12 August 1994

25. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe did not agree with the U.S. contention that the BDA differential was so small as to be of no commercial consequence to the tobacco market and that under the circumstances the difference was reasonable. The complainants referred to previous GATT panel rulings which had repeatedly rejected any notion that it was permissible for contracting parties to impose higher taxes on imported products, even if the difference was minimal or of no commercial consequence. ³⁰ On the contrary, GATT panels had made clear that any differential in internal charges levied on domestic and imported products, no matter how small, violated Article III:2. ³¹ Once it was shown that the tax levied on imported products was higher than the tax levied on the like domestic product, nullification or impairment was presumed. ³² This presumption was, according to the complainants, "irrefutable". ³³ Thus, the fact that the United States levied a higher tax on imported flue-cured tobacco than on some sales of the like domestic product compelled the conclusion that the budget deficit assessment violated Article III:2 of the General Agreement.

26. Canada added that the level of the BDA on US-grown burley tobacco was of no relevance to the national treatment obligations that the United States owed to Canada. The obligations of the United States under Article III:2 was attached to each individual pound of flue-cured tobacco imported from Canada, none of which could be subject to internal taxes or charges in excess of those applied to a like pound of domestic US flue-cured tobacco. Referring to the findings of the Superfund panel, ³⁴ Canada was of the view that Article III:2 protected expectations on the competitive relationship between imported and domestic products, not export volumes. Also, as stated above, there could be no balancing of a higher tax against a lower one to reach an average. ³⁵

27. The United States submitted that the General Agreement firmly supported the right of contracting parties to extend taxes imposed on domestic products to imports at the border; there was no obligation to provide a competitive advantage to imports by exempting them from domestic taxes. The United States referred to the 1970 report of the working party on Border Tax Adjustments, ³⁶ which noted that taxes which were directly applied to domestic products could also be applied at the border to imports. The purpose of border tax adjustments was to ensure equal conditions of competition with respect to taxation.

28. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe responded that although the BDA might indeed be eligible for border tax adjustments as claimed by the United States, any such border tax adjustments had nonetheless to conform to the national treatment provisions of Article III:2. That provision specified that any such tax had to be levied on imports at the same or a lower rate than that levied on the like domestic product, and that no such border tax adjustment should provide protection to the domestic industry in violation of Article III:1. However, the BDA levied on certain types of imported tobacco was higher than that levied on the like domestic product.

29. The complainants submitted that the United States was in breach of its Article III:2 obligations regardless of whether the Panel considered that the "like domestic product" was flue cured tobacco or all kinds of unmanufactured tobacco. The "like domestic products" could be either (i) flue-cured tobacco, or (ii) all kinds of unmanufactured tobacco. Whichever comparison was used, the United States was, in the opinion of the complainants, in breach of Article III:2. If the Panel considered that U.S. flue-cured tobacco was the "like domestic product" to imported flue-cured tobacco, then the BDA was inconsistent with Article III:2 since it was applied at a higher rate on imported than on domestic flue-cured tobacco. Moreover, the application of the BDA to imports afforded protection to domestic production. If the Panel concluded that the appropriate comparison between imported and "like domestic products" was all unmanufactured tobacco rather than just flue-cured tobacco, the BDA still violated Article III:2. The complainants noted that the BDA was imposed on every pound of tobacco imported into the United States, regardless of type, while certain varieties of US-grown tobacco paid no BDA of any kind. A number of other US-grown tobaccos were assessed a BDA in an amount that was less than that assessed on imports. According to the complainants, this constituted discriminatory taxation, contrary to Article III:2.

30. The United States explained that flue-cured, light air-cured burley, Maryland and Turkish (oriental) tobaccos were distinct types which imparted distinct flavour characteristics to the American blend cigarette. Each type was valued differently by the manufacturers for its individual qualities. The three main leaf components were flue-cured, burley and Turkish, the proportional use of which had varied very little over the years. Burley tobacco had certain burning characteristics which distinguished it from other tobacco. Flue-cured tobacco had a lightness of taste that made it different from the heavier oriental tobaccos. Maryland tobacco also had a mild taste and distinct burning characteristics, but was considered a distinct type by manufacturers; a manufacturer's switch from burley to Maryland would definitely change the character of the cigarettes produced. Cigarette tobaccos, as a group, tended to have different markets in general from cigar tobaccos.

No Net Cost Assessment (Section 1106(b)(2))

31. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe submitted that the NNCA ³⁷ was an internal tax or charge on imported tobacco that exceeded the internal charge on comparable domestic tobacco. It was therefore inconsistent with Article III:2, first sentence. Unlike the situation presented by the BDA, the NNCA did not apply a rate to imported tobacco that was higher than the rate applied to comparable domestic tobacco. First, the NNCA was applied only to imported burley and flue-cured tobacco, not to other imported tobacco. Second, the rate used for the imported tobacco was the sum of the producer and purchaser assessments that applied to the same type of tobacco grown in the United States. However, while the rate used for imported burley and flue-cured tobacco was the same as the rate applied to the same type of domestic tobacco, the net charge to imported tobacco was greater than the charge for the same type of domestic tobacco. Domestic burley and flue-cured tobacco were subject to price support programmes in which the producer was offered a minimum price for his tobacco. These programmes were not available to the importer of these tobaccos. The value of the tobacco at the appropriate support price was "loaned" to the producer by the producer-owned cooperative if the farmer could not obtain that price at auction. The cooperative retained the tobacco as "collateral". The 1993 Budget Act levied an identical NNCA on each pound of imported tobacco, for which importers (and imported tobacco) received no benefits at all. Indeed, the proceeds of the NNCA on imported tobacco were used to fund the costs of the domestic price support programme. Since the price support programme provided benefits only to domestic tobacco, the NNCA operated as a true "tax" on imported tobacco, and as a payment (fee) for services for domestic products.

32. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe submitted that by giving the proceeds of the NNCA on imports directly to the cooperatives, the law benefited and protected domestic production. It indirectly reduced the cost of the price support programme to the domestic producer, without providing any benefit at all to imported tobacco. The application of the law was thus inconsistent with paragraph 1 of Article III, thereby also creating an inconsistency with Article III:2, second sentence.

33. The United States submitted that, like the BDA, the NNCA was simply a border tax adjustment consistent with Article III:2. The 1970 report of the working party on Border Tax Adjustments and the more recent revisitation of the issue by the panel in United States - Taxation on Petroleum and Certain Imported Products supported two principles: first, that taxes applied to domestic products could be applied equally at the border to imports and secondly, that the ultimate use of the revenues was not relevant in determining whether a border tax adjustment was consistent with Article III. Unlike the BDA, imports of flue-cured and burley tobacco were assessed charges identical to those levied on domestic flue-cured and burley tobacco. No other tobacco imports were charged the NNCA, even though other varieties of domestic tobacco were assessed NNCAs and were affected by imports. In the United States' view, no argument had been offered to suggest that there were unequal fiscal burdens between imported and domestic burley and flue-cured tobacco. According to the United States, the complainants also appeared to overlook the fact that Article III referred to the treatment of products, not to individual importers or enterprises. Here, imports and domestic products were charged identical amounts, in conformity with Article III:2. The full amount of the NNCA was a charge on the tobacco, no matter how the payment obligation was divided. The fact that, for domestic tobacco, the NNCA was split between producer and purchaser did not make it ineligible for border tax adjustment. This interpretation was supported by the language of the General Agreement, the 1970 working party on Border Tax Adjustments and prior panel reports. In particular, the assessments were taxes "directly levied" on a product. The same working party made an observation with regard to value-added taxes, noting that the fact that a tax's collection was "fractured" - split across several points along the production chain - did not prevent the tax as a whole from being eligible for border tax adjustment. Moreover, the purpose of the charge was not relevant in determining the conformity of a border tax adjustment with Article III:2. The United States referred to the Superfund report ³⁸ which considered the argument by the EC that a U.S. excise tax on chemicals was not eligible for a border tax adjustment because its underlying purpose was to tax polluting activities occurring only in the United States and to finance environmental programmes benefitting only U.S. producers. The Panel declined even to examine this argument, concluding that the only determination to be made concerning the applicability of border tax adjustments was whether the domestic tax was applied directly to a product. ³⁹ The United States explained that the NNCA was such a direct tax assessed on the marketing of all tobacco grown in the United States subject to the price support programme.

34. The United States rejected the claim that benefits received by domestic tobacco growers through the tobacco programme amounted to a tax remission of the NNCA. The provision of a loan to a farmer was a transaction entirely separated from the farmer's payment of the NNCA in that year or subsequent years. Producers who grew price support tobacco had a choice at marketing time. They could sell the tobacco to a private buyer, or they could place the tobacco for a price support loan with the appropriate area marketing association. (About one quarter of the tobacco crop currently went under loan and was placed with an association.) In either case, the tobacco was assessed the producer portion of the NNCA. If the tobacco was sold to a private buyer, that buyer was liable to pay the purchaser NNCAs at the same time as well. For the farmer, the loan received from the CCC was not a loan in the normal sense but was rather as though the farmer had sold the tobacco to the government. The tobacco was never returned, and the marketing associations took up to eight years to sell it. The money went directly into the U.S. Treasury and could never be returned or refunded. The sufficiency of past assessments to cover losses regulated how large the current assessment would be, i.e. if there should be a surplus of NNCA receipts for a particular crop, when compared with the actual losses incurred on that crop by the area marketing associations, that surplus was not paid back to producers or purchasers, but simply reduced the amount needed to be collected in subsequent years. Simply put, the charges a farmer paid in one year did not predetermine either his decision to sell to either the market or the government, or the amount of money he received for the tobacco. Rather, the NNCAs remained uniform each year for all producers regardless of what they had done in the past.

35. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe considered that the United States had mischaracterized the findings of the Superfund panel report. That panel stated only that the underlying policy of the tax in that case was not relevant to the consideration of whether or not the tax was eligible for a border tax adjustment. Notwithstanding this finding, the panel nonetheless went on to consider whether the border tax adjustment was consistent with "the national treatment requirement of Article III:2". Thus, even though the underlying policy of the NNCA might not be relevant for purposes of determining whether the tax was eligible for border tax adjustment, a panel still had to examine the effect of the border tax adjustment to ensure that it was not being imposed in a manner inconsistent with Article III:2 and the principles of Article III:1. Since the NNCA provided benefits only to domestic producers and since the fees collected on imports reduced the assessment on domestic production, the NNCA afforded protection to domestic producers in a manner contrary to the General Agreement.

36. The United States considered that there was no disagreement on the fundamental principles with respect to the eligibility of a domestic tax for border tax adjustment. First, a domestic tax could be extended to imports equally at the border. Second, eligibility for border tax adjustment was independent of the purpose or the ultimate use of the revenue derived from the tax. The purpose of border tax adjustment was to ensure equal conditions of competition with respect to taxation. All taxes would accrue to the benefit of resident taxpayers, directly or indirectly. That the use of the revenue derived from the tax might ultimately benefit domestic rather than imported tobacco was simply not relevant to the Panel's analysis under Article III:2. It was not within the province of the General Agreement to second-guess domestic tax policies to ensure that imports also ultimately obtained some kind of benefit from government revenue. In the United States' view, the NNCA met the criteria of a border tax adjustment consistent with Article III.

37. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe argued that the NNCA could not be considered as a valid border adjustment measure. U.S. tobacco producers who participated in the domestic price support programme were eligible to receive a minimum support price, which was usually higher than the market price. The difference between the market price and the support price lowered the effective NNCA imposed on participating domestic tobacco. Consequently, the net or actual NNCA imposed on imported burley or flue cured tobacco was higher than the assessment on domestic burley or flue cured tobacco, in violation of Article III:2. Given this inconsistency between the NNCA and Article III, the NNCA could not be considered to be a valid border adjustment.

38. The United States submitted that paragraph 8(b) of Article III further supported the view that any indirect benefit ultimately received by U.S. tobacco farmers in the form of a more sustainable price support programme could not make the border tax adjustment inconsistent with Article III:2. Thus, Article III:8(b) supplemented the general principle that the purpose of the tax was irrelevant in the analysis of a border tax adjustment, by specifically providing that the use of tax revenues to grant domestic subsidies was permissible where taxes were equally applied. The non-recourse loans given by the CCC to U.S. tobacco farmers from government funds did not make the application of the same taxes to foreign imports inconsistent with Article III.

39. Argentina, Brazil, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe were of the view that Article III:8(b) had nothing to do with the case at issue here. Paragraph 8(b) provided only that Article III should not "prevent the payment of subsidies" exclusively to domestic producers. In this case, however, the complainants raised no arguments that would in any way prevent payments of subsidies to anyone. They simply objected to being required to help pay for benefits available only to U.S. domestic producers. Further, the complainants argued that they did not question the right of the United States to develop a programme to pay farmers higher-than-market prices. Nor did they question in any way the right of the United States to transfer the costs of these subsidies to tobacco farmers and domestic purchasers, through the imposition of an NNCA. What the complainants did object to was the imposition of levies on imports that received no benefits from the tobacco price support programme. Article III:8(b) by its own terms permitted subsidies to continue only so long as the internal taxes which financed them were applied "consistently with the provisions of this Article". If the provisions of the tobacco price support programme were consistent with Article III:8(b), they were consistent only so long as they did not impose a burden on imports that was greater than the burden on domestic tobacco, and only so long as they did not afford protection to domestic tobacco. In this case, the NNCA imposed a greater burden on imports than on domestic tobacco, because domestic tobacco received a benefit for the assessment it was charged whereas imported tobacco did not. Thus, the assessment was not only discriminatory, it afforded protection to domestic tobacco, in violation of both sentences of Article III:2. Finally, the complainants disputed that the loan programme to support tobacco prices was a "government purchase" since the domestic producers had the option to sell their tobacco to private purchasers or place it "under loan" with the producer-owned area marketing associations. These cooperatives then took title to the tobacco. Therefore, the second part of Article III:8(b) was not applicable in the case of the U.S. tobacco support programme.

40. Canada submitted, in addition, that the receipt of the support price by domestic producers was a tax remission of the NNCA otherwise payable, not a subsidy to which Article III:8(b) applied. Canada argued that unlike subsidies that were disbursed from general revenues, often in respect of persons and products unrelated to the source of the funds, moneys collected under the NNCA and disbursed from this account were administered separately from general revenues. Under the new law, taxes were collected on domestic and imported tobacco. These taxes were already earmarked for reducing the costs otherwise payable on a domestic support programme available only for the benefit of domestic tobacco. Since the NNCA fees could only be used for this purpose, receipt of a support price lowered the net or effective tax paid on each pound of domestic tobacco, while imported tobacco carried a higher fiscal burden and was thus subject to internal charges in excess of those applied to domestic tobacco. Canada referred to the report of the panel on United States - Measures Affecting Alcoholic and Malt Beverages ⁴⁰ which considered the drafting history of Article III:8(b), noting that the Havana Reports stated:

In Canada's opinion, the drafting history thus made clear that tax remissions were specifically excluded from the benefits of Article III:8(b). Further, paragraph 8(b) referred to "taxes or charges applied consistently with the provisions of this Article." The NNCA was not applied consistently with Article III.

41. The United States disagreed that any benefit accruing to domestic producers deriving from government revenue was a tax remission. According to the United States, Article III:8(b) provided that the national treatment provisions of the General Agreement did not inhibit contracting parties from the use of taxes as the source of funds for even direct payments to domestic producers, so long as those taxes were applied evenly to imported and domestic goods. If Canada's broad definition was accepted, then the types of governmental assistance derived from tax revenue described in Article III:8(b) also amounted to "tax remissions", in which case the complainants were also wrong to claim that taxes for which such remissions were unavailable could not be applied to imported products. In the opinion of the United States, the complainants had not distinguished the case at hand from the specific provisions of Article III:8(b).

Inspection Fee for Importing Tobacco (Section 1106(c))

42. Argentina, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Thailand and Zimbabwe submitted that the 1993 Budget Act (Section 1106(c)) imposed inspection fees which were inconsistent with paragraph 1(a) of Article VIII of the General Agreement since Section 1106(c) did not impose fees on imports in an amount equal to the cost of inspecting imported tobacco. Although the USDA had not yet issued regulations implementing Section 1106(c), it had issued regulations for inspecting imported tobacco pursuant to pre-existing law. ⁴¹ Section 1106(c) of the Budget Act required that inspection fees on imported tobacco "be comparable" to the fees charged on domestic tobaccos. It made no reference to the cost of inspection of imported tobacco. On its face, the imposition of a fee without regard to the cost of inspecting imported tobacco was inconsistent with the terms of Article VIII:1(a). Indeed, if the cost of inspecting domestic tobacco was higher than the cost of inspecting imported tobacco, Section 1106(c) nevertheless required that the inspection fee charged on the imported tobacco be comparable to the cost of inspecting the domestic tobacco.

43. The complainants argued that Article VIII of the General Agreement applied only to fees and charges imposed "on or in connection with importation". It differed from the provisions of Article III of the General Agreement, which applied to "internal taxes" or charges. Both by statute and by government regulation, the inspection of imported tobacco had to take place before the tobacco entered domestic commerce. As such, it was an activity "in connection with importation" within the meaning of Article VIII and not an internal charge within the meaning of Article III. The complainants recognized that the amount of the fee ultimately imposed by the United States could well be commensurate with the cost of inspection. However, Section 1106(c) required that the inspection fee be imposed commensurate with the cost of inspecting domestic tobacco, not with the cost of inspecting imported tobacco. Only if the costs of inspecting domestic and imported tobacco happened to be the same would the requirement of Section 1106(c) be consistent with the General Agreement. The complainants were of the view that if a provision had not yet gone into effect, it did not mean that it could not be inconsistent with the General Agreement. As the report of the Superfund panel noted, the objectives of the General Agreement "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". ⁴² Section 1106(c), according to the complainants, required inspection fees to be imposed commensurate with something other than the cost of inspecting imported tobacco. As such, it was inconsistent with the terms of Article VIII:1(a).

44. Canada, in addition, referred to the report of the panel on the United States - Customs User Fee ⁴³ which stated that the words "cost of services rendered" in Articles II:2(c) and VIII:1(a) had to be interpreted to refer to the cost of the customs processing for the individual entry in question. ⁴⁴ This panel was also of the view that the government imposing the fee should have the initial burden of justifying any government activity for which charges were imposed. The 1993 Budget Act did not require that the fees for inspecting imported tobacco be set at a level commensurate with the cost of services rendered. Rather, it stated that the fees should be comparable to fees collected for services provided in connection with tobacco produced in the United States. This might not be commensurate with the cost of the actual service rendered. ⁴⁵ In Canada's view, the only way for the U.S. government to comply with the requirement of the 1993 Budget Act, making fees for inspecting imported tobacco comparable to fees imposed on domestic tobacco, would be to increase the import inspection fees to the domestic level. This would raise the fees for inspecting imported tobacco above the cost of services actually rendered, contrary to Article VIII:1(a). Canada considered that the United States' fees for inspecting imported tobacco, by violating Article VIII, nullified or impaired benefits accruing to Canada under the General Agreement. Further, Canada's complaint was limited to the fact that the fee for inspection of imported tobacco could not be restricted to the costs of services rendered, as required by Article VIII:1(a), and still be consistent with the requirements of U.S. law. Canada did not question the level of the fee that the United States was free to establish for domestic inspection, nor the nature of such inspections. The only relevance of the fee for inspection of domestic tobacco was that, under U.S. law, the level of that fee effectively pre-determined the level of the fee for inspection of imported tobacco, regardless of the actual cost of services rendered for such inspection.

TO CONTINUE WITH MEASURES AFFECTING THE IMPORTATION, INTERNAL SALE AND USE OF TOBACCO

³⁰ Report of the panel on United States Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987, BISD 34S/136.

³¹ Idem.

³² Idem.

³³ Idem, page 158.

³⁴ See footnote 27 above.

³⁵ Report of the panel on United States - Section 337 of the Tariff Act of 1930, adopted on 17 November 1989, BISD 36S/345.

³⁶ Report of the working party on Border Tax Adjustments, adopted on 2 December 1970, BISD 18S/97.

³⁷ See paragraph 10 above.

³⁸ Report of the panel on United States - Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987, BISD 34S/136.

³⁹ Idem, paragraph 5.2.4.

⁴⁰ Report of the panel on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD 39S/206.

⁴¹ 7 U.S.C. paragraph 511r 7 C.F.R. 400 et seq.

⁴² Report of the panel on United States - Taxes on Petroleum and Certain Imported Substances, 160, adopted on 17 June 1987, BISD 34S/136.

⁴³ Report of the panel on United States Customs User Fee, adopted on 2 February 1988, BISD 35S/245.

⁴⁴ Idem, paragraph 86.

⁴⁵ The regulations setting the fees had yet to be published.