OAS

5 June 1987

UNITED STATES - TAXES ON PETROLEUM AND CERTAIN IMPORTED SUBSTANCES

Report of the Panel adopted on 17 June 1987
(L/6175 - 34S/136)

1. INTRODUCTION

1.1 In a communication dated 7 November 1986 Canada requested consultations with the United States under Article XXII:1 on taxes on petroleum and certain imported substances levied under the "Superfund Amendments and Reauthorization Act of 1986" (L/6085). The European Economic Community (EEC) made the same request in a communication dated 30 October 1986 (L/6080). Mexico asked the United States to consult on the tax on petroleum in accordance with Article XXIII:1 in a communication dated 10 November 1986 (L/6093).

1.2 Canada, the EEC and Mexico held joint consultations with the United States under Article XXII:1 on 21 November 1986. As no satisfactory settlement was reached, Canada, in a communication dated 20 January 1987, asked the CONTRACTING PARTIES to establish a panel to examine the matter under Article XXIII:2 (L/6121). The EEC made the same request in a communication dated 22 January 1987 (L/6123). Mexico, in a communication dated 13 January 1987, referred the matter to the Director-General with the request that he use his good offices in accordance with the procedures under Article XXIII adopted by the CONTRACTING PARTIES in 1966 (L/6114 and BISD 14S/18).

1.3 The Council, at its meeting on 4 February 1987, considered the request for the establishment of a panel by Canada and the EEC. As to the complaint by Mexico, the Director-General informed the Council that, after consultations with the interested delegations and taking into account that two requests for a panel in the same matter were before the Council, he could inform the contracting parties that Mexico and the United States had agreed that this matter be pursued in a panel. It was suggested in the Council that, in the interests of efficiency and expediency, the three complaints be examined by a single panel. Canada, the EEC and Mexico agreed with this suggestion provided that their rights under the panel procedures were thereby not impaired (C/M/206).

1.4 The Council agreed to establish a panel with the following terms of reference:

"To examine, in the light of the relevant GATT provisions, the matters referred to the CONTRACTING PARTIES by

(a) Canada in document L/6085,

(b) the European Economic Community in document L/6123, and

(c) Mexico in document L/6114,

and to make such findings as will assist the CONTRACTING PARTIES in making the recommendations or in giving the rulings provided for in Article XXIII:2."

The Council adopted this decision subject to the following understanding:

"1. The Panel will organize its examination and present its findings to the Council in such a way that the procedural rights which the parties to the dispute would have enjoyed if separate panels had examined the complaints are in no way impaired. If one of the complainants so requests the panel will submit a separate report on the complaint of that party.

2. The written submissions by each of the complainants will be made available to the other complainants and each complainant will have the right to be present when one of the other complainants presents its views to the Panel" (C/M/206).

1.5 The Council authorized its Chairman to designate the chairman and members of the Panel in consultation with the parties concerned (C/M/206). The Council Chairman informed the contracting parties on 27 February 1987 that agreement had been reached on the following composition of the Panel (C/146):

Chairman:Mr. Michael D. Cartland
Members:Mr. Christer Manhusen
Mr. Kyotaka Akasaka

1.6 At the Council meeting on 4 February 1987 Argentina, Australia, Chile, Colombia, Indonesia, Kuwait, Malaysia, Nigeria and Norway reserved their rights to make a submission to the Panel in accordance with paragraph 15 of the Understanding regarding Notification, Consultation, Dispute Settlement and Surveillance (C/M/206 and BISD 26S/213). The Panel addressed letters to these contracting parties offering them the possibility to be heard by the Panel. Australia, Indonesia, Kuwait, Malaysia, Nigeria and Norway made use of this possibility. Their views are summarized below in paragraphs 4.1 to 4.6.

1.7 The Panel met with the parties on 2 and 30 March and on 4 May 1987 and with interested third parties on 31 March 1987. It submitted its report to the parties to that dispute on 27 May 1987.

1.8 The terms of reference of the Panel were adopted on the understanding that the Panel present its findings to the Council in such a way that the procedural rights which the parties to the dispute would have enjoyed if separate panels had examined their complaints are in no way impaired (see above para. 1.4). The Panel noted that, while the three complaining parties had requested findings on the tax on petroleum, only Canada and the EEC but not Mexico had requested findings on the tax on certain imported substances. The parts of this report containing the arguments and conclusions therefore deal with the tax on petroleum and the tax on imported substances in separate sections so as to permit separate decisions by the Council on each of the two taxes should this be necessary to protect the procedural rights referred to in the Council decision.

2. FACTUAL ASPECTS

2.1 The "United States Superfund Amendments and Reauthorization Act of 1986" (hereinafter referred to as the "Superfund Act") was signed into law on 17 October 1986. The Superfund Act reauthorized a programme to clean up hazardous waste sites and deal with public health programmes caused by hazardous waste. It provided for excise and corporate income taxes and appropriations to pay for the cost of these programmes. The Superfund Act introduced in particular a new broad-based corporate income tax and authorized yearly appropriations from general government revenues. It further (a) re-imposed an excise tax on petroleum at higher rates, (b) re-imposed a tax on certain chemicals ("feedstock chemicals"), and (c) imposed a new tax on certain imported substances produced or manufactured from taxable feedstock chemicals.

2.2 The tax on petroleum, which had been imposed at the rate of 0.79 cent per barrel for both domestic and imported products, was increased to 8.2 cents per barrel for "crude oil received at a United States refinery" and 11.7 cents a barrel for "petroleum products entered into the United States for consumption, use or warehousing." The term "crude oil" is defined to include crude oil condensate and natural gasoline. The term "petroleum products" is defined to comprise not only the products defined as "crude oil" but also refined gasoline, refined and residual oil, and certain other liquid hydrocarbon products. The tax increases went into effect on 1 January 1987.

2.3 The Superfund Act reimposed a tax on certain chemicals with effect from 1 January 1987. The taxable chemicals and the applicable tax rates are listed in Annex I. The tax rates were set at the lower of either $4.87 per ton for petrochemicals and $4.45 per ton for inorganic chemicals or a dollar amount equivalent to 2 per cent of the 1980 wholesale price of the chemical. The tax is borne by the chemicals whether they are sold by the manufacturer, producer or importer thereof. The tax is not imposed if the manufacturer or producer of the taxable chemical sells it for export or for resale by the purchaser to a second purchaser for export.

2.4 The Superfund Act further imposes a new tax on certain imported substances sold or used by the importer thereof. This tax enters into effect on 1 January 1989. The Superfund Act establishes an initial list of taxable substances, which is reproduced in Annex II. The taxable substances are derivatives of the chemicals subject to the tax on certain chemicals described in the preceding paragraph. A substance shall be added to the list if the Secretary of the Treasury, in consultation with the Administrator of the Environmental Protection Agency and the Commissioner of Customs, determined that chemicals subject to the tax on certain chemicals constitute more than 50 per cent of the weight of the materials used to produce such substance (determined on the basis of the predominant method of production). He may also, to the extent necessary to carry out the purposes of the legislation, add any substance to the list if the value of the taxable chemicals constitutes more than 50 per cent of the total value of the materials used to produce the substance. The Secretary of the Treasury may also withdraw items from the list of taxable substances as necessary to carry out the purposes of the legislation.

2.5 The amount of tax on any of the 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 the taxable chemicals had been sold in the United States for use in the manufacture or production of the imported substance.

2.6 Importers will be required to provide sufficient information regarding the chemicals inputs of taxable substances to enable the tax authorities to determine the amount of tax to be imposed. If the importer fails to furnish such information a tax shall be imposed equivalent to five per cent of the appraised value of the product at the time it was entered into the United States for consumption, use, or warehousing. However, the Secretary of the Treasury may prescribe by regulation, in lieu of the five 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.

3. MAIN ARGUMENTS

3.1 Tax on petroleum

3.1.1 Canada, the EEC and Mexico stated that the tax on petroleum was levied at the rate of 11.7 cents a barrel on imported products while domestic products were subject to a tax of only 8.2 cents a barrel. The United States thus imposed an internal tax on imported products in excess of the tax applied to like domestic products and therefore acted inconsistently with Article III:2 of the General Agreement. According to GATT practice an infringement of obligations assumed under the General Agreement was considered prima facie to constitute a case of nullification or impairment within the meaning of Article XXIII (BISD 26S/206). Canada, the EEC and Mexico therefore requested the Panel to find that the tax on petroleum was inconsistent with Article III:2 of the General Agreement and nullified or impaired benefits accruing to them under the General Agreement and to recommend that the United States bring the tax on petroleum in conformity with the General Agreement.

3.1.2 The United States said that it was correct that the tax on petroleum was applied to imported products at a rate that was higher than the rate applied to like domestic products. However, the tax differential was so small that its commercial effects were insignificant. The tax amounted to approximately US$0.0007 per litre for imported goods and US$0.0005 per litre for domestic goods. The difference of US$0.0002 per litre was insignificant when compared to day-to-day changes in contract prices for petroleum. The United States submitted to the Panel detailed statistics comparing the tax differential with price developments in the petroleum market. According to these statistics the difference between the highest and lowest spot prices per barrel of oil of the type "West Texas Intermediate" was US$3 in December 1986, or 15 cents per trading day during that month. The contract prices for one-month futures had risen by US$2.63 per barrel in December 1986 and day-to-day fluctuations during that month were on average 30 cents within each trading day. The United States contended that, given such price fluctuations, the small tax differential of 3.5 cents could not appreciably influence petroleum buyers' decisions and that these were accustomed, as a matter of ordinary commercial practice, to ignore price and quality variations of considerably greater importance. In its view the tax differential was also too small to stimulate investments in domestic oil production. The United States oil production had fallen in recent years (between the beginning of 1986 and mid-March 1987 by about 700,000 barrels per day) and a tax differential of 3.5 cents per barrel could not reverse this trend.

3.1.3 The United States further stated that the tax differential's effect on overall demand for imported petroleum was minimal or nil. The consumers' response to changes in the price of oil was so inelastic that the small tax differential could not have a noticeable effect on demand. At current market prices the 3.5 cents per barrel tax differential amounted to approximately 0.19 per cent of the price. Using -0.1 as a reasonable estimate of the short-term price elasticity of crude oil demand, a 0.19 per cent price increase on the 4.8 million barrels per day of net imports of crude oil and petroleum products into the United States, averaged into total United States crude oil and petroleum products demand of 16.4 million barrels per day, amounted to a price increase of less than 0.06 per cent overall, resulting in a demand decrease of about 900 barrels per day or US$6 million per year at current prices. In spite of the tax differential the United States would thus import approximately the same volume of oil and petroleum products as before. For these reasons the United States asked the Panel to find that the tax on petroleum did not have adverse trade effects and consequently did not nullify or impair benefits accruing to Canada, the EEC or Mexico under the General Agreement.

3.1.4 Canada, the EEC and Mexico noted that the United States had not presented any arguments to counter their contention that the tax on petroleum was contrary to Article III:2 but had merely attempted to demonstrate that the commercial effect of the tax differential was insignificant. This argument was not a valid legal defence. It had already been recognized in 1949 by the majority of the members of the Working Party on Brazilian Internal Taxes "that, whether or not damage was shown, taxes on imported products in excess of those on like 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 means of rectifying such damage" and that "the provisions of the first sentence of Article III, paragraph 2, were equally applicable whether imports from other contracting parties were substantial, small or non-existent" (BISD Vol. II/184 - 185). The view expressed in this Working Party had also been expressed by the United States when it rejected in November 1981 the report of the Panel on "Spain - Measures Concerning Domestic Sale of Soyabean Oil" (L/5161 and C/M/152).

3.1.5 The United States replied that it was not arguing that trade effects were relevant in determining whether or not a measure was consistent with Article III. It was arguing that the procedure of Article XXIII applied to cases of nullification and impairment and that it was established GATT practice that, even if a measure was considered prima facie to constitute a case of nullification and impairment under Article XXIII, the party against whom the action had been brought could rebut the allegation of nullification or impairment. This practice was reflected in paragraph 5 of the Annex to the 1979 Understanding on dispute settlement which stated that it was in the case of a prima facie case of nullification or impairment "up to the contracting party against whom the complaint has been brought to rebut the charge" (BISD 26S/216). The United States emphasized that it had provided ample evidence to rebut the charge of nullification or impairment.

3.1.6 Mexico noted that the United States' position was ambivalent. On the one hand the United States did not admit a breach of Article III, on the other it evoked the concept of prima facie nullification and impairment which was relevant only in the case of a breach of obligations. Canada, the EEC and Mexico disagreed that the 1979 Understanding on dispute settlement could be interpreted to allow for a rebuttal of the presumption that a breach of GATT obligations, in itself, causes nullification or impairment. Paragraph 4 of the Annex to the Understanding clearly stated that, in the absence of a mutually agreed solution to a dispute, "the first objective of the CONTRACTING PARTIES is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the General Agreement." Paragraph 4 did not state that the CONTRACTING PARTIES aimed at the withdrawal of inconsistent measures only if these had adverse trade effects. According to paragraph 5 of the Annex to the 1979 Understanding on dispute settlement cited by the United States the possibility to rebut the presumption that a breach of the rules had an adverse trade impact was not given in the context of a decision of the CONTRACTING PARTIES on nullification and impairment but in the context of a decision on whether, in the case of a measure inconsistent with the General Agreement, the circumstances were serious enough to authorize compensatory action. Paragraph 5 of the Annex recognized that, if a measure inconsistent with GATT was not immediately withdrawn, the adversely affected contracting parties may make claims regarding the compensatory actions to which they were entitled. The function of the paragraph was to place the onus on the contracting party maintaining the inconsistent measure to rebut these claims. A contextual analysis of paragraphs 4 and 5 of the Annex to the 1979 Understanding on dispute settlement thus clearly showed that there was an irrefutable presumption that a breach of the rules of the General Agreement caused nullification or impairment within the meaning of Article XXIII and that the question of trade effects was relevant only for a decision to authorize compensatory action and for determining the extent of compensation owed when the immediate withdrawal of an illegal measure could not be secured. The Panel on "Canada - Administration of the Foreign Investment Review Act" had clearly proceeded on this basis. It had stated in its report adopted in 1984 that it believed "that an evaluation of the trade effects was not directly relevant to its findings because a breach of a GATT rule is presumed to have an adverse impact on other contracting parties" (BISD 30S/167).

3.1.7 The United States replied that it was not asserting that it was necessary for a finding of nullification or impairment to first establish statistical evidence of damage. The report of the Panel on "Treatment by Germany of Imports of Sardines" had made clear that this was not necessary (BISD 1S/56). However, it was also clear that, if the party complained against could demonstrate the absence of trade effects, the Panel had to take this into account.

3.1.8 Canada, the EEC and Mexico said that one of the benefits accruing to them under the General Agreement certainly was the observance by other contracting parties of the fundamental GATT principle of national treatment. Mexico pointed out that one of the basic benefits accruing under the General Agreement was precisely that of having a contractual instrument which made it possible to know in advance the rules and principles that applied between the parties and that would be observed by them. If a violation of these rules and principles were permitted on the grounds that the violation had insignificant trade effects, it would establish a dangerous precedent that would weaken the GATT. Mexico stated that, in the present case, a basic benefit accruing under the General Agreement had been nullified or impaired, namely that of national treatment in matters of internal taxation and regulation, a benefit which Mexico did not have before acceding to the General Agreement.

3.1.9 Canada, the EEC and Mexico emphasized that if the Panel were to examine the trade effects of the tax differential it would have to conclude that the tax differential did adversely affect their trade. Canada stated that the United States imported, according to the indications given to the Panel (see paragraph 3.1.3 above), at present about 4.8 million barrels per day. At this volume of imports the tax differential of 3.5 cents per barrel applied to imported products resulted in revenues to the United States Government of more than US$61 million annually. Canada's share of the resulting fiscal burden was about US$9 million. These amounts were not commercially insignificant. The EEC said that the annual cost of the tax differential was US$8.7 million for Community suppliers, estimated on the basis of 1985 supplies. In the highly competitive and price sensitive oil market a price differential of 3.5 cents could very well determine the buyer's decision on whether to give preference to imported or domestic products. The tax differential gave buyers an incentive to buy domestic products whether prices were volatile or not and whether total demand for petroleum was elastic or not. The effect of the tax differential on investments was not relevant for the determination of nullification and impairment because, in the application of this concept, the question of whether the conditions of competition for imported products had been changed relative to those for domestic goods was relevant but not the question of whether the change in competitive relationships had stimulated domestic investments. The EEC therefore considered the United States submissions on oil price volatility, price elasticity and production effects to be irrelevant even if it were accepted that the charge of nullification and impairment caused by an illegal measure could be rebutted by demonstrating that the measure had insignificant trade effects.

3.1.10 Mexico stated that the tax differential meant that imported products paid a tax almost 43 per cent higher than that applied to domestic products. This gave a clear advantage to United States suppliers. In the first quarter of 1987 the tax differential had cost Mexico already about US$2 million. If the present volume of petroleum exports to the United States were maintained, the cost to Mexico during 1987 would amount to about US$8 million. That sum was not commercially insignificant, especially for a developing country like Mexico which needed foreign exchange earnings to finance its development and to service its debt.

3.1.11 The United States said that while the revenue effect of the tax differential may be significant, the trade effect was not; the 3.5 cents per barrel was a cost to the importer, not the exporting country and would (as assumed under the border tax adjustments provisions of the General Agreement) be passed through to consumers in any event. Moreover, the revenue amounts cited by Canada, the EEC and Mexico should be seen in relation to the total sales. Compared to the US$3.9 billion petroleum imports from Canada, the US$9 million additional tax revenue amounted to only 0.2 per cent. Canada, the EEC and Mexico asked the United States if the tax differential did not have any impact on imports, as the United States claimed, what then was the purpose of the differentiation between imported and domestic products? If the effect of the tax differential was indeed insignificant there should be no economic difficulty in immediately removing the discrimination.

3.1.12 Canada raised concerns that petroleum products exported from Canada which were made from synthetic petroleum could be subject to the tax while similarly produced domestic petroleum products might not be taxed. The United States responded that the Superfund Act was silent as to whether synthetic products should be included in the definition of "petroleum products entered into the United States". Therefore, this matter was being considered in the context of proposed legislation to effect technical corrections to the Superfund Act, and could be considered when regulations were formulated to implement the Act.

3.2 Tax on Certain Imported Substances

3.2.1 The United States objected to an examination of this tax by the Panel. The tax did not go into effect before 1 January 1989 and therefore had no immediate effect on trade. It could not cause nullification or impairment and was consequently outside the scope of Article XXIII. According to paragraph 5 of the Annex to the 1979 Understanding on dispute settlement, contracting parties had recourse to Article XXIII only when in their view a benefit accruing to them under the General Agreement was being nullified or impaired (BISD 26S/216). This implied that the function of panels was not to render hypothetical conclusions on measures that were not yet in effect.

3.2.2 Canada and the EEC considered it appropriate for the Panel to examine the tax. The legislation establishing the tax was in force and the date for its implementation fixed. Already before its actual implementation the tax could affect decisions on investments and supply contracts. The CONTRACTING PARTIES had in this case the opportunity to act before more serious trade damage had occurred and there was no valid reason not to seize that opportunity. Canada and the EEC pointed out that the CONTRACTING PARTIES had in previous cases taken decisions on legislation that was not in operation. Before the Panel on "United States - Prohibition of Imports of Tuna and Tuna Products from Canada", the United States had argued that "the lifting of the import prohibition had removed the practical source of complaint by Canada and rendered the dispute before the Panel hypothetical". Canada had argued that "in the absence of a ratified agreement, there remained risk, that the discriminatory prohibition ... could be reimposed, or indeed extended, to other products", and that there was "a threat of further discriminatory United States import restrictions being imposed". The Panel had considered the matter and had "decided to proceed with the work and establish a complete report" (BISD 29S/103-106). That measures imposed inconsistently with the General Agreement could nullify or impair benefits accruing under the General Agreement before they were actually applied to specific imports had also been recognized by the CONTRACTING PARTIES when they adopted the report of the Panel on "Japanese Measures on Imports of Leather". This Panel had stressed that in spite of the fact that the leather quota had not been filled, "the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had had on the volume of trade but also for other reasons e.g., it would lead to increased transaction costs and would create uncertainties which could affect investment plans" (BISD 31S/113).

3.2.3 The United States replied that the present case differed from the previous cases because in the present case the precise manner in which the measure at issue would be implemented had not yet been determined. The regulations implementing the tax on certain imported substances would be drafted only in 1988, after the Secretary of the Treasury had submitted a study to Congress on the issues related to the implementation of the tax. Only after these regulations were available could the tax and its trade effects be subjected to a definitive assessment. At this stage, the Panel therefore did not have enough information to examine the tax.

3.2.4 Canada and the EEC said that the essential elements of the tax were already known: the Superfund Act established an internal tax on certain imported substances without imposing an equivalent tax burden on like domestic products. The implementing regulations could not change that. The Panel could find that the legislation, if implemented in its current form, would be contrary to Article III:2.

3.2.5 The United States contended that, if the Panel were to decide to examine the tax, it would have to conclude that the tax constituted a border tax adjustment fully consistent with Articles II:2(a) and III:2 of the General Agreement. The principle to be applied in implementing the legislation was that the amount of tax to be imposed on the imported substances would equal the amount of tax that would have been imposed on the chemicals used in producing the imported substances if the chemicals had been sold in the United States for an equivalent use. The Superfund Act thus imposed the same fiscal burden on imported and like domestic substances: Substances of domestic origin bore a fiscal burden corresponding to the tax on the chemicals used in their production. Imported substances bore the same burden because the tax on certain imported substances was equal to the tax that would have been levied on the chemicals used in the production of the imported substances had they been produced in the United States. This form of border tax adjustment was explicitly foreseen in Article II:2(a), which read:

"Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product ... a charge equivalent to an internal tax imposed consistently with the provision of paragraph 2 of Article III in respect of the like domestic products or in respect of an article from which the imported product has been manufactured or produced in whole or in part ..."(emphasis added).

3.2.6 The drafters of the General Agreement had clearly contemplated the possibility for making border tax adjustments in respect of imported products that contained substances subject to an internal tax. Thus they had agreed with respect to the word "equivalent" in Article II:2(a) that it meant:

"For example, if a [charge] is imposed on perfume because it contains alcohol, the [charge] to be imposed must take into consideration the value of the alcohol and not the value of the perfume, that is to say the value of the content and not the value of the whole" (SPCT/TAC/PV/26, p. 21).

3.2.7 The EEC replied that it followed from the report of the Working Party on order Tax Adjustment, adopted by the CONTRACTING PARTIES in 1970 (BISD 18S/100), that not all taxes were eligible for border tax adjustment irrespective of the nature and purpose of such taxes. Tax levied on the sale of a product to finance a specific service rendered by the government for the benefit of domestic producers or made necessary by their activities was not eligible for border tax adjustment because this meant that a tax was imposed on products from foreign producers which neither benefited from that service nor caused it to be needed. The GATT had recognized so far only sales taxes and excise taxes to be eligible for border tax adjustment. The tax on certain feedstock chemicals was different from a sales tax or excise tax imposed for general revenue purpose in that it was imposed on specific products for a specific purpose, namely to finance measures to clean up the hazardous waste created by the use of such substances in the process of production in the United States. It was a tax on pollution or potential pollution which was imposed for obvious reasons of administrative convenience and certainty on the products which were likely to pollute rather than on the activity of causing pollution. This tax was not eligible for border tax adjustment once the feedstock chemicals and the imported chemical derivatives were not in the same situation. The EEC and Canada said that the pollution created in the production of the imported substances did not occur in the United States. It was therefore inappropriate to tax these substances upon entry in the United States. It was equally inappropriate to exempt export sales from the tax on certain chemicals because the pollution caused by the production of these chemicals occurred in the United States whether the chemicals were sold in the domestic market or abroad. Both tax adjustments were therefore inconsistent with the environmental purpose of the Superfund Act. The EEC also pointed out that the tax adjustments departed from the principles adopted by to OECD Council in 1972 in its recommendation on Guiding Principles concerning International Economic Aspects of Environmental Policies (OECD Document C(72) 128 of 6 June 1972). In particular they departed from the "Polluter-Pays Principle" which meant that the polluter should bear the costs of measures decided by public authorities to ensure that the environment was in an acceptable state. On the basis of this principle the OECD had recommended that differences in environmental policies should not lead to the introduction of compensating import levies or export rebates.

3.2.8 The EEC added that it was incorrect to assume that the border tax adjustments were necessary to avoid giving foreign producers an unfair competitive advantage. In accordance with the Polluter-Pays Principle the foreign competitors of the United States producers of the taxable chemicals and substances could be assumed to have paid for the pollution caused by the production of the chemicals and substances either directly - by paying a tax for the removal of pollution - or indirectly - by meeting regulatory requirements designed to prevent pollution. The border tax adjustments effected by the United States have in fact the United States' producers an unfair competitive advantage. A chemical exported from the United States to the EEC was not subjected to any environmental taxes: it was exempted from the tax under the Superfund Act and no corresponding tax was imposed when it was imported into the EEC. Conversely, a substance containing the chemical exported from the EEC to the United States would have to bear the costs of environmental protection twice: once in the exporting country in accordance with the Polluter-Pays Principle and upon importation into the United States under the Superfund Act. What the United States was in fact doing under the label of border tax adjustments was to ask foreign producers to help defray the costs of cleaning up the environment for the United States industries.

3.2.9 The United States stated that the Polluter-Pays Principle had not been adopted by the CONTRACTING PARTIES and it was on the GATT, provisions and not on OECD recommendations that the Panel had to base its conclusions. It was therefore irrelevant whether that principle had been observed. Moreover, the Superfund Act's primary function was to raise revenue, not to alter consumer or producer behaviour to take into account the cost of environmental resources. The fiscal motivation behind the Superfund Act was reflected in the fact that it provided also for a new corporate tax - imposed on almost all corporations, whether engaged in polluting activities or not - and appropriations from general tax revenue. For these various reasons the United States considered that it would be inappropriate for the Panel to determine the consistency of the tax on certain imported substances with the General Agreement on the basis of the Polluter-Pays Principle. Environmental policy principles related to trade could conceivably be incorporated into the GATT legal system, but such a far-reaching step required the co-operation of all contracting parties and could be taken only after considerable study and discussion. A reinterpretation of the existing GATT rules on border tax adjustments would not be the proper vehicle to introduce such principles.

3.2.10 The United States added that the EEC was in any case basing its objections on the erroneous assumption that environmental resources were consumed only in the production of goods. In fact certain substances could cause pollution throughout their life-cycle, from production to disposal. That meant that they could cause pollution not only before but also after importation. If the objective of the Polluter-Pays Principle was to internalize all negative externalities caused by polluting activities, environmental taxes had to take into account not only the, pollution caused in the production process but also the costs of disposal. When a toxic chemical was exported, the cost of its disposal was exported as well. It would then be quite appropriate to tax not only domestic but, also imported products.

3.2.11 The EEC replied that the reasoning advanced by the United States did not apply to several of the products subject to the taxes on certain chemicals and on certain imported substances. For instance, ethylene and benzene were volatile chemicals, the production of which required special measures to prevent pollution. Once polymerized to polystyrene, they no longer caused special pollution problems because they could be disposed of in the same manner as household refuse. Similarly, the production of ethylene created environmental problems; its derivative polyethylene however was a type of paraffin which posed no more disposal problems than candle wax. The same applied to styrene-butadiene latex and synthetic rubbers, which were stable and non-reacting substances, derived from volatile hydrocarbons such as ethylene, propylene, butadiene and styrene.

3.2.12 Canada and the EEC stated that, whether the tax on chemicals was eligible for border tax adjustment or not, the tax on imported substance was in any case not in conformity with Article III:2 because it did not meet the General Agreement's requirements for border tax adjustments. The Working Party on Border Tax Adjustments, the report of which had been adopted by the CONTRACTING PARTIES in 1970, had agreed that the rules of the General Agreement dealing with border tax adjustments "set maxima limits for adjustment (compensation) which were not to be exceeded, but below which every contracting party was free to differentiate in the degree of compensation applied, provided that such action was in conformity with other provisions of the GATT" (BISD 18S/100). One of the criteria against which the tax of certain imported substances thus had to be examined was that a border tax adjustment must not exceed a maximum limit equal to the tax applied to like domestic production. The Superfund Act contained a provision directing the Secretary of the Treasury to impose a 5 per cent of the appraised value tax on imported products unless sufficient information was provided to the Secretary to allow a determination of to amount of tax which would have been imposed on, the chemicals used in the production or manufacture of the product. The tax level of 5 per cent was significantly in excess of the maximum tax allowed under the provisions for the tax on certain chemicals. The legislation thus allowed for an internal tax on imported chemicals that was higher than the tax that could ever be applied to domestic chemicals. Canada expressed particular concern about this aspect of the legislation.

3.2.13 The United States emphasized that the tax of 5 per cent of the appraised value applied only if the importer did not furnish the information necessary to permit the levying of a tax equivalent to the tax borne by the like domestic product. In all probability the 5 per cent penalty tax would never be applied because the Superfund Act authorized the Secretary of the Treasury to prescribe by regulation, in lieu of the 5 per cent penalty tax, a tax the rate of which was equivalent to the tax that would be applied if the imported substance had been produced with the predominant method of production.

3.2.14 Canada and the EEC noted that the Superfund Act provided that the Secretary "may" prescribe a lower level of tax, but that the use of this lower level was not required by the Act. The legislation thus effectively prescribed the imposition of an internal tax in excess of that applied to like domestic products in violation of Article III:2 unless the Secretary chose to prescribe otherwise. Moreover the importer would benefit from the normal rates only by providing the Secretary with sufficient information to determine the appropriate level of tax. Domestic producers were not subjected to such a requirement. Given the complexity of the production processes, the fact that proprietary information map be involved and the wide range of products affected, the additional administrative burden imposed on importer could place foreign producers at competitive disadvantage relative to producers in the United States.

3.2.15 The United States stated that the Treasury regulations implementing the tax on certain imported substance were not yet drafted. It was therefore not known which tax rates would actually be applied to imported substances in respect of which insufficient information was made available and how much information importers would actually have to provide. Any conclusions of the Panel would therefore be only of a hypothetical nature. This demonstrated clearly that it was too early to arrive at any conclusions a to the consistency of the tax with the General Agreement.

TO CONTINUE WITH TAXES ON PETROLEUM AND CERTAIN IMPORTED SUBSTANCES