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WORLD TRADE
ORGANIZATION

WT/DS31/AB/R
30 June 1997
(97-2653)
Appellate Body

CANADA - CERTAIN MEASURES CONCERNING PERIODICALS

AB-1997-2

Report of the Appellate Body


WORLD TRADE ORGANIZATION
APPELLATE BODY

Canada - Certain Measures
Concerning Periodicals
AB-1997-2
Present:
Canada Appellant/AppelleeMatsushita Presiding Member
United States Appellant/Appellee Ehlermann Member
Lacarte-Muró Member

I. Introduction

Canada and the United States appeal from certain issues of law and legal interpretations in the Panel Report, Canada - Certain Measures Concerning Periodicals1 (the "Panel Report"). The Panel was established to consider a complaint by the United States against Canada concerning three measures: Tariff Code 99582, which prohibits the importation into Canada of certain periodicals, including split-run editions; Part V.1 of the Excise Tax Act3, which imposes an excise tax on split-run editions of periodicals; and the application by Canada Post Corporation ("Canada Post") of commercial "Canadian", commercial "international" and "funded" publications mail postal rates, the latter through the Publications Assistance Program (the "PAP") maintained by the Department of Canadian Heritage ("Canadian Heritage") and Canada Post.4

The Panel Report was circulated to the Members of the World Trade Organization (the "WTO") on 14 March 1997. It contains the following conclusions:

    (a) Tariff Code 9958 is inconsistent with Article XI:1 of GATT 1994 and cannot be justified under Article XX(d) of GATT 1994; (b) Part V.1 of the Excise Tax Act is inconsistent with Article III:2, first sentence, of GATT 1994; (c) the application by Canada Post of lower "commercial Canadian" postal rates to domestically-produced periodicals than to imported periodicals, including additional discount options available only to domestic periodicals, is inconsistent with Article III:4 of GATT 1994; but (d) the maintenance of the "funded" rate scheme is justified under Article III:8(b) of GATT 1994.5

The Panel made the following recommendation:

    The Panel recommends that the Dispute Settlement Body request Canada to bring the measures that are found to be inconsistent with GATT 1994 into conformity with its obligations thereunder.6

On 29 April 1997, Canada notified the Dispute Settlement Body7 (the "DSB") of its intention to appeal certain issues of law covered in the Panel Report and legal interpretations developed by the Panel, pursuant to paragraph 4 of Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU"), and filed a Notice of Appeal with the Appellate Body, pursuant to Rule 20 of the Working Procedures for Appellate Review (the "Working Procedures"). On 12 May 1997, Canada filed an appellant's submission.8 On 14 May 1997, the United States filed an appellant's submission pursuant to Rule 23(1) of the Working Procedures. On 26 May 1997, Canada filed an appellee's submission pursuant to Rule 23(3) of the Working Procedures and the United States filed an appellee's submission pursuant to Rule 22 of the Working Procedures. The oral hearing provided for in Rule 27 of the Working Procedures was held on 2 June 1997, at which the participants presented their arguments and answered questions from the Division of the Appellate Body hearing the appeal.

II. Arguments of the Participants

A. Canada

Canada submits that the Panel erred in law by characterizing Part V.1 of the Excise Tax Act as a measure regulating trade in goods subject to the GATT 1994. In the alternative, Canada argues that, even on the assumption that the GATT 1994 applies, the Panel erred in law when it found Part V.1 of the Excise Tax Act to be inconsistent with Article III:2, first sentence, of the GATT 1994. In particular, Canada submits that the Panel erred in law in finding that imported United States' split-run periodicals9 and Canadian non-split-run periodicals are like products; and in failing to apply the principle of non-discrimination that is embodied in Article III:2, first sentence, of the GATT 1994. Canada agrees with the Panel's conclusion that the "funded" postal rate scheme is a permissible subsidy in accordance with the terms and conditions of Article III:8(b) of the GATT 1994.

1. Applicability of the GATT 1994 to Part V.1 of the Excise Tax Act

Canada submits that the Panel erred in law when it applied Article III:2, first sentence, of the GATT 1994 to a measure affecting advertising services. Canada asserts that the GATT 1994 applies, as the GATT 1947 had always applied previously, to measures affecting trade in goods, but it has never been a regime for dealing with services in their own right. In Canada's view, if the GATT 1994 applied to all aspects of services measures on the basis of incidental, secondary or indirect effects on goods, the GATT 1994 would effectively be converted into a services agreement. More precisely, the GATT 1994 should not apply merely on the ground that a service makes use of a good as a tangible medium of communication. Assuming that the measure at issue is designed essentially to restrict access to the services market, the mere fact that a service makes use of a good as a vehicle or a medium is an insufficient ground on which to base a challenge under the GATT 1994.

Canada asserts that the Panel's decision to consider Part V.1 of the Excise Tax Act as a measure subject to Article III of the GATT 1994 was based largely upon an unwarranted generalization of the terms of Article III:4, as well as a misconstruction of the word "indirectly" in Article III:2, first sentence. Canada argues that it is evident from its text that Article III:4 of the GATT 1994 governs only services measures that affect the ability of foreign goods to compete on an equal footing with domestic goods. Canada submits that advertising services are only subject to Article III:4 to the extent that they affect the "internal sale or offering for sale, purchase, transportation, distribution or use" of a product that is entitled to national treatment under Article III of the GATT 1994. The inference that advertising services in general are covered by Article III:2 of the GATT 1994 is without foundation.

Canada stresses that the concept of "indirectly" in Article III:2 of the GATT 1994 is intended to capture taxes which apply to "inputs" that contribute to the production or distribution of a good, such as raw materials, services inputs and intermediate inputs. It is important to distinguish services inputs that are directly involved in the production or marketing of a good from services that are "end-products" in their own right. In Canada's view, the advertising services of a publisher are not, like labour in the production of a car, an input into the production of a good. Canada asserts that services are often delivered by means of a good, and that the taxation of services that are associated with goods in this way does not "subject" those goods "indirectly" to the tax, because the tax does not affect the costs of the production, distribution and marketing of the goods. Canada argues that, although magazines serve as a tangible medium in which advertising is incorporated, this association, however close, does not meet the tests appropriate to the interpretation of Article III:2 of the GATT 1994. Canada maintains that advertising is not an input or a cost in the production, distribution or use of magazines as physical products. Therefore, the taxation of magazine advertising services is not indirect taxation of magazines as goods within the meaning of Article III:2.

Canada asserts that the Panel mischaracterized Part V.1 of the Excise Tax Act as a measure affecting trade in goods. It is a measure regulating access to the magazine advertising market. Most magazines represent two distinct economic outputs, that of a good and an advertising medium for providing a service, depending on the perspective of the purchaser. According to Canada, the tax is not applied to the consumer good because it is not based on, nor applied to, the price of a magazine. Instead, the tax is calculated using the value of advertising carried in a split-run edition of a magazine and is assessed against the publisher of each split-run magazine as the seller of the advertising service.

In Canada's view, since the provision of magazine advertising services falls within the scope of the General Agreement on Trade in Services (the "GATS"), and Canada has not undertaken any commitments in respect of the provision of advertising services in its Schedule of Specific Commitments, Canada is not bound to provide national treatment to Members of the WTO with respect to the provision of advertising services in the Canadian market.

2. Consistency of Part V.1 of the Excise Tax Act with Article III:2 of the GATT 1994

Should the Appellate Body conclude that Part V.1 of the Excise Tax Act is properly subject to the jurisdiction of the GATT 1994, Canada submits, as an alternative argument, that such measure is consistent with Article III:2, first sentence, of the GATT 1994. First, Canada asserts that the Panel erred in its finding that imported split-run periodicals and Canadian non-split-run periodicals are "like products" within the meaning of Article III:2, first sentence, of the GATT 1994. The Panel disregarded the evidence before it, and based its finding on a speculative hypothesis, thus failing to make "an objective assessment of the facts of the case" as required by Article 11 of the DSU. In Canada's view, the "like product" test under Article III:2, first sentence, requires a comparison of an imported product with a domestic product. While the Panel acknowledged the correctness of this test, the Panel failed to apply it by using a hypothetical example for its comparison rather than actual examples of split-run and non-split-run magazines provided by Canada. Canada notes that the Panel asserted that its hypothetical example was necessary because there were no imported split-run periodicals in Canada due to the import prohibition under Tariff Code 9958. However, Canada argues that there are certain "grandfathered" split-run magazines produced in Canada, and that those magazines provide an accurate representation of the content and properties of a split-run edition based on a non-Canadian parent magazine. The Panel did not consider the evidence which had been filed by Canada10, it did not provide any reason why that evidence was not relevant, and instead based its analysis upon an hypothetical scenario. Therefore, Canada argues, the Panel followed an approach which is inconsistent with the letter and spirit of Article 11 of the DSU.

Furthermore, Canada submits that the Panel made two errors in its hypothetical analysis of "like products". First, the Panel failed to compare an imported product with a domestic product, and instead it compared two imported "Canadian" editions. Second, the Panel failed to compare products which could be marketed simultaneously in the Canadian market. Canada also argues that the Panel's decision fails to reflect the narrow construction and case-by-case approach required by the Appellate Body Report in Japan - Taxes on Alcoholic Beverages ("Japan - Alcoholic Beverages").11 The case-by-case approach requires an analysis based upon the specific properties of the magazines in a Canadian context.

The chief and, for all practical purposes, the only distinguishing characteristic of a magazine is its content. Although Canada recognizes that the Panel did not, in principle, reject the idea that content can be relevant, Canada argues that the Panel evaded a determination of whether split-run periodicals containing foreign content are substantially identical to magazines developed specifically for a Canadian readership.

Canada submits that content developed for and aimed at the Canadian market cannot be the same as foreign content. Content for the Canadian market will include Canadian events, topics, people and perspectives. The content may not be exclusively Canadian, but the balance will be recognizably and even dramatically different than that which is found in foreign publications which merely reproduce editorial content developed for and aimed at a non-Canadian market.

Canada also submits that, even if United States' split-run periodicals and Canadian non-split- run periodicals are "like products", Part V.1 of the Excise Tax Act does not discriminate against imported products. Canada affirms that the tax is non-discriminatory, in form and in fact, and has no greater impact on imported products than on domestic products. Because the legislation does not make any distinction between domestic and imported products, the tax is free from any taint of overt discrimination. Canada asserts that there can be no violation of Article III:2, first sentence, unless imported products, as a class, are taxed in excess of like domestic products. Canada submits that the mere potential that an individual, imported item might be taxed at a higher rate than a like domestic product cannot create an automatic violation, when it results from fiscal classifications that are not themselves discriminatory in form or in fact. Article III:2 was not intended to impose fiscal harmonization in tax rates, methods or classifications. Canada states that its interpretation does not involve the subjectivity of the now-discredited "aims and effects" test. Canada suggests only that if the fiscal categories of a measure are origin-neutral and exhibit no inherent bias, then the mere existence of such categories, with differential rates of taxation, does not violate Article III:2. In the present case, Canada asserts there is no de jure or de facto discrimination, and the definitions (or fiscal categories) used in the Excise Tax Act display no inherent bias against imported products.

With respect to the second sentence of Article III:2 of the GATT 1994, Canada argues that imported split-run and domestic non-split-run periodicals are not directly competitive or substitutable products according to the criteria in Japan - Alcoholic Beverages. Because content is so specific in magazines and because readers are looking for something fairly specific, magazines are not interchangeable or substitutable. Readers buy multiple magazines. These are complex questions of fact.

Canada argues that, in the case at hand, there are two separate determinations to be made under Article III:2. The first sentence relates to whether or not there is discrimination against like products. Only if there is no violation of the first sentence can the Appellate Body decide whether the measure is consistent with the second sentence of Article III:2. On this point, Canada argues, it is not the actual decision of the Panel that is in question, but the fact that the Panel made no decision at all on the second sentence of Article III:2. An examination of the second sentence would involve an examination of factual elements which have not been dealt with one way or the other by the Panel in the first instance.

Canada's position is that the second sentence of Article III:2 is not an appropriate subject for appellate review in this case. Canada argues that the jurisdiction of the Appellate Body is limited to matters that are specifically appealed as constituting errors of law or interpretation in the Panel Report within the meaning of paragraph 17.6 of the DSU. The United States failed to raise the Panel's findings on Article III:2, second sentence, as a point of appeal, and therefore, the Appellate Body has no jurisdiction to look into this issue. If the Appellate Body decides to reverse the Panel's findings on Article III:2, first sentence, that should be the end of the matter.

3. Consistency of the "Funded" Postal Rate Scheme with Article III:8(b) of the GATT 1994

Canada submits that, consistent with the Panel's findings, the payments made by Canadian Heritage to Canada Post to provide Canadian publishers with reduced postal rates are payments of subsidies exclusively to domestic producers within the meaning of Article III:8(b) of the GATT 1994.

Canada asserts that nothing in the expression, "payment of subsidies exclusively to domestic producers" implies any limitations on the manner in which the payment must be made. In this case, the payments made by Canadian Heritage to Canada Post are made for the sole benefit of Canadian publishers. In Canada's view, Canadian Heritage is purchasing a benefit for domestic producers.

Canada argues that the phrase "exclusively to domestic producers" does not support the United States' assertion that a payment must actually be made directly to the publishers. Rather, the word "exclusively" is concerned with the distinction between "domestic" as opposed to "non-domestic" producers. Canada submits that the general thrust of Article III is against discrimination between imported and domestic products. In this context, Canada considers that granting a government subsidy "exclusively" to domestic producers means granting a subsidy only to the producers of domestic products, in the sense that it is paid to them alone and not to foreign producers.

Canada asserts that the United States' position is based on a difference of form, not substance, and that the specific form in which the subsidy is paid is irrelevant to the operation of Article III:8(b) of the GATT 1994. The word "including" in a legal text is illustrative, not exhaustive, and it demonstrates that the Members intended to cover a very broad range of subsidies, regardless of the particular form of the subsidy or the manner of payment. In Canada's view, the 1990 panel report in European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins ("EEC - Oilseeds")12 confirms that the payment of subsidies can be indirect, provided that the condition of exclusivity is met. Canada submits that indirect payment merely creates a presumption that a payment not made directly to producers is not made exclusively to them. However, the panel report in EEC - Oilseeds clearly leaves open the possibility that the presumption can be rebutted in the right circumstances. In Canada's view, indirect payment creates at most a presumption, but it is a rebuttable presumption.

Canada submits that the broad meaning of "payment" in Article III:8(b) is confirmed by the fact that the word "payment" in the French text of the GATT 1994 appears as "attribution", and not as "paiement". The expression "payment of subsidies" is translated into French as "attribution de subventions", i.e. granting of subsidies. Canada argues the expression "attribution de subventions" clearly does not require that there must be an actual transfer of government funds to domestic producers.

Canada points out that its interpretation of Article III:8(b) of the GATT 1994 does not diminish the protection offered under Article III generally. Whether the cheques are written to Canada Post or to the publishers will not change the competitive conditions between magazines. Canada submits that it makes no sense to suggest that Article III:8(b) should be interpreted in a manner that can only lead to government inefficiencies in delivering subsidies to producers.

Canada also argues that the panel reports quoted by the United States in its appellant's submission13 do not support the conclusion that a subsidy must be paid directly to domestic producers to qualify under the provisions of Article III:8(b). Those panel reports do not apply to the facts in this dispute. The method of subsidy payment is not, in and of itself, conclusive in determining whether Article III:8(b) of the GATT 1994 applies. The essential factor is that the payment must be made by the government for the benefit of domestic producers.

B. United States

The United States agrees with the Panel's findings and conclusions concerning Tariff Code 9958, Part V.1 of the Excise Tax Act and the lower "commercial Canadian" postal rates, as summarized in paragraph 6.1 of the Panel Report, but the United States submits that the Panel erred in determining that Canada's "funded" postal rate scheme is justified by Article III:8(b) of the GATT 1994.

1. Applicability of the GATT 1994 to Part V.1 of the Excise Tax Act

The United States submits that Canada's excise tax is not exempt from Article III of the GATT 1994 on the ground that it is a "services measure" subject only to the GATS. Canada has failed to demonstrate any significant conflict between the GATT 1994 and the GATS arising from this case or that, in any event, the GATS should be accorded priority over the GATT 1994. The United States argues that Canada is incorrect in suggesting that the GATT 1994 cannot apply to measures whose application affects both goods and services.

The United States asserts that the question of whether the GATT 1994 and the GATS may overlap to some extent is irrelevant. The fundamental legal question, which the panel addressed, is whether the two agreements impose conflicting obligations with respect to Canada's excise tax, and whether one agreement should be given priority over the other. The United States submits that the Panel was correct in pointing out that nothing in the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement")14 suggests that a measure that comes within the scope of the GATS cannot be equally subject to the GATT 1994.

The United States maintains that because Canada's general argument forbidding any significant overlap between the two agreements is incorrect, so too is Canada's more specific argument that Part V.1 of the Excise Tax Act cannot be subject to the GATT 1994 because it applies to advertising services. Measures affecting imported products are not excluded from the purview of the GATT 1994 simply because they take the form of a tax or other measure applied to "services". According to the United States, Canada's view that measures affecting imported goods are exempt from scrutiny under Article III of the GATT 1994 whenever they take the form of taxation or regulation of services would give WTO Members licence to impose a wide range of discriminatory tax and regulatory measures on imported goods. Should Canada's view prevail, a Member could, consistently with the GATT 1994, impose an exclusive tax on the rental of foreign cars, place a prohibitive surcharge on telephone services carried out using imported telecommunications equipment or tax medical services using foreign diagnostic machinery.

The United States asserts that for the purposes of Article III of the GATT 1994, it is irrelevant whether Canada's excise tax could be characterized as a measure affecting trade in advertising services within the terms of the GATS. The tax measure alters the terms of competition for imported split-run periodicals vis-à-vis like domestic magazines for the placement of advertisements -- as indeed it is intended to do -- and thus falls squarely within the purview of Article III:2, first sentence, of the GATT 1994.

The United States also submits that Canada's excise tax applies "directly or indirectly" to split-run periodicals. The sweeping language of Article III:2, first sentence, ensures coverage of taxes (such as taxes imposed on goods or services) that have the potential to affect the competitive position of imported and domestic goods. Thus, the Panel was correct to find that the terms "directly or indirectly" specifically encompass Canada's excise tax on split-run periodicals. The United States points out that the tax is assessed on a "per issue" basis, which plainly links the tax to the physical good, a particular issue of a magazine. The United States also stresses that Part V.1 of the Excise Tax Act is entitled "Tax on Split-Run Periodicals", and the terms of the Excise Tax Act provide that the tax is imposed "in respect of" split-run editions of periodicals.

The United States submits that advertisements, together with editorial content, constitute fundamental, physical components of many, if not most, magazines. It is inconsistent to argue, as Canada does, that a tax concerning inputs is a tax directly or indirectly on a product, but a tax concerning a major component of that product is not. Furthermore, the United States asserts that advertisements affect a magazine's price, cost and competitive position as much as any input used in the production of a product.

The United States also maintains that, by its terms, the first sentence of Article III:2 applies only when imported products are "subject" to internal taxes. Since the language of that sentence includes both direct and indirect taxes on products, it is plain that the first sentence applies even when the immediate object of the taxation is not an imported product. Even if Canada's assertion that the tax applies to "advertising services" is correct, that would hardly be the end of the inquiry; the question would then be whether the tax nevertheless applies at least "indirectly" to split-run periodicals. The answer to that question is plainly "yes", as the language of the Excise Tax Act makes clear. The notion that restricting a major use of a product -- in this case, the carrying of certain types of advertising -- cannot affect competitive conditions is untenable. By applying a confiscatory tax based on advertisements placed in split-run periodicals, Canada virtually ensures the elimination of such periodicals from the Canadian marketplace -- which indeed is the whole point of the tax.

2. Consistency of Part V.1 of the Excise Tax Act with Article III:2 of the GATT 1994

The United States submits that split-run periodicals are "like" domestic non-split-run periodicals. In the United States' view, none of the three separate claims of legal error raised by Canada with respect to the Panel's findings and conclusions on Article III:2, first sentence, are persuasive.

The United States asserts that Canada's argument that the Panel erred by using a hypothetical example as a basis for comparison is without merit. The Panel correctly determined that the application of the tax turned on factors other than the characteristics of the product sold in Canada and that, as a result, imported split-run periodicals and domestic non-split-run periodicals could be practically identical products. The United States points out that the Excise Tax Act does not draw any distinctions based on type of editorial content and, consequently, under the Excise Tax Act a split-run periodical could theoretically be entirely Canadian-oriented. By the same token, a non-split-run periodical need not have any articles with a particular Canadian focus. Thus, according to the United States, Canada's attempt to demonstrate that TIME Canada and Maclean's reflect a different editorial orientation is simply irrelevant because the application of the Excise Tax Act is not based on any such difference.

The United States also submits that, even if one could credit Canada's argument that it is seeking through the excise tax to ensure "original content" in magazines sold in Canada, this result would be contrary to the object and purpose of Article III. In the United States' view, if the GATT 1994 permitted Members to require that imported goods be designed exclusively or primarily for their markets, they could easily insulate their markets from the comparative economic advantages enjoyed by producers in other countries. By requiring "originality", WTO Members could exclude products that are sold in multiple markets or that enjoy the economies of scale that result from such sales.

The United States stresses that Canada has banned importation of split-run periodicals for over 30 years. For this reason, the Panel was entirely justified to use hypothetical examples in its reasoning on the "like product" issue.

According to the United States, Canada's argument that the Excise Tax Act does not impose a higher tax on imported products than on like domestic products is difficult in the light of the fact that, (1) the Act makes only one class of magazines -- split-runs -- subject to the special 80 percent excise tax; and (2) the Panel found that, for purposes of GATT Article III:2, imported split-run periodicals are "like" non-split-run domestic Canadian magazines. The United States argues that manifestly imported split-run periodicals are subject to a higher rate of taxation than like domestic non-split-run periodicals. That is the end of the inquiry for purposes of Article III:2, first sentence. The United States also maintains that Canada's 80 percent excise tax alters the competitive environment in the Canadian magazine market against imported split-run magazines and thus favours "like" domestically-produced periodicals. Thus, Canada's proposed "discrimination" test based on "imports as a class" is inconsistent with the recent panel and Appellate Body reports in Japan - Alcoholic Beverages15, where no additional "discrimination" test based on "classes" of imported products was accepted.

The United States requests the Appellate Body to affirm the Panel's conclusions that Part V.1 of the Excise Tax Act is inconsistent with Article III:2, first sentence, of the GATT 1994.

With respect to whether imported split-run periodicals and domestic non-split-run periodicals are directly competitive or substitutable products within the meaning of the second sentence of Article III:2, the United States asserts that it is clear that if there was no competition for readers, there would be no need for Part V.1 of the Excise Tax Act. In its excise tax, Canada has targeted those magazines that are likely to be the most competitive with Canadian magazines for readers.

Regarding the jurisdictional arguments presented by Canada concerning whether the Appellate Body can examine a claim under the second sentence of Article III:2, the United States responds that there were no grounds for the United States to claim that the Panel had made a legal error in not addressing the alternative argument raised by the United States under Article III:2, second sentence. The Panel had resolved the issue by finding a violation of Article III:2, first sentence, of the GATT 1994 and therefore, had correctly stopped at that point. The United States also refers to the recent Appellate Body Report in United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India16 which upheld the judicial economy approach taken by panels.

In the United States' view, this situation is analogous to the Appellate Body's reasoning concerning Article XX of the GATT 1994 in United States - Standards for Reformulated and Conventional Gasoline ("United States - Gasoline").17 The procedure suggested by Canada is not consistent with the goals of Article 3.3 of the DSU. The parties to the dispute made a number of arguments before the Panel relating to the second sentence of Article III:2 as well as to Article III:4 of the GATT 1994. The United States asserts that there is a sufficient legal basis for the Appellate Body to apply the law to the facts in the panel record in analyzing a claim under the second sentence of Article III:2 should the Appellate Body decide to reverse the Panel's findings on Article III:2, first sentence, of the GATT 1994.

3. Consistency of the "Funded" Postal Rate Scheme with Article III:8(b) of the GATT 1994

The United States submits that the Panel erred in determining that Canada's "funded" postal rate regime falls within the scope of Article III:8(b) of the GATT 1994. According to the United States, neither the intra-governmental transfers of funds between the Canadian governmental entities nor the application by Canada Post of lower postage rates to domestic periodicals amounts to "the payment of subsidies exclusively to domestic producers" within the meaning of Article III:8(b).

The United States argues that any "payment" under Canada's "funded" postal rate scheme is made from one government entity to another, not from the Canadian government to domestic producers as required by Article III:8(b). Canada Post's favourable postage rates for domestic periodicals do not, in themselves, amount to a payment "exclusively to domestic producers", because whether or not there is any "subsidy" reflected in the "funded" postal rates, they take the form of advantageous transport and delivery rates for domestic periodicals. In making its findings, the Panel ignored both the plain language of Article III:8(b) and a series of adopted panel reports under the GATT 1947 that correctly interpreted Article III:8(b) as applying only to the actual payment of subsidies to domestic producers.18 The United States also submits that the Panel did not clarify how a postal charge could amount to a subsidy payment, nor why postal fees imposed on domestic periodicals should be viewed as payments to domestic periodical producers.

According to the United States, the text of Article III:8(b) plainly requires: (1) that there be a payment, and (2) that this payment be made exclusively to domestic producers. The United States asserts that the use of the word "payment" in the phrase "payment of subsidies" -- instead of more general terms such as "provision", "furnishing" or "granting" -- indicates that the scope of Article III:8(b) is limited to measures involving an actual transfer of government funds to domestic producers. Furthermore, the two specific examples of exempted measures set out in Article III:8(b) ­­ "payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products" -- confirm this interpretation. In the United States' view, both types of subsidies are typically effected through monetary payments made by a government to domestic producers.

In response to Canada's reference to the French translation of the word "payment" in Article III:8(b), the United States points out that in the Spanish version of the WTO Agreement, adopted at Marrakesh, the translation of "payment" was changed from "concesión" in the GATT 1947 to "pago" in the GATT 1994. The term "concesión" means "grant", whereas "pago" means "payment".

The United States also maintains that the use of the phrase "exclusively to domestic producers" indicates that the payment must actually be made to the producers, and excludes advantages provided by governments to domestic products that may provide indirect benefits to domestic producers. Article III:8(b) reflects a willingness on the part of the framers of the GATT 1947 to allow governments some ability to subsidize domestic production. On the other hand, the United States considers that the narrow terms of the provision suggests that the drafters wished to restrict such subsidies to a particular form, i.e. direct payments, that would not undermine the basic purpose of Article III.

According to the United States, the distinction between (a) payments to domestic producers and (b) advantages conferred with respect to domestic products is significant in the context of the object and purpose of Article III. First, governmental advantages directed to domestic products, such as lower transportation or delivery rates, directly and immediately undercut Article III's fundamental prohibition of less favourable treatment of imported products. By contrast, payments made to domestic producers do not automatically distort competition between domestic and imported products. Second, measures that are reflected in intra-governmental transfers, rate-setting and the like may more easily escape public attention than direct monetary transfers to producers, and thus may be less open to public scrutiny and debate. Third, governments may find it more costly and administratively complex to establish a system of direct payments to producers than to provide advantages directly tied to the treatment of products. For the preceding reasons, the limitation of Article III:8(b) to direct payments to producers may reduce the incidence and magnitude of government advantages provided solely to domestic interests, thereby reducing the possibility of competitive distortions that could undermine Article III's objective of maintaining equal competitive conditions for domestic and imported products.

The United States asserts that the Panel failed to address the question of whether payment was actually made to domestic producers. Instead, the Panel assumed, without articulating its reasoning, that the payment to Canada Post constituted payment of a subsidy to domestic producers, and that the only issue in dispute with respect to the application of Article III:8(b) was whether that payment was made "exclusively" to domestic producers. Neither Canadian Heritage nor Canada Post makes any "payment" to Canadian producers under Canada's "funded" postal rate programme. Rather, Canadian Heritage periodically transfers funds to Canada Post, and the latter does not pay those funds to Canadian producers. Canada Post uses the funds to underwrite, in part, the cost of providing transportation and delivery services for domestic periodicals at low, "funded" postal rates. The United States argues that whether or not Canada's discriminatory "funded" rate scheme reflects a government "subsidy", any such subsidy is not granted directly in the form of payments to domestic periodical producers. Rather, the subsidy is reflected in the preferential rate charged in connection with the transportation and delivery of Canadian-produced periodicals.

If sustained, the United States submits, the Panel's finding in this case would free WTO Members to use a wide range of reduced-price governmental services and tax measures to confer advantages exclusively on domestically-produced goods. Such a result would not only undermine the equality of competitive opportunities for imported and domestic goods that Article III is meant to ensure, but would also upset the balance of rights and obligations reflected in Articles III:2 and III:4, on the one hand, and Article III:8(b), on the other.

III. Issues Raised in this Appeal

The appellant, Canada, raises the following issues in this appeal:

    (a) Whether Part V.1 of the Excise Tax Act is a measure affecting trade in goods to which Article III:2 of the GATT 1994 applies, or whether it is a measure affecting trade in services to which the GATS applies;

    (b) If Article III:2 of the GATT 1994 is applicable to Part V.1 of the Excise Tax Act, whether imported split-run periodicals and domestic non-split-run periodicals are "like products" within the meaning of Article III:2, first sentence, of the GATT 1994; and

    (c) Even if imported split-run periodicals and domestic non-split-run periodicals are "like products" within the meaning of Article III:2, first sentence, of the GATT 1994, is it necessary to demonstrate that Part V.1 of the Excise Tax Act discriminates against imported products.

The appellant, the United States, raises the following issue in this appeal:

    (a) Whether Canada's special "funded" postal rates programme qualifies as "a payment of subsidies exclusively to domestic producers" pursuant to Article III:8(b) of the GATT 1994.

IV. Applicability of the GATT 1994

Canada's primary argument with respect to Part V.1 of the Excise Tax Act is that it is a measure regulating trade in services "in their own right" and, therefore, is subject to the GATS. Canada argues that the Panel's conclusion that Part V.1 of the Excise Tax Act is a measure affecting trade in goods, and, therefore, is subject to Article III:2 of the GATT 1994, is an error of law.19

We are unable to agree with Canada's proposition that the GATT 1994 is not applicable to Part V.1 of the Excise Tax Act. First of all, the measure is an excise tax imposed on split-run editions of periodicals. We note that the title to Part V.1 of the Excise Tax Act reads, "TAX ON SPLIT-RUN PERIODICALS", not "tax on advertising". Furthermore, the "Summary" of An Act to Amend the Excise Tax Act and the Income Tax Act20, reads: "The Excise Tax Act is amended to impose an excise tax in respect of split-run editions of periodicals". Secondly, a periodical is a good comprised of two components: editorial content and advertising content.21 Both components can be viewed as having services attributes, but they combine to form a physical product -- the periodical itself.

The measure in this appeal, Part V.1 of the Excise Tax Act, is a companion to Tariff Code 9958, which is a prohibition on imports of special edition periodicals, including split-run or regional editions that contain advertisements primarily directed to a market in Canada and that do not appear in identical form in all editions of an issue distributed in that periodical's country of origin. Canada agrees that Tariff Code 9958 is a measure affecting trade in goods, even though it applies to split-run editions of periodicals as does Part V.1 of the Excise Tax Act. As Canada stated in the oral hearing during this appeal:

    Tariff Code 9958 is basically an import prohibition of a physical good, i.e., the magazine itself. In that sense the entire debate was as to whether or not there was a possible defence against the application of Article XI of the GATT. In that case, therefore, there were direct effects and Canada recognized that there were effects on the physical good -- the magazine as it crossed the border.22

The Panel found that Tariff Code 9958 is an import prohibition, although it applies to split-run editions of periodicals which are distinguished by their advertising content directed at the Canadian market. Canada did not appeal this finding of the Panel. It is clear that Part V.1 of the Excise Tax Act is intended to complement and render effective the import ban of Tariff Code 9958.23 As a companion to the import ban, Part V.1 of the Excise Tax Act has the same objective and purpose as Tariff Code 9958 and, therefore, should be analyzed in the same manner.

An examination of Part V.1 of the Excise Tax Act demonstrates that it is an excise tax which is applied on a good, a split-run edition of a periodical, on a "per issue" basis. By its very structure and design, it is a tax on a periodical. It is the publisher, or in the absence of a publisher resident in Canada, the distributor, the printer or the wholesaler, who is liable to pay the tax, not the advertiser.24

Based on the above analysis of the measure, which is essentially an excise tax imposed on split­run editions of periodicals, we cannot agree with Canada's argument that this internal tax does not "indirectly" affect imported products. It is a well-established principle that the trade effects of a difference in tax treatment between imported and domestic products do not have to be demonstrated for a measure to be found to be inconsistent with Article III.25 The fundamental purpose of Article III of the GATT 1994 is to ensure equality of competitive conditions between imported and like domestic products.26 We do not find it necessary to look to Article III:1 or Article III:4 of the GATT 1994 to give meaning to Article III:2, first sentence, in this respect. In Japan - Alcoholic Beverages, the Appellate Body stated that "Article III:1 articulates a general principle" which "informs the rest of Article III".27 However, we also said that it informs the different sentences in Article III:2 in different ways. With respect to Article III:2, second sentence, we held that "Article III:1 informs Article III:2, second sentence, through specific reference".28

Article III:2, first sentence, uses the words "directly or indirectly" in two different contexts: one in relation to the application of a tax to imported products and the other in relation to the application of a tax to like domestic products. Any measure that indirectly affects the conditions of competition between imported and like domestic products would come within the provisions of Article III:2, first sentence, or by implication, second sentence, given the broader application of the latter.

The entry into force of the GATS, as Annex 1B of the WTO Agreement, does not diminish the scope of application of the GATT 1994. Indeed, Canada concedes that its position "with respect to the inapplicability of the GATT would have been exactly the same under the GATT 1947, before the GATS had ever been conceived".29

We agree with the Panel's statement:

    The ordinary meaning of the texts of GATT 1994 and GATS as well as Article II:2 of the WTO Agreement, taken together, indicates that obligations under GATT 1994 and GATS can co-exist and that one does not override the other.30

We do not find it necessary to pronounce on the issue of whether there can be potential overlaps between the GATT 1994 and the GATS, as both participants agreed that it is not relevant in this appeal.31 Canada stated that its

    ... principal argument is not based ... on the need to avoid overlaps and potential conflicts. On the contrary it is based on a textual interpretation of the provision, on the plain meaning of the words in Article III:2 -- more precisely the word 'indirectly' interpreted in its legal context and in light of the object and purpose of the provision.32

We conclude, therefore, that it is not necessary and, indeed, would not be appropriate, in this appeal to consider Canada's rights and obligations under the GATS. The measure at issue in this appeal, Part V.1 of the Excise Tax Act, is a measure which clearly applies to goods -- it is an excise tax on split-run editions of periodicals. We will now proceed to analyze this measure in light of Canada's points of appeal under Article III:2 of the GATT 1994.

TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS


1 WT/DS31/R, 14 March 1997.

2 Customs Tariff, R.S.C. 1985, c. 41 (3rd Supp.), s. 114, Schedule VII, Item 9958.

3 An Act to Amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46.

4 Canada Post Corporation Act, R.S.C. 1985, c. C-10; Publications Mail Postal Rates, Canada Post Corporation, effective 4 March 1996; Canadian Publication Mail Products Sales Agreement, 1 March 1995; International Publications Mail Product (Canadian Distribution) Sales Agreement, 1 March 1994; Memorandum of Agreement concerning the Publications Assistance Program between the Department of Communications and Canada Post Corporation (the "MOA").

5 Panel Report, para. 6.1.

6 Panel Report, para. 6.2.

7 WT/DS31/5, 2 May 1997.

8 Pursuant to Rule 21(1) of the Working Procedures.

9 We use the terms "periodical" and "magazine" interchangeably in this Report.

10 Comparing TIME (a United States' magazine) and TIME Canada (a split-run magazine) with Maclean's (a domestic non-split run magazine).

11 WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996.

12 Adopted 25 January 1990, BISD 37S/86.

13 Panel Report, Italian Discrimination Against Agricultural Machinery, ("Italian Agricultural Machinery"), adopted 23 October 1958, BISD 7S/60; Panel Report, United States - Measures Affecting Alcoholic and Malt Beverages, ("United States - Malt Beverages"), adopted 19 June 1992, BISD 39S/206; Panel Report, United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, ("United States - Tobacco"), DS44/R, adopted 4 October 1994; Panel Report, EEC - Oilseeds, adopted 25 January 1990, BISD 37S/86.

14 Done at Marrakesh, Morocco, 15 April 1994.

15 Panel Report, WT/DS8/R, WT/DS10/R, WT/DS11/R, and Appellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996.

16 WT/DS33/AB/R, adopted 23 May 1997, p. 18.

17 WT/DS2/AB/R, adopted 20 May 1996.

18 Panel Report, Italian Agricultural Machinery, adopted 23 October 1958, BISD 7S/60; Panel Report, United States - Malt Beverages, adopted 19 June 1992, BISD 39S/206; Panel Report, United States - Tobacco, DS44/R, adopted 4 October 1994; Panel Report, EEC - Oilseeds, adopted 25 January 1990, BISD 37S/86.

19 Canada's Appellant's Submission, 12 May 1997, pp. 2-3, paras. 6, 9, 13 and 15.

20 S.C. 1995, c. 46.

21 Panel Report, para. 3.33.

22 Canada's Statement at the oral hearing, 2 June 1997.

23 Panel Report, paras. 3.25 and 3.26.

24 An Act to Amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46, s. 35(1).

25 Appellate Body Report, Japan - Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 16.

26 Panel Report, United States - Tobacco, DS44/R, adopted 4 October 1994, para. 99; Panel Report, United States - Malt Beverages, adopted 19 June 1992, BISD 39S/206, para. 5.6; Panel Report, Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, adopted 18 February 1992, BISD 39S/27, para. 5.6; Panel Report, United States - Section 337 of the Tariff Act of 1930, ("United States - Section 337"), adopted 7 November 1989, BISD 36S/345, para. 5.13; Panel Report, United States - Taxes on Petroleum and Certain Imported Substances, adopted 17 June 1987, BISD 34S/136, para. 5.1.9; Panel Report, Brazilian Internal Taxes, adopted 30 June 1949, BISD IIS/181, para. 15.

27 WT/DS8/AB/R, WT/DS10/AB/R,WT/DS11/AB/R, adopted 1 November 1996, p. 18.

28 Ibid., p. 23. In this respect, we draw attention to paragraphs 4.8, 5.37 and 5.38 of the Panel Report, and we note that a Panel finding that has not been specifically appealed in a particular case should not be considered to have been endorsed by the Appellate Body. Such a finding may be examined by the Appellate Body when the issue is raised properly in a subsequent appeal.

29 Canada's Appellant's Submission, 12 May 1997, p. 3, para. 14.

30 Panel Report, para. 5.17.

31 Canada's Appellant's Submission, 12 May 1997, p. 3, para. 14; United States' Appellee's Submission, 26 May 1997, p. 13, para. 29.

32 Canada's Statement at the oral hearing, 2 June 1997.