5 June 1987

4.1 Australia

4.1.1 Australia stated that the imposition of a higher rate of tax on imported crude oil and petroleum products than that applied to like domestic products was inconsistent with the United States' obligations under Article III:2. The tax differential of 3.5 cents per barrel constituted a form of protection to the identical domestic product which was taxed at a lower rate.

4.1.2 In interpretations of Article III the CONTRACTING PARTIES had agreed that a contracting party was bound by the provisions of Article III, whether or not it had entered into tariff commitment with respect to the goods concerned (BISD, Vol. II/182) and that the question of whether or not the tax breached bindings was therefore irrelevant to the determination of whether the tax was inconsistent with the provisions of Article III. It was however apparent that the imposition of an additional tax, at the point of entry of the product, did in fact breach a number of GATT bindings.

4.1.3 The Working Party on Brazilian Internal Taxes had agreed that the provisions of Article III applied, whether or not imports from other contracting parties were substantial, small, or non-existent (BISD Vol. II/185) of Article III thus protected small suppliers (such as Australia in the present case) and substantial suppliers alike. The Working Party had taken the view that, whether or not damage was shown, taxes on imported products in excess of those on domestic products were prohibited by Article III, and that the provisions of Article III were intended to prevent damage and not merely to provide a mean of rectifying such damage (BISD Vol. II/184). Similarly, during the discussion in the Council of the Panel report on "Spain - Measures Concerning Domestic Sale of Soyabean Oil" (which had not been adopted by Council but only noted), many contracting parties had stated that neither the language of Article III nor past interpretation of its provisions, nor the 1979 Understanding on dispute settlement, supported an interpretation that internal regulations which protect domestic production must have restrictive effect on directly competitive or substitutable products in order to be found contrary to Article III. The rule embodied in the 1979 Understanding on dispute settlement was "that there is normally a presumption that a breach of the rule has an adverse impact on other contracting parties, and in such cases, it is up to the contracting parties against whom the complaint has been brought to rebut the charge" (BISD 26S/216). Only after a breach of the rules had been found, independent of the question of injurious effects, the question of adverse effects could be considered. Some representatives had also noted that adverse affects could not only be measured by direct effects on import volume in the country maintaining the measure but could manifest themselves as well by other trade-distorting consequences, including possible suppression of growth of trade (C/M/152).

4.1.4 Australia's share of United States' imports of petroleum and petroleum products to date had been relatively small (the largest share in the past 3 years having been 1.1 per cent in 1985). Nevertheless these products were a significant item in Australia's exports. The value of Australia's exports of oil and petroleum products to the United States in Australian dollars for the period 1983/84 - 1985/86 had been as follows:

Australia was concerned about the effects on any future growth of trade in these products which this differential tax could have. Australia was not convinced by the United States' argument that the effect of the differential would be insignificant.

4.2 Indonesia

4.2.1 Indonesia pointed out that petroleum and petroleum products played an important role in Indonesia's development. These products accounted for nearly 70 per cent of Indonesia's export receipts and 60 per cent of its government revenues. Sales had been affected considerably not only by lower prices but also by unstable demand in the international market. 35 per cent of the total Indonesian production of petroleum and petroleum products had been exported to the United States: 114 million barrels in 1984, 103.7 million barrels in 1985 and 113.8 million barrels in 1986. As the trade in these products was carried out in dollars, the decline in the value of the dollar had caused a significant decline in Indonesia's export earnings in the United States market, namely about 13.3 per cent in 1985 and 44.8 per cent in 1986. Any additional constraints on Indonesia's petroleum and petroleum products exports would aggravate its development problems.

4.2.2 Indonesia emphasized that it supported the environmental objectives of the Superfund Act but objected to the raising of funds in a way that violated the General Agreement - in particular its Article III - discriminated in favour of domestic products and made developing countries, pay for the protection of the environment in an industrialized country.

4.3 Kuwait

4.3.1 Kuwait shared the concern shown by other contracting parties about the tax imposed by the United States on imports of petroleum and petroleum products to finance the Superfund. In its view the adoption of this legislation was contrary to, and incompatible with, the provisions of Article III of the General Agreement.

4.3.2 Kuwait was opposed to all taxes and other measures by industrialized countries affecting the importation of oil, petro-products and petro-chemicals. Such taxes had negative effects on the trade and development of the exporting countries and reduced the volume of international trade in general.

4.4 Malaysia

4.4.1 Malaysia stated that the tax on petroleum, because it discriminated against imported products, was contrary to Article III:2. No matter what the level of difference between the two taxes was, the principle remained that there was a discriminatory element.

4.4.2 International prices for petroleum had fallen drastically, and like all other developing countries producing and supplying petroleum, Malaysia had suffered from a correspondingly drastic decline in foreign exchange earnings from the sale of petroleum. This situation had been further exacerbated by the imposition of the discriminatory tax which gave an advantage to United States domestic oil producers. Malaysia's exports of crude petroleum to the United States in 1982, 1983, 1984 and 1985 were (at the current exchange rates) US$110.3 million, US$72.94 million, US$21.58 million and US$21.16 million respectively. The figures, whilst showing a decline, were by no means a measure of the importance Malaysia placed in the United States market for its petroleum. Its petroleum industry was constantly seeking new markets. The imposition of the discriminatory tax adversely affected these endeavours. Malaysia therefore believed that the tax was also inconsistent with Part IV of the General Agreement, in particular Article XXXVII:1.

4.5 Nigeria

4.5.1 Nigeria stated that it recognized the need to solve the problem of hazardous wastes but that it saw no justification for the imposition of discriminatory taxes for that purpose. It rejected the claim of the United States that the trade effect of the differential of 3,5 cents per barrel between imported and domestic oil was nil or minimal. The tax differential was clearly contrary to Article III and for an oil-exporting developing country such as Nigeria it was essential that it be removed in the shortest time possible.

4.5.2 Nigeria said that the United States should be asked to reconsider its position. Developing countries, faced with serious debt and commodity price problems, should not be denied their rights under the General Agreement. The United States should assume the responsibility it had as the largest trading nation for maintaining the credibility of the General Agreement.

4.6 Norway

4.6.1 Norway said that it supported the motives behind the Superfund and that it also did not oppose the use of a tax as a means to reach environmental policy goals provided that the tax was in conformity with international obligations. The tax on petroleum however discriminated against foreign suppliers and therefore violated Article III. The Norwegian authorities were concerned about the tax not only for reasons of principle but also because of its direct economic repercussions.

4.6.2 The total net exports from the oil-producing countries were approximately 18 million barrels per day and of this quantity approximately 5 million barrels per day went to the united States. The United states accounted for one third of world energy consumption, state-trading countries excluded. If discriminatory taxes Of the kind imposed by the United States were accepted, they could proliferate and lead to added protection. Norway rejected the argument that the tax differentiaL of 3.5 cents per barrel was negligible. The total tax burden on Norwegian, oil exports would amount to about US$3.4 million, of which US$1.0 million would be due to that discriminatory element, estimated on the basis of 1986 exports.

5.1 Tax on petroleum

5.1.1 The Panel examined the tax on petroleum in the light of the obligations the United States assumed under the General Agreement and found the following: the tax on petroleum is an excise tax levied on imported and domestic goods. Such taxes are subject to the national treatment requirement of Article III:2, first sentence, which reads:

The CONTRACTING PARTIES have not developed a definition of the term "like products" in the above provision. In the report of the Working Party on Border Tax Adjustments, adopted by the CONTRACTING PARTIES in 1970, it was suggested that the problems arising from the interpretation of this term should be examined on a case-by-case basis and that one of the possible methods for determining whether two products were like products was to compare their end-uses in a given market (BISD 18S/102). The domestic products subject to the tax are: crude oil, crude oil condensates, and natural gasoline. The imported products subject to the tax are: crude oil, crude oil condensates, natural gasoline, refined and residual oil, and certain other liquid hydrocarbon products. The imported and domestic products are thus either identical or, in the case of imported liquid hydrocarbon products, serve substantially identical end-uses. The imported and domestic products subject to the tax on petroleum are therefore in the view of the Panel "like products" within the meaning of Article III:2. The rate of tax applied to the imported products is 3.5 cents per barrel higher than the rate applied to the like domestic products. Article III:2, first sentence, applies whether or not the products concerned are subject to a tariff concession and whether or not adverse trade effects occurred (see paragraph 5.1.9 below). The tax on petroleum is for these reasons inconsistent with the United States obligations under Article III:2, first sentence.

5.1.2 The United States did not present to the Panel any arguments to support a legal conclusion different from the one set out above. Its main contention was that the tax differential was so small that its trade effects were minimal or nil and that the tax differential - whether it conformed to Article III:2, first sentence, or not - did not nullify or impair benefits accruing to Canada, the EEC and Mexico under the General Agreement. Canada, the EEC and Mexico considered this defence to be neither legally valid nor factually correct (paragraphs 3.1.1-3.1.11 above). As both sides to the dispute considered this issue to be the central legal question to which the tax on petroleum gives rise, the Panel examined it in particular detail. It reached the following conclusions.

5.1.3 Under Article XXIII of the General Agreement contracting parties may bring complaints, inter alia, if they consider that benefits accruing to them under that Agreement are nullified or impaired. According to established GATT practice, described in the Annex to the 1979 Understanding on dispute settlement,

The question raised by the case before the Panel is whether the presumption that a measure inconsistent with the General Agreement causes a nullification or impairment of benefits accruing under that Agreement is an absolute or a rebuttable presumptiOn and, if rebuttable, whether a demonstration that a measure inconsistent with Article III:2, first sentence, has no or insignificant effects on trade is a sufficient rebuttal.

5.1.4 According to Article XXIII:2 there are two decisions the CONTRACTING PARTIES may take after a claim of nullification or impairment, unresolved through consultations, has been referred to them. First, they may make recommendations or give a ruling on the matter. As to Such a decision paragraph 4 of the Annex to the 1979 Understanding on dispute settlement states:

The impact of the inconsistent measure is not mentioned in the above paragraph. This suggests that the practice of the CONTRACTING PARTIES is to make recommendations and rulings on measures found to be inconsistent with the General Agreement independent of the impact of such measures.

5.1.5 The second category of decisions the CONTRACTING PARTIES may take under Article XXIII:2 are decisions to authorize a suspension of concessions or other obligations if that "consider that the circumstances are serious enough to justify such an action". Paragraph 5 of the Annex to the 1979 Understanding on dispute settlement indicates how the CONTRACTING PARTIES are to deal with requests for such an authorization in the case of an infringement of the obligations assumed under the General Agreement. The relevant part of this paragraph reads:

Thus, the 1979 Understanding does not refer to the adverse impact of a measure, and the possibility of a rebuttal, in connection with the power of the CONTRACTING PARTIES to make recommendations or give rulings on measures inconsistent with the General Agreement; it does so only in connection with the authorization of compensatory action. This, in the view of the Panel, supports the conclusion that the impact of a measure inconsistent with the General Agreement is not relevant for a determination of nullification or impairment by the CONTRACTING PARTIES.

5.1.6 The Panel examined how the CONTRACTING PARTIES have reacted in previous cases to claims that a measure inconsistent with the General Agreement had no adverse impact and therefore did not nullify or impair benefits accruing under the General Agreement to the contracting party that had brought the complaint. The Panel noted such claims had been made in a number of cases but that there was no case in the history of the GATT in which a contracting party had successfully rebutted the presumption that a measure infringing obligations causes nullification and impairment. In a case involving credit facilities granted to farmers that purchase domestically-produced machinery the Panel considered that:

In a case involving undertakings to purchase domestic products, given by foreign investors to obtain a governmental authorization to invest, the Panel concluded:

In the case of an import quota on leather which allegedly had not been fully utilized by the complaining country the Panel stated:

The remarks made by the panels in these cases apply, mutatis mutandis, also to the case before the present Panel.

5.1.7 The Panel concluded from its review of the above and other cases that, while the CONTRACTING PARTIES had not explicitly decided whether the presumption that illegal measures cause nullification or impairment could be rebutted, the presumption had in practice operated as an irrefutable presumption.

5.1.8 The Panel then examined whether - even assuming that the presumption could be regarded as rebuttable in the present case - a demonstration that the trade effects of the tax differential were insignificant would constitute a proof that the benefits accruing to Canada, the EEC and Mexico under Article III:2, first sentence, had not been nullified or impaired.

5.1.9 An acceptance of the argument that measures which have only an insignificant effect on the volume of exports do not nullify or impair benefits accruing under Article III:2, first sentence, implies that the basic rationale of this provision - the benefit it generates for the contracting parties - is to protect expectations on export volumes. That,, however, is not the case. Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products. Unlike some other provisions in the General Agreement, it does not refer to trade effects. The majority of the members of the Working Party on the "Brazilian Internal Taxes" therefore correctly concluded that the provisions of Article III:2, first sentence, "were equally applicable, whether imports from other contracting parties were substantial, small or non-existent" (BISD Vol. II/185). The Working Party also concluded that "a contracting party was bound by the provisions of Article III whether or not the contracting party in question had undertaken tariff commitments in respect of the goods concerned" (BISD Vol. II/182), in other words, the benefits under Article III accrue independent of whether there is a negotiated expectation of market access or not. Moreover, it is conceivable that a tax consistent with the national treatment principle (for instance, a high but non-discriminatory excise tax) has a more severe impact on the exports of other contracting parties than a tax that violates that principle (for instance a very low but discriminatory tax). The case before the panel illustrates this point: the United States could bring the tax on petroleum in conformity with Article III:2, first sentence, by raising the tax on domestic products, by lowering the tax on imported products or by fixing a new common tax rate for both imported and domestic products. Each of these solutions would have different trade results, and it is therefore logically not possible to determine the difference in trade impact between the present tax and one consistent with Article III:2, first sentence, and hence to determine the trade impact resulting from the non-observance of that provision. For these reasons, Article III:2, first sentence, cannot be interpreted to protect expectations on export volumes; it protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement. A demonstration that a measure inconsistent with Article III:2, first sentence, has no or insignificant effects would therefore in the view of the Panel not be a sufficient demonstration that the benefits accruing under that provision had not been nullified or impaired even if such a rebuttal were in principle permitted.

5.1.10 For the reasons given in the paragraphs above, the Panel decided not to examine the submissions of the parties on the trade effects of the tax differential. This decision was based on legal grounds only and should therefore not be interpreted as endorsing either the views of the United States or those of Canada, the EEC and Mexico on the trade effects of the tax differential.

5.1.11 The Panel noted that Canada had raised concerns regarding the taxation of imported products made from synthetic petroleum (paragraph 3.1.12 above). However, since the Superfund Act, according to the United States, is silent on the treatment of such products, the Panel did not specifically examine these concerns. Canada's right to request an investigation of this matter under Article XXIII:2 is therefore in no way affected by the present report.

5.1.12 In the light of the considerations set out in paragraphs 5.1.1-5.1.9 above, the Panel concluded that the tax on petroleum was inconsistent with Article III:2, first sentence and consequently constituted a prima facie case of nullification and impairment and that an evaluation of the trade impact of the tax was not relevant for this finding. The Panel therefore suggests that the CONTRACTING PARTIES recommend that the United States bring the tax on petroleum in conformity with its obligations under the Genera] Agreement.

5.2 Tax on certain imported substances

5.2.1 The Panel noted that the United States objected to an examination of this tax because it did not go into effect before 1 January 1989, and - having no immediate effect on trade and therefore not Causing nullification or impairment - fell outside the framework of Article XXIII. The Panel examined this point and concluded the following.

5.2.2 The Panel on "Japanese Measures on Imports of Leather" examined the contention of Japan that an import quota had not been filled and considered that

The reasoning endorsed by the CONTRACTING PARTIES on that occasion applies also in the present case. The general prohibition of quantitative restrictions under Article XI, which the Panel on Japanese Measures on Imports of Leather examined, and the national treatment obligation of Article III, which Canada and the EEC invoked in the present case, have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between heir products and those of the other contracting parties. Both articles are not only to protect current trade but also to create the predictability needed to plan future trade. That objective could not be attained if contracting parties could not challenge existing legislation mandating actions at variance with the General Agreement until the administrative acts implementing it had actually been applied to their trade. Just as the very existence of a regulation providing for a quota, without it restricting particular imports, has been recognized to constitute a violation of Article XI:1, the very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III:2, first sentence. The Panel noted that the tax On certain imported substance[; had been enacted, that the legislation was mandatory and that the tax authorities had to apply it after the end of next year and hence within a time frame within which the trade and investment decisions that could be influenced by the tax are taken. The Panel therefore concluded that Canada and the EEC were entitled to an investigation of their claim that this tax did not meet the criteria of Article III:2, first sentence.

5.2.3 The Panel noted that the United States justified the tax on certain imported substances as a border tax adjustment corresponding in its effect to the internal tax on certain chemicals from which these substances were derived (paragraph 3.2.5 above). To Panel further noted that the EEC considered the tax on certain chemicals not to be eligible for border tax adjustment because it was designed to tax polluting activities that occurred in the United States and to finance environmental programmes benefitting only United States producers. Consistent with the Polluter-Pays Principle, the United States should have taxed only products of domestic origin because only their production gave rise to environmental problems in the United States. The United States denied the legal relevance of EEC's arguments and their applicability to the tax on certain chemicals (paragraphs 3.2.7-3.2.11 above). The Panel therefore first examined whether the tax on certain chemicals was eligible for border tax adjustments.

5.2.4 The report of the Working Party on Border Tax Adjustments, adopted by the CONTRACTING PARTIES in 1970, concluded the following on the rules of the General Agreement relating to tax adjustments applied to goods entering into international trade:

As these conclusions of the CONTRACTING PARTIES clearly indicate, the tax adjustment rules of the General Agreement distinguish between taxes on products and taxes not directly levied on products they do not distinguish between taxes with different policy purposes. Whether a sales tax is levied on a product for general revenue purposes or to encourage the rational use of environmental resources, is therefore not relevant for the determination of the eligibility of a tax for border tax adjustment. For these reasons the Panel concluded that the tax on certain chemicals, being a tax directly imposed on products, was eligible for border tax adjustment independent of the purpose it served. The Panel therefore did not examine whether the tax on chemicals served environmental purposes and, if so, whether a border tax adjustment would be consistent with these purposes.

5.2.5 The Panel wishes to point out, however, that the Working Part on Border Tax Adjustment agreed that the provisions of the General Agreement on tax adjustment

Consequently, if a contracting party wishes to tax the sale of certain domestic products (because their production pollutes the domestic environment) and to impose a lower tax or no tax at all on like imported products (because their consumption or use causes fewer or no environmental problems), it is in principle free to do so. The General Agreement's rules on tax adjustment thus give the contracting party in such a case the possibility to follow the Polluter-Pays Principle, but they do not oblige it to do so.

5.2.6 The mandate of the Panel is to examine the case before it "in the light of the relevant GATT provisions" (paragraph 1.4 above). The Panel therefore did not examine the consistency of the revenue provisions in the Superfund Act with the environmental objectives of that Act or with the Polluter-Pays Principle. The Panel notes that the CONTRACTING PARTIES established in 1972 a Group on Environmental Measures and International Trade with the task

This Group has never met but still exists. The EEC would thus have a forum available in the GATT in which to pursue the environmental issues which the Panel, because of its limited mandate, could not address.

5.2.7 The Panel, having concluded that the tax on certain chemicals was in principle eligible for border tax adjustment, then examined whether the tax on certain imported substances meets the national treatment requirement of Article III:2 first sentence. This provision permits the imposition of an internal tax on imported products provided the like domestic products are taxed, directly or indirectly, at the same or a higher rate. Such internal taxes may be levied on imported products at the time or point of importation (Note ad Article III). Paragraph 2(a) of Article II therefore clarifies that a tariff concession does not prevent the levying of

The drafters of the General Agreement explained the word "equivalent" used in this provision with the following example:

5.2.8 The tax on certain imported substances equals in principle the amount of the tax which would have been imposed under the Superfund Act on the chemicals used as materials in the manufacture or production of the imported substance if these chemicals had been sold in the United States for use in the manufacture or production of the imported substance. In the words which the drafters of the General Agreement used in the above perfume-alcohol example: The tax is imposed on the imported substances because they are produced from chemicals subject to an excise tax in the United States and the tax rate is determined in principle in relation to the amount of these chemicals used and not in relation to the value of the imported substance. The Panel therefore concluded that, to the extent that the tax on certain imported substances was equivalent to the tax borne by like domestic substances as a result of the tax on certain chemicals the tax mat the national treatment requirement of Article III:2, first sentence.

5.2.9 According to the Superfund Act, the tax on certain imported substances will however not necessarily be equal to the tax on the chemicals used in their production. If an importer fails to furnish the information necessary to determine the amount of tax to be imposed, a penalty tax of 5 per cent of the appraised value of the imported substance shall be imposed. Since the tax on certain chemicals subjects some of the chemicals only to a tax equivalent to 2 per cent of the 1980 wholesale price of the chemical, the 5 per cent penalty tax could be much higher than the highest possible tax that the importer would have to pay if he provided sufficient information (paragraph 2.3 above) the imposition of a penalty conform with the national treatment requirement of Article III:2, first sentence, because the tax rate would in that case no longer be imposed in relation to the amount of taxable chemicals used in their production but the value of the imported substance. Thus it would not meet the requirement of equivalence which the drafters explained in the perfume-alcohol example mentioned in the preceding paragraph. However, the Superfund Act permits the Secretary of the Treasury to prescribe by regulation, in lieu of the 5 per cent rate, a rate which would equal the amount that would be imposed if the substance were produced using the predominant method of production (Paragraph 2.6 above). These regulations have not yet been issued. Thus, whether they will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, as required b Article III:2, first sentence, remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose a tax inconsistent with the national treatment principle but, since the Superfund Act also gives them the possibility to avoid the need to impose that tax by issuing regulations, the existence of the penalty rate provisions as such does not constitute a violation of the United States obligations under the general Agreement. The Panel noted with satisfaction the statement of the United States that, given the tax authorities' regulatory authority under the Act, "in all probability the 5 per cent penalty rate would never be applied" (paragraph 3.2.13 above).

5.2.10 The Panel concluded that the tax on certain imported substances constituted a tax adjustment corresponding to the tax on certain chemicals that was in principle consistent with Article III:2, first sentence, and that the exaction of the penalty rate provisions as such did not constitute an infringement of Article III:2, first sentence, since the tax authorities had regulatory power to eliminate the need for' the imposition of the penalty rate. The Panel recommend that the CONTRACTING PARTIES take note of the statement by the United States that the penalty rate would in all probability never be applied.

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