25 November 1987
UNITED STATES CUSTOMS USER FEE
Report by the Panel adopted on 2 February 1988
(L/6264 - 35S/245)
40. Concerning other specific elements of the "commercial operations" budget that had been questioned, the United States made the following replies: The clearance of carriers referred to in the Inspection and Control programme referred to examination of cargo manifests, the first step in releasing cargo. The inclusion in "commercial operations" of functions relating to enforcement of laws against counterfeit goods was appropriate because these were also services rendered to importers of legitimate merchandise. The "commercial operations" activities pertaining to the anti-dumping and countervailing duty laws included only the collection of duties and administration of the procedures provided for in outstanding anti-dumping and countervailing duty orders, which the United States regarded as normal and GATT-consistent elements of customs operations. With regard to those general Executive Management activities for which a pro-rata share had been allocated to the "commercial operations" budget, the United States explained that (i) International Affairs related to the expense of maintaining Customs offices or officials in foreign countries, whose functions included furnishing customs information and participating in international customs organizations; (ii) Internal Affairs related to various programmes of personnel management and monitoring; and (iii) Chief Counsel related to the legal services required to deal with general legal issues arising from all, Customs operations, other than the specific customs law questions dealt with under the Tariff and Trade programme. The United States suggested that some differences of view in this area might be due to different perceptions of the import process, reflecting differences in national customs procedures. Not all countries actually released merchandise, as the United States did, before determining duty liability. 2 Not all countries had the same configuration of tasks given to their customs services. However, GATT did not require the adoption of any one solution to the management problems presented by customs clearance and determination of final duty liability.
41. (b) The cost of customs processing for exempt imports. Canada argued that the manner in which the United States had treated exemptions from the merchandise processing fee had not been consistent with the "cost of services" limitations of Articles II and VIII. The United States, had exempted certain countries and products from the fee, but had included the costs of providing services to these exempted countries and products in the total cost base. If the United States wished to provide exemptions (on which Canada reserved its rights), then the cost of services for these imports must be defrayed by the United States and the fees should be calculated in a manner whereby importers of non-exempt products did not have to pay for the costs of processing these exempted products. The European Economic Community considered that while it might not be a violation of the GATT to grant exemptions from a user fee régime, the cost of clearance of goods which were exempt from user fees could not be charged to other users without violating the General Agreement.
42. With respect to the treatment of exemptions, the United States explained that almost all of the value of imports under Schedule 8 was accounted for by articles of metal exported for further processing and then returned to the United States (item 806.30) and articles assembled abroad from components from the United States (item 807.00). Entries under these items were dutiable essentially on value added outside the United States. The Administration had proposed that the user fee exemption be eliminated for entries under items 806.30 and 807.00.
43. (c) The cost of "commercial operations" for the first two months of Fiscal Year 1987. Canada argued that the cost of Customs "commercial operations" for the first two months of FY 1987 (October-November 1986), when the merchandise processing fee was not in force, could not be considered services rendered to those importers paying the fee during the last ten months of FY 1987. The European Economic Community associated itself with this position. The United States argued that, with respect to the assessment of the merchandise processing fee in the last ten months of the initial fiscal year of the fee, the services rendered during those ten months were the same services rendered throughout the entire fiscal year.
(iii) To what extent did the total receipts collected under the US merchandise processing fee correspond to the total "cost of services rendered"?
44. Canada and the European Economic Community questioned the correspondence between the total receipts from the merchandise processing fee and the total costs of "services rendered" to the importers in question for the same period. Final figure for FY 1987 not being available, the parties to the dispute accepted that, for purposes of the present Panel report, the receipts for FY 1987 (1 December 1986 to 30 September 1987) were $536 million, and that the estimated receipts for FY 1988, assuming a 0.17 per cent ad valorem rate and no other change in the law, were $540 million. For the purpose of the present report, the parties also agreed to accept $505 million as the total estimated cost of "commercial operations" in FY 1987, and $535 million as the projected costs for the same level of "commercial operations" activities in 1988.
45. Canada pointed out that in both FY 1987 and FY 1988 the total receipts in question exceeded the total costs of "commercial operations". Canada further argued that, if the costs of "commercial operations" were reduced by excluding the costs not properly chargeable to the importers paying the tax, the excess of receipts over properly chargeable costs would be very substantial. Costs which should be excluded, in the Canadian view, were (i) the cost of those Customs activities which could not be considered "services rendered" to commercial importers, (ii) costs of processing exempt imports, and (iii) the cost of "commercial operations" for the first two months of FY 1987. A similar analysis of the costs of "commercial operations" for FY 1988 suggested a similar excess. Canada considered that these excesses constituted a violation of the requirements in Articles II and VIII that fees not exceed the cost of services rendered. The European Economic Community associated itself with this position.
46. Canada supplied the Panel with an illustrative analysis of the types of adjustments and calculations that should be made in determining the relationship of total receipts to total chargeable costs. Canada noted that the item in the analysis labelled "costs properly chargeable to commercial importers" should actually be lower, but it had not been possible to estimate costs of some activities which Canada considered did not properly fall within "commercial operations". As amplified by further explanation and applied to the data finally accepted, the analysis is reproduced as Annex 2.
47. The United States noted that, as described more fully above, it had not accepted the contention that various elements of the "commercial operations" budget were not properly chargeable to all commercial importers paying the fee, and so did not accept the various adjustments provided for in Canada's illustrative analysis. To the extent that receipts did exceed costs, however, it wished to reiterate that any excess would be retained in the special sub-account for "commercial operations" and would operate to reduce the fee otherwise chargeable in subsequent years, so that receipts would eventually be equated with costs.
48. Canada and the European Economic Community raised a further question with regard to the United States practice of drawing upon the receipts collected in one year to pay for "commercial operations" in the following year. They argued that the separation of actual receipts from actual expenditures in this fashion resulted in a further attenuation of the link between the fee and the cost of services, and that it also created an upward bias by permitting excess collections in one year to be spent as increased appropriations the following year. Canada further noted that the fees collected in one year amounted to fees for services that had not yet been rendered and that might never be rendered, particularly in respect of the individual importer paying the fee. The United States replied that the segregation of receipts, undertaken to assure that receipts were not used for other purposes, required such a delay in actual expenditure, since it was not possible to appropriate and spend funds out of a special account until the amount were actually collected, nor was it possible to fund customs operations on a month-to-month basis from current fee receipts.
C. Other provisions of Article VIII:1(a)
(i) "Indirect Protection to Domestic Products" (Article VIII:1(a))
49. Canada believed that, in certain circumstances, the customs user fees represented indirect protection to domestic products, in violation of the United States' obligations under the General Agreement. To satisfy the second condition of Article VIII:1(a), a fee would have to be structured in such a way that it did not act in a manner which was protectionist for certain shipments. The fees acted in the same manner as a tariff and, in addition, imposed extra business costs for exporting products to the United States, in the form of additional paperwork and administrative burden, as well as higher fees charged by customs brokerage firms. The potential protectionist effect of these extra costs was particularly evident in the case of lower value shipments. The fee could also act in a protectionist manner when it was applied to bulk commodity shipments or to goods with a low margin of added value. The legislation did not contain provisions to review cases where the fee was acting in a protectionist manner. The Panel should find that the fee represented an indirect protection to domestic products and nullified and impaired benefits accruing to Canada under the General Agreement.
50. The European Economic Community stated that the question whether the United States fee represented indirect protection, arose in particular if the Panel were to agree with the United States position that the "cost of services" limitation merely prevented contracting parties from making a profit out of its Customs operations as a whole. Much scope for concealed protection would result from such a view.
51. The United States argued that the level of the merchandise processing fee did not "represent an indirect protection to domestic products". The rate of the fee would decline to 0.17 per cent or a lesser rate sufficient to fund salaries and expenses of "commercial operations" of the Customs Service. The Customs Service budget was in turn subject to the discipline of the Administration's budget process, as well as the scrutiny of both the Congressional committees with substantive jurisdiction over customs and trade, and the Congressional appropriations committees. The discipline of the budgetary process, and further efficiencies achieved by the Customs Service, would make it possible to keep the fee at a level that did not impede trade. Past discussions concerning user fees in the GATT showed that fees complained of had been much higher than the merchandise processing fee under examination, e.g. the 3 per cent Zairian fee cited above. Congress had chosen an ad valorem fee to make it possible to have a low rate that would not interfere with trade. Changing to a transaction-based fee, which could have a protective effect on low-value importations, would lead to more problems for trade, not fewer. With the increased consolidation of entries that a transaction-based fee would stimulate, the per-entry fee could increase still further.
(ii) "Taxation ... for fiscal purposes" (Article VIII:1(a))
52. Canada argued that the collection of fees which provided revenue in excess of the total cost of services rendered constituted "taxation ... for fiscal purposes" and considered that certain elements of the merchandise processing fee offended in this respect. Any government activities which were not services that could be charged to importers who paid the merchandise processing fee should be a charge on general revenues, and thus a fee used to pay for such activities would be taxation for fiscal purposes.
53. The European Economic Community also considered that the merchandise processing fee represented a taxation of imports for fiscal purposes. The enactment of the fee until 30 September 1989 indicated that it was a contributory measure to the reduction of the US budget deficit. Explanations of the budget reduction process in the US Congress clearly demonstrated the link between the introduction of the fee and the objective to thereby reduce the budget deficit.
54. The United States stated that the intent of this provision of Article VIII:1(a) was to draw a line between fees which financed only the activity charged for, and fees which generated surplus funds which were either paid into the general revenues of the government, or used to finance extraneous activities. Reference was made to past GATT discussion concerning a French statistical tax on imports and exports (L/64, G/46/Add.4, SR.8/7 page 10, L/238, SR.9/2 page 5) which had been levied to develop a fund for providing certain social security benefits. The merchandise processing fee under examination was not such a fiscal measure, but a fee for services rendered. It had been the clear intent of Congress that proceeds not be spent on extraneous activities but only on the Customs activities necessary and useful to the import trade. The United States authorities had endeavoured to be true to that Congressional intent and to Article VIII. Proceeds of the fee were not deposited in general revenues of the United States, but were carefully segregated in a special budget receipt account. To avoid cross-subsidization of other activities by the merchandise processing fee, the proceeds of this fee were kept separate from the proceeds of the other eight fees referred to in paragraph 7, which were not the subject of this dispute. The statute required that the Secretary of the Treasury reduce the level of the user fee if this was necessary to avoid collecting an amount in excess of the cost of Customs "commercial operations". Budget authorization legislation in the United States normally was used as a means for Congress to make policy decisions, including decisions unconnected to fiscal considerations. Provision of a time limitation on the merchandise processing fee reflected the untested nature of the fee, and the strength of importers in the political process.
55. The European Economic Community noted that the United States had interpreted the term "taxation of imports or exports for fiscal purposes" to mean that customs user fees might not be used to generate a revenue surplus. It noted, however, that the United States had given the same interpretation to the "cost of services" limitation. In the view of the EEC, this demonstrated that the US interpretation of "cost of services rendered" could not be correct. It could not be correct to interpret a term which appeared in both Articles II:2(c) and VIII:I(a) as having no meaning other than that of another term in one of the same two provisions. Provisions of an Agreement such as GATT should not be interpreted so as to be superfluous or unnecessary.
D. Other arguments
56. Canada considered that the United States customs user fee was inconsistent not only with the letter but also with the spirit of the General Agreement. Canada noted that although the GATT allowed certain fees under certain circumstances Article VIII:1(b) and (c) provided guidance regarding the general question of applying fees. Thus, the contracting parties had recognized "the need for reducing the number and diversity of fees and charges referred to in sub-paragraph (a)", as well as "the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements". As a result of the United States action, however, such fees and formalities had been increased instead of decreased. In addition, given the closely associated nature of the consular fees and the customs user fees (both being subject to Articles II:2(c) and VIII:1(a) and both involving charges for the processing required for importation of goods) the guidance of the CONTRACTING PARTIES on consular fees in particular, was also relevant. The question of administration of consular fees had been addressed in the Recommendation by the CONTRACTING PARTIES of 30 November 1952 (1S/25) on "The Abolition of Consular Formalities and Code of Standard Practices". According to its paragraph 1 "Any consular fee should not be a percentage of the value of the goods but should be a flat charge". This Recommendation had been slightly modified in the Recommendation of 30 November 1957 (6S/25) to read "No consular charge should be assessed as a percentage of the value of goods but should be a flat charge". The Recommendation of 1952, as amended in 1957, had been reaffirmed in general terms by the CONTRACTING PARTIES in the Recommendation of 31 October 1962 (11S/214).
57. The European Economic Community stated that it would be pointless to say that importers should not be asked to pay too many fees and charges, even those which might be imposed for services specifically rendered to them, if they could legally be asked to pay a disproportionate contribution to the overall cost of customs processing. From a broader perspective the EEC took the position that service fees of the kind involved in this case were an anachronism in the modern world. It was questionable whether the collection of duties could be regarded as "services" provided. Neither the importer nor any private commercial party to any import transaction benefitted in any way from being obliged to comply with whatever importation formalities might be required. As a result of a series of judgements of the Court of Justice of the European Communities, all customs user fees on trade between the EEC Member States were being eliminated. They were also being eliminated on imports into the EEC from non-Member States. Although the EEC was not asking the Panel to rule that all customs user fees were prohibited by Article VIII, it was saying that these considerations made it appropriate that Article VIII be interpreted strictly.
58. The United States reiterated that the merchandise processing fee before the Panel was collected from commercial shipments, and covered only the cost of Customs "commercial operations". Article VIII:1(b) and (c) would support an ad valorem fee rather than a transaction-based fee because an ad valorem fee was less complex. The efforts in the GATT in the 1950s to abolish consular fees were of only minor relevance. Consular fees were levied in the country of exportation and required preparation of special documents, submitted to the consulate of the country of destination. The problems noted in the 1962 report on Consular Formalities were not an issue here. In fact, the 1962 report recommended conversion from consular fees to import fees. It was incorrect to say that, since importers did not benefit from being obliged to comply with import formalities, customs services were not services rendered to them. This position appeared to be based on the assumption that there was some absolute right to import, to which customs clearance only acted as a hindrance. This assumption was wrong; the GATT did not give an importer the right to import goods without paying the duties specified in the relevant schedule of concessions, nor did it give even an importer of duty-free goods the right to import without showing that the goods actually qualified for duty-free treatment. The United States concluded by stressing that the legal provisions in question required that fees correspond to the cost of providing a service, and not to the value of benefits received from it.
E. Trade Effects
59. Canada estimated that the customs user fee would add $152 million to the cost of goods imported from Canada in the period 1 December 1986 - 30 September 1987 and $120 million in later years (assuming a 0.17 per cent fee). These amounts were substantial and represented an increase of over 20 per cent in the charges paid on goods imported into the United States from Canada in calendar year 1986. In addition to these fees, Canadian exporters were also being required to pay additional administrative costs and higher customs brokerage fees. Most of Canada's trade entered the United States under bound tariff rates, over 70 per cent of which was duty free. Canada, in its tariff negotiations with the United States, had placed a high priority on duty-free access.
60. The European Economic Community stated that the customs user fee had a considerable negative effect on its exports to the United States market. It was estimated to cost its exporters about $175 million in 1987.
IV. SUBMISSIONS BY INTERESTED THIRD PARTIES
61. Australia called the Panel's attention to Article II:1(b), which required that products covered by a schedule should "be exempt from all other duties or charges of any kind imposed on or in connection with importation in excess of those imposed on the date of this Agreement or those directly and mandatorily imposed thereafter by legislation in force in the importing territory on that date". Australia considered that the merchandise processing fee, having the effect of raising duties and charges beyond the level existing when the United States schedule of bindings had been negotiated, was inconsistent with the United States obligations under that provision. It viewed the exception of Article II:2(c) as inapplicable because it did not consider the fee commensurate with the cost of services. Australia considered that the fees were also inconsistent with Article VIII as they appeared to have been imposed for fiscal purposes, were not related to the cost of the customs services rendered to the importer, and were a protection provided to United States industry. Benefits accruing to Australia under the General Agreement were therefore nullified or impaired within the meaning of Article XXIII:1(a). The United States had a number of commodities bound to Australia under Article II. Many items covered by ceiling bindings were entered at or near the bound rate and in such circumstances an additional fee breached even a ceiling binding. 3 The ad valorem fee particularly discriminated against shipments of bulk commodities, including a number of Australia's major exports, where the charge was disproportionately high in relation to the service performed. Also, since the merchandise processing fee had been imposed in addition to a "port user fee", Australia was concerned at the additional costs to a number of its major exports and therefore at the possible nullification and impairment of benefits. Australia called the Panel's attention to several GATT decisions that surcharges which raised the level of the customs tariff beyond the maximum rates bound under Article II were inconsistent with GATT obligations. With respect to Article VIII:1(a), Australia called the Panel's attention to the United States complaint against France in 1952 (L/238) concerning the proceeds of a "statistical and customs control" tax which had been used for fiscal purposes, and another United States complaint in 1955 charging that a French "stamp tax" violated Articles II:1 and VIII:1 since it had been used for fiscal purposes and had also been in excess of the cost of services rendered (L/410, L/569, L/720). Australia also mentioned the report of the Working Party on the Accession of the Democratic Republic of the Congo (Zaire) (18S/89) in this regard. Australia considered, therefore, that there had generally been a consensus among contracting parties (and one which the United States had shared) that an import tax which exceeded the cost of service and/or was used for fiscal purposes was inconsistent with Article VIII:1(a). Article XXII consultations with the United States had failed to resolve the problem. Australia therefore requested the United States to bring its system into conformity with the GATT by making the fees correlate more exactly to services provided, and by entering into Article XXVIII negotiations to provide compensation where bindings were breached. Australia also raised two other issues. The first was a possible breach by the United States of the undertaking on standstill made at Punta Del Este, in particular of Part I:C(i) "not to take any trade restrictive or distorting measures inconsistent with the provisions of the General Agreement". Australia hoped that the United States would reconsider its action in the interests of ensuring the success of the Uruguay Round. The second was the exemption from the customs user fee of countries which participated in the Caribbean Basin Initiative (CBI) and least developed countries. The terms of the waiver granted in respect of the CBI required the United States not to use the duty free treatment to raise barriers or to create undue difficulties for the trade of other contracting parties and to consult promptly with any contracting party whose interests were affected by the operation of the Agreement. It appeared that the United States intended to recover costs associated with the import of products from these areas by imposing greater than proportional fees on other contracting parties. It was a matter of concern that this discriminatory practice could have an adverse effect on Australian exports.
62. Hong Kong stated that it had a particular interest in the matter because the United States was the principal market for its exports and that as a result of the imposition of the merchandise processing fee, the total cost of Hong Kong's exports to the United States was estimated to increase by approximately US$20 million in 1987. Although all funds in the Customs User Fee Account should "only be available to the extent provided for in appropriation Acts, for the salaries and expenses of the United States Customs Service incurred in conducting commercial operations", the term "commercial operations" would appear to have a wider scope than services rendered on or in connection with importation, as provided in Article VIII:1(a). This in turn could mean that the fee at the present level of 0.22 per cent was not commensurate with or limited in amount to the approximate cost of services rendered. If this were so, the fee would represent a taxation on imports for fiscal purposes. Moreover, the merchandise processing fee was not levied on US exports and might thus also afford indirect protection to domestic products. On the general question of ad valorem assessment, Hong Kong noted that the General Agreement was silent on the actual mechanics of the application of customs fees or charges. The GATT provided only that the amount of the fee should approximate the cost of services rendered. Systematic devices for the collection of such fees, whether on a flat rate or ad valorem basis (either of which would produce variations at the individual transaction level), were therefore not inherently inconsistent with the GATT. The Panel should address the issues raised by this complaint but should exercise due care to avoid any generalization not based on specific GATT provisions that might prejudice the rights of other contracting parties which were applying, or might wish to apply, the ad valorem system within the purview of Article VIII.
63. India was of the view that the merchandise processing fee was applied in a manner not consistent with Articles II:2(c) and VIII:1(a) and that it in fact amounted to taxation on imports for fiscal purposes. The argument that proceeds would be deposited in the special account which was only available for meeting the expenses of the US Customs Service was not a valid one, considering the fact that revenue was a fungible resource. Further, the services of customs personnel were utilized not only for checking import consignments but also exports. Any user fee which purported to have been imposed to meet such expenses could not be restricted to imports alone. India also stated that the exemption given to least developed countries from the payment of fees was not in conformity with the obligation of non-discrimination contained in Article I of the General Agreement. Neither was it covered by the provisions of the Enabling Clause (26S/203) since the exemptions granted in this case did not involve "special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries".
64. Japan stated that the question before the Panel was a legal one and not factual. There was no direct link between the cost of cargo processing and the price of imported goods and therefore the fee could not be justified as being commensurate with the cost of services rendered. A fee on an ad valorem basis could result in revenues in excess of the cost of providing the services. While the intentions of the US Government were not put into question, the mechanism of collecting the fee did not always guarantee concordance with the requirements of the relevant GATT Articles. Despite the claim that the fee was not designed for fiscal purposes, the actual implementation of the measure could result in revenues far in excess of the cost of services rendered, and therefore could have the same implication as a taxation of imports for fiscal purposes. Moreover, the fact that other countries maintained similar ad valorem user fees did not render the United States measure consistent with the GATT. Japan considered that the United States merchandise processing fee was not consistent with the GATT, in particular Article II:2(c) and VIII:1(a).
65. New Zealand stated that if a charge such as the United States merchandise processing fee was compatible with Articles II and VIII, it would appear to be attractive for many contracting parties to consider. The basis of calculation of fees and charges, in terms of Article VIII, was to be the "approximate cost of services rendered". Any degree of flexibility in this provision implied by the term "approximate" seemed to relate to the degree of precision in calculating the cost rather than in the basis of the actual charging itself. For this basic reason it was difficult to reconcile an ad valorem basis with the basis prescribed by Article VIII. This contrast could be underlined by comparing the terms of this provision with those of Article VII:2(a). It was difficult to envisage that there would be a systematic relationship between value of imported goods and cost of services rendered. Yet, if a value was relatively high it would carry a relatively high charge. Also, the ad valorem charge might be particularly non-transparent, because it would be extremely difficult, if not impossible, to ensure that aspects of customs administration which were actually outside the ambit of fees and charges imposed "on or in connection with importation or exportation" were not built into the charges. The above considerations applied in respect of all imports, but were even more important in the case of bound items. A concession granted in respect of a given item created a particularly clear and firm obligation. The wording of Article II pertaining to these obligations clarifies and renders more precise the logic of Article VIII. The cost of services, for which permission to levy a charge was granted in Article II:2(c), was limited strictly to those applicable to the specific product subject to a concession. The first sentence of Article II:2 made this clear: "Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product, etc." This, furthermore, was consistent with the nature of obligations in respect of a concession because it was granted in respect of a particular product. If an ad valorem system was applied there would be the possibility that the costs arising from Customs administration more generally (including those which would arise from the administration of other concessions negotiated elsewhere and in respect of other contracting parties) would be directly, or more likely, indirectly, "built into" the charge for a particular concession.
66. Peru stated that Articles II and VIII only permitted user fees which covered the cost of services rendered. The United States ad valorem fee did not meet this requirement and, in addition, provided indirect protection to domestic industry, which was also in contravention of Article VIII. Moreover, the fee increased the costs of exports to the United States and this affected Peru's interests. Peru therefore fully supported the views expressed by the complainants in previous Council meetings. The United States reference to Peruvian customs user fees at the Council (C/M/206, item 11) was erroneous in that this was not an ad valorem, but a fixed fee, expressed in US dollars and payable in Peruvian currency, as per the exchange rate on the date of importation. Decrees issued in January 1986 were applied in accordance with GATT obligations, covering exactly the cost of services rendered by the Peruvian Customs in connection with importation of goods.
67. Singapore stated that the imposition by the United States of a merchandise processing fee, on an ad valorem basis, was not consistent with the obligations of the United States under Articles II and VIII of the General Agreement. An ad valorem basis did not correspond to the cost of providing the service of processing the import of a product and resulted in revenues not commensurate with the cost of services rendered. Article VIII:1(a) clearly stated that any fees imposed should be limited to the approximate cost "of services rendered". Furthermore, the illustrative list in Article VIII:4 indicated that fees should only be charged for specific services related to importation and exportation. Article II:2(c) stated that fees or other charges should be commensurate with the cost of services rendered. A customs user fee that was not specific, but based on the value of the imports could not be commensurate with the cost of services rendered. It would appear that the merchandise processing fee was being used to underwrite other commercial operations not related to importation. Singapore was also concerned about the discriminatory aspect of the fee which was applied to all imported merchandise, except products of the least-developed countries and eligible countries under the Caribbean Basin Economic Recovery Act. The level of 0.22 per cent was not so small that it could not be construed as having a protective effect. Based on the 0.22 per cent fee for the period 1 December 1986 to 30 September 1987, Singapore's estimated exports of about S$9,100 million for the same period would incur a payable customs user fee of approximately S$20 million. This would be an additional cost over and above the usual customs brokers' and other fees. Singapore was concerned about the effects on its exports to the United States which this additional fee would have. The merchandise processing fee might reduce the competitiveness of Singapore's exports in the US market, especially for products which were price-sensitive, and might have the indirect effect of encouraging potential US importers to source their merchandise from domestic suppliers.
V. FINDINGS AND CONCLUSIONS
68. Having reviewed the arguments made by Canada and the European Economic Community, the Panel considered that it would be possible to cover the points raised by each party in a single set of findings and conclusions, and that it would be neither necessary nor helpful to try to separate the frequently overlapping positions of the two parties in order to be able to give separate responses to them.
69. Before turning to the specific questions raised by the parties, the Panel first addressed the general meaning of Articles II:2(c) and VIII:1(a), and their relationship to each other. Article VIII:1(a) states a rule applicable to all charges levied at the border, except tariffs and charges which serve to equalize internal taxes. It applies to all such charges, whether or not there is a tariff binding on the product in question. The rule of Article VIII:1(a) prohibits all such charges unless they satisfy the three criteria listed in that provision:
(a) the charge must be "limited in amount to the approximate cost of services rendered";
(b) it must not "represent an indirect protection to domestic products";
(c) it must not "represent ... a taxation of imports ... for fiscal purposes".
The first requirement is actually a dual requirement, because the charge in question must first involve a "service" rendered, and then the level of the charge must not exceed the approximate cost of that "service".
70. Article II:2(c) is a provision of somewhat narrower scope. Its function is to permit the imposition of certain non-tariff border charges on products which are subject to a bound tariff. Paragraph 1(b) of Article II establishes a general ceiling on the charges that can be levied on a product whose tariff is bound; it requires that the product be exempt from all tariffs in excess of the bound rate, and from all other charges in excess of those (i) in force on the date of the tariff concession, or (ii) directly and mandatorily required by legislation in force on that date. Article II:2 permits governments to impose, above this ceiling, three types of non-tariff charges, of which the third, permitted by sub-paragraph (c), is "fees or other charges commensurate with the cost of services rendered".
71. In order to help clarify the meaning of Articles II:2(c) and VIII:1(a), the Panel examined the origins and the drafting history of these provisions. During the drafting of the General Agreement, the previous legal instrument referred to most frequently in connection with these provisions was the International Convention Relating to the Simplification of Customs Formalities of 3 November 1923. 4 One of the major purposes of the 1923 convention had been to reduce the number and the level of fees imposed in connection with importation. Governments had agreed to limit certain fees to the actual cost of the government activity in question. Article 10 stated, "When a visa [for commercial travellers] is required, its cost shall be as low as possible and shall not exceed the cost of the service". Article 11(8) stated, "The cost of the [consular] visa must be as low as possible, and must not exceed the cost of issue, especially in the case of consignments of small value". Article 12 stated, "The cost of a visa for Consular invoices shall be a fixed charge, which should be as low as possible". The Convention's two provisions on consular fees were reaffirmed in the recommendations of the World Economic Conference of 1927, which restated them as follows:
(1) Consular fees should be a charge, fixed in amount and not exceeding the cost of issue, rather than an additional source of revenue. Arbitrary or variable consular fees cause not only an increase of charges, which is at times unexpected, but also an unwarrantable uncertainty in trade. 5
72. The Panel was unable to find specific antecedents to Articles II:2(c) and VIII:1(a). In particular, no such provisions could be found in the United States bilateral trade agreements of 1934-1942, from which the United States had drawn many of the texts proposed for adoption in the General Agreement. Those bilateral agreements had contained no general limitation on non-tariff charges as in Article VIII:1(a), nor had their definition of tariff bindings permitted the imposition of new "service" fees as in Article II:2(c).
73. According to the detailed negotiating history of GATT Articles II:2(c) and VIII:1(a) provided by the United States, proposals to permit such fees, characterized as fees for "services rendered", appeared in the earliest stages of the GATT/ITO negotiations. 6 The criteria stated in the initial draft texts submitted to the negotiating conference 7 were almost identical to those adopted in the final texts, with the result that the actual negotiations presented no occasions for further elaboration of their meaning.
74. When the General Agreement was first adopted in 1947, the requirements of Article VIII:1(a) were merely hortatory, reading "should" rather than "shall". Article VIII:1(a) was made mandatory in the Review Session amendments to Part II of the General Agreement (3S/214), which were adopted in March 1955 and which entered into force in October 1957. Article II:2(c) was included in the original 1947 text of the General Agreement in its present form.
75. Two questions of general interpretation had to be answered before addressing the specific issues raised by the complainants. First, it was necessary to decide whether there was any legal significance in the slight difference in wording between the two "cost of services" limitations stated in Articles II:2(c) and VIII:1(a), i.e. "commensurate with the cost of services rendered" and "limited in amount to the approximate cost of services rendered". The words themselves suggested no immediately apparent difference in meaning. After reviewing both the drafting history and the subsequent application of these provisions, the Panel concluded that no difference of meaning had been intended. The difference in wording appears to be explained by the somewhat different paths by which each provision entered the General Agreement. The text which was to become Article VIII:1(a) appeared in the very first draft submitted to the negotiating conference by the United States, whereas the text of Article II:2(c) originated as a standard term to be incorporated in each contracting party's schedule of concessions (see E/PC/T/153) and was not raised to the text of Article II until some time later (E/PC/T/201). 8
76. Second, it was necessary to determine what type of fees were incorporated within the basic concept of "services rendered" in Articles II:2(c) and VIII:1(a). The Panel concluded that there was a rather well established general understanding of this concept, demonstrated more by practice than by the actual text of the General Agreement. In its original form, as found in Article 13 of the United States' Suggested Charter of September, 1946, Article VIII was explicitly addressed to "fees, charges, formalities and requirements relating to all customs matters", and this definition was followed by an illustrative list which is virtually the same as the list now included in Article VIII:4. The illustrative list includes various aspects of the customs process such as "consular transactions", "statistical services", and "analysis and inspection". The text of Article VIII was later changed to enlarge the scope of that provision. Notwithstanding the fact that the enlarged scope gave a different meaning to the illustrative list in paragraph 4, GATT practice since 1948 has tended to interpret that illustrative list according to its original meaning, as a list of those customs-related government activities which the draftsmen meant when they referred to "services rendered". Thus, GATT proceedings have treated the following types of import fees as being within Articles II:2(c) or VIII:1(a): consular fees (CP.2/SR.11 (pages 7-8); 1S/25), customs fees (L/245; SR.9/28 (pages 4-5)), and statistical fees (18S/89).
77. In referring to these customs-related government activities as "services rendered", the drafters of Articles II and VIII were clearly not employing the term "services" in the economic sense. Granted that some government regulatory activities can be considered as "services" in an economic sense when they endow goods with safety or quality characteristics deemed necessary for commerce, most of the activities that governments perform in connection with the importation process do not meet that definition. They are not desired by the importers who are subject to them. Nor do they add value to the goods in any commercial sense. Whatever governments may choose to call them, fees for such government regulatory activities are, in the Panel's view, simply taxes on imports. It must be presumed, therefore, that the drafters meant the term "services" to be used in a more artful political sense, i.e., government activities closely enough connected to the processes of customs entry that they might, with no more than the customary artistic licence accorded to taxing authorities, be called a "service" to the importer in question. No other interpretation can make Articles II:2(c) and VIII:1(a) conform to their generally accepted meaning.
(i) To what extent does the "cost of services" limitation in Articles II:2(c) and VIII:1(a) require that the amount of the fee not exceed the approximate cost of the government activities performed with respect to the individual customs entry for which the fee is imposed?
78. The Panel began its consideration of the legal issues by addressing the primary issue raised by Canada and the European Economic Community: whether the structure of the United States merchandise processing fee, in the form of an ad valorem charge without upper limits, was consistent with the "cost of services" limitation in Articles II and VIII. The complainants stressed that they did not intend to question the ad valorem method itself. They suggested, for example, that they would not object to an ad valorem fee that had a ceiling limitation equal to the average cost of processing an individual customs entry. The aspect of the United States fee the complainants wished to challenge was its tendency to impose fees exceeding the average cost of processing an individual entry. When the rate of an ad valorem fee is calculated by dividing the total costs of customs processing by the total value of the imports processed, the fee will, when imposed without upper limits, automatically exceed the average cost of processing whenever it is applied to entries of greater-than-average value.
79. The Panel agreed with the parties that the GATT consistency of this type of ad valorem fee turned on the meaning of the "cost of services" limitation in Article II:2(c) and Article VIII:1(a). The Panel understood the central contentions of the parties to be as follows: Canada and the EEC had argued that "cost of services rendered" should be interpreted to mean the cost of the customs processing activities ("services") actually rendered to the individual importer with respect to the customs entry in question, or, at least, the average cost of such processing activities for all customs entries of a similar kind. Both complainants had stressed that the normal practice with respect to service fees was to require persons to pay only for the services rendered to them. The United States had argued that the "cost of services" limitation did not require exact conformity between fees and costs, but only that the fee be "commensurate with" the cost (Article II:2(c)), or limited to the "approximate" cost (Article VIII:1(a)). It had argued that, stated in these terms, the "cost of services" requirements would be satisfied if the total revenues from the fee did not exceed the total cost of the government activities in question, and if the fee were otherwise fair and equitable in its application. The United States had stressed that the ad valorem structure of the merchandise processing fee was the most equitable and least protective method by which such a fee could be imposed.
TO CONTINUE WITH UNITED STATES CUSTOMS USER FEE
2 The United States provided further details on the various steps
involved in the entry procedures in the United States.
3 Details were provided on bound rates and operative rates on items
where the fee was likely to breach the binding. Estimates were given
of increases in the cost of Australian exports to the United States for
a number of products for which Australia had initial negotiator
and/or principal/substantial supplier rights.
4 League of Nations Treaty Series, vol. 30, p. 372 (1925). The treaty,
which was negotiated under League of Nations auspices, entered into
force on 27 November 1924.
5 League of Nations Document C.356.M.129.1927.II., paragraph 5(1).
6 According to negotiation records in the United States archives,
the earliest reference occurred in a document titled "Agenda Resulting
from Informal Exploratory Discussions between Officials of the United
Kingdom and of the United States ...", dated 16 October 1943.
7 Article VIII:1(a) first appeared as Article 13. Suggested Charter
for an International Trade Organization of the United Nations, submitted
by the United States in September 1946. The first document found by
the Panel containing the text of what was to become Article II:2(c) was
by the Panel containing the text of what was to become Article II:2(c) was
E/PC/T/153 of August 1947. See also E/PC/T/201 of September 1947.
8 A collateral issue which the Panel considered but was not required
to answer was whether the form of words utilized in Article II:2(c)
might not have been intended as a reference to exactly the same fees
permitted by Article VIII:1(a) - in other words, whether Article II:2(c)
incorporates all three of the criteria in Article VIII:1(a).
The following considerations had raised the issue: (i) The text of
Article II:2(c) was in fact developed after the draft text of Article
VIII:1(a) had been established. (ii) Article II:2(c) sets the
standards for determining when "service" fees may be imposed in excess
of tariff bindings, whereas Article VIII:1(a) is a general provision
relating to fees on all products. (iii) At least two Article XXIII
complaints in the past had claimed that an import fee used for
a "fiscal purpose" had constituted a violation of Article II, and
in both cases the contracting party complained against had agreed
and had withdrawn the fee (L/64; SR.8/7 (page 10; L/410; SR.10/5