8.270 At the present rate of 10 percent, payments on account at customs yield an average income of around US$ 100 million per month in the case of the IVA. The IG equivalent is approximately 34 million per month. Hence, a one-point difference in the rate of collection of any of the two payments on account (IVA and IG) means a monthly tax revenue loss of 14 million pesos from two taxes under which payments on account represent 30 percent and 48 percent of the overall tax take as explained earlier.

8.271 The European Communities notes that the percepciones on imports are pre payments of the final tax. Therefore, it cannot be assumed that the loss of tax revenue due to a reduction of the percepciones would be definitive. Moreover, Argentina does not explain why raising the rates applicable to internal sales could not compensate loss of tax revenue.

8.272 Argentina asserts that the payments on account help to improve collection as they account for practically 50 percent in the case of the IG.

8.273 In other words, the various regimes for withholding and/or collection are indispensable to securing observance of tax laws and are at the same time an efficacious means of averting tax evasion. This is so because the existence of those regimes helps to cover marginal sectors of the economy as those assessed for withholdings and/or levies are obliged to declare all their transactions, precisely because those payments are in the nature of advances.

8.274 The European Communities recalls that the "additional IVA" does not purport to "enforce" the "ordinary" IVA due on the importation (which is fully paid upon importation, together with any applicable customs duties, and cannot be evaded unless the goods are smuggled into Argentina), but instead the "ordinary" IVA due on the subsequent re-sale of the imported goods. That re-sale is an internal transaction. Therefore, Argentina's argument that the "control mechanisms" referred to cannot be applied by Customs is totally irrelevant. The European Communities argues that Argentina has not provided evidence that the "ordinary" IVA due on the re-sale of imported goods is more frequently evaded, or easier to evade, than the "ordinary" IVA on the internal sale of domestic goods. Indeed, Argentina cannot provide that evidence because the only difference between the two types of transactions is the origin of the goods sold.

8.275 Argentina stresses that the initial rates were lower than those now in force under the various payment on account regimes and that the rates were successively increased in order to narrow the gap between actual and potential tax collection. The effect is reflected by the fact that with the successive increases in the rates for payments on account, final tax revenue also increased, which means that the increases made it possible to tap the informal sectors of the economy. If those untaxed informal sectors did not exist, the increase in the payments on account rates would not have led to an increase in the final tax take, as those payments on account are credited against the final settlement of the tax.

8.276 Argentina also points out that in fact, since the institution of the payments on account regimes at customs (1991 and 1992), not only have imports increased steadily, but in proportional terms, their growth has also outstripped sales on the domestic market.

8.277 With respect to small local buyers, a higher rate would not have the same multiplier effect of lending greater transparency to downstream operations because, coming almost at the end of the marketing chain, there is the risk that payments on account could give rise to overpayment in the discharge of tax liability. An increase in the rate would therefore lead to a greater number of applications for exemption and that could open the way to informal transactions with the consequent reduction in tax collection.

8.278 The European Communities recalls that exclusions are granted only to the extent that the final liability exceeds the amount paid by way of percepciones and retenciones. Therefore, while higher percepción and retención rates may result in an increase in the number of exclusions, they will not lead per se to a loss of "advance" tax revenue. In any event, importers also re-sell the imported goods to small local buyers. Argentina's argument does not explain why those re-sales are subject to a higher percepción rate than the sales of domestic goods to small local buyers.

8.279 Argentina underlines that in those cases where there is an equivalent on the domestic market, a rate of payment on account is applied equal to or greater than that levied at customs. Such is the case of the withholding agents under Resolution 18, which, being equivalent to customs as far as the concentration of formal transactions is concerned, must withhold 10.5 percent on transactions with their suppliers, pursuant to that regulation. What is more, in other activities where there is a similarly high concentration of transactions, such as payments of certain professional fees, a 14 percent rate is withheld (Resolution 3316/91).

8.280 Therefore, the financial impact represented by each percentage point in the rate of collection is considerable (for the Argentine economy is US$ 14 million). Argentina states that it has demonstrated above that it cannot be argued that as the tax rate is a single one, the final fiscal income will be the same.

8.281 Argentina wishes to clarify in that regard that in the context of high tax evasion, the rate of payment of account set for imports obliges importers to declare their subsequent transactions, which means that if that rate is reduced, the overall tax rate would fall because, in the absence of an incentive to be open about their subsequent transactions, these taxpayers would not declare them, thereby not subjecting them to the tax.

8.282 Argentina therefore rejects the European Communities claim that a reduction of the rate of payment on account would not affect the definitive tax take.

8.283 Argentina also notes that a reduction in the rate of payment on account would spawn another financial problem, given that Argentina's tax accounts are reviewed on a quarterly basis by the IMF and the revenue from the payments on account helps to achieve the targets set.

8.284 In other words, ensuring revenue of US$ 14 million for each point of payment on account at the close of a quarter in which there is a specific IMF deficit commitment (with the possibility of failure to comply and the need to request a waiver) is not the same as making an evaluation for a longer fiscal period, such as a year, when the obligations assumed do not envisage that possibility.

8.285 Besides, it has been observed that increasing the 5 percent rate of IVA payments on account would not increase final tax revenue, for recent years have seen a steady increase in the number of requests for exemptions, from which it may be inferred that an increase in the rate would trigger an increase in such requests rather than an increase in revenue.

8.286 To a question by the Panel why Argentina cannot refund the lost interest allegedly resulting from the tax differential, Argentina replies that none of the rules governing any payments on account regimes provides for interest refunds. This is so because the normal mechanics of the tax, consisting of a chain of tax debits and credits, eventually cancel out any financial costs. This results from the fact that the National Tax Authority does not reclaim interest from the withholding and/or collection agents on the sums withheld or collected and held by them for a period of around 15 days. Furthermore, even if there were lost interest, it would be virtually impossible to quantify it, since that would require an evaluation of the rate of interest foregone by the taxpayer and which depends on a range of factors (the time-lapse between each payment on account and its corroboration in the sworn declaration, etc.). If interest had to be paid, the resulting cost to the Government of verifying the appropriateness and of subsequent quantification would be exorbitant enough to cause the failure of the payments on account system.

8.287 In reply to the question by the Panel why an increase in the rate for domestic transactions would not result in more (i) "advance" revenue (ii) "final" revenue, Argentina states that an increase in the rate of payments on account for domestic market transactions would elicit a larger number of applications for exemption, which would certainly undermine the purpose of the payments on account regimes as the original taxpayers targeted by them are excluded from the system. Accordingly, the statistics from the collection agency (Exhibit ARG-XLV) show a steady rise in the number of exemptions granted, from 2,322 in 1997 (the system of exemptions began operating in October 1997) to 9,000 for 1998 and 10,746 for 1999. These figures illustrate that a rate increase would only lead to a higher number of exemptions, with the following twofold negative impact: (1) loss of advance tax collection and (2) loss of control over compliance with tax liability by means of the payments on account mechanism, with the consequent upsurge in informal transactions, ultimately diminishing tax revenue.

8.288 In response to the question by the Panel why there have been more and more requests for exclusion from the advance IVA, particularly for domestic transactions rather than import transactions, Argentina states that domestic market transactions are subject to a greater number of payments on account regimes, which explains why domestic market operators seek exemptions, given the greater possibility of overpayment in discharge of their tax liability.

8.289 The European Communities, in comments on Argentina's replies, states that Argentina has provided no evidence that the increase in the number of exclusions is linked to an increase in the percepción or retención rates. The increase shown may be the result of other factors (e.g. increase in the number of taxpayers as a result of the success of the system of percepciones and retenciones and the other measures taken by Argentina to fight tax evasion; greater familiarity of the taxpayers with the exclusion system, etc.) The European Communities further argues that Argentina has not provided any evidence that exclusions are more frequently requested, in relative terms, in the "internal sector" than in the "import sector" (assuming that it is feasible to draw such a distinction). Argentina merely assumes that they must be so because the retenciones and percepciones on internal transactions are higher. That assumption, however, has been disputed by the European Communities in this case. In any event, as explained above, an increase in the number of exclusions does not have to translate into a loss of "advance" tax revenue.

8.290 Argentina asserts that even accepting the EC's argument that the increase may be the result of other factors, it is obvious that, if these factors persist, an increase in percepción rates could only lead to an increase in the number of exclusions.

8.291 Likewise, since advance IVA cannot be collected from those taxpayers who have obtained an exclusion, the greater the number of taxpayers excluded, the smaller the amount collected by way of advance IVA.

8.292 The European Communities takes issue with the argument that "collecting a tax such as the IVA is not the same in the case of a taxpayer who has a habitual relationship with the tax authorities based on regular operation on the domestic market, and in that of an importer, who may only occasionally generate a taxable transaction, i.e. when he decides to effect the inward customs clearance of merchandise is not persuasive. The European Communities argues that most importers are also involved in making internal sales. Accordingly, it is misleading to say that importers have only "occasional" contacts with the tax authorities, while those persons making internal sales have a "habitual" relationship with those authorities. Taxpayers subject to the IVA on imports are, as a general rule, the same as those subject to the IVA on internal sales. What is more, most imports are made by registered taxpayers, which therefore are well known to the tax authorities. Indeed, according to Argentina, it would be "practically impossible" that a non-registered taxpayer may ever be subject to the additional IVA on imports.

8.293 The European Communities finds it moreover difficult to understand why an importer could be interested in not charging the ordinary IVA when it resells the merchandise, since that is the easiest way for that importer to credit the ordinary IVA paid on the import transaction.

8.294 Overall, the European Communities asserts that Argentina has not demonstrated that the measures are justified under Article XX (d). In particular, Argentina, has not shown that the rate differentials are "necessary."

2. Relationship of the "chapeau" of Article XX of the GATT 1994 to the content of
paragraph (d)

8.295 Argentina argues that if a measure is intended to secure observance of a WTO-consistent law or regulation, as in the present case, it is inappropriate to add to the concept of necessary measures further additional obligations that go beyond a literal interpretation of the text.

8.296 Neither the "reasonableness" of the measure nor its being the "least inconsistent" with the GATT 1994 are concepts that have to do with the requirements laid down in the various subparagraphs of Article XX, but must instead be examined in the light of the prescriptions in the chapeau, which address "not so much the questioned measure or its specific contents as such, but rather the manner in which that measure is applied."²⁸²

8.297 Argentina believes that in setting the requirements for invoking any of exceptions (a) to (j) ("arbitrary discrimination … or a disguised restriction …"), the chapeau to Article XX establishes the standard that must be met by the various exceptions envisaged in the subparagraphs. In other words, if the requirements of the chapeau are satisfied, this should mean that the measure is being applied in a "reasonable" manner. This is consistent with the statement by the Appellate Body that "… the purpose and object of the introductory clauses of Article XX is generally the prevention of 'abuse of the exceptions …'. In other words, the measures falling within the particular exceptions must be applied reasonably …."²⁸³ The evaluation of the reasonableness of the application of a specific measure must be done by matching it against the standard set in the chapeau to Article XX and not against the requirements that must be met for a measure to be in line with any of the subparagraphs.

8.298 A contrary interpretation incorporating into the legal framework of the rule in a particular subparagraph of Article XX an additional criterion of "reasonableness" beyond that established in the chapeau (which is applicable to all the exceptions) would be adding a double requirement for invoking each of the subparagraphs in Article XX. Accepting this criterion, which is based on Panel interpretations of the GATT 1947, which did not examine the chapeau to Article XX in the light of the Vienna Convention as did the Appellate Body in the Gasoline Case, would lead to the formulation of a criterion of reasonableness for each subparagraph, considering that they deal with completely different situations and are already inspired by the provisions of the chapeau
.
8.299 For example, what would be the standard for defining "reasonableness" or a "less inconsistent" alternative in subparagraph (e) " … products of prison labour," or in (f) "national treasures … "? Would it be the same standard as for (g) "natural resources … "? Creating conditions of reasonableness different from those of the chapeau for each subparagraph would generate an unlimited caseload and would add requirements to each exception not envisaged in the Agreement.

8.300 The test of "reasonableness" is foreseen in the chapeau and, according to the Appellate Body, is much stricter than matching the exception with a specific subparagraph of Article XX. If that "test" can be adequately done based on compliance with the requirements of the chapeau ("arbitrary discrimination … or a disguised restriction … "), for which purposes the objectives of the measure take on crucial importance, it is inappropriate again to require additional "reasonableness" for each subparagraph. What is appropriate is examining whether the exception matches the type addressed in each subparagraph.

8.301 In addition, if the criterion of reasonableness were considered to be applicable to each subparagraph, what could then be defined as reasonable for a developing country such as Argentina, when it establishes a payment on account mechanism to improve tax collection and meet the targets established with the IMF in a context of high levels of tax evasion such as prevailed in the early 1990s?

8.302 The overriding reason why the Argentine Republic established the withholding and collection regimes at the root of this dispute is, without any doubt, tax evasion. The payments on account mechanisms established under Resolutions 3431 and 3543 are aimed at ensuring compliance with the IVA and the IG Laws, thereby guaranteeing tax revenue for the tax authorities and preventing tax evasion. In this connection, the doctrine supporting payments on account first of all analyses the definition of tax evasion, for the sake of greater clarity.

8.303 Tax evasion arises from the difference between potential and effective tax revenue. It becomes much more acute in unstable economic situations. The facts therefore show that the problem is much more pronounced in developing countries. Indeed, these latter countries often lack a reasonable degree of political and economic stability and are likely to display many of the features that lend themselves to tax evasion (e.g. an informal economy, inflation, an inequitable tax system, tolerance of failure to comply with regulations, lack of simple and precise rules, inefficient tax administration, corruption, low levels of education, a disregard for tax-paying obligations, etc.). In the Argentine Republic, tax evasion is an entrenched social ill that is sometimes accentuated by cyclical factors. That scourge reached alarming proportions in the 1990s. Argentina quotes Vito Tanzi: "In countries where the average tax backlog is high for the entire system and where inflation and the initial level of taxation are also high, the loss of tax revenue as a proportion of national income can be extremely high … ." ²⁸⁴

8.304 The modern trend among tax administrations is to differentiate their action depending on the situation with which they have to deal, that is whether there is a high or a low level of compliance with tax liabilities. In the first case, the administration must focus on restraint, while in the second, the focus is on precautionary measures. Specifically in the case of precautionary action, rules and regulations that enable it to achieve its targets must support the administration.

8.305 It is unquestionably of great utility for them to include a system of presumptions as an instrument for determining certain fiscal obligations, given that presumption implies that on the basis of an unquestionable, proven fact from which reasonable inferences can be made, and whose existence is not in doubt, an affirmation can be made as to the probable existence of another fact that is inferred, presumed and well-founded.

8.306 The regimes for withholding and collection at source are precautionary instruments based on presumptions reflecting both the tax-bearing capacity of those concerned and the established fact that tax evasion is inevitable in a process comprised of all the stages of the production and marketing chain. They also simplify and reduce the cost of tax administration.

8.307 In instituting a comprehensive network of agents for withholding and collection at source in Argentina, an analysis was made of the main operational channels in the various sectors of the economy, making it possible to detect possible "upstream" and "downstream" tax evasion, in turn giving greater flexibility to tax collection by improving the flow of funds. In that connection, the customs is of crucial importance as an agent of collection as it is an important focal point where economic traffic can be gauged and where business transactions are concentrated, thus making it possible to lend transparency to business dealings and avoid "downstream" tax evasion. Argentina discussed the importance of levy collection in customs in detail in its replies to questions 56 and 57.

8.308 In the light of the foregoing, it cannot be concluded that those regimes are intended to alter the competitive conditions for imported goods on the Argentine market nor that the design of the specific instruments (the timing of payments) and the rates established are such as to have that effect (so much so that ultimately the only European Communities claim is lost interest, which, as far as Argentina is concerned, is not covered by Article III:2).

3. Justification of the advance IVA and IG under the "chapeau" of Article XX of the GATT 1994

(a) "Arbitrary or unjustifiable" discrimination

8.309 Argentina argues that for the requirements of the chapeau of Article XX(d) to apply, it must first be determined whether the measure is being applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

8.310 The adjectives "arbitrary" and "unjustifiable" are predicated upon the idea that if a case of discrimination exists, it could be "not arbitrary" or "justified." In other words, discrimination could be present in a "measure" which it is being sought to justify under Article XX, and could be consistent with it, provided that it does not constitute "the abuse of the exception provided for in Article XX."

8.311 Argentina states that this reasoning has been well circumscribed by the Appellate Body:

" … the fundamental theme is to be found in the purpose and object of avoiding abuse or illegitimate use of the exceptions to substantive rules available in Article XX."²⁸⁵

8.312 If by definition the invocation of Article XX indicates the existence of some kind of discrimination, it is when we attempt to define the "abuse" that the qualification of that discrimination, i.e. arbitrary or unjustifiable, becomes important.

8.313 Argentina considers that in examining whether the first requirement of the chapeau has been met, one must begin by analysing the content of the concept of discrimination. In its broad sense, discrimination may be defined as "a failure to treat equally."²⁸⁶ In its narrow sense and as far as the chapeau to Article XX is concerned, according to WTO precedents, discrimination would be applying different treatment to countries where the same conditions prevail.

8.314 In the present case, all countries exporting goods to Argentina receive the same treatment under the payments on account mechanism. Discrimination arises when a different treatment is given under equal conditions, as might have been presumed from the different time-frames given in the "Shrimp" case to the three complaining Members²⁸⁷ to adapt their fishing methods, by comparison with the time allowed to other WTO Members.

8.315 In the same case, it was clear which were the "Members" amongst which the same conditions prevailed. The aforementioned Panel stated:

" … the US measure at issue applies to all Members seeking to export to the United States … shrimp retrieved mechanically from waters where sea turtles and shrimp occur concurrently. We consider those Members to be 'countries where the same conditions prevail', within the meaning of Article XX. We further note that some of those countries have been ... and are subject to an import ban. Consequently, discriminatory treatment is applied to shrimp from non-certified countries." ²⁸⁸

It was also established at the time that

" … the US administration currently has to apply the import ban, including on TED-caught shrimp, as long as the country concerned has not been certified. In addition, certification is only granted if comprehensive requirements regarding use of TEDs by fishing vessels are applied by the exporting country concerned, or if the shrimp trawling operations of the exporting country take place exclusively in waters in which sea turtles do not occur." ²⁸⁹

8.316 It was precisely this double standard that the Panel considered to be "unjustifiable discrimination between countries where the same conditions prevail." ²⁹⁰

8.317 Given the conditions under which payments on account are applied, that is, without discrimination by origin, Argentina believes that it is incorrect to argue that discrimination could arise between Argentina and the European Communities.

8.318 Argentina asserts that the country applying the measure must necessarily be excluded from the definition of Member, otherwise the entire Article XX would become redundant and useless. This has been well established in various precedents by the finding that

"an interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility."²⁹¹

8.319 In this context, the interpretation of who are Members between which discrimination could be possible is also reaffirmed in other precedents, where it was stated that

"the exclusion order was 'not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination against countries where the same conditions prevail', because it 'was directed against imports … from all foreign sources and not just from Canada'." ²⁹²

8.320 Along these same lines, in the case Tuna I, it was stated

"The United States action of 31 August 1979 had been taken exclusively against imports of tuna and tuna products from Canada, but similar actions had been taken against imports from Costa Rica, Ecuador, Mexico and Peru and then for similar reasons, the Panel felt that the discrimination of Canada in this case might not necessarily have been arbitrary nor unjustifiable." ²⁹³

8.321 In sum, Argentina professes that the application of the payments on account mechanism to imports from all origins does not discriminate between countries where the same conditions prevail, that is, between all WTO Member countries exporting to Argentina.

8.322 The European Communities argues that the tax differentials, even if assuming that they were "necessary," do not meet the requirements of the "chapeau." The chapeau is not only concerned with "arbitrary and unjustifiable discrimination" between exporting countries, but extends also to discrimination between the importing country and the exporting countries, as accepted by the Appellate Body in US – Gasoline. ²⁹⁴

8.323 In arguing that Article XX would become redundant, since by definition a violation of Article III presupposes that kind of discrimination, the European Communities asserts that Argentina overlooks, the understanding of the Appellate body on this question which is that the "nature and quality of the discrimination [in the chapeau] is different from the discrimination … which was already found to be inconsistent with one of the substantive obligations of the GATT 1994." ²⁹⁵

8.324 Argentina argues that the finding in US – Gasoline, which was later cited in Shrimp, was applicable to the specific case in which the parties had a common interpretation of the field of application of the standards set forth in the chapeau to Article XX. This was corroborated by the Appellate Body in Gasoline, where that Body did not see the need "… to make a ruling at variance with the common understanding of the participants."²⁹⁶
 
(b) Disguised restriction

8.325 Argentina believes that the other requirement arising from the chapeau to Article XX, i.e. that the measure is not applied in a manner which would constitute a "disguised restriction," must be studied jointly with the condition that the measure must not be a means of "arbitrary or unjustifiable" discrimination. It has already been clarified, according to Argentina, that such discrimination is neither present nor taking place between countries where the same conditions prevail. In addition, the payments on account are not intended to restrict international trade. Their basis and purpose is to combat tax avoidance and to ensure tax revenue by compelling the taxpayer concerned to make an advance payment of the tax at a point where there is a high concentration of transactions. The system was hence designed to ensure tax collection and place foreign goods on an equal footing with domestic products for the purposes of IVA treatment. ²⁹⁷

8.326 What is more, there is an objective interest in increasing trade, considering that increased trade means increased tax collection. If it were a disguised restriction on international trade, the aim of ensuring tax collection would also be thwarted. Argentina states that figures provided to the Panel prove precisely the opposite: trade increased and so did tax collection as a consequence.²⁹⁸ It would be preposterous to think that the whole design of this system, which was aimed at improving tax collection in the framework of agreements with the IMF, could have included a "disguised" element that would restrict trade, the very source of the tax revenue that it set out to increase.

IX. THIRD PARTY SUBMISSION BY THE UNITED STATES

9.1 The United States limits its third party submission to the question whether the advance payment of income taxes is within the scope of Article III:2.

9.2 The United States argues that Article III:2, by its express language, applies to "internal taxes or other internal charges" that are "applied ... to...products." This language indicates that only taxes on a physical product itself come within the scope of Article III:2. Other types of taxes, such as taxes on income, are outside the scope of Article III.2.
 
9.3 Article III:2, first sentence, is violated when a higher tax is imposed on an imported product than is imposed on a like domestic product. There is no requirement for a showing that this differential application of taxes provides protection to the domestic product.

9.4 The United States argues that the negotiating history of Article III:2 demonstrates that the paragraph does not apply to income taxes. During discussions in Sub-Committee A of the Third Committee at the Havana Conference, which considered Article 18 of the Charter (on national treatment), it was stated that the sub-committee on Article 25 [XVI] "had implied that exemptions from income taxes would constitute a form of subsidy permissible under Article 25 [XVI] and therefore not precluded by Article 18." It was agreed that "neither income taxes nor import duties came within the scope of Article 18 [III] since this Article refers specifically to internal taxes on products."²⁹⁹ Moreover, the negotiating history makes clear that the reference in Article III:2 to "directly or indirectly" is not a reference to indirect taxes, as that term is used in the Illustrative List of Export Subsidies.³⁰⁰ Rather, it means an indirect method of imposing a tax on a product:

9.5 In initial discussions at the London session of the Preparatory Committee, it was suggested that while this phrase in the US Draft Charter referred to "taxes and other internal charges imposed on or in connection with like products," the rapporteurs in the Working Party on Technical Articles had used the phrase ‘directly or indirectly' instead, owing to the difficulty of obtaining the exact equivalent in the French text. In later discussions in Commission A at the London session of the Preparatory Committee, it was stated that the word "indirectly" would cover even a tax not on a product as such but on the processing of the product.³⁰¹

9.6 The text of Article III:2, reinforced by its negotiating history, clearly demonstrates that the Article deals only with internal taxes imposed upon goods (including taxes imposed on the processing of goods). It does not apply to income taxes.

9.7 As to question whether the "advance" IG violates Article III:2 by imposing a higher tax on imported products than upon like domestic products, the United States argues that a tax that is imposed on products is within the scope of Article III:2, regardless of whether the taxing authorities of a government subsequently permit the proceeds of the tax on products to be credited by the taxpayer against its income tax liability. The crediting of the proceeds of a tax on products against income tax liability does not convert the tax on products into an income tax. If the tax is imposed on imported products in a manner that violates Article III:2, that violation is not cured by applying the proceeds thereof against the liability for an income tax that is itself beyond the reach of Article III:2.

9.8 The United States suggests that in order to determine whether a tax violates Article III:2, the Panel must first determine whether a withholding scheme imposes a tax upon products or upon income. If the withholding is upon income, then no further examination is warranted under Article III:2. If, however, the tax is imposed upon products, then the Panel should decide whether there is a violation of Article III:2.

9.9 The United States points out that its examination of the written submissions by the European Communities and Argentina has not provided sufficient information for the United States to opine on whether the "advance" IG is, in fact, a tax on products, within the scope of Article III:2, or whether it is a withholding of income tax, outside the scope of Article III:2. The United States offers the following observations concerning income tax withholding, in general, and how the "advance" IG compares with normal income tax withholding practice.

9.10 The United States states that it is normal for tax authorities to impose a withholding tax on income at the source in order to secure compliance with income tax rules. Back up withholding generally applies to broad categories of transactions. A taxpayer can generally credit the back up withholding against its net income tax liability by filing a tax return; if the back-up withholding exceeds the taxpayer's net income tax, the excess is refunded. Back-up withholding is intended to enforce net-basis taxation of residents; therefore such systems generally provide an exemption for persons who are not taxpayers in that country. The Argentine "advance" IG does not seem to be a back-up withholding mechanism because it is imposed on the purchaser of the product, not the person who would be subject to tax on the payment.

9.11 Secondly, the United States observes that the "advance" IG is also unlike withholding taxes imposed on non-residents. Most countries impose substantive ("final") withholding tax on non-residents. Non-residents generally cannot be forced to file a return and pay tax on a net basis; if a country fails to collect tax when the payment is made, tax is unlikely ever to be paid. These taxes generally are imposed on investment income and other types of determinable income; payments for products generally are not subject to withholding taxes. Argentina imposes final tax on non-residents with respect to dividends, interest, royalties, service fees, rents and certain capital gains.

9.12 As noted before, the "advance" IG is imposed on the purchaser, not the person selling the products. The "advance" IG may be closest in theory to collection mechanisms that are intended to prevent a company from being left without cash to pay its taxes. However, these types of taxes are relatively rare, and generally apply to payments between the company and its shareholders, which might be suspected of colluding to avoid taxes. If the "advance" IG is, indeed, a tax on income, rather than a tax on products, then it should logically apply to all payments that reduce the amount of cash available for the payment of taxes. In addition, Argentina requires a corporation to make periodic payments of estimated income tax, which should alleviate any concerns about non-payment.

²⁸²"United States - Standards for Reformulated and Conventional Gasoline, Report of the Appellate Body, WT/DS2/AB/R, p. 22.
²⁸³ Ibid., p. 22.
²⁸⁴ "Macroeconomic policies and taxation levels in developing countries," paper prepared for the "Twentieth Symposium on Public Finances," Córdoba, Argentina, September 1997.
²⁸⁵ United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, page 25.
²⁸⁶ Black's Law Dictionary. Revised Fourth Edition, 1968, page 553.
²⁸⁷ See United States – Import Prohibition of Shrimp and Certain Shrimp Products, WT/DS58/R, paragraph 7.31, page 286, " … India, Pakistan and Thailand, have been given substantially less notice than the other countries … initially affected countries, before being forced to comply with TEDs requirements."
²⁸⁸ Ibid., paragraph 7.33.
²⁸⁹ Ibid., paragraph 7.48.
²⁹⁰ Ibid., paragraph 7.49.
²⁹¹ See United States –Standards for Reformulated and Conventional Gasoline, Op. Cit., page 23.
²⁹² United States – Imports of Certain Automotive Spring Assemblies, BISD 30S/107, paragraph 55.
²⁹³ United States –Prohibition of Imports of Tuna and Tuna Products from Canada, BISD 29S/91, paragraph 4.8.
²⁹⁴ See US – Standards for Reformulated and Conventional Gasoline, Op. Cit., pp. 23-24. See also the Report of the Appellate Body on United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, paragraph 150.
²⁹⁵ Ibid., paragraph 150.
²⁹⁶ United States - Standards for Reformulated and Conventional Gasoline, Op. Cit. page 24.
²⁹⁷ Recitals of Resolution 3.43: "The regime to be implemented aims to accord the aforementioned marketing transactions equal treatment with those covered by the regime of collection established under RG 3.337 (domestic market),"
²⁹⁸ See Exhibit ARG XXI.
²⁹⁹ E/CONF.2/C.3/A/W/32, p.1-2; statement repeated in Havana Reports, p. 63. paragraph 44. See also E/CONF.2/C.3/SR.13, p.1. cited in Analytical Index of the GATT, volume 1, 1995, at 144.
³⁰⁰ The distinction between taxes on a product and taxes that are not on a product is set forth in footnote 58 of Annex I, "Illustrative List of Export Subsidies" to the Agreement on Subsidies and Countervailing Measures. Footnote 58 defines "direct taxes" as "taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership or real property." By contrast, "indirect taxes" are defined as "sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and import charges." While these definitions are legally applicable only to the Agreement on Subsidies and Countervailing Measures, this footnote embodies generally accepted distinctions between taxes imposed on a product ("indirect taxes") and taxes imposed on income ("direct taxes").
³⁰¹ Proposal by UK, EPCT/C.II/11; discussion at EPCT/C.II/W.5, p.5; EPCT/A/PV/9 p.19; EPCT/W/181, p. 3, cited in Analytical Index of the GATT, Volume 1, 1995, at p. 141.