National Treatment

By Sana Sud , SLS, Pune

Editor’s Note: The national treatment obligation in the General Agreement on Trade in Services (GATS) is wider in scope but more limited in application than that in the General Agreement on Tariffs and Trade (GATT). It is wider in scope because, while national treatment under GATT is concerned with measures affecting products per se, the domain of this obligation in the GATS includes not only measures affecting services products, but also measures affecting service suppliers. It is more limited in application because, while national treatment under the GATT applies across the board, under the GATS it applies only to scheduled sectors, and there too it may be subject to limitations. These differences were intended and are well known. An elaboration of the concept of National Treatment would help us gain a better understanding of the reasons behind this approach.

Introduction

The counterpart in international trade law of the Biblical injunction to “love thy neighbour as thyself” is the national treatment obligation. Article III of the GATT 1994 talks about ‘National Treatment on Internal Taxation and Regulation’. It prohibits internal taxes and other regulations that enhance the competitive position of domestic producers relative to that of foreign producers.[i] It tries to equate the treatment of domestic and foreign imported products in a market. National treatment obligation does not apply to laws, regulations or requirements governing government procurement and that the national treatment obligation does not prevent the payment of subsidies exclusively to domestic producers.[ii]

The scope and extent of the reach of WTO national treatment policy is over all the members of WTO i.e. 146 Countries it covers all the government of these policies , it covers not only taxes but also laws, regulations which affect the sale , distribution , of imported goods and services . Under the prohibitive scope of national treatment even those provisions are covered which do not explicitly have affects but indirectly effect.[iii] Thus having a interpretation in the true sense of the term,  not merely restricted to  verbal but interpretive in spirit.

The general principle that internal measures should not be applied so as to afford protection to domestic production is elaborated on in Article III:2 with regard to internal taxation and in Article III:4 with regard to internal regulation. In Article III:2, two non-discrimination obligations can be distinguished: one obligation is set out in the first sentence of Article III:2, relating to internal taxation of ‘like products’; and the other obligation is set out in the second

sentence of Article III:2, relating to internal taxation of ‘directly competitive or substitutable products’. Therein lies a distinction between Article III :2 first sentence and second sentence. In Japan — Alcoholic Beverages II, the Appellate Body described the distinction between the first and second sentences of Article III:2 as follows: “[T]he second sentence of Article III:2 provides for a separate and distinctive consideration of the protective aspect of a measure in examining its application to a broader category of products that are not ‘like products’ as contemplated by the first sentence.

This distinction was further elaborated in the case of  Canada — Periodicals, the Appellate Body, in reviewing the Panel’s finding that the Canadian excise tax on magazines was inconsistent with Article III:2, first sentence

“[T]here are two questions which need to be answered to determine whether there is a violation of Article III:2 of the GATT 1994: (a) whether imported and domestic products are like products; and (b) whether the imported products are taxed in excess of the domestic products. If the answers to both questions are affirmative, there is a violation of Article III:2, first sentence. If the answer to one question is negative, there is a need to examine further whether the measure is consistent with Article III:2, second sentence.”

 In Japan — Alcoholic Beverages II, the Appellate Body clarified the two elements contained in the first sentence of Article III:2 — “like products” and “in excess of”. The Appellate Body established that these requirements constitute, in and of themselves, an application of the general principle contained in Article III:1 and that, consequently, the presence of a protective application need not be established separately from the specific criteria of Article III:2, first sentence. On the other hand  in Article III:2 second sentence there is a description of ‘directly competitive or substitutable products’ which are ‘not similarly taxed’ and are formulated in such a way so as to afford a protection to domestic products. To prove the violation of Article III:2 second sentence there must be proof of three things “directly and substitutive goods” , “not similarly taxed” and “so as to afford protection to domestic production” which shall be elaborated when the fiscal measure of sentence 1 have been dealt with i.e. in excess of.

‘In excess of’

 In Japan — Alcoholic Beverages II, the Appellate Body established a strict standard for the term “in excess of” under Article III:2, first sentence:

“Even the smallest amount of ‘excess’ is too much. ‘The prohibition of discriminatory taxes in Article III:2, first sentence, is not conditional on a ‘trade effects test’ nor is it qualified by a de minimis standard.’

Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III.

Article III:2, first sentence concerns ‘internal taxes and other charges of any kind’ which are applied ‘directly or indirectly’ on products. Examples of such internal taxes on products are value added taxes (VAT), sales taxes and excise duties. Income taxes or import duties are not covered since they are not internal taxes on products. The words ‘applied directly or indirectly on products’ should be understood to mean ‘applied on or in connection with products’. It has been suggested that a tax applied ‘indirectly’ is a tax applied, not on a product as such, but on the processing of the product.

Even where imported and like domestic products are subject to identical tax rates, the actual tax burden can still be heavier on imported products. This could be the case, for instance, where different methods of computing tax bases lead to a greater actual tax burden for imported products.Thus not only the quantitative measure but the actual burden experienced by the consumer in buying either domestic or imported products is measured.

The GATT 1947 panel  in Japan — Alcoholic Beverages I has stated that:

 … in assessing whether there is tax discrimination, account is to be taken not only of the rate of the applicable internal tax but also of the taxation methods (e.g. different kinds of internal taxes, direct taxation of the finished product or indirect taxation by taxing the raw materials used in the product during the various stages of its production) and of the rules for the tax collection (e.g. basis of assessment)

It may thus be stated, in more general terms, that a determination of whether an infringement of Article III:2, first sentence, exists must be made on the basis of an overall assessment of the actual tax burdens imposed on imported products, on the one hand, and like domestic products, on the other hand.

In Argentina – Hides and Leather the Panel also emphasised that Article III:2, first sentence,

requires a comparison of actual tax burdens rather than merely of nominal tax burdens. The Panel ruled: It is necessary to recall the purpose of Article III:2, first sentence, which is to ensure ‘‘equality of competitive conditions between imported and like domestic products’’.

Accordingly, Article III:2, first sentence, is not concerned with taxes or charges as such or the policy purposes Members pursue with them, but with their economic impact on the  competitive opportunities of imported and like domestic products. It follows, in our view, that what must be compared is the tax burdens imposed on the taxed products.

We consider that Article III:2, first sentence, requires a comparison of actual tax burdens rather than merely of nominal tax burdens. Were it otherwise, Members could easily evade its disciplines. Thus, even where imported and like domestic products are subject to identical tax rates, the actual tax burden can still be heavier on imported products. This could be the case, for instance, where different methods of computing tax bases lead to a greater actual tax burden for imported products.

The Appellate Body in Canada — Periodicals that ‘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.’ If differences in taxes are based only upon the nationality of producers or the origin of the parts and components contained in the products, these tax differences are – as the Panel in Indonesia – Autos found – necessarily inconsistent with the national treatment obligation of Article III:2, first sentence

Test under Article III:2, second sentence

In Japan — Alcoholic Beverages II, the Appellate Body explained the test to be used under Article III:2, second sentence, and distinguished this test from the test applicable under the first sentence. This distinction, in the view of the Appellate Body, is a result of the explicit reference to Article III:1 in the second sentence of Article III:2:

“Unlike that of Article III:2, first sentence, the language of Article III:2, second sentence, specifically invokes Article III:1. The significance of this distinction lies in the fact that whereas Article III:1 acts implicitly in addressing the two issues that must be considered in applying the first sentence, it acts explicitly as an entirely separate issue that must be addressed along with two other issues that are raised in applying the second sentence. Giving full meaning to the text and to its context, three separate issues must be addressed to determine whether an internal tax measure is inconsistent with Article III:2, second sentence. These three issues are whether:

 (1)     the imported products and the domestic products are ‘directly competitive or substitutable products’ which are in competition with each other;

 (2)     the directly competitive or substitutable imported and domestic products are ‘not similarly taxed’; and

 (3)     the dissimilar taxation of the directly competitive or substitutable imported domestic products is applied so as to afford protection to domestic production’.

These are three separate issues. Each must be established separately by the complainant for a panel to find that a tax measure imposed by a Member of the WTO is inconsistent with Article III:2, second sentence.”

Not similarly taxed

While under Article III:2, first sentence, even the slightest tax differential leads to the

conclusion that the internal tax imposed on imported products is inconsistent with the national treatment obligation, under Article III:2, second sentence, the tax differential has to be more than de minimis to support a conclusion that the internal tax imposed on imported products is WTO-inconsistent.

 The Appellate Body stated in Canada – Periodicals that The ‘not similarly taxed’  requirement is met even if only some imported products are not taxed similarly to domestic products, while other imported products are taxed similarly.

 “should not be applied to imported or domestic products so as to afford protection to domestic production”

 The Appellate Body noted in Japan – Alcoholic Beverages II : an examination in any case of whether dissimilar taxation has been applied so as to afford protection requires a comprehensive and objective analysis of the structure and application of the measure in question on domestic as compared to imported products.

We believe it is possible to examine objectively the underlying criteria used in a particular tax measure, its structure, and its overall application to ascertain whether it is applied in a way that affords protection to domestic products.

Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure .

To determine whether the application of a tax measure affords protection to domestic production, it is the application criteria, the structure and the overall application rather than the subjective intent of the legislator or regulator that must be examined.

In Japan – Alcoholic Beverages II the Appellate Body acknowledged .The very magnitude of the tax differential may be evidence of the protective application of a tax measure. Most often, however, other factors will also be considered.

Article III:2, first sentence, by establishing that if imported products are taxed in excess of like domestic products, then that tax measure is inconsistent with Article III.

The presence of a protective application need not be established separately from the specific requirements that are included in the first sentence in order to show that a tax measure is inconsistent with the general principle set out in the first sentence.Thus proving this point is another distinction between article III:2 first b sentence and second sentence.

 National treatment under GATS

The national treatment obligation in the General Agreement on Trade in Services (GATS) is wider in scope but more limited in application than that in the General Agreement on Tariffs and Trade (GATT). It is wider in scope because, while national treatment under GATT is concerned with measures affecting products per se, the domain of this obligation in the GATS includes not only measures affecting services products, but also measures affecting service suppliers. It is more limited in application because, while national treatment under the GATT applies across the board, under the GATS it applies only to scheduled sectors, and there too may be subject to limitations. These differences were intended and are well known.[iv]

Members set out such commitments in the national treatment column of their ‘Schedule of Specific Commitments’. These specific commitments to grant national treatment are often made subject to certain conditions, qualifications and limitations, which are also set out in the Schedules.

In the sectors inscribed in its Schedule and subject to the conditions, qualifications and limitations set out therein, a Member must accord treatment no less favourable, to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, than that it accords to its own like services and service suppliers. Article XVII of the GATS sets out a three-tier test of consistency. In brief, this three-tier test of consistency with Article XVII of the GATS requires the examination of whether:

* the measure at issue affects trade in services;

* the foreign and domestic services or service suppliers are ‘like’ services or service suppliers; and

* The foreign services or service suppliers are granted treatment no less favourable.

The concept of a ‘measure affecting trade in services’ has been

Clarified by the appellate body in Canada – Autos, where it stated that two key

Issues must be examined to determine whether a measure is one ‘affecting

Trade in services’, namely:

* first, whether there is ‘trade in services’ in the sense of article i:2; and

* secondly, whether the measure at issue ‘affects’ such trade in services

Within the meaning of article i:1.[v]

The broad scope of the concept of ‘trade in services’, including all services except services supplied in the exercise of governmental authority and including services supplied in any of the four distinct modes of supply (cross-border supply, consumption abroad, commercial presence and the presence of natural persons. For a measure to ‘affect’ trade in services, this measure must not regulate or govern the trade in, i.e. The supply of, services.

A measure affects trade in services when the measure bears ‘upon the conditions of competition in supply of a service’.

Treatment no less favourable’

The test of consistency with the national treatment obligation of Article XVII:1 of the GATS is whether the foreign services or service suppliers are granted treatment no less favourable. Paragraphs 2 and 3 of Article XVII clarify the requirement of ‘treatment no less favourable’ set out in paragraph 1 by stating:

  1. A Member may meet the requirement of paragraph 1 by according to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers.
  2. Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member.

A Member that gives formally identical treatment to foreign and domestic services or service suppliers may nevertheless be in breach of the national treatment obligation if that Member, by giving formally.

Identical treatment, modifies the conditions of competition in favour of the domestic services or service suppliers. Also, a Member that gives formally different treatment to foreign and domestic services or service suppliers does

Not act in breach of the national treatment obligation if that Member, by giving formally different treatment, does not modify the conditions of competition in favour of the domestic services and service suppliers.

Conclusion

The principal purpose of the national treatment obligations of Article III of the GATT 1994 is to avoid protectionism in the application of internal tax and regulatory measures. As is explicitly stated in Article III:1, the purpose of Article III is to ensure that internal measures ‘not be applied to imported and domestic products so as to afford protection to domestic production’. To this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products.

 Edited by Kanchi Kaushik

[i] General Agreement on Tariffs and Trade, opened for signature Apr. 15,1994, in GATT SECRETARIAT, THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 21, GATT Sales No. 1994-4 (1994) [hereinafter GATT]

[ii] Won Mog Choi, Overcoming The “Aim And Effect” Theory: Interpretation Of The “Like Product” In Gatt Article Iii,8 U. C. Davis J. Int’l L. & Pol’y 107 2002

[iii] Henerik Horn and Petros C.Mavroidis, Still Hazy after All these Years : The interpretation of National Treatment in GATT/WTO Case Law on Tax Determination , EJIL (2004) Vol.15 No.1 ,39-69  .P40

[iv] Aaditya Mattoo, National Treatment in the GATS: Corner-stone or Pandora’s Box?, 22 January 1997

[v] Appellate Body Report, Canada – Autos, pp. 320–1.

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