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AB-1997-2 Report of the Appellate Body
WORLD TRADE ORGANIZATION
I. Introduction
Canada and the United States
appeal from certain issues of law and legal interpretations in
the Panel Report, Canada - Certain Measures Concerning Periodicals1
(the "Panel Report"). The Panel was established to
consider a complaint by the United States against Canada concerning
three measures: Tariff Code 99582, which prohibits the importation
into Canada of certain periodicals, including split-run editions;
Part V.1 of the Excise Tax Act3, which imposes an excise
tax on split-run editions of periodicals; and the application
by Canada Post Corporation ("Canada Post") of commercial
"Canadian", commercial "international" and
"funded" publications mail postal rates, the latter
through the Publications Assistance Program (the "PAP")
maintained by the Department of Canadian Heritage ("Canadian
Heritage") and Canada Post.4
The Panel Report was circulated
to the Members of the World Trade Organization (the "WTO")
on 14 March 1997. It contains the following conclusions:
The Panel made the following
recommendation:
On 29 April 1997, Canada notified
the Dispute Settlement Body7 (the "DSB") of its
intention to appeal certain issues of law covered in the Panel
Report and legal interpretations developed by the Panel, pursuant
to paragraph 4 of Article 16 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (the "DSU"),
and filed a Notice of Appeal with the Appellate Body, pursuant
to Rule 20 of the Working Procedures for Appellate Review
(the "Working Procedures"). On 12 May 1997,
Canada filed an appellant's submission.8 On 14 May 1997,
the United States filed an appellant's submission pursuant to
Rule 23(1) of the Working Procedures. On 26 May 1997,
Canada filed an appellee's submission pursuant to Rule 23(3) of
the Working Procedures and the United States filed an appellee's
submission pursuant to Rule 22 of the Working Procedures.
The oral hearing provided for in Rule 27 of the Working Procedures
was held on 2 June 1997, at which the participants presented their
arguments and answered questions from the Division of the Appellate
Body hearing the appeal.
II. Arguments of the Participants
A. Canada
Canada submits that the Panel
erred in law by characterizing Part V.1 of the Excise Tax Act
as a measure regulating trade in goods subject to the GATT 1994.
In the alternative, Canada argues that, even on the assumption
that the GATT 1994 applies, the Panel erred in law when it found
Part V.1 of the Excise Tax Act to be inconsistent with Article
III:2, first sentence, of the GATT 1994. In particular, Canada
submits that the Panel erred in law in finding that imported United
States' split-run periodicals9 and Canadian non-split-run
periodicals are like products; and in failing to apply the principle
of non-discrimination that is embodied in Article III:2, first
sentence, of the GATT 1994. Canada agrees with the Panel's conclusion
that the "funded" postal rate scheme is a permissible
subsidy in accordance with the terms and conditions of Article
III:8(b) of the GATT 1994.
1. Applicability of the
GATT 1994 to Part V.1 of the Excise Tax Act
Canada submits that the Panel
erred in law when it applied Article III:2, first sentence, of
the GATT 1994 to a measure affecting advertising services. Canada
asserts that the GATT 1994 applies, as the GATT 1947 had always
applied previously, to measures affecting trade in goods, but
it has never been a regime for dealing with services in their
own right. In Canada's view, if the GATT 1994 applied to all
aspects of services measures on the basis of incidental, secondary
or indirect effects on goods, the GATT 1994 would effectively
be converted into a services agreement. More precisely, the GATT
1994 should not apply merely on the ground that a service makes
use of a good as a tangible medium of communication. Assuming
that the measure at issue is designed essentially to restrict
access to the services market, the mere fact that a service makes
use of a good as a vehicle or a medium is an insufficient ground
on which to base a challenge under the GATT 1994.
Canada asserts that the Panel's
decision to consider Part V.1 of the Excise Tax Act as a measure
subject to Article III of the GATT 1994 was based largely upon
an unwarranted generalization of the terms of Article III:4, as
well as a misconstruction of the word "indirectly" in
Article III:2, first sentence. Canada argues that it is evident
from its text that Article III:4 of the GATT 1994 governs only
services measures that affect the ability of foreign goods to
compete on an equal footing with domestic goods. Canada submits
that advertising services are only subject to Article III:4 to
the extent that they affect the "internal sale or offering
for sale, purchase, transportation, distribution or use"
of a product that is entitled to national treatment under Article
III of the GATT 1994. The inference that advertising services
in general are covered by Article III:2 of the GATT 1994 is without
foundation.
Canada stresses that the concept
of "indirectly" in Article III:2 of the GATT 1994 is
intended to capture taxes which apply to "inputs" that
contribute to the production or distribution of a good, such as
raw materials, services inputs and intermediate inputs. It is
important to distinguish services inputs that are directly involved
in the production or marketing of a good from services that are
"end-products" in their own right. In Canada's view,
the advertising services of a publisher are not, like labour in
the production of a car, an input into the production of a good.
Canada asserts that services are often delivered by means of
a good, and that the taxation of services that are associated
with goods in this way does not "subject" those goods
"indirectly" to the tax, because the tax does not affect
the costs of the production, distribution and marketing of the
goods. Canada argues that, although magazines serve as a tangible
medium in which advertising is incorporated, this association,
however close, does not meet the tests appropriate to the interpretation
of Article III:2 of the GATT 1994. Canada maintains that advertising
is not an input or a cost in the production, distribution or use
of magazines as physical products. Therefore, the taxation of
magazine advertising services is not indirect taxation of magazines
as goods within the meaning of Article III:2.
Canada asserts that the Panel
mischaracterized Part V.1 of the Excise Tax Act as a measure affecting
trade in goods. It is a measure regulating access to the magazine
advertising market. Most magazines represent two distinct economic
outputs, that of a good and an advertising medium for providing
a service, depending on the perspective of the purchaser. According
to Canada, the tax is not applied to the consumer good because
it is not based on, nor applied to, the price of a magazine.
Instead, the tax is calculated using the value of advertising
carried in a split-run edition of a magazine and is assessed against
the publisher of each split-run magazine as the seller of the
advertising service.
In Canada's view, since the
provision of magazine advertising services falls within the scope
of the General Agreement on Trade in Services (the "GATS"),
and Canada has not undertaken any commitments in respect of the
provision of advertising services in its Schedule of Specific
Commitments, Canada is not bound to provide national treatment
to Members of the WTO with respect to the provision of advertising
services in the Canadian market.
2. Consistency of Part V.1
of the Excise Tax Act with Article III:2 of the GATT 1994
Should the Appellate Body conclude
that Part V.1 of the Excise Tax Act is properly subject to the
jurisdiction of the GATT 1994, Canada submits, as an alternative
argument, that such measure is consistent with Article III:2,
first sentence, of the GATT 1994. First, Canada asserts that
the Panel erred in its finding that imported split-run periodicals
and Canadian non-split-run periodicals are "like products"
within the meaning of Article III:2, first sentence, of the GATT
1994. The Panel disregarded the evidence before it, and based
its finding on a speculative hypothesis, thus failing to make
"an objective assessment of the facts of the case" as
required by Article 11 of the DSU. In Canada's view,
the "like product" test under Article III:2, first sentence,
requires a comparison of an imported product with a domestic product.
While the Panel acknowledged the correctness of this test, the
Panel failed to apply it by using a hypothetical example for its
comparison rather than actual examples of split-run and non-split-run
magazines provided by Canada. Canada notes that the Panel asserted
that its hypothetical example was necessary because there were
no imported split-run periodicals in Canada due to the import
prohibition under Tariff Code 9958. However, Canada argues that
there are certain "grandfathered" split-run magazines
produced in Canada, and that those magazines provide an accurate
representation of the content and properties of a split-run edition
based on a non-Canadian parent magazine. The Panel did not consider
the evidence which had been filed by Canada10, it did not
provide any reason why that evidence was not relevant, and instead
based its analysis upon an hypothetical scenario. Therefore,
Canada argues, the Panel followed an approach which is inconsistent
with the letter and spirit of Article 11 of the DSU.
Furthermore, Canada submits
that the Panel made two errors in its hypothetical analysis of
"like products". First, the Panel failed to compare
an imported product with a domestic product, and instead it compared
two imported "Canadian" editions. Second, the Panel
failed to compare products which could be marketed simultaneously
in the Canadian market. Canada also argues that the Panel's decision
fails to reflect the narrow construction and case-by-case approach
required by the Appellate Body Report in Japan - Taxes on Alcoholic
Beverages ("Japan - Alcoholic Beverages").11
The case-by-case approach requires an analysis based upon the
specific properties of the magazines in a Canadian context.
The chief and, for all practical
purposes, the only distinguishing characteristic of a magazine
is its content. Although Canada recognizes that the Panel did
not, in principle, reject the idea that content can be relevant,
Canada argues that the Panel evaded a determination of whether
split-run periodicals containing foreign content are substantially
identical to magazines developed specifically for a Canadian readership.
Canada submits that content
developed for and aimed at the Canadian market cannot be the same
as foreign content. Content for the Canadian market will include
Canadian events, topics, people and perspectives. The content
may not be exclusively Canadian, but the balance will be recognizably
and even dramatically different than that which is found in foreign
publications which merely reproduce editorial content developed
for and aimed at a non-Canadian market.
Canada also submits that, even
if United States' split-run periodicals and Canadian non-split-
run periodicals are "like products", Part V.1 of the
Excise Tax Act does not discriminate against imported products.
Canada affirms that the tax is non-discriminatory, in form and
in fact, and has no greater impact on imported products than on
domestic products. Because the legislation does not make any
distinction between domestic and imported products, the tax is
free from any taint of overt discrimination. Canada asserts that
there can be no violation of Article III:2, first sentence, unless
imported products, as a class, are taxed in excess of like domestic
products. Canada submits that the mere potential that an individual,
imported item might be taxed at a higher rate than a like domestic
product cannot create an automatic violation, when it results
from fiscal classifications that are not themselves discriminatory
in form or in fact. Article III:2 was not intended to impose
fiscal harmonization in tax rates, methods or classifications.
Canada states that its interpretation does not involve the subjectivity
of the now-discredited "aims and effects" test. Canada
suggests only that if the fiscal categories of a measure are origin-neutral
and exhibit no inherent bias, then the mere existence of such
categories, with differential rates of taxation, does not violate
Article III:2. In the present case, Canada asserts there is no
de jure or de facto discrimination, and the definitions
(or fiscal categories) used in the Excise Tax Act display no inherent
bias against imported products.
With respect to the second sentence
of Article III:2 of the GATT 1994, Canada argues that imported
split-run and domestic non-split-run periodicals are not directly
competitive or substitutable products according to the criteria
in Japan - Alcoholic Beverages. Because content is so specific
in magazines and because readers are looking for something fairly
specific, magazines are not interchangeable or substitutable.
Readers buy multiple magazines. These are complex questions
of fact.
Canada argues that, in the case
at hand, there are two separate determinations to be made under
Article III:2. The first sentence relates to whether or not there
is discrimination against like products. Only if there is no
violation of the first sentence can the Appellate Body decide
whether the measure is consistent with the second sentence of
Article III:2. On this point, Canada argues, it is not the actual
decision of the Panel that is in question, but the fact that the
Panel made no decision at all on the second sentence of Article
III:2. An examination of the second sentence would involve an
examination of factual elements which have not been dealt with
one way or the other by the Panel in the first instance.
Canada's position is that the
second sentence of Article III:2 is not an appropriate subject
for appellate review in this case. Canada argues that the jurisdiction
of the Appellate Body is limited to matters that are specifically
appealed as constituting errors of law or interpretation in the
Panel Report within the meaning of paragraph 17.6 of the DSU.
The United States failed to raise the Panel's findings on Article
III:2, second sentence, as a point of appeal, and therefore, the
Appellate Body has no jurisdiction to look into this issue. If
the Appellate Body decides to reverse the Panel's findings on
Article III:2, first sentence, that should be the end of the matter.
3. Consistency of the "Funded"
Postal Rate Scheme with Article III:8(b) of the GATT 1994
Canada submits that, consistent
with the Panel's findings, the payments made by Canadian Heritage
to Canada Post to provide Canadian publishers with reduced postal
rates are payments of subsidies exclusively to domestic producers
within the meaning of Article III:8(b) of the GATT 1994.
Canada asserts that nothing
in the expression, "payment of subsidies exclusively to domestic
producers" implies any limitations on the manner in which
the payment must be made. In this case, the payments made by
Canadian Heritage to Canada Post are made for the sole benefit
of Canadian publishers. In Canada's view, Canadian Heritage is
purchasing a benefit for domestic producers.
Canada argues that the phrase
"exclusively to domestic producers" does not support
the United States' assertion that a payment must actually be made
directly to the publishers. Rather, the word "exclusively"
is concerned with the distinction between "domestic"
as opposed to "non-domestic" producers. Canada submits
that the general thrust of Article III is against discrimination
between imported and domestic products. In this context, Canada
considers that granting a government subsidy "exclusively"
to domestic producers means granting a subsidy only to the producers
of domestic products, in the sense that it is paid to them alone
and not to foreign producers.
Canada asserts that the United
States' position is based on a difference of form, not substance,
and that the specific form in which the subsidy is paid is irrelevant
to the operation of Article III:8(b) of the GATT 1994. The word
"including" in a legal text is illustrative, not exhaustive,
and it demonstrates that the Members intended to cover a very
broad range of subsidies, regardless of the particular form of
the subsidy or the manner of payment. In Canada's view, the 1990
panel report in European Economic Community - Payments and
Subsidies Paid to Processors and Producers of Oilseeds and Related
Animal-Feed Proteins ("EEC - Oilseeds")12
confirms that the payment of subsidies can be indirect, provided
that the condition of exclusivity is met. Canada submits that
indirect payment merely creates a presumption that a payment not
made directly to producers is not made exclusively to them. However,
the panel report in EEC - Oilseeds clearly leaves open
the possibility that the presumption can be rebutted in the right
circumstances. In Canada's view, indirect payment creates at
most a presumption, but it is a rebuttable presumption.
Canada submits that the broad
meaning of "payment" in Article III:8(b) is confirmed
by the fact that the word "payment" in the French text
of the GATT 1994 appears as "attribution", and not as
"paiement". The expression "payment of subsidies"
is translated into French as "attribution de subventions",
i.e. granting of subsidies. Canada argues the expression "attribution
de subventions" clearly does not require that there must
be an actual transfer of government funds to domestic producers.
Canada points out that its interpretation
of Article III:8(b) of the GATT 1994 does not diminish the protection
offered under Article III generally. Whether the cheques are
written to Canada Post or to the publishers will not change the
competitive conditions between magazines. Canada submits that
it makes no sense to suggest that Article III:8(b) should be interpreted
in a manner that can only lead to government inefficiencies in
delivering subsidies to producers.
Canada also argues that the
panel reports quoted by the United States in its appellant's submission13
do not support the conclusion that a subsidy must be paid directly
to domestic producers to qualify under the provisions of Article
III:8(b). Those panel reports do not apply to the facts in this
dispute. The method of subsidy payment is not, in and of itself,
conclusive in determining whether Article III:8(b) of the GATT
1994 applies. The essential factor is that the payment must be
made by the government for the benefit of domestic producers.
B. United States
The United States agrees with
the Panel's findings and conclusions concerning Tariff Code 9958,
Part V.1 of the Excise Tax Act and the lower "commercial
Canadian" postal rates, as summarized in paragraph 6.1 of
the Panel Report, but the United States submits that the Panel
erred in determining that Canada's "funded" postal rate
scheme is justified by Article III:8(b) of the GATT 1994.
1. Applicability of the
GATT 1994 to Part V.1 of the Excise Tax Act
The United States submits that
Canada's excise tax is not exempt from Article III of the GATT
1994 on the ground that it is a "services measure" subject
only to the GATS. Canada has failed to demonstrate any significant
conflict between the GATT 1994 and the GATS arising from this
case or that, in any event, the GATS should be accorded priority
over the GATT 1994. The United States argues that Canada is incorrect
in suggesting that the GATT 1994 cannot apply to measures whose
application affects both goods and services.
The United States asserts that
the question of whether the GATT 1994 and the GATS may overlap
to some extent is irrelevant. The fundamental legal question,
which the panel addressed, is whether the two agreements impose
conflicting obligations with respect to Canada's excise tax, and
whether one agreement should be given priority over the other.
The United States submits that the Panel was correct in pointing
out that nothing in the Marrakesh Agreement Establishing the
World Trade Organization (the "WTO Agreement")14
suggests that a measure that comes within the scope of the GATS
cannot be equally subject to the GATT 1994.
The United States maintains
that because Canada's general argument forbidding any significant
overlap between the two agreements is incorrect, so too is Canada's
more specific argument that Part V.1 of the Excise Tax Act cannot
be subject to the GATT 1994 because it applies to advertising
services. Measures affecting imported products are not excluded
from the purview of the GATT 1994 simply because they take the
form of a tax or other measure applied to "services".
According to the United States, Canada's view that measures affecting
imported goods are exempt from scrutiny under Article III
of the GATT 1994 whenever they take the form of taxation or regulation
of services would give WTO Members licence to impose a wide range
of discriminatory tax and regulatory measures on imported goods.
Should Canada's view prevail, a Member could, consistently with
the GATT 1994, impose an exclusive tax on the rental of foreign
cars, place a prohibitive surcharge on telephone services carried
out using imported telecommunications equipment or tax medical
services using foreign diagnostic machinery.
The United States asserts that
for the purposes of Article III of the GATT 1994, it is irrelevant
whether Canada's excise tax could be characterized as a measure
affecting trade in advertising services within the terms of the
GATS. The tax measure alters the terms of competition for imported
split-run periodicals vis-à-vis like domestic magazines
for the placement of advertisements -- as indeed it is intended
to do -- and thus falls squarely within the purview of Article
III:2, first sentence, of the GATT 1994.
The United States also submits
that Canada's excise tax applies "directly or indirectly"
to split-run periodicals. The sweeping language of Article III:2,
first sentence, ensures coverage of taxes (such as taxes imposed
on goods or services) that have the potential to affect the competitive
position of imported and domestic goods. Thus, the Panel was
correct to find that the terms "directly or indirectly"
specifically encompass Canada's excise tax on split-run periodicals.
The United States points out that the tax is assessed on a "per
issue" basis, which plainly links the tax to the physical
good, a particular issue of a magazine. The United States also
stresses that Part V.1 of the Excise Tax Act is entitled "Tax
on Split-Run Periodicals", and the terms of the Excise Tax
Act provide that the tax is imposed "in respect of"
split-run editions of periodicals.
The United States submits that
advertisements, together with editorial content, constitute fundamental,
physical components of many, if not most, magazines. It is inconsistent
to argue, as Canada does, that a tax concerning inputs is a tax
directly or indirectly on a product, but a tax concerning a major
component of that product is not. Furthermore, the United States
asserts that advertisements affect a magazine's price, cost and
competitive position as much as any input used in the production
of a product.
The United States also maintains
that, by its terms, the first sentence of Article III:2 applies
only when imported products are "subject" to internal
taxes. Since the language of that sentence includes both direct
and indirect taxes on products, it is plain that the first sentence
applies even when the immediate object of the taxation is not
an imported product. Even if Canada's assertion that the tax
applies to "advertising services" is correct, that would
hardly be the end of the inquiry; the question would then be
whether the tax nevertheless applies at least "indirectly"
to split-run periodicals. The answer to that question is plainly
"yes", as the language of the Excise Tax Act makes clear.
The notion that restricting a major use of a product -- in this
case, the carrying of certain types of advertising -- cannot affect
competitive conditions is untenable. By applying a confiscatory
tax based on advertisements placed in split-run periodicals, Canada
virtually ensures the elimination of such periodicals from the
Canadian marketplace -- which indeed is the whole point of the
tax.
2. Consistency of Part V.1
of the Excise Tax Act with Article III:2 of the GATT 1994
The United States submits that
split-run periodicals are "like" domestic non-split-run
periodicals. In the United States' view, none of the three separate
claims of legal error raised by Canada with respect to the Panel's
findings and conclusions on Article III:2, first sentence, are
persuasive.
The United States asserts that
Canada's argument that the Panel erred by using a hypothetical
example as a basis for comparison is without merit. The Panel
correctly determined that the application of the tax turned on
factors other than the characteristics of the product sold in
Canada and that, as a result, imported split-run periodicals and
domestic non-split-run periodicals could be practically identical
products. The United States points out that the Excise Tax Act
does not draw any distinctions based on type of editorial content
and, consequently, under the Excise Tax Act a split-run periodical
could theoretically be entirely Canadian-oriented. By the same
token, a non-split-run periodical need not have any articles with
a particular Canadian focus. Thus, according to the United States,
Canada's attempt to demonstrate that TIME Canada and Maclean's
reflect a different editorial orientation is simply irrelevant
because the application of the Excise Tax Act is not based on
any such difference.
The United States also submits
that, even if one could credit Canada's argument that it is seeking
through the excise tax to ensure "original content"
in magazines sold in Canada, this result would be contrary to
the object and purpose of Article III. In the United States'
view, if the GATT 1994 permitted Members to require that imported
goods be designed exclusively or primarily for their markets,
they could easily insulate their markets from the comparative
economic advantages enjoyed by producers in other countries.
By requiring "originality", WTO Members could exclude
products that are sold in multiple markets or that enjoy the economies
of scale that result from such sales.
The United States stresses that
Canada has banned importation of split-run periodicals for over
30 years. For this reason, the Panel was entirely justified to
use hypothetical examples in its reasoning on the "like product"
issue.
According to the United States,
Canada's argument that the Excise Tax Act does not impose a higher
tax on imported products than on like domestic products is difficult
in the light of the fact that, (1) the Act makes only one class
of magazines -- split-runs -- subject to the special 80 percent
excise tax; and (2) the Panel found that, for purposes of GATT
Article III:2, imported split-run periodicals are "like"
non-split-run domestic Canadian magazines. The United States
argues that manifestly imported split-run periodicals are subject
to a higher rate of taxation than like domestic non-split-run
periodicals. That is the end of the inquiry for purposes of Article
III:2, first sentence. The United States also maintains that
Canada's 80 percent excise tax alters the competitive environment
in the Canadian magazine market against imported split-run magazines
and thus favours "like" domestically-produced periodicals.
Thus, Canada's proposed "discrimination" test based
on "imports as a class" is inconsistent with the recent
panel and Appellate Body reports in Japan - Alcoholic Beverages15,
where no additional "discrimination" test based on "classes"
of imported products was accepted.
The United States requests the
Appellate Body to affirm the Panel's conclusions that Part V.1
of the Excise Tax Act is inconsistent with Article III:2, first
sentence, of the GATT 1994.
With respect to whether imported
split-run periodicals and domestic non-split-run periodicals are
directly competitive or substitutable products within the meaning
of the second sentence of Article III:2, the United States asserts
that it is clear that if there was no competition for readers,
there would be no need for Part V.1 of the Excise Tax Act. In
its excise tax, Canada has targeted those magazines that are likely
to be the most competitive with Canadian magazines for readers.
Regarding the jurisdictional
arguments presented by Canada concerning whether the Appellate
Body can examine a claim under the second sentence of Article
III:2, the United States responds that there were no grounds for
the United States to claim that the Panel had made a legal error
in not addressing the alternative argument raised by the United
States under Article III:2, second sentence. The Panel had resolved
the issue by finding a violation of Article III:2, first sentence,
of the GATT 1994 and therefore, had correctly stopped at that
point. The United States also refers to the recent Appellate
Body Report in United States - Measure Affecting Imports of
Woven Wool Shirts and Blouses from India16 which upheld
the judicial economy approach taken by panels.
In the United States' view,
this situation is analogous to the Appellate Body's reasoning
concerning Article XX of the GATT 1994 in United States - Standards
for Reformulated and Conventional Gasoline ("United
States - Gasoline").17 The procedure suggested by
Canada is not consistent with the goals of Article 3.3 of the
DSU. The parties to the dispute made a number of arguments
before the Panel relating to the second sentence of Article III:2
as well as to Article III:4 of the GATT 1994. The United States
asserts that there is a sufficient legal basis for the Appellate
Body to apply the law to the facts in the panel record in analyzing
a claim under the second sentence of Article III:2 should the
Appellate Body decide to reverse the Panel's findings on Article
III:2, first sentence, of the GATT 1994.
3. Consistency of the "Funded"
Postal Rate Scheme with Article III:8(b) of the GATT 1994
The United States submits that
the Panel erred in determining that Canada's "funded"
postal rate regime falls within the scope of Article III:8(b)
of the GATT 1994. According to the United States, neither the
intra-governmental transfers of funds between the Canadian governmental
entities nor the application by Canada Post of lower postage rates
to domestic periodicals amounts to "the payment of subsidies
exclusively to domestic producers" within the meaning of
Article III:8(b).
The United States argues that
any "payment" under Canada's "funded" postal
rate scheme is made from one government entity to another, not
from the Canadian government to domestic producers as required
by Article III:8(b). Canada Post's favourable postage rates for
domestic periodicals do not, in themselves, amount to a payment
"exclusively to domestic producers", because whether
or not there is any "subsidy" reflected in the "funded"
postal rates, they take the form of advantageous transport and
delivery rates for domestic periodicals. In making its findings,
the Panel ignored both the plain language of Article III:8(b)
and a series of adopted panel reports under the GATT 1947 that
correctly interpreted Article III:8(b) as applying only to the
actual payment of subsidies to domestic producers.18 The
United States also submits that the Panel did not clarify how
a postal charge could amount to a subsidy payment, nor why postal
fees imposed on domestic periodicals should be viewed as payments
to domestic periodical producers.
According to the United States,
the text of Article III:8(b) plainly requires: (1) that there
be a payment, and (2) that this payment be made exclusively to
domestic producers. The United States asserts that the use of
the word "payment" in the phrase "payment of subsidies"
-- instead of more general terms such as "provision",
"furnishing" or "granting" -- indicates that
the scope of Article III:8(b) is limited to measures involving
an actual transfer of government funds to domestic producers.
Furthermore, the two specific examples of exempted measures set
out in Article III:8(b) "payments to domestic
producers derived from the proceeds of internal taxes or charges
applied consistently with the provisions of this Article and subsidies
effected through governmental purchases of domestic products"
-- confirm this interpretation. In the United States' view, both
types of subsidies are typically effected through monetary payments
made by a government to domestic producers.
In response to Canada's reference
to the French translation of the word "payment" in Article
III:8(b), the United States points out that in the Spanish version
of the WTO Agreement, adopted at Marrakesh, the translation
of "payment" was changed from "concesión"
in the GATT 1947 to "pago" in the GATT 1994. The term
"concesión" means "grant", whereas
"pago" means "payment".
The United States also maintains
that the use of the phrase "exclusively to domestic producers"
indicates that the payment must actually be made to the producers,
and excludes advantages provided by governments to domestic products
that may provide indirect benefits to domestic producers. Article
III:8(b) reflects a willingness on the part of the framers of
the GATT 1947 to allow governments some ability to subsidize domestic
production. On the other hand, the United States considers that
the narrow terms of the provision suggests that the drafters wished
to restrict such subsidies to a particular form, i.e. direct payments,
that would not undermine the basic purpose of Article III.
According to the United States,
the distinction between (a) payments to domestic producers and
(b) advantages conferred with respect to domestic products is
significant in the context of the object and purpose of Article
III. First, governmental advantages directed to domestic products,
such as lower transportation or delivery rates, directly and immediately
undercut Article III's fundamental prohibition of less favourable
treatment of imported products. By contrast, payments made to
domestic producers do not automatically distort competition between
domestic and imported products. Second, measures that are reflected
in intra-governmental transfers, rate-setting and the like may
more easily escape public attention than direct monetary transfers
to producers, and thus may be less open to public scrutiny and
debate. Third, governments may find it more costly and administratively
complex to establish a system of direct payments to producers
than to provide advantages directly tied to the treatment of products.
For the preceding reasons, the limitation of Article III:8(b)
to direct payments to producers may reduce the incidence and magnitude
of government advantages provided solely to domestic interests,
thereby reducing the possibility of competitive distortions that
could undermine Article III's objective of maintaining equal competitive
conditions for domestic and imported products.
The United States asserts that
the Panel failed to address the question of whether payment was
actually made to domestic producers. Instead, the Panel assumed,
without articulating its reasoning, that the payment to Canada
Post constituted payment of a subsidy to domestic producers, and
that the only issue in dispute with respect to the application
of Article III:8(b) was whether that payment was made "exclusively"
to domestic producers. Neither Canadian Heritage nor Canada Post
makes any "payment" to Canadian producers under Canada's
"funded" postal rate programme. Rather, Canadian Heritage
periodically transfers funds to Canada Post, and the latter does
not pay those funds to Canadian producers. Canada Post uses the
funds to underwrite, in part, the cost of providing transportation
and delivery services for domestic periodicals at low, "funded"
postal rates. The United States argues that whether or not Canada's
discriminatory "funded" rate scheme reflects a government
"subsidy", any such subsidy is not granted directly
in the form of payments to domestic periodical producers. Rather,
the subsidy is reflected in the preferential rate charged in connection
with the transportation and delivery of Canadian-produced periodicals.
If sustained, the United States
submits, the Panel's finding in this case would free WTO Members
to use a wide range of reduced-price governmental services and
tax measures to confer advantages exclusively on domestically-produced
goods. Such a result would not only undermine the equality of
competitive opportunities for imported and domestic goods that
Article III is meant to ensure, but would also upset the balance
of rights and obligations reflected in Articles III:2 and III:4,
on the one hand, and Article III:8(b), on the other.
III. Issues Raised in this
Appeal
The appellant, Canada, raises
the following issues in this appeal:
(b) If Article III:2 of the
GATT 1994 is applicable to Part V.1 of the Excise Tax Act, whether
imported split-run periodicals and domestic non-split-run periodicals
are "like products" within the meaning of Article III:2,
first sentence, of the GATT 1994; and
(c) Even if imported split-run
periodicals and domestic non-split-run periodicals are "like
products" within the meaning of Article III:2, first sentence,
of the GATT 1994, is it necessary to demonstrate that Part V.1
of the Excise Tax Act discriminates against imported products.
The appellant, the United States,
raises the following issue in this appeal:
IV. Applicability of the GATT
1994
Canada's primary argument with
respect to Part V.1 of the Excise Tax Act is that it is a measure
regulating trade in services "in their own right" and,
therefore, is subject to the GATS. Canada argues that the Panel's
conclusion that Part V.1 of the Excise Tax Act is a measure affecting
trade in goods, and, therefore, is subject to Article III:2 of
the GATT 1994, is an error of law.19
We are unable to agree with
Canada's proposition that the GATT 1994 is not applicable to Part
V.1 of the Excise Tax Act. First of all, the measure is an excise
tax imposed on split-run editions of periodicals. We note that
the title to Part V.1 of the Excise Tax Act reads, "TAX ON
SPLIT-RUN PERIODICALS", not "tax on advertising".
Furthermore, the "Summary" of An Act to Amend the Excise
Tax Act and the Income Tax Act20, reads: "The Excise
Tax Act is amended to impose an excise tax in respect of split-run
editions of periodicals". Secondly, a periodical is a good
comprised of two components: editorial content and advertising
content.21 Both components can be viewed as having services
attributes, but they combine to form a physical product -- the
periodical itself.
The measure in this appeal,
Part V.1 of the Excise Tax Act, is a companion to Tariff Code
9958, which is a prohibition on imports of special edition periodicals,
including split-run or regional editions that contain advertisements
primarily directed to a market in Canada and that do not appear
in identical form in all editions of an issue distributed in that
periodical's country of origin. Canada agrees that Tariff Code
9958 is a measure affecting trade in goods, even though it applies
to split-run editions of periodicals as does Part V.1 of the Excise
Tax Act. As Canada stated in the oral hearing during this appeal:
The Panel found that Tariff
Code 9958 is an import prohibition, although it applies to split-run
editions of periodicals which are distinguished by their advertising
content directed at the Canadian market. Canada did not appeal
this finding of the Panel. It is clear that Part V.1 of the Excise
Tax Act is intended to complement and render effective the import
ban of Tariff Code 9958.23 As a companion to the import ban,
Part V.1 of the Excise Tax Act has the same objective and purpose
as Tariff Code 9958 and, therefore, should be analyzed in the
same manner.
An examination of Part V.1 of
the Excise Tax Act demonstrates that it is an excise tax which
is applied on a good, a split-run edition of a periodical, on
a "per issue" basis. By its very structure and design,
it is a tax on a periodical. It is the publisher, or in the absence
of a publisher resident in Canada, the distributor, the printer
or the wholesaler, who is liable to pay the tax, not the advertiser.24
Based on the above analysis
of the measure, which is essentially an excise tax imposed on
splitrun editions of periodicals, we cannot agree with Canada's
argument that this internal tax does not "indirectly"
affect imported products. It is a well-established principle
that the trade effects of a difference in tax treatment between
imported and domestic products do not have to be demonstrated
for a measure to be found to be inconsistent with Article III.25
The fundamental purpose of Article III of the GATT 1994 is to
ensure equality of competitive conditions between imported and
like domestic products.26 We do not find it necessary to
look to Article III:1 or Article III:4 of the GATT 1994 to give
meaning to Article III:2, first sentence, in this respect. In
Japan - Alcoholic Beverages, the Appellate Body stated
that "Article III:1 articulates a general principle"
which "informs the rest of Article III".27 However,
we also said that it informs the different sentences in Article
III:2 in different ways. With respect to Article III:2, second
sentence, we held that "Article III:1 informs Article III:2,
second sentence, through specific reference".28
Article III:2, first sentence,
uses the words "directly or indirectly" in two different
contexts: one in relation to the application of a tax to imported
products and the other in relation to the application of a tax
to like domestic products. Any measure that indirectly affects
the conditions of competition between imported and like domestic
products would come within the provisions of Article III:2, first
sentence, or by implication, second sentence, given the broader
application of the latter.
The entry into force of the
GATS, as Annex 1B of the WTO Agreement, does not diminish
the scope of application of the GATT 1994. Indeed, Canada concedes
that its position "with respect to the inapplicability of
the GATT would have been exactly the same under the GATT 1947,
before the GATS had ever been conceived".29
We agree with the Panel's statement:
We do not find it necessary
to pronounce on the issue of whether there can be potential overlaps
between the GATT 1994 and the GATS, as both participants agreed
that it is not relevant in this appeal.31 Canada stated that
its
We conclude, therefore, that
it is not necessary and, indeed, would not be appropriate, in
this appeal to consider Canada's rights and obligations under
the GATS. The measure at issue in this appeal, Part V.1 of the
Excise Tax Act, is a measure which clearly applies to goods --
it is an excise tax on split-run editions of periodicals. We
will now proceed to analyze this measure in light of Canada's
points of appeal under Article III:2 of the GATT 1994. TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS
1 WT/DS31/R, 14 March 1997. 2 Customs Tariff, R.S.C. 1985, c. 41 (3rd Supp.), s. 114, Schedule VII, Item 9958. 3 An Act to Amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46. 4 Canada Post Corporation Act, R.S.C. 1985, c. C-10; Publications Mail Postal Rates, Canada Post Corporation, effective 4 March 1996; Canadian Publication Mail Products Sales Agreement, 1 March 1995; International Publications Mail Product (Canadian Distribution) Sales Agreement, 1 March 1994; Memorandum of Agreement concerning the Publications Assistance Program between the Department of Communications and Canada Post Corporation (the "MOA"). 5 Panel Report, para. 6.1. 6 Panel Report, para. 6.2. 7 WT/DS31/5, 2 May 1997. 8 Pursuant to Rule 21(1) of the Working Procedures. 9 We use the terms "periodical" and "magazine" interchangeably in this Report. 10 Comparing TIME (a United States' magazine) and TIME Canada (a split-run magazine) with Maclean's (a domestic non-split run magazine). 11 WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996. 12 Adopted 25 January 1990, BISD 37S/86. 13 Panel Report, Italian Discrimination Against Agricultural Machinery, ("Italian Agricultural Machinery"), adopted 23 October 1958, BISD 7S/60; Panel Report, United States - Measures Affecting Alcoholic and Malt Beverages, ("United States - Malt Beverages"), adopted 19 June 1992, BISD 39S/206; Panel Report, United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, ("United States - Tobacco"), DS44/R, adopted 4 October 1994; Panel Report, EEC - Oilseeds, adopted 25 January 1990, BISD 37S/86. 14 Done at Marrakesh, Morocco, 15 April 1994. 15 Panel Report, WT/DS8/R, WT/DS10/R, WT/DS11/R, and Appellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996. 16 WT/DS33/AB/R, adopted 23 May 1997, p. 18. 17 WT/DS2/AB/R, adopted 20 May 1996. 18 Panel Report, Italian Agricultural Machinery, adopted 23 October 1958, BISD 7S/60; Panel Report, United States - Malt Beverages, adopted 19 June 1992, BISD 39S/206; Panel Report, United States - Tobacco, DS44/R, adopted 4 October 1994; Panel Report, EEC - Oilseeds, adopted 25 January 1990, BISD 37S/86. 19 Canada's Appellant's Submission, 12 May 1997, pp. 2-3, paras. 6, 9, 13 and 15. 20 S.C. 1995, c. 46. 21 Panel Report, para. 3.33. 22 Canada's Statement at the oral hearing, 2 June 1997. 23 Panel Report, paras. 3.25 and 3.26. 24 An Act to Amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46, s. 35(1). 25 Appellate Body Report, Japan - Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 16. 26 Panel Report, United States - Tobacco, DS44/R, adopted 4 October 1994, para. 99; Panel Report, United States - Malt Beverages, adopted 19 June 1992, BISD 39S/206, para. 5.6; Panel Report, Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, adopted 18 February 1992, BISD 39S/27, para. 5.6; Panel Report, United States - Section 337 of the Tariff Act of 1930, ("United States - Section 337"), adopted 7 November 1989, BISD 36S/345, para. 5.13; Panel Report, United States - Taxes on Petroleum and Certain Imported Substances, adopted 17 June 1987, BISD 34S/136, para. 5.1.9; Panel Report, Brazilian Internal Taxes, adopted 30 June 1949, BISD IIS/181, para. 15. 27 WT/DS8/AB/R, WT/DS10/AB/R,WT/DS11/AB/R, adopted 1 November 1996, p. 18. 28 Ibid., p. 23. In this respect, we draw attention to paragraphs 4.8, 5.37 and 5.38 of the Panel Report, and we note that a Panel finding that has not been specifically appealed in a particular case should not be considered to have been endorsed by the Appellate Body. Such a finding may be examined by the Appellate Body when the issue is raised properly in a subsequent appeal. 29 Canada's Appellant's Submission, 12 May 1997, p. 3, para. 14. 30 Panel Report, para. 5.17. 31 Canada's Appellant's Submission, 12 May 1997, p. 3, para. 14; United States' Appellee's Submission, 26 May 1997, p. 13, para. 29. 32 Canada's Statement at the oral hearing, 2 June 1997. |
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