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Report of the Panel
The report of the Panel on Canada - Certain Measures Concerning Periodicals is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 14 March 1997 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report, an appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel, and that there shall be no ex parte communications with the panel or Appellate Body concerning matters under consideration by the panel or Appellate Body.
II. FACTUAL ASPECTS
B. Part V.I of the Excise Tax Act
C. Funded and Commercial Postal Rates
(ii) Commercial "Canadian" and commercial "International" rates
(ii) Article XX(d)
"Taxes applied directly or indirectly to products"
So as to afford protection to domestic production
"Regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use"
Like product issue
Treatment of imported and domestic magazines
B. Tariff Code 9958
C. The Excise Tax Act
(ii) GATT Article III:2
(iii) Like product issue
(iv) Taxation in excess: "directly or indirectly"
(ii) Applicability of Article III:8(b) to the "funded" rate scheme
1.1 On 11 March 1996, the United States requested Canada to hold consultations pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994) on certain measures maintained by Canada, namely, measures prohibiting or restricting the importation into Canada of certain periodicals; tax treatment of so-called "split-run" periodicals; and the application of favourable postage rates to certain Canadian periodicals (WT/DS31/1). These consultations were held on 10 April 1996. As they did not result in a satisfactory adjustment of the matter, the United States, in a communication dated 24 May 1996, requested the Dispute Settlement Body (DSB) to establish a panel to examine the matter (WT/DS31/2).
1.2 The DSB, at its meeting on 19 June 1996, established a panel on the matter in accordance with Article 6 of the DSU. In document WT/DS31/3, the Secretariat reported that the Panel would have the following standard terms of reference and composition:
"To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS31/2, the matter referred to the DSB by the United States in that document and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".
1.3 On 25 July 1996, the Panel was constituted with the following composition:
1.4 No Members reserved their rights to participate in the Panel proceedings as a third party.
1.5 The Panel met with the parties to the dispute on 11 October 1996 and 14-15 November 1996. The Panel submitted its report to the parties on 21 February 1997.
II. FACTUAL ASPECTS
2.1 This Panel concerns three Canadian measures: Tariff Code 9958 which prohibits the importation into Canada of certain periodicals; Part V.I of the Excise Tax Act, as enacted by Bill C-103 of 15 December 1995, which imposes an excise tax on certain "split-run" periodicals; and the application of certain postal rates to certain Canadian periodicals including through actions of Canada Post Corporation and the Department of Canadian Heritage.
A. Tariff Code 9958 - Import Prohibition
2.2 In 1965, the Canadian Government enacted Tariff Code 9958, in Schedule VII of the Customs Tariff. It is put into effect by Article 114 of the Customs Tariff which provides that "the importation into Canada of any goods enumerated or referred to in Schedule VII is prohibited".1 Tariff Code 9958 applies if an issue of a periodical imported into Canada is a special edition, including a split-run or regional edition, that contains an advertisement that is primarily directed to a market in Canada and that does not appear in identical form in all editions of that issue of the periodical that were distributed in the periodical's country of origin. The Code defines an "issue" to include a special annual issue, and a "periodical" to mean a periodical, the issues of which other than the special annual issue, are published at regular intervals of more than six days and less than fifteen weeks and are distributed as issues of a distinct publication or as a supplement to more than one newspaper, but does not include a catalogue, a newspaper, or a periodical, the principal function of which is the encouragement, promotion or development of the fine arts, letters, scholarship or religion.
2.3 For the purposes of determining whether or not an advertisement is primarily directed at the Canadian market, a number of factors are taken into consideration such as whether there are enticements to the Canadian market, references to the goods and services tax, listing of Canadian addresses as opposed to foreign addresses, and specific invitations to Canadian consumers only.
2.4 The Code also applies where an issue of a periodical imported into Canada is an edition in which more than five per cent of the advertising content consists of advertisements directed to the Canadian market. Advertisements directed to the Canadian market include those that indicate specific sources of product or service availability in Canada or which include specific terms or conditions relating to the sale of goods or services in Canada.2 The publisher of a periodical is notified by the Department of National Revenue for Customs and Excise when a periodical is found to be in contravention of Tariff Code 9958.3
2.5 In 1988, the Canadian Parliament enacted an exception to Tariff Code 9958 which allows Canadian publishers to have their periodicals, which must otherwise be Canadian issues of Canadian periodicals, typeset or printed wholly or partially in the United States.
B. Part V.I of the Excise Tax Act
2.6 In 1995, Bill C-103, which added Part V.I - Tax on Split-run Periodicals to the Excise Tax Act, became law.4 The amendment calls for the imposition, levy and collection, in respect of each split-run edition of a periodical, a tax equal to 80 per cent of the value of all the advertisements contained in the split-run edition. The tax is levied on a per issue basis. The value of all advertisements in a split-run edition of a periodical is the total of all the gross fees for all the advertisements contained in the edition.5 The term "periodical" means printed material that is published in a series of issues that appear not less than twice a year and not more than once a week. Where an issue of a periodical is published in several versions, each version is an edition of the issue. Each edition of the issue must be considered separately when determining whether an edition is a split-run edition. The definition of "periodical" explicitly excludes a catalogue which is substantially made up of advertisements.6
2.7 The amendment defines a split-run edition as an edition of an issue of a periodical that:
(ii) in which more than 20 per cent of the editorial material is the same or substantially the same as editorial material that appears in one or more excluded editions of one or more issues of one or more periodicals; and
(iii) contains an advertisement that does not appear in identical form in all the excluded editions.
2.8 Further, a grandfathering
provision provides limited "grandfathering" treatment
to certain existing periodicals that distributed Canadian split-run
editions prior to 26 March 1993. A particular periodical is eligible
for "grandfathering" treatment and therefore not subject
to the tax on split-runs if the number of split-run editions per
year does not exceed the number of split-run editions that were
distributed during the 12-month period ending on 26 March 1993,
provided that the periodicals continue to be similar in editorial
content and direction to the split-run editions distributed before
that date. If the number of split-run editions per year is increased,
the tax applies to the additional split-run editions.8
2.9 Depending on the circumstances,
the person responsible for paying the tax is the publisher, a
person connected with the publisher, the distributor, the printer
or the wholesaler of the split-run edition. (The Excise Tax Act
stipulates that a person is considered to be connected to another
person if one of them is controlled by the other or if both of
them are controlled by the same person.9 A corporation is
controlled by a particular person if 50 per cent or more of its
share of capital with voting rights belongs to that person or
to persons with whom that person does not deal at arm's length.
A partnership is controlled by a particular person if the person
or persons with whom that person does not deal at arm's length
is or are entitled to 50 per cent or more of the partnership's
income.10) The responsible person is the first of these persons
who resides in Canada.11 The responsible person can be domestic-
or foreign-owned or controlled. In order to ensure enforcement
and collection of the tax, the tax is imposed on a person who
resides in Canada. The persons connected with the responsible
person are jointly and severally liable for payment of the tax.12
As well, where the responsible person is a distributor, a printer
or a wholesaler (and if there is more than one), they are jointly
and severally liable for payment of the tax.13 Where a person
other than the publisher pays the excise tax in respect of a split-run
edition, the person is deemed to have paid the tax on behalf of
the publisher of the periodical. The legislation authorizes the
person to recover the amount of the tax from the publisher in
a court of competent jurisdiction or to deduct or withhold the
amount from any amount payable by the person to the publisher
or distributor of the periodical.14
C. Funded and Commercial
2.10 In 1981, the Canada Post Corporation (hereafter called Canada Post) was established by the Parliament of Canada as a Crown corporation pursuant to the Canada Post Corporation Act (CPC Act).15 Crown corporations are created by one of three methods: an Act of Parliament; letters patent under the Canada Business Corporations Act; or Articles of Incorporation under the Canada Business Corporations Act. According to a treatise on Crown law cited by Canada, Crown corporations are created to separate the management of an activity from continuous partisan intervention and to provide independence from the close financial controls within the government departmental structure.16 The Government of Canada gains control over, and accountability from, Crown corporations primarily through the Financial Administration Act (FA Act) and its Regulations. The FA Act endeavours to strike a balance between the desires for public accountability and for private industry independence. Parliament is required to approve the creation, mandate, and financing of new parent Crown corporations. Government approval is required for annual corporate plans operating and capital budgets, and major corporate acquisitions. The FA Act and the CPC Act define the responsibilities for the direction and daily operation of the corporations.
2.11 The Canada Post publication entitled Publications Mail Postal Rates, (effective 4 March 1996), describes the three categories of publications mail postal rates which are the subject of this dispute: the "funded" publications rates and the commercial "Canadian" and commercial "International" publications rates. The first two categories apply to periodicals published and printed in Canada. "Funded" rates are rates that are subsidized by the Canadian Government and commercial rates are for publications ineligible for "funded" rates. "Canadian" rates are commercial rates available to Canadian publications and "International" commercial rates apply to all foreign publications mailed in Canada.
(i) "Funded" rates
2.12 Since its incorporation, the Government of Canada has provided funding to Canada Post to support special rates of postage for eligible publications through the Publications Distribution Assistance Program (hereafter called the Program). The Program, which was developed to promote Canadian culture, provided funding through Canada Post to eligible Canadian publications, including periodicals, mailed in Canada for delivery in Canada. "Funded" postal rates are available to Canadian-owned and -controlled paid circulation publications that are published and printed in Canada and meet certain editorial and advertising requirements. In January 1990, the Government announced plans to gradually phase out the Program and replace it with a system of direct funding to eligible publications. Since the announcement, funding available for the Program has been gradually reduced. On 30 April 1996, the current policy and funding agreement concerning the Program between Canada Post and the Department of Canadian Heritage (hereafter called Canadian Heritage) was set to expire. At that time, available funding would have been directed to eligible publishers through a replacement program.17
2.13 The Program and its funding structure was extended for three years through a Memorandum of Agreement (MOA), signed in March 1996 and effective 1 May 1996, between the Department of Communications (now the Department of Canadian Heritage) and Canada Post.18 This new agreement provides for payments of funds in quarterly instalments by Canadian Heritage to Canada Post "in exchange for providing prescribed postage rates for publications deemed eligible to the Publications Assistance Program", and the transfer of the program administration from Canada Post to Canadian Heritage.19 Canadian Heritage had requested within the new agreement that Canada Post initiate the complete removal of funded publications mail from the regulations associated with the CPC Act, effective April 1996.20 On 23 April 1996, Canada Gazette published a repeal of the Newspapers and Periodicals Regulations pursuant to Subsection 19(1) of the CPC Act. The revocation was intended to facilitate the transfer of eligibility assessment from Canada Post to Canadian Heritage, to reduce the Program's administrative costs while expediting and simplifying modifications to its policies21, and to allow Canada Post and Canadian Heritage to respond more appropriately and more rapidly to Program and customer needs.
2.14 The amounts authorized by the MOA are CD$58 million for the period commencing 1 May 1996 and ending 31 March 1997; CD$57.9 million for the period 1 April 1997 to 31 March 1998; and CD$47.3 million for the period 1 April 1998 to 31 March 1999.
2.15 Canadian Heritage administers the eligibility requirements for the Program based on the criteria specified in Schedule A to the MOA. Canadian Heritage is responsible for the administration of the eligibility requirements for the Program, and Canada Post must accept for distribution all publications that are eligible under the Program once the publication is approved by Canadian Heritage. For eligible publications to receive funded rates, the publisher must first enter into a sales agreement with Canada Post prior to posting under the Program. Rates of postage for publications eligible under the Program are set out in Schedule C of the MOA and are as follows:
per kg or fraction thereof:
or, per individually addressed copy whichever is the greater:
b) Copies exceeding the first 10,000 copies of an issue addressed to Bona Fide Subscribers and newsdealers in Canada:
per kg or fraction thereof:
or, per individually addressed copy, whichever is the greater:
(Year 1: 1 May 1996 to 31 March
1997; Year 2: 1 April 1997 to 31 March 1998;
Year 3: 1 April 1998 to 31
2.16 In order to be eligible
for funded rates, Canadian publications must generally meet the
following criteria: (i) produced by a person or company whose
primary business is publishing22; (ii) Canadian ownership
and control; (iii) published, printed and mailed in Canada;
(iv) edited in Canada23; (v) eligible editorial categories24;
(vi) minimum paid circulation requirement25; (vii) maximum
advertising allowance26; (viii) frequency27; and (ix)
(ii) Commercial "Canadian"
and commercial "International" rates
2.17 Canada Post has authority
to set its commercial rates outside of regulation, pursuant to
subsections 16(1) and 21(a) of the CPC Act, for any person who
has entered into an agreement with Canada Post for (a) the variation
of rates of postage on the mailable matter of that person in consideration
of his mailing in bulk, preparing the mailable matter in a manner
that facilitates the processing thereof or receiving additional
services in relation thereto;...".29 In order to take
advantage of this provision and receive commercial postal rates
and service, a publisher must enter into an agreement with Canada
Post. For a Canadian publication, this agreement is the "Publications
Mail Product Service Agreement"30, and for a foreign
publication mailed in Canada, this agreement is the "International
Publications Mail Product (Canadian Distribution) Sales Agreement".31
These arrangements are intended to benefit Canadian and foreign
publications and their subscribers by reducing mailing costs and
improving delivery standards. Appendix A of each "Agreement"
contains the commercial "Canadian" and commercial "International"
rates. These rates are identical to those found in the Publications
Mail Postal Rates (referred to in paragraph 2.11) which divides
commercial rates into those that apply for (i) mail service for
Canadian publications that are ineligible for "funded"
rates (Rate Code 5); and (ii) mail service for international
publications (Rate Code 6 or what are called "International"
rates in this dispute). Further, special agreements may be entered
into for both Canadian and non-Canadian publications whereby terms
and conditions (including rates of postage) may be established
on a case-by-case basis.
2.18 Publications must meet the
six criteria enumerated below in order for their publishers to
enter into either a "Publications Mail Products Sales Agreement"
or an "International Publications Mail Product Sales Agreement".
Additionally for the former, the publication "must be a
newspaper, newsletter or periodical, published, printed and mailed
in Canada".32 Additionally for the latter, the publications
"must be a newspaper, newsletter or periodical printed outside
of Canada or registered under Rate Code 5 prior to 1 March 1992".33
(ii) devoted primarily to one or more of religion, the sciences, agriculture, forestry, the fisheries, social or literary criticism or reviews of literature or the arts, or academic or scholarly writings;
(iii) published at a frequency of not less than four times a year;
(iv) addressed to a subscriber, non-subscriber, company or to a newsdealer in Canada;
(v) containing not more than 70 per cent of the space devoted to advertising in more than 50 per cent of the issues published during any twelve month period; and
(vi) published by or at the direction of a person whose principal business is publishing.
2.19 The rates for the commercial
"Canadian" and commercial "International"
publications mail service are summarized as follows:
Two sub-categories include discounts
for palletization and by-pass. Non-subsidized Canadian publications
can receive discounts of $0.01 to $0.02 per copy if palletized,
and discounts ranging from $150.00 to $200.00 per truck load for
a by-pass or downstream entry. These discounts are not available
generally to foreign publications mailed in Canada. Further,
the commercial "Canadian" and commercial "International"
categories have not been subject to regulation since 1994 and
TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS
1 R.S.C. 1985, c. 41 (3rd Suppl.) as amended to 30 April 1996, s.114, Sch. VII, Item 9958, (1996 Customs Tariff: Departmental Consolidation) Ottawa: Minister of Supply & Services Canada, 1996.
2 The Department of National Revenue for Customs and Excise has adopted and published guidelines providing details relating to the application and administration of Code 9958 of the Customs Tariff (Revenue Canada Memorandum D9-1-10, 21 May 1993).
3 The Importation of Periodicals Regulations (C.R.C., c. 533 as amended on 30 April 1996) describe the review process as carried out by an officer or the Deputy Minister of the Department of National Revenue for Customs and Excise.
4 An Act to amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46.
5 Ibid., s. 38.
6 Ibid., ss.35(1) and 35(5).
7 Ibid., ss.35(5).
8 Ibid., s. 39.
9 Ibid., ss.35(2).
10 Ibid., ss.35(3).
11 Ibid., ss.35(1).
12 Ibid., s. 41.1.
13 Ibid., s. 41.2.
14 Ibid., ss.41.3(2).
15 R.S.C. 1985, c. C-10.
16 P. Lordon, Crown Law (Toronto: Butterworths 1991) at 49, 57 and 58. The next five sentences are also from this source.
17 Canada Gazette, Part II, Vol 130, No. 10, Newspapers and Periodicals Regulations, repeal, SOR/96-209, 23 April 1996, Regulatory Impact Analysis Statement.
18 Memorandum of Agreement (MOA) Concerning the Publications Assistance Program Between the Department of Communications and Canada Post Corporation.
19 Canada Gazette, Part II, Vol 130, No. 10.
22 Funded rates cannot be used to promote a specific business, service, fraternal, trade or professional organizations (MOA).
23 An eligible publication must be edited by persons residing in Canada (editing encompasses the commissioning of editorial material and artwork, supervising writers, illustrators and photographers regarding the final format of the material, as well as laying out, copy editing and proofreading, and otherwise preparing the contents for printing) (MOA).
24 Eligible publications must be published for the dissemination to the public consisting of either news, comment and analysis of news and articles on topics of current public interest; or articles on religion, the sciences, agriculture, forestry, the fisheries, social or literary criticism, reviews of literature or the arts, or be an academic or scholarly journal; or articles promoting public health and published by a non-profit organization administered on a national or provincial basis (MOA).
25 No less than 50 per cent of an eligible publication's total circulation must be paid circulation (MOA).
26 No more than 70 per cent of the space, including advertising inserts, in an eligible publication may be devoted to advertising (MOA).
27 It must be published not less than twice a year and not more than 56 times a year (MOA).
28 It must have a stated subscription price of $0.50 or more per copy and $6.00 or more per year.
29 R.S.C. 1985, c.C-10, s. 21(a).
30 Canadian Publications Mail Products Sales Agreement, 1 March 1995.
31 International Publications Mail Product (Canadian Distribution) Sales Agreement, 1 March 1994.
32 Canadian Publications Mail Products Sales Agreement, para. 5.1.
33 International Publications Mail Product (Canadian Distribution) Sales Agreement, para. 4.1.
34 SOR/94-210, 24 February 1994 and SOR/91-641, 7 November 1991.