly to products"

3.43 The United States further argued that the tax is covered by Article III because it is imposed on the split-run edition which, like all magazines, are "products" for purposes of GATT. Magazines are physical goods that are manufactured, traded, and in the absence of a ban such as Canada's, imported. While the amount of the tax is measured in terms of "the value of all advertising in the edition," the tax is applied to each split-run edition. By its terms the tax is applied "in respect of each split-run edition of a periodical". Moreover, the tax is applied on a "per issue" basis. In addition, the obligation to pay the tax is imposed on those who produce or trade in the magazine as a final product, such as the publisher, distributor, printer or wholesaler, as opposed to those who design or purchase advertising. Finally, even the method of calculating the tax is based on revenues derived from an integral element of the physical magazine itself - the printed advertisements. Thus, the excise tax is applied directly on split run editions themselves, not on a service offered in connection with such editions.

3.44 Canada argued that the tax is not applied directly to a split-run magazine and in particular it is not based on, or applied to, the price of a split-run magazine. The tax is applied to the value of advertising carried by each issue of a split-run magazine and is assessed against the publisher of the split-run magazine, as the seller of the advertising service. The expression "in respect of each edition" serves as a basis for determining and calculating liability that relates to advertising revenue as the subject matter of the tax. The significant point, which decisively identifies the subject matter of the tax, is that the tax is measured not in terms of the price of the magazine but in terms of the advertising revenues it generates.

3.45 The tax is imposed on the publisher in the publisher's capacity as a provider of advertising services. The tax is tied to the service provided rather than the good. The publisher is the person responsible for the payment of the tax. The distributor, the printer and the wholesaler have been identified as potentially liable where it would be impossible to collect the tax in Canada from the publisher. In such cases, the Act grants those persons a right of recovery against the publisher.⁵³ Accordingly, there is no doubt that the ultimate liability falls on the publisher, and because the ad valorem basis of the tax is advertising, this liability arises directly out of the services dimension of the publisher's business. The collection mechanism is designed to ensure that there is always a person in Canada from whom the tax can be collected. It is doubtful whether collection machinery should ever be used as a basis for characterizing the nature of a tax, and in the particular circumstances of this case it would be entirely inappropriate.

3.46 The United States responded that Canada's allegation that the excise tax is collected from the publisher in connection with its provision of advertising services ignored that the publisher was the producer of the magazine as a product. With regard to imported magazines, Canada admitted that it is the distributor "who has to pay the tax". A magazine's distributor had absolutely no connection to the provision of any "advertising services". Moreover, if the foreign publisher of the imported magazine did not have a sufficient business presence in Canada, the magazine's distributor who paid the tax would be unlikely to obtain indemnification from the publisher at all. Indeed, the excise tax on split-run magazines was collected in a fashion similar to other excise taxes on products, such as the excise taxes in the Japan - Alcoholic Beverages case, and the federal excise taxes in the US - Malt Beverages case. Like the split-run tax, in those cases the excise taxes with respect to domestic products were collected from the producer, and the excise taxes with respect to imported products were collected from the importer, who was essentially a type of distributor.

TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS

³⁵ Panel Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20 May 1996, WT/DS2/R, para. 6.31 (emphasis in original).

³⁶ Panel Report on European Economic Community - Regulations on Parts and Components, adopted on 16 May 1990, BISD 37S/132.

³⁷ Ibid., para. 5.17 (emphasis added).

³⁸ Panel Report on United States - Section 337 of the Tariff Act of 1930, adopted on 7 November 1989, BISD 36S/345, para. 5.26.

³⁹ Ibid., at 392, paras. 5.25-5.27.

⁴⁰ Appellate Body Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20 May 1996, WT/DS2/AB/R at 25.

⁴¹ Panel Report on United States - Prohibition on Imports of Tuna and Tuna Products from Canada, adopted on 22 February 1982, BISD 29S/91 .

⁴² Panel Report on United States - Imports of Certain Automotive Spring Assemblies, adopted 26 May 1993, BISD 30S/107.

⁴³ A Question of Balance, Report of the Task Force on the Canadian Magazine Industry, 1994 ("Task Force Report") at 72.

⁴⁴ Task Force Report at iii.

⁴⁵ Task Force Report at 50-52.

⁴⁶ News Release, Canadian Heritage, December 22, 1994 at 1.

⁴⁷ Commons Debates at 14790-1 (Sept. 25, 1995).

⁴⁸ Commons Debates at 14795 (statement of Mr. Monte Solberg).

⁴⁹ Canada notes that there are three Articles in Part III of the GATS on Specific Commitments, entitled Market Access, National Treatment, and Additional Commitments (Articles XVI, XVII and XVIII respectively). In general, the classification of sectors in national schedules is based on the Secretariat's Services Sectoral Classification List. This reference list of the Secretariat is based on the Central Product Classification (CPC) of the United Nations. See Services Sectoral Classification List: Note by the Secretariat, MTN.GNS/W/120 (10 July 1991). See also Scheduling of Initial Commitments in Trade in Services: Explanatory Note, MTN.GNS/W/164 (3 September 1993).

⁵⁰ Canada cites United Nations, Dept. of International Economic and Social Affairs, Statistical Office of the United Nations, Provisional Central Product Classification, Statistical Papers, Series M No. 77, U.N. Doc. ST/ESA/STAT/SER.M/77 (New York: United Nations, 1991) at 147-148, 173. Item 8711 states: sale or leasing services of advertising space or time. Services provided in soliciting advertising space or time for newspapers, other periodicals, and television stations. Item 8712 states: planning, creating and placement services of advertising. Planning, creating and placement services of advertisements to be displayed through the advertising media. Item 8719 states: other advertising services. Other advertising services not elsewhere classified, including outdoor and aerial advertising services and delivery services of samples and other advertising material.

⁵¹ See General interpretive note to Annex 1A.

⁵² See 1995 National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C.: United States Trade Representative, 1995) at 38.

⁵³ Excise Tax Act, R.S.C. 1985, c. E-15 as amended by S.C. 1995, c. 46, s. 41.3(2).