## _tnm1602

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### Economic effects of an export tax (Box 1)
- Partial-equilibrium effects — small country:
  - Initial equality: domestic price p0 = π0 (world price).
  - With export tax t (small country, π0 unchanged):
    - Exports fall; domestic supply increases; domestic price falls until p1(1+t) = π0.
    - Consumers: consume more (d1 > d0); consumer surplus gain = area (a).
    - Producers: produce and sell less (x1 < x0); producers’ surplus falls by areas a + b + c + d.
    - Government tax revenue = area (c) = post-tax exports (x1 - d1) × per-unit tax (π0 - p1).
    - Net domestic welfare change = loss = areas (b + d) (deadweight losses).
  - Comparative note: import tariff ≡ tax on domestic consumption + subsidy for domestic production; export tax ≡ subsidy on domestic consumption + tax on domestic production.
- Partial-equilibrium effects — large country (terms-of-trade effects):
  - If net supply is large enough to affect world prices, reduced exports can raise world price from π0 to π1.
    - Tax revenues increase by area (e) corresponding to rise to π1.
    - Per-unit export tax becomes (π1 - p1) (not (π0 - p1)).
    - Export tax raises domestic welfare if area (e) > (b + d). Area (e) = terms-of-trade gain = (π1 - π0) per unit exported.
    - Optimum export tax = inverse of the absolute value of the export demand elasticity.
- Industrial-policy and distributional consequences:
  - Export tax on primary/intermediate products advantages domestic downstream processors relative to foreign processors paying world price.
  - “De-escalating” export tax structure (higher tax on primary/intermediate than on final goods) used to encourage manufacturing at expense of upstream sectors.
  - Advantage equals (π1 - p1) in a large country and (π0 - p1) in a small country; advantage + tax revenues come at expense of taxed-product producers and overall efficiency if world prices unaffected; if world prices rise, foreign consumers also bear part of cost.
  - Such assistance may distort trade and could be illegal under WTO if shown to have “adverse effects.”
- Conservation, environmental objectives, and unintended consequences:
  - Export tax can reduce domestic output (x1 < x0) and aid conservation, but is seldom the most effective instrument; measures that curtail production are usually more effective (magnitude depends on supply elasticity).
  - Downstream processing and exports not similarly constrained can undo conservation effects.
  - Export taxes may incentivize foreign firms to locate downstream processing domestically to access inputs, potentially bringing know-how and technology.

*Source: Box adapted from Bouet and Laborde.*

### Part V of the ASCM — substantive and procedural requirements
- Preconditions to impose countervailing measures:
  - Determination required that there are: subsidized imports; injury to domestic industry manufacturing like products; causal link between subsidized imports and injury.
- Procedural rules include:
  - initiation and conduct of countervailing investigations;
  - imposition of preliminary and final measures;
  - use of undertakings;
  - duration of measures.
- Failure to respect substantive or procedural rules may lead to dispute settlement and invalidation of measures.
- Evidentiary burden: complaining Member usually must show an “actionable” subsidy has “adverse effects” — arguably more onerous than proving a prohibited subsidy.

### Tax measures and Annex I (illustrative export subsidies)
- Annex I items involving tax measures: import charges (i); indirect taxes (g) and (h); direct taxes (e) and (f).
- Item (g): exemption/remission of indirect taxes in respect of production/distribution of exported products in excess of those for like products sold domestically. Footnote 60: VAT covered exclusively by (g) not (h).
- Item (h): exemption/remission/deferral of prior-stage cumulative indirect taxes on inputs used in exported goods in excess of like prior-stage relief for domestic sales; permissible only for inputs consumed in production (normal allowance for waste); Annex II contains guidelines on consumption of inputs.
- Item (i): remission/drawback of import charges in excess of those levied on imported inputs consumed in production of exported product (normal allowance for waste).
- Items (e) and (f) (direct taxes and social welfare charges) embody origin principle:
  - Item (e) precludes full/partial exemption/remission/deferral specifically related to exports of direct taxes; footnote 59 clarifies exceptions for avoiding double taxation, deferral with appropriate interest, and arm’s length transfer pricing.
  - Item (f) treats special deductions directly related to exports or export performance, over and above those for domestic production, as export subsidies.

### Limits on relief and treatment of capital inputs
- Relief under (h) and (i) confined to inputs physically incorporated, energy, fuels and oil used in production, and catalysts consumed in use.
- Capital inputs cannot receive such relief because they are not physically incorporated, despite depreciation allowances.
- Footnote 61 does not mention computer software as an allowable consumed input.

### Special and differential treatment for developing countries
- Article 27:
  - Prohibition on export subsidies does not apply to least-developed countries designated by UN per Annex VII (a).
  - Prohibition does not apply to developing Members listed in Annex VII (b) until GNP per capita reaches US$1,000 per year in constant 1990 dollars for three consecutive years.
    - As of 6 July 2015, Members listed: Bolivia, Cameroon, Congo, Ivory Coast, Ghana, Guyana, Honduras, India, Kenya, Nicaragua, Nigeria, Pakistan, Senegal, and Zimbabwe. Dominican Republic, Egypt, Guatemala, Indonesia, Morocco, the Philippines, and Sri Lanka recently passed this threshold.
  - Article 27.4: other developing Members not listed benefit from programme-specific and time-limited exemptions subject to a “standstill” and annual SCM Committee review, not later than 31 December 2015. Nineteen Members’ export subsidy programs were subject to this exemption. Jordan requested an extension until 31 December 2019.
  - Exemption may cease if Member attains export competitiveness in a product: threshold = exports attaining 3.25 percent of world trade in that product for two consecutive years.
- Even exempt Members’ subsidies can be challenged at WTO if they have “adverse effects.”
- Countervailing duty investigation thresholds for developing country Members:
  - Proceedings must be terminated if overall subsidies ≤ two percent (vs one percent for others), or if volume of subsidised imports < four percent of total imports of like product (unless imports from multiple developing Members with individual shares < 4 percent collectively exceed 9 percent).

### Tax Measures in Free Trade Zones (FTZs) — key findings and policy implications (Box 2)
- FTZs/SEZs statistics and focus:
  - About 4,300 zones exist in more than 130 countries.
  - Of 66 million workers employed in zones worldwide, China accounted for over 60 percent and the rest of Asia 22 percent.
  - FTZs historically facilitated manufacturing; services are becoming more prominent (example: Shanghai Pilot Free Trade Zone launched in September 2013).
- Typical tax reliefs in FTZs:
  - exemption from tariffs (or other charges) on imported raw materials and intermediate inputs, machinery and equipment, or goods destined for sale abroad;
  - exemption from indirect taxes (excises, VAT and other sales taxes) and full/partial relief from other fees and charges connected with exports;
  - full/partial exemption from direct taxes (e.g. income tax) and social welfare charges.
- WTO relevance and risks:
  - FTZ tax conditions (export performance requirements, domestic sales restrictions, local input use requirements) may infringe GATT, ASCM, TRIMs, and potentially GATS.
  - Each category of FTZ tax relief fits ASCM “subsidy” definition and could be:
    - prohibited if contingent upon export performance or local content; or
    - “actionable” if “specific” and having “adverse effects.”
  - Specificity can arise from authorization processes (government selection).
  - Adverse effects include: (a) injury to domestic industry; (b) nullification/impairment of WTO tariff concessions; (c) “serious prejudice.”
- Transition provisions:
  - Article 27.2 provides general exemption for some developing countries and phase-out for others re export subsidies (many involving FTZ tax incentives).
  - Phase-out period for import substitution subsidies (Article 27.3) expired in 2002.
  - Export subsidies of Members exempt or with extended transition can still be challenged if they have adverse effects.

### FTZs and WTO disciplines (continued)
- FTZs not explicitly referenced in ASCM or TRIMs though trade-related.
- TRIMs illustrative list includes local content requirements, trade balancing requirements, foreign exchange restrictions; FTZ measures imposing these would infringe TRIMs unless notified under Article 5.1 (no such notifications related to FTZs have been made).
- Subsidies to services are covered by GATS, not ASCM or TRIMs.
- Under GATS:
  - Tax and non-tax measures contingent on export performance are permitted if non-discriminatory within FTZs.
  - FTZs cannot grant preferential treatment to a subset of foreign services/service suppliers; cannot treat foreign services less favourably than domestic services where NT commitments exist.
- Under ASCM:
  - Export-contingent subsidies are restricted; some tax measures permitted under GATS for services could be prohibited under ASCM if they constitute export subsidies.

### Tax treatment of trade between FTZs and domestic market
- Sales by FTZ firms to domestic market should face:
  - full tariffs and all indirect taxes; and
  - same direct taxes as domestic suppliers.
- For inverted tariff cases, FTZ producers should choose:
  - tariff rate applicable to imported inputs, or
  - rate applicable to finished goods.
- To develop domestic exports and link value chains inside/outside zones:
  - sales by domestic firms to zone-based enterprises should be eligible for full tariff drawbacks and rebates of indirect internal taxes.

### TRIMs scope and prohibitions
- TRIMs applies to investment measures related to trade in goods only.
- Article 2 prohibits TRIMs inconsistent with GATT Articles III and XI.
- Illustrative prohibited TRIMs: benefits conditional on local content; conditioning import ability on export performance; foreign exchange balancing requirements; domestic sales requirements restricting exports.
- Prohibited TRIMs include measures where compliance is “necessary to obtain an advantage”; “advantage” includes tax relief.
- TRIMs does not prevent attaching export performance requirements to incentives (ASCM covers those); nor measures such as minimum local equity holdings or requirements to bring in technology or conduct local R&D.

### GATS, services, and taxation
- GATS applies to services trade and imposes MFN (Article II) and NT (Article XVII, for scheduled sectors).
- MFN is a general obligation; NT applies only where commitments made.
- GATS covers FDI insofar as it involves commercial presence (mode 3), estimated to account for around 56 percent of total world trade in services.
- Article XIV(d) allows exceptions: NT commitments apply to tax measures, including tax incentives, except where aimed at ensuring “the equitable or effective imposition or collection of direct taxes in respect of services or service suppliers of other Members.”
- Article XXII and Article XIV(e) permit departures from MFN for double taxation agreements.
- Direct taxation largely excluded from GATS disciplines where double taxation agreements exist.
- GATS Article XV (Subsidies) is a negotiating mandate, not enforceable rules; subsidies-related disciplines under GATS remain to be negotiated.

### Trade Policy Review Mechanism (TPRM) and taxation transparency
- TPRM provides periodic “peer” review to enhance transparency; WTO Secretariat plays major role.
- Transparency for taxation should include:
  - description of nature of tax measures;
  - rationale/objectives;
  - cost (or benefits) in terms of tax revenue forgone (or taxes collected);
  - economic evaluation of effectiveness relative to alternatives.
- TPRM permits evaluation even when measures may not contravene WTO obligations but is not a basis for dispute settlement. DSB ruled TPRs not relevant for disputes (Brazil–Canada aircraft case).

### WTO tax disputes — scope and selected examples
- Dispute statistics and scope:
  - Since 1995, as of 10 November 2015, Members had brought 500 disputes before the DSB; 282 proceeded to litigation.
  - More than 40 disputes initiated at the WTO have been over taxation, mostly indirect taxes (excises and VAT), often alleging NT violations.
- Selected dispute findings:
  - Internal taxes on alcoholic beverages (Japan, Korea, Chile): rulings clarified “like” and “directly competitive or substitutable” product concepts; differential taxation can violate Article III:2.
  - Indonesia’s National Car Programme: tariff/tax exemptions based on local content and domestic-only grants violated GATT Article III:2, Article I, ASCM as “specific subsidies” causing “serious prejudice.”
  - Thailand VAT on cigarettes: discriminatory VAT administration violating Article III:2 rejected Article XX(d) defence.
  - Argentina advance tax payments: higher prepayment rates on imports violated Article III:2; Article XX(d) justification rejected due to alternatives.
  - China’s export taxes on raw materials and rare earths: Panels/DSB ruled export duties inconsistent with China’s Protocol of Accession; Panel/Appellate Body reports adopted 29 August 2014; China informed DSB 20 May 2015 that export restrictions removed (US contested compliance). Panels did not rule on less-than-full VAT rebates (partial rebates not legally “export duties”).
  - US FSC, ETI, AJCA schemes (direct taxation): FSC ruled a prohibited subsidy contingent on exporting (Article 3.1(a) ASCM); combination of exemptions approximated total tax exemption of between 15 and 30 percent of income from exports (empirical estimate cited).
- Consequences and remedies:
  - AB/Panel rulings led to countermeasures/arbitration (e.g., Arbitrator set EC suspension roughly $4 billion per year; EC authorized to suspend concessions; US enacted AJCA and later repealed grandfather provisions).
  - Washington State B&O tax for aircraft: DSB ruled foregone revenue = financial contribution; subsidy specific and combined with FSC/ETI caused “serious prejudice.” EU requested consultations regarding Revised Code of Washington tax incentives on 19 December 2014.
  - Brazil FTZ-related measures: EU requested consultations December 2013 alleging discriminatory indirect taxes, export-contingent tax relief and FTZ measures contravening GATT, ASCM and TRIPS; DSB panel established 17 December 2014; related dispute by Japan on 2 July 2015.

### Summary observations from dispute rulings and policy implications
- NT scope clarified:
  - For “like” products, any tax on imports “in excess of” that on domestic products is excessive.
  - For “directly competitive or substitutable products,” the excess must be more than de minimis to be “not similarly taxed.”
- Tax differences include rates and administrative measures; GATT exemptions do not circumvent NT obligations.
- Both direct and indirect taxes are subject to WTO rules; tax measures have been challenged as prohibited or “actionable” subsidies.
- WTO rules apply to national and sub-national taxes.
- Export taxes, though less disciplined than import tariffs, have been scrutinized as implicit subsidies; recent accession bindings and member proposals target these barriers.
- Border carbon adjustments (BCAs) could, in principle, be justified under Article XX(b) or (g) if domestic environmental policies are “important and legitimate in character” and measures avoid “arbitrary or unjustifiable discrimination ... or a disguised restriction on international trade.”
- FTZs are increasingly a focus: about 4,300 FTZs in more than 130 countries.

### Concluding remarks and policy guidance
- WTO rules cover import tariffs, export taxes, and internal taxes affecting trade in goods and services.
- Major DSB rulings have shaped the treatment of tax measures; future disputes can be expected.
- Even WTO-permissible tax measures can be economically inadvisable; investment incentives are typically seldom cost effective.
- Greater transparency, including cost-benefit analysis of tax measures, would improve Members’ tax policies.

*Technical Notes and Manuals 16/03 | 2016*

### Box 1. Economic Effects of an Export Tax

### Box 1. Economic Effects of an Export Tax

### Partial-equilibrium effects: small country
- Initial equality: domestic price p0 = π0 (world price).
- Imposition of an export tax t by a small country that cannot affect world prices:
  - Exports fall and domestic supply increases, reducing the domestic price until p1(1+t) = π0, with π0 unchanged.
  - At price p1 (< p0), domestic consumers consume more (d1 > d0) and gain consumer surplus equal to area (a).
  - Domestic producers produce and sell less (x1 < x0) at the lower price p1; producers’ surplus falls by areas a + b + c + d.
  - Government tax revenue increases by area (c), equal to post-tax exports (x1 - d1) times per-unit export tax (π0 - p1).
  - Net domestic welfare change is a loss equal to red areas (b + d) (deadweight losses/Harberger triangles), since producers’ loss (a + b + c + d) exceeds consumers’ gain (a) plus tax revenue (c).
- Comparative note: an import tariff is equivalent to a tax on domestic consumption combined with a subsidy for domestic production, whereas an export tax is equivalent to a subsidy on domestic consumption combined with a tax on domestic production.

### Partial-equilibrium effects: large country (terms-of-trade effects)
- If a country’s net supply is sufficiently large to affect world prices, the fall in its exports due to the tax can raise the world price from π0 to π1.
  - Consumers’ and producers’ surpluses are affected symmetrically as in the small-country case.
  - Tax revenues increase by area (e) in line with the rise in the world price to π1.
  - Post-tax exports remain (x1 - d1), but the per-unit export tax becomes (π1 - p1) instead of (π0 - p1).
  - An export tax raises domestic welfare if area (e) > (b + d). Area (e) equals the terms-of-trade gain: final exports (x1 - d1) are sold at π1 not π0, with (π1 - π0) representing the gain per unit exported.
  - The optimum export tax equals the inverse of the absolute value of the export demand elasticity. (The optimum export tax is the inverse of the absolute value of the export demand elasticity.)

### Industrial-policy and distributional consequences
- When levied on primary or intermediate products used in manufacturing, an export tax gives domestic downstream processors an advantage over foreign processors who pay the world price.
- A “de-escalating” export tax structure (higher tax on primary/intermediate products than on final goods) has been used as an industrial-policy instrument to encourage expansion of manufacturing at the expense of primary and intermediate sectors.
  - This advantage equals (π1 - p1) in a large country and (π0 - p1) in a small country.
  - The advantage (plus export tax revenues) comes at the expense of domestic producers of the taxed product and overall efficiency if world prices are unaffected; if world prices rise, foreign consumers also bear part of the cost.
- Although the advantage involves no direct government financial contribution (or taxes forgone) and thus may not appear to be subject to WTO rules, it nonetheless constitutes assistance to manufacturing that can distort trade and could be illegal if shown to have “adverse effects” on the marketplace.

### Conservation, environmental objectives, and unintended consequences
- If the export tax is motivated by resource conservation or environmental protection:
  - The tax can induce a fall in domestic output of the taxed product (x1 < x0) and thus help alleviate the problem.
  - However, export taxation is seldom the most effective instrument to achieve conservation or environmental objectives; measures that curtail production would usually be more effective. (The magnitude of the fall in domestic production depends on the elasticity of supply.)
  - If downstream processing and exports of the processed product are not similarly constrained, the conservation/environmental effects on the unprocessed product can be undone.
  - An export tax may incentivize foreign enterprises to establish downstream processing plants domestically to gain access to key inputs, potentially bringing know-how and technology.

*Source: This box is adapted from Bouet, Antoine and David Laborde, “The economics of export taxation: a theoretical and CGE-approach contribution.” Viewed at: http://www.oecd.org/dataoecd/56/3/43965958.pdf.*

### Part V of the ASCM sets forth certain substantive requirements that must be fulfilled in order

### _tnm1602 - Part V of the ASCM sets forth certain substantive requirements that must be fulfilled in order

### Substantive and procedural requirements under the ASCM
- A Member may not impose a countervailing measure unless it determines that there are:
  - subsidized imports;
  - injury to a domestic industry manufacturing like products; and
  - a causal link between the subsidized imports and the injury.
- Members must abide by procedural rules regarding:
  - the initiation and conduct of countervailing investigations;
  - the imposition of preliminary and final measures;
  - the use of undertakings; and
  - the duration of measures.
- Failure to respect either substantive or procedural rules may be taken to dispute settlement and may be the basis for invalidation of the countervailing measure.
- In most cases, the onus is on the complaining Member to provide evidence that an “actionable” subsidy has “adverse effects.” This evidentiary burden is arguably more onerous than determining whether a subsidy is prohibited.

### Tax measures and Annex I (illustrative export subsidies)
- Footnote 1 together with Annexes I to III of the ASCM specify circumstances under which taxes may or may not be rebated on exports.
- Annex I contains an illustrative list of export subsidies; five of these involve tax measures:
  - import charges (item (i));
  - indirect taxes (items (g) and (h));
  - direct taxes (items (e) and (f)).
- Item (g) of Annex I:
  - concerns the “exemption or remission, in respect of the production and distribution of exported products, of indirect taxes in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.”
  - Footnote 60 states explicitly that VAT is covered exclusively by (g) not (h).
- Item (h) of Annex I:
  - concerns “exemption, remission or deferral of prior-stage cumulative indirect taxes on goods or services used in the production of exported goods in excess of the exemption, remission or deferral of like prior-stage cumulative indirect taxes on goods or services used in the production of like products when sold for domestic consumption.”
  - Such relief is permissible provided the prior-stage cumulative indirect taxes are levied on inputs consumed in the production process (making normal allowance for waste).
  - Guidelines on consumption of inputs in the production process are contained in Annex II of the ASCM.
  - Relief is confined to “inputs physically incorporated, energy, fuels and oil used in the production process and catalysts which are consumed in the course of their use to obtain the exported product.”
- Item (i) of Annex I:
  - involves the “remission or drawback of import charges in excess of those levied on imported inputs that are consumed in the production of the exported product (making normal allowance for waste).”
- Items (e) and (f) (direct taxes and social welfare charges) embody the origin principle:
  - Item (e) precludes “full or partial exemption, remission, or deferral specifically related to exports, of direct taxes,” with footnote 59 clarifications:
    - not intended to prevent measures to avoid double taxation of foreign-source income;
    - deferral need not amount to an export subsidy where appropriate interest charges are collected;
    - requires Members to adhere to the arm’s length principle as regards transfer pricing.
  - Item (f) treats as an export subsidy “... special deductions directly related to exports or export performance, over and above those granted in respect to production for domestic consumption, in the calculation of the base on which direct taxes are charged.”

### Limits on relief and treatment of capital inputs
- Relief under items (h) and (i) is confined to inputs physically incorporated, energy, fuels and oil used in the production process, and catalysts consumed in use.
- Capital inputs cannot receive such relief because they are not physically incorporated in processed products, despite being consumed to some extent in production (and qualifying for depreciation allowances for tax purposes).
- Footnote 61 does not mention computer software as an input that may be consumed in the production process.

### Special and differential treatment for developing countries
- Article 27 (Special and Differential Treatment of Developing Country Members) of the ASCM:
  - prohibition on export subsidies does not apply to any least-developed countries designated by the United Nations in accordance with Annex VII (a) of the ASCM.
  - the prohibition does not apply to developing country Members listed in Annex VII (b) of the ASCM until such time as their Gross National Product (GNP) per capita reached US$1,000 per year in constant 1990 dollars for three consecutive years.
    - As of 6 July 2015, the Members were: Bolivia, Cameroon, Congo, Ivory Coast, Ghana, Guyana, Honduras, India, Kenya, Nicaragua, Nigeria, Pakistan, Senegal, and Zimbabwe (WTO, G/SCM/110/Add.12, 6 July 2015). The Dominican Republic, Egypt, Guatemala, Indonesia, Morocco, the Philippines, and Sri Lanka recently passed this threshold.
  - Article 27.4: other developing country Members not listed in Annex VII still benefit from programme-specific and time-limited exemptions from the prohibition on export subsidies, subject to a “standstill” obligation and an annual review by the SCM Committee, that may last no longer than 31 December 2015.
    - Nineteen Members’ export subsidy programs, many involving tax incentives and FTZs/SEZs, were subject to this exemption (Box 2).
    - Jordan has requested an extension until 31 December 2019 (see WTO document G/C/W/705/Rev.1, 23 June 2015).
  - A developing country Member otherwise exempt may no longer be exempt if it reaches export competitiveness in any product.
    - Export competitiveness is reached when exports of a given product by a developing country Member attain 3.25 percent of world trade in that product for two consecutive years.
- Even subsidies of Members exempt from the prohibition on export subsidies can be challenged at the WTO if they have “adverse effects” and may be subject to countervailing measures.
- Countervailing duty investigation thresholds for developing country Members:
  - proceedings must be terminated if the overall level of subsidies does not exceed two percent (as against one percent for others), or if the volume of subsidised imports is less than four percent of the total imports of the like product (unless subsidized imports from two or more developing country Members with individual market shares of less than 4 percent collectively exceed 9 percent of total imports).

### Box 2 — Tax Measures in Free Trade Zones (FTZs): key findings and policy implications
- FTZs/SEZs:
  - About 4,300 zones exist in more than 130 countries.
  - Of the 66 million workers employed in the zones worldwide, China accounted for over 60 percent and the rest of Asia 22 percent.
  - FTZs have been aimed at facilitating manufacturing rather than services, although services are becoming more prominent (example: Shanghai Pilot Free Trade Zone launched in September 2013).
- Typical tax reliefs in FTZs include:
  - exemption from tariffs (or other charges) on imported raw materials and intermediate inputs, machinery and equipment, or goods destined for sale abroad;
  - exemption from indirect taxes (excises, VAT and other sales taxes) and full or partial relief from other fees and charges in connection with exports;
  - full or partial exemption from direct taxes (e.g. income tax) and social welfare (such as social security) charges.
- WTO relevance and risks:
  - Although there are no WTO rules that deal with FTZs per se, FTZ tax conditions (e.g., export performance requirements, domestic sales restrictions, local input use requirements) may infringe the GATT and related agreements, including the ASCM and TRIMs Agreement, and to a lesser degree the GATS.
  - Each of the three categories of tax relief described is consistent with the ASCM definition of a “subsidy” and could be:
    - prohibited insofar as they are contingent upon export performance or local content; or
    - “actionable” if they are “specific” and have “adverse effects.”
  - Specificity may arise from the authorization process (e.g., government selection of industries or enterprises allowed in the zone).
  - Adverse effects may take the form of:
    - (a) injury to a Member’s domestic industry;
    - (b) nullification or impairment of WTO benefits of tariff concessions; or
    - (c) “serious prejudice.”
- Transition provisions:
  - Article 27.2 continues to provide a general exemption for some developing countries and a phase-out period for others in respect of export subsidies (many involving FTZ tax incentives).
  - The phase-out period for import substitution subsidies provided in Article 27.3 expired in 2002.
  - Even export subsidies of Members exempt from disciplines, or granted extended transition periods, can be challenged if they have adverse effects and may be subject to countervailing measures.

*Technical Notes and Manuals 16/03 | 2016 — Part V of the ASCM (excerpt).*

### Box 2: Tax Measures in Free Trade Zones (FTZs) (Continued)

### Box 2: Tax Measures in Free Trade Zones (FTZs) (Continued)

### FTZs and WTO disciplines
- FTZs are not explicitly referenced in the ASCM or the TRIMs Agreement, despite being trade related and often involving measures to attract FDI and promote exports.
- The TRIMs Agreement contains an illustrative list of measures inconsistent with GATT Articles III (National Treatment) and XI (General Elimination of Quantitative Restrictions), including:
  - local content requirements;
  - trade balancing requirements; and
  - foreign exchange restrictions.
- Any FTZ measure that imposes such requirements or restrictions would infringe the TRIMs Agreement unless notified under Article 5.1; no such notifications related to FTZs have been made to the WTO.
- Subsidies to services, whether in FTZs or elsewhere, are not covered by the ASCM or TRIMs; they are instead subject to the GATS (notably MFN treatment and, where Members have commitments, National Treatment).

### Tax and non-tax measures in FTZs under GATS and ASCM
- Under GATS:
  - tax and non-tax measures contingent upon export performance (or import substitution) are permitted so long as they are non-discriminatory within FTZs.
  - FTZs cannot accord preferential treatment to a subset of services and service suppliers from foreign countries.
  - FTZs cannot treat foreign services and service suppliers less favourably than domestic services and service suppliers insofar as Members have made NT commitments in specific service sectors (FTZs may treat foreign services more favourably than domestic ones).
- Under the ASCM:
  - export-contingent subsidies are restricted; this distinction means some tax measures that would be permitted under GATS for services could be prohibited under ASCM if they constitute export subsidies.

### Tax treatment of trade between FTZs and the domestic market
- To equalize firms supplying the domestic market from inside and outside the zone, sales of goods and services to the domestic market by FTZ firms should face full taxation for:
  - tariffs and all other indirect taxes; and
  - the same direct taxes as domestic suppliers.
- In the case of an inverted tariff, producers in the FTZ should be allowed to choose either:
  - the tariff rate that would have applied to the imported inputs, or
  - the rate that applies to the finished goods.
- To facilitate exports by domestic firms outside the zones and develop value chains linking firms inside and outside zones:
  - sales of goods and services by domestic firms to zone-based enterprises should be eligible for full tariff drawbacks and rebates of indirect internal taxes.

### Agreement on Trade Related Investment Measures (TRIMs) — scope and prohibitions
- TRIMs applies to investment measures related to trade in goods only.
- Article 2 prohibits TRIMs inconsistent with GATT Articles III and XI.
- Illustrative list of prohibited TRIMs contains four categories:
  - benefits conditional upon local content requirements;
  - conditioning a firm’s ability to import on its export performance;
  - foreign exchange balancing requirements or restrictions; and
  - domestic sales requirements involving restrictions on exports.
- Prohibited TRIMs include measures where compliance “is necessary to obtain an advantage.” The term “advantage” is understood to encompass all types of advantages, including tax relief.
- The TRIMs Agreement does not prevent attaching export performance requirements to tax or non-tax incentives for investment (such requirements are covered by the ASCM), nor does it prevent measures such as minimum local equity holdings or requirements to bring in up-to-date technology or conduct local R&D.

### GATS, services, and taxation
- GATS applies to trade in services and subjects supply of services to MFN (Article II) and NT (Article XVII) principles.
- MFN is a general obligation applying to all measures affecting trade in services; NT under GATS applies only to scheduled sectors.
- GATS covers FDI insofar as it involves a commercial presence (mode 3), with commercial presence estimated to account for around 56 percent of total world trade in services.
- Article XIV(d) allows exceptions: NT commitments apply to tax measures, including tax incentives, except where aimed at ensuring “the equitable or effective imposition or collection of direct taxes in respect of services or service suppliers of other Members.”
- Article XXII permits that a Member may not invoke the NT obligation if a measure falls within the scope of a treaty relating to avoidance of double taxation; Article XIV(e) permits departures from MFN for agreements on avoidance of double taxation.
- Consequence: direct taxation has, to a considerable extent, been excluded from GATS disciplines, particularly when double taxation agreements exist.
- GATS Article XV (Subsidies) is a negotiating mandate rather than a set of enforceable rules; as a result, GATS disciplines aimed at curtailing subsidies (including export subsidies) have yet to be negotiated.

### Trade Policy Review Mechanism (TPRM) and taxation transparency
- The TPRM enhances transparency beyond notification obligations by obliging Members to undergo periodic “peer” review, with the WTO Secretariat playing a prominent role.
- Purpose: contribute to improved adherence to WTO rules and commitments by increasing transparency and understanding of Members’ trade policies and practices, including tax measures.
- For taxation, transparency entails four key elements:
  - a description of the nature of tax measures;
  - their rationale or objectives;
  - their cost (or benefits) in terms of tax revenue forgone (or taxes collected); and
  - an economic evaluation of the effectiveness of individual tax measures relative to alternatives.
- The TPRM permits evaluation of trade and trade-related policies even when they may not contravene WTO obligations; however, it is not intended as a basis for enforcement or dispute settlement.
- The Dispute Settlement Body ruled that TPRs are not relevant for disputes, citing section A(i) of the TPRM in the Brazil–Canada aircraft export measures case.

### WTO tax disputes — scope and examples
- Since 1995, as of 10 November 2015, Members had brought 500 disputes before the Dispute Settlement Body (DSB), 282 of which proceeded to litigation.
- More than 40 disputes initiated at the WTO have been over taxation, mostly indirect taxes (excises and VAT), often alleging differential treatment of imported products in violation of NT.
- Selected dispute findings and clarifications:

  - Internal taxes on alcoholic beverages (Japan, Korea, Chile)
    - Japan: AB found imported vodka and domestic shochu to be “like” products; vodka taxed more than shochu, violating Article III:2 first sentence. AB further found several spirits were “directly competitive or substitutable” and dissimilarly taxed in a manner affording protection, violating Article III:2 second sentence.
    - Korea: DSB clarified that all like products are directly competitive/substitutable, but not all directly competitive/substitutable products are like.
    - Chile: A tax linked to alcohol content (ad valorem rates) was found to violate Article III:2 second sentence despite public health rationale; distribution of domestic production and imports across tax categories mattered to the finding.

  - Indonesia’s National Car Programme
    - Tariff and tax exemptions based on local content and luxury car exemptions granted solely to domestic companies violated:
      - GATT Article III:2 (national treatment) due to local content requirements constituting TRIMs;
      - GATT Article I (MFN) because advantages to Korean imports were not unconditionally granted to others;
      - ASCM as “specific subsidies” causing “serious prejudice” through price undercutting.
    - DSB observed subsidies in respect of direct taxes are generally not covered by Article III:2 but may infringe Article III:4 when linked to conditions favouring domestic products.

  - Thailand’s VAT on cigarettes
    - Philippines complained that Thailand’s VAT administration imposed VAT on resellers of imported cigarettes who failed to meet input tax credit conditions, while resellers of like domestic cigarettes were exempt, violating Article III:2 first sentence.
    - DSB rejected Thailand’s claim that measures were justified as administrative requirements under Article XX(d).

  - Argentina’s advance tax payments
    - EC challenged prepayments under IVA (prepayment rates of 10 percent or 12.7 percent for imports by registered and non-registered taxable persons) and IG (prepayment rates of 3 percent or 11 percent).
    - DSB found prepayments were measures “applying to products” and fell within Article III:2 scope; higher nominal prepayment rates on imports imposed heavier actual tax burdens, violating Article III:2.
    - Although measures could be “necessary to secure compliance” under Article XX(d), they resulted in “unjustifiable discrimination” under the chapeau of Article XX when alternatives existed.

  - China’s export taxes on raw materials and rare earths
    - Complainants challenged export taxes and restraints as inconsistent with China’s Protocol of Accession (Paragraph 11.3) since affected raw materials were not in Annex 6.
    - Panel and DSB ruled China’s export duties inconsistent with its Protocol obligations; China’s Article XX defences were rejected.
    - In the rare earths case, Panel and Appellate Body reports were adopted on 29 August 2014; China later informed the DSB on 20 May 2015 that export restrictions had been removed (US contested compliance status).
    - Panels did not rule on less-than-full VAT rebates for exports (de facto export taxes) because partial rebates are not legally “export duties”; excess rebates are clearly contrary to WTO rules, but partial rebates are not necessarily so.

  - United States’ FSC, ETI and AJCA schemes (direct taxation)
    - The FSC allowed partial tax exemption for income of foreign corporate subsidiaries derived from handling sales of US exports; formula approximated arm’s length pricing.
    - WTO Panel (October 1999) concluded the FSC’s carve-out constituted a prohibited subsidy contingent on exporting, violating Article 3.1(a) of the ASCM and Article 3.3 of the AA.
    - The FSC/ETI/AJCA disputes clarified that direct as well as indirect taxes are subject to WTO rules.
    - Noted empirical estimate: the combination of specified exemptions and pricing rules embodied in the FSC amounted to a total tax exemption of between 15 and 30 percent of income from exports.

*Technical Notes and Manuals 16/03 | 2016 — Box 2: Tax Measures in Free Trade Zones (FTZs) (Continued)*

### conclusion, the Panel rejected the US analogy between FSC and “territorial” taxation. Although

### _tnm1602 - conclusion, the Panel rejected the US analogy between FSC and “territorial” taxation. Although

### FSC, ETI and WTO findings
- The Panel concluded that because the FSC carved out an exception from the way the US normally taxed income from exports, the FSC was an export subsidy.
- The WTO Appellate Body (AB) on 22 February 2000 ruled that, having decided to tax foreign source income in general, the US provided a subsidy by carving out an exception to that treatment, rejecting the analogy between FSC and “territorial” taxation.
- The Extraterritorial Income Exclusion Act (ETI) enacted in November 2000:
  - excluded from the US definition of gross income certain foreign source income (namely a portion of export earnings and a portion of earnings from production abroad);
  - conditioned use of this territorial method on the taxpayer not claiming foreign tax credits with respect to the same earnings;
  - conditioned benefits upon the sale of goods outside the US and the use of less than 50 percent imported inputs.
- The Panel ruled against the US on four grounds:
  - ETI provisions imposed special conditions departing from general US tax practice and therefore constituted a subsidy (Article 1.1 of the ASCM).
  - The subsidy was “dependent or contingent upon export” performance (Article 3.1(a) of the ASCM).
  - The ETI was broader than measures intended to avoid double-taxation (footnote 59 of the ASCM).
  - The 50 percent “foreign content limitation” violated Article III:4 of GATT 1994 by according less favourable treatment to imported products than to like domestic products.
- The Panel stated that Article III:4 applies to measures conditioning access to income tax advantages in respect of certain products.

### Appeals, countermeasures and arbitration
- The AB issued its report in January 2002 upholding the Panel’s ruling.
- The Arbitrator in August 2002 determined that the EC’s proposed suspension of concessions in the form of a 100 percent ad valorem charge on imports of certain goods from the US in a maximum amount of roughly $4 billion per year would constitute appropriate countermeasures (Article 4.10 of the ASCM).
- In May 2003, the DSB authorized the EC to take appropriate countermeasures and to suspend concessions; in March 2004 the EC began imposing tariffs rising by 1 percent monthly from 5 percent initially to 17 percent in March 2005.
- In October 2004, US Congress passed the American Jobs Creation Act (AJCA) of 2004, signed into law on 22 October 2004, to repeal the FSC/ETI and replace it with new corporate tax measures, including a corporate tax deduction of almost $77 million for domestic manufacturing and other industries.
- The EC challenged transition and “grandfathering” provisions; a WTO compliance panel on 30 September 2005 found the US had failed to implement earlier rulings by allowing some tax breaks to continue through 2006 and beyond.
- The AB upheld the compliance panel; reports were adopted by the DSB on 14 March 2006. On 17 May 2006, US Congress repealed the “grandfather” provisions; the EC withdrew its sanctions, ending the dispute.

### Washington State B&O tax and aircraft subsidies
- The DSB ruled in March 2012 that Washington State’s B&O tax rate reduction for commercial aircraft and component manufacturers:
  - constituted foregone tax revenue and therefore a financial contribution (Article 1.1(a)(1)(ii) of the ASCM);
  - was a “specific” subsidy (Article 2.1(a) of the ASCM);
  - combined with FSC/ETI subsidies, caused “serious prejudice” in the form of significant lost sales with respect to the 100-200 seat large civil aircraft market (Articles 5(c) and 6.3(c) of the ASCM).
- In September 2012 the US notified the DSB of withdrawal of subsidies and removal of adverse effects; the EU requested Article 21.5 consultations and a compliance panel composed in October 2012. The Chairman informed the DSB in March 2015 that the panel did not expect to complete its work before mid-2016.
- On 19 December 2014 the EU requested consultations regarding Revised Code of Washington tax incentives (preferential B&O rate, tax credits, exemptions from sales, excises and property taxes) alleged to be specific and prohibited subsidies; the DSB established a panel on 23 February 2015, composed by the Director General on 22 April 2015.

### Brazil’s tax measures and FTZs
- The EU requested consultations in December 2013 concerning Brazilian tax measures (including FTZ-related measures) alleged to:
  - levy higher indirect taxes on imported goods than on domestic goods;
  - provide tax relief contingent upon export performance and the use of domestic goods;
  - contravene the GATT, ASCM and TRIPS Agreement.
- The Inovar-Auto programme:
  - grants accredited automobile manufacturers tax credits of up to 30 percent with respect to the Imposto sobre Productos Industrializados (IPI);
  - requires accreditation conditions: minimum levels of manufacturing and R&D in Brazil, a vehicle labelling programme, and Brazilian energy efficiency targets.
- The EU alleges violations of Article I:1 (MFN), Article III (National Treatment), Article 3.1(b) of the ASCM (domestic content contingency), and Article 2 of the TRIMs Agreement.
- The DSB established a panel on 17 December 2014, composed on 26 March 2015; third-party rights were reserved by Argentina, Australia, Canada, China, Chinese Taipei, Colombia, India, Japan, Korea, Russia, South Africa, Turkey and the US.
- A related dispute was initiated by Japan on 2 July 2015.
- This dispute is notable as the first regarding FTZs.

### Summary observations concerning tax disputes
- DSB rulings clarified the scope of National Treatment (NT) obligations:
  - For “like” products, even the smallest amount of tax on imported products “in excess of” that on domestic products is excessive.
  - For “directly competitive or substitutable products,” the excess amount must be more than de minimis to be considered “not similarly taxed.”
- Differences in taxation include tax rates and administrative measures; GATT exemptions do not circumvent NT obligations.
- Direct as well as indirect taxes are subject to WTO rules.
- Tax measures have been successfully challenged both as prohibited subsidies and as “actionable” subsidies causing adverse effects.
- WTO rules apply to national and sub-national taxes.
- Export taxes, though less disciplined than import tariffs, have drawn attention as implicit subsidies; recent accession bindings and member proposals focus on curtailing these barriers.
- China’s export taxes were ruled to breach China’s Protocol of Accession despite arguments invoking Article XX(b) of GATT 1994.
- Border carbon adjustments (BCAs) intended to equalize domestic and foreign producers could, in principle, be justified under Article XX(b) or (g) if the implementing country demonstrates the domestic environmental policies are “important and legitimate in character” and that measures are not applied as “arbitrary or unjustifiable discrimination ... or a disguised restriction on international trade.”
- Attention may be turning towards FTZs: some 4,300 FTZs exist in more than 130 countries.

### Concluding remarks
- WTO rules encompass import tariffs, export taxes, and direct and indirect internal taxes insofar as they affect international trade in goods and services.
- A wide range of tax measures have been scrutinized at the WTO and major DSB rulings have shaped dispute outcomes; WTO rules will continue to influence tax policy design.
- Trade Policy Reviews suggest DSB complaints are the tip of a growing set of issues; more tax measures can be expected to be challenged at the WTO.
- Even permissible tax measures can be economically inadvisable; evaluations of investment incentives typically find them seldom cost effective.
- Greater transparency, including cost-benefit analysis of tax measures, would improve Members’ tax policies.

*Technical Notes and Manuals 16/03 | 2016*

### References

### References

### Bibliographic references
- Adlung, R. and Zhang, W. (2013), “Trade Disciplines with a Trapdoor: Contract Manufacturing,” Journal of International Economic Law, May, pp 1-26.
- Atkins, C., 2005, “FSC/ETI Transition Relief in the New JOBS Act: Does the U.S. Have to Quit Cold Turkey?” Special Report N° 133, Tax Foundation, Washington, D.C.
- Bagwell, K. and Staiger, R. (2002), The Economics of the World Trading System, The MIT Press, Cambridge, Massachusetts.
- Bouet, A., and Laborde, D. (2010), Economics of Export Taxation: A Theoretical and CGE Approach Contribution, IFPRI Discussion Paper 00994, June.
- Brumbaugh, D. (2004), A History of the Extraterritorial Income (ETI) and Foreign Sales Corporation (FSC) Export Tax-Benefit Controversy, Congressional Research Service, 9 November.
- Condon, M. and Ignaciuk, A. (2013), Border Carbon Adjustment and International Trade: A Literature Review, OECD Trade and Environment Working Paper 2013/06, OECD Publishing.
- Coppens, D. (2010), Balancing Policy Space and Policy Constraints? A Critical Legal Analysis of WTO Disciplines on Subsidies and Countervailing Measures, Katholieke Universiteit Leuven.
- Corden, W.M. (1971), The Theory of Protection, London: Oxford University Press.
- Daly, M. (1995), “The role of tax expenditure reporting in a global economy,” The World Economy, 12(1), pp 87-111.
- Daly, M. (2005), The WTO and Direct Taxation, WTO Discussion Paper No. 9, WTO, Geneva, available at http://www.wto.org/english/res_e/booksp_e/discussion_papers9_e.pdf.
- Devarajan, S. et al. (1996), The Whys and Why Nots of Export Taxation, Policy Research Working Paper 1684, The World Bank, Washington, D.C.
- Fung, K.C. and Korinek, J. (2013), Economic of Export Restrictions as Applied to Industrial Raw Materials, OECD Trade Policy Paper N° 155 (TAD/TC/WP(2012)23/FINAL).
- Garred, J. (2015), “Trade in Raw Materials and Economic Development,” a thesis submitted to the Department of Economics of the London School of Economics for the degree of Doctor of Philosophy London.
- Geloso Grosso, M. (2008), Analysis of Subsidies for Services: The Case of Export Subsidies, OECD Trade Policy Papers, No. 66, OECD Publishing.
- Hoda, A. and Ahuja, R. (2003) Agreement on Subsidies and Countervailing Measures: Need for Clarification and Improvement, Working Paper No. 101, India Council for Research on International Relations.
- Horn, H. and Mavroidis P. (2001), “Economic and legal aspects of the Most-Favoured-Nation clause,” European Journal of Political Economy, Vol. 17, 233-279.
- Hufbauer, G. (2002), “The FSC Case: Background and Implications,” Peterson Institute for International Economics, Washington, D.C., February 27.
- Keen, M., and Ligthart, J. (2002), “Coordinating Tariff Reduction and Domestic Tax Reform,” Journal of International Economics, vol. 56, pp 489–507.
- Klemm, A. (2009), Causes, Benefits, and Risks of Business Tax Incentives, IMF Working Paper WP/09/21.
- Krugman, P., Obstfeld, M., and Melitz, M. (2012), International Economics: Theory and Policy (Ninth Edition), Addison-Wesley, World Student Series.
- Lerner, A.P. (1936), “The symmetry between import and export taxes,” Economica 3, pp 306-313.
- McLure, C. E., and Hellerstein, W. (2002), “Does Sales-Only Apportionment Violate International Trade Rules?” Tax Notes, September 9, pp. 1513-1521.
- McMillan, M. and Rodrik, D. (2011), Globalization, Structural Change and Productivity Growth, NBER Working Paper No. 17143.
- OECD (2014), Global Value Chains: Challenges, Opportunities, and Implications for Policy, Paris.
- Piermartini, R. (2004), The Role of Export Taxes in the Field of Primary Commodities, WTO, Geneva, available at http://www.wto.org/english/res_e/booksp_e/discussion_papers4_e.pdf.
- Productivity Commission (2007), Public Support for Science and Innovation, Research Report, Canberra.
- Sykes, A. (2001), “Effective Protection through WTO Rulemaking.” In Efficiency, Equity, Legitimacy: The Multilateral Trading System at the Millennium,” Porter, R. et al. (eds), Brookings Institution.
- Sykes, A. (2003), The Economics of WTO Rules on Subsidies and Countervailing Measures, Economics Working paper N° 186, The Law School, University of Chicago, pp. 23-25.
- Torres, R. (2007), “Free Zones and the World Trade Organization Agreement on Subsidies and Countervailing Measures,” Global Trade and Customs Journal.
- Zee, H. H., Stotsky, J. G., and Ley, E. (2002), “Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries,” World Development, Vol. 30, No. 9, pp. 1497-1516.

### WTO disputes and reports cited
- WTO (1996a), Japan – Taxes on Alcoholic Beverages (WT/DS8, 10, 11/AB/R).
- WTO (1996b), Canada – Certain Measures Concerning Periodicals (WT/DS31/AB/R).
- WTO (1998a), Indonesia – Certain Measures Affecting the Automobile Industry (WT/DS54/R, WT/DS55/R, WT/DS/59/R, WT/DS64/R).
- WTO (1998b), Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items (WT/DS56/AB/R).
- WTO (1998c), United States – Import Prohibitions on Certain Shrimp and Shrimp Products (WT/DS58/AB/R).
- WTO (1999a), Canada – Measures Affecting the Export of Civilian Aircraft” (WT/DS70/R).
- WTO (1999b), Korea – Taxes on Alcoholic Beverages (WT/DS75/AB/R and WT/DS84/AB/R).
- WTO (1999c), Chile – Taxes on Alcoholic Beverages (WT/DS87/AB/R and WT/DS110/AB/R).
- WTO (2000a), European Communities – Measures Affecting Asbestos and Asbestos-Containing Products (WT/DS135/AB/R).
- WTO (2000b), Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather (WT/DS155/R).
- WTO (2000c), United States – Tax Treatment for “Foreign Sales Corporations” (WT/DS108/AB/R).
- WTO (2002), United States – Tax Treatment for “Foreign Sales Corporations,” Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108/RW), adopted 29 January 2002, as modified by the Appellate Body Report (WT/DS108/AB/RW).
- WTO (2004), China – Value-Added Tax on Integrated Circuits (WT/DS309/1).
- WTO (2005), United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (WT/DS285/AB/R).
- WTO (2006), World Trade Report, Geneva, available at http://www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_report06_e.pdf.
- WTO (2011a), Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines (WT/DS371/AB/R).
- WTO (2011b), European Union and Certain Member States – Measures Affecting Trade in Large Civil Aircraft (WT/DS316/AB/R).
- WTO (2012a), China – Measures Related to the Exportation of Various Raw Materials (WT/DS394, DS395, DS398/AB/R).
- WTO (2012b), United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (WT/DS353/AB/R).
- WTO (2013), Brazil – Certain Measures Concerning Taxation and Charges (WT/DS472/1).
- WTO (2014a), China – Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum (WT/DS431, 432, 433/R).
- WTO (2014b), China – Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum (WT/DS431, 432, 433/AB/R).
- WTO (2015a), United States – Conditional Tax Incentives for Large Civil Aircraft (WT/DS487/2).
- WTO (2015b), Brazil – Certain Measures Concerning Taxation and Charges (WT/DS497/1).

### Annex summaries: TABLE A1 — Border tax measures and adjustments
- Tax measure at issue: Tariff rates exceeding bound MFN rates.
  - Key WTO provisions: GATT Art. II (schedules of concessions) concerning bound MFN rates.
  - Guidelines: Applied tariff rates should not exceed bound MFN rates.
- Tax measure at issue: Preferential tariff rates.
  - Key WTO provisions: GATT Arts. I (MFN treatment) and XXIV (customs unions and free-trade areas) and the “Enabling Clause.”
  - Guidelines: In general, tariffs should be applied in accordance with the MFN principle (unless allowed by GATT Art. XXIV or the “Enabling Clause”).
- Tax measure at issue: Discriminatory tariff exemptions or reductions.
  - Key WTO provisions: GATT Art. I:1; and ASCM Arts. 1.1, 2, 5.
  - Relevant dispute: Indonesia – tax measures pertaining to the automobile industry (DS54, 55, 59, 64).
  - Guidelines: Tariff exemptions or reductions should not discriminate among importers. Nor should they have “adverse effects” on other WTO Members.
- Tax measure at issue: Tariff exemptions or reductions contingent upon local content requirements (LCRs).
  - Key WTO provisions: TRIMs Art. 2.1 and Annex.
  - Relevant dispute: Indonesia – tax measures pertaining to the automobile industry (DS54, 55, 59, 64).
  - Guidelines: Tariff exemptions or reductions should not be contingent upon LCRs (or other TRIMs).
- Tax measure at issue: Tariff drawbacks for exported products.
  - Key WTO provisions: ASCM Arts. 3.1(a), 27, Annex I item (i).
  - Guidelines: Excess remission or drawback of import tariffs in respect of exported products constitutes an export subsidy and, as such, is prohibited (unless ASCM Art. 27 waiver applies).
  - N.B.: Remissions or drawbacks for tariffs paid on capital imports are not allowed as these inputs are not considered to be consumed in the production of the exported product.
- Tax measure at issue: Refunds of indirect taxes in respect of exported goods or services.
  - Key WTO provisions: ASCM Arts. 3.1(a), 27, Annex I items (g) and (h).
  - Guidelines: Excess refunds of indirect taxes in respect of exported goods or services constitute export subsidies and, as such, are prohibited (unless ASCM Art. 27 waiver applies).
  - N.B.: Rebates of indirect taxes on capital imports are not allowed as these inputs are not considered to be consumed the production of the exported product.
- Tax measure at issue: Other import/export fees and charges.
  - Key WTO provisions: GATT Art. VIII.
  - Relevant dispute: Argentina – statistical services tax levied on imports (DS56).
  - Guidelines: Other import/export fees, including transit fees, should usually involve specific rather than ad valorem rates.
- Tax measure at issue: Withholding tax on imports.
  - Key WTO provisions: GATT Arts. II, III:2 and XX(d).
  - Relevant dispute: Argentina – advance tax payments on imports (DS155).
  - Guidelines: Unless listed in schedules of concessions, withholding tax should not impose a larger burden on imported products than on domestic products (when viable alternatives are available to ensure compliance with domestic tax laws).
- Tax measure at issue: Export taxes.
  - Key WTO provisions: Protocols of Accession; GATT Arts. I, XX(b), XX(g).
  - Relevant disputes: China’s export taxes and charges on raw materials (DS394, 395, 398) and rare earths (DS431, 432, 433).
  - Guidelines: Export taxes should be levied in accordance with the MFN principle and comply with Members’ Accession Protocols.

### Annex summaries: TABLE A2 — Internal tax measures
- Tax measure at issue: Sales taxes discriminating against imported goods.
  - Key WTO provisions: GATT Arts. III:1, III:2.
  - Relevant disputes: Japan (DS8, 10, 11), Korea (DS75, 84), Chile (DS87, 110) concerning imports of alcoholic beverages.
  - Guidelines: Sales taxes levied on imported products should not exceed those levied on “like” domestic products.
- Tax measure at issue: Discriminatory tax administration.
  - Key WTO provisions: GATT Arts. III:2, III:4, XX(d).
  - Relevant dispute: Thailand – discriminatory conditions for obtaining VAT credits for inputs (DS371).
  - Guidelines: Sales taxes should not treat imported goods less favourably than “like” domestic products by imposing additional administrative requirements only on imported products.
- Tax measure at issue: Sales tax exemptions or reductions conditional upon LCRs.
  - Key WTO provisions: GATT Art. III:2; TRIMs Art. 2.1 and Annex.
  - Relevant dispute: Indonesia – tax measures pertaining to the automobile industry (DS54, 55, 59, 64).
  - Guidelines: Sales tax exemptions or reductions must not be discriminatory or conditional upon LCRs or other trade-related investment measures.
- Tax measure at issue: Relief from direct taxes contingent upon local content.
  - Key WTO provisions: GATT Art. III:4; ASCM Arts. 1.1, 3.1(b); TRIMs Arts. 2 and Annex.
  - Relevant dispute: US – Foreign Sales Corporations and Extraterritorial Income Exclusion (ETI) Act (DS108).
  - Guidelines: Tax relief contingent upon LCRs constitutes a prohibited subsidy.
- Tax measure at issue: Relief from direct taxes specifically related to exports.
  - Key WTO provisions: ASCM Arts. 1.1, 3.1(a), 4.7, 27, Annex I items (e) and (f); AA Arts. 3.3, 8, 10.1.
  - Relevant dispute: US – Foreign Sales Corporations and Extraterritorial Income Exclusion Act (DS108).
  - Guidelines: No relief from direct taxes specifically related to exports is allowed (unless ASCM Art. 27 waiver applies).
- Tax measure at issue: “Actionable” tax incentives.
  - Key WTO provisions: ASCM Arts. 1.1, 2, 5, 6, and 7.8.
  - Relevant disputes: Indonesia – tax measures pertaining to the automobile industry (DS54, 55, 59, 64); US – tax incentives for large civil aircraft (DS317, 353, 487).
  - Guidelines: Tax incentives are potentially “actionable” subsidies if they are “specific” and have “adverse effects” on other WTO Members.
- Tax measure at issue: Taxation of services and service providers.
  - Key WTO provisions: GATS Arts. II, XVII, XIV (d) and (e), and XXII.
  - Guidelines: Tax measures concerning services and service providers should respect MFN treatment and, to the extent that commitments have been made in specific service sectors, NT (except when allowed by Art. XIV). N.B. Tax measures contingent upon export performance or LCRs are permitted provided they are non-discriminatory.

### Acronyms (as listed)
- AA Agriculture Agreement
- AB Appellate Body
- AJCA American Jobs Creation Act
- ASCM Agreement on Subsidies and Countervailing Measures
- DISC Domestic International Sales Corporation
- DSB Dispute Settlement Body
- DSU Dispute Settlement Understanding
- EC European Community
- ERP Effective Rate of Protection
- ETI Extraterritorial Income
- EU European Union
- FSC Foreign Sales Corporation
- FTZ Free Trade Zone
- GATS General Agreement on Trade in Services
- GATT General Agreement on Tariffs and Trade
- LCR Local Content Requirement
- MFN       Most-Favoured-Nation
- NT National Treatment
- SEZ Special Economic Zone
- TPRB Trade Policy Review Body
- TPRM Trade Policy Review Mechanism
- TRIM Trade-Related Investment Measure
- TRIPS Trade-Related Aspects of Intellectual Property Rights
- VER Voluntary Export Restraint

*Technical Notes and Manuals 16/03 | 2016*

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