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WTO ANALYTICAL INDEX: SUBSIDIES AND COUNTERVAILING MEASURES Agreement on Subsidies and Countervailing Measures |
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A. Relationship with GATT 1994 (a) Absence of conflict between the SCM Agreement and Article III of GATT 1994 380. Considering whether there is a general conflict between the SCM Agreement and Article III of GATT 1994, the Panel on Indonesia - Autos stated: "As was the case under GATT 1947, we think that Article III of GATT 1994 and the WTO rules on subsidies remain focused on different problems. Article III continues to prohibit discrimination between domestic and imported products in respect of internal taxes and other domestic regulations, including local content requirements. It does not 'proscribe' nor does it 'prohibit' the provision of any subsidy per se. By contrast, the SCM Agreement prohibits subsidies which are conditional on export performance and on meeting local content requirements, provides remedies with respect to certain subsidies where they cause adverse effects to the interests of another Member and exempts certain subsidies from actionability under the SCM Agreement. In short, Article III prohibits discrimination between domestic and imported products while the SCM Agreement regulates the provision of subsidies to enterprises. ... Accordingly, we consider that Article III and the SCM Agreement have, generally, different coverage and do not impose the same type of obligations. Thus there is no general conflict between these two sets of provisions."(516) 381. The Panel on Indonesia - Autos further acknowledged that while Article III of GATT 1994 and the SCM Agreement may overlap to a certain extent, the two sets of provisions serve different purposes: "[T]he only subsidies that would be affected by the provisions of Article III are those that would involve discrimination between domestic and imported products. While Article III of GATT and the SCM Agreement may appear to overlap in respect of certain measures, the two sets of provisions have different purposes and different coverage. Indeed, they also offer different remedies, different dispute settlement time limits and different implementation requirements. Thus, we reject ... [the] argument that the application of Article III to subsidies would reduce the SCM Agreement to 'inutility'. ... [T]he obligations contained in the WTO Agreement are generally cumulative, can be complied with simultaneously and ... different aspects and sometimes the same aspects of a legislative act can be subject to various provisions of the WTO Agreement."(517) (b) Absence of conflict between the SCM Agreement and Article III:2 of GATT 1994 382. The Panel on Indonesia - Autos rejected the argument that "the obligations contained in Article III:2 of GATT and the SCM Agreement are mutually exclusive"(518) because "the SCM Agreement 'explicitly authorizes' Members to provide subsidies that are prohibited by Article III:2 of GATT."(519) The Panel stated: "We also recall that the obligations of the SCM Agreement and Article III:2 are not mutually exclusive. It is possible ... to respect ... obligations under the SCM Agreement without violating Article III:2 since Article III:2 is concerned with discriminatory product taxation, rather than the provision of subsidies as such. Similarly, it is possible ... to respect the obligations of Article III:2 without violating ... obligations under the SCM Agreement since the SCM Agreement does not deal with taxes on products as such but rather with subsidies to enterprises. At most, the SCM Agreement and Article III:2 are each concerned with different aspects of the same piece of legislation."(520) 383. As regards the relationship with Article 27.3 on a transition period for developing countries and least developing countries and Article III:2 of GATT 1994, see also paragraph 325 above. 384. In the Brazil - Desiccated Coconut dispute, the Panel was faced with the question "whether Article VI creates rules which are separate and distinct from those of the SCM Agreement, and which can be applied without reference to that Agreement, or whether Article VI of GATT 1994 and the SCM Agreement represent an inseparable package of rights and disciplines that must be considered in conjunction."(521) In phrasing this issue, the Panel on Brazil - Desiccated Coconut made clear that the SCM Agreement did not supersede Article VI of GATT 1994 as the basis for the regulation by the WTO Agreement of countervailing measures. In making this finding, the Panel relied on the existence of the general interpretive note to Annex 1A of the WTO Agreement and on the fact that certain provisions of Article VI are not "replicated or elaborated" in the SCM Agreement.(522) The Appellate Body on Brazil - Desiccated Coconut confirmed the statement by the Panel that the SCM Agreement did not supersede Article VI of GATT 1994.(523) In making this finding, the Appellate Body emphasized the integrated nature of the WTO Agreement and the annexed agreements. More specifically, the Appellate Body found that although the provisions of GATT 1947 were now incorporated into GATT 1994, they did not represent the totality of rights and obligations of WTO Members in a given subject area: "The relationship between the GATT 1994 and the other goods agreements in Annex 1A is complex and must be examined on a case-by-case basis. Although the provisions of the GATT 1947 were incorporated into, and became a part of the GATT 1994, they are not the sum total of the rights and obligations of WTO Members concerning a particular matter. For example, with respect to subsidies on agricultural products, Articles II, VI and XVI of the GATT 1994 alone do not represent the total rights and obligations of WTO Members. The Agreement on Agriculture and the SCM Agreement reflect the latest statement of WTO Members as to their rights and obligations concerning agricultural subsidies. The general interpretative note to Annex 1A was added to reflect that the other goods agreements in Annex 1A, in many ways, represent a substantial elaboration of the provisions of the GATT 1994, and to the extent that the provisions of the other goods agreements conflict with the provisions of the GATT 1994, the provisions of the other goods agreements prevail. This does not mean, however, that the other goods agreements in Annex 1A, such as the SCM Agreement, supersede the GATT 1994."(524) 385. The Appellate Body on Brazil - Desiccated Coconut noted that "[t]he relationship between the SCM Agreement and Article VI of GATT 1994 is set out in Articles 10 and 32.1 of the SCM Agreement."(525) Apart from the integrated structure of the WTO Agreement and the annexed agreements, the Appellate Body therefore focused on these two provisions of the SCM Agreement. The Appellate Body then explicitly agreed with the Panel's statement that: "Article VI of GATT 1994 and the SCM Agreement represent a new and different package of rights and obligations, as among WTO Members, regarding the use of countervailing duties. Thus, Article VI and the respective SCM Agreements impose obligations on a potential user of countervailing duties, in the form of conditions that have to be fulfilled in order to impose a duty, but they also confer the right to impose a countervailing duty when those conditions are satisfied. The SCM Agreements do not merely impose additional substantive and procedural obligations on a potential user of countervailing measures. Rather, the SCM Agreements and Article VI together define, clarify and in some cases modify the whole package of rights and obligations of a potential user of countervailing measures."(526) 386. The Appellate Body on Brazil - Desiccated Coconut then proceeded to find that: "[C]ountervailing duties may only be imposed in accordance with Article VI of the GATT 1994 and the SCM Agreement. A countervailing duty being a specific action against a subsidy of another WTO Member, pursuant to Article 32.1, it can only be imposed "in accordance with the provisions of GATT 1994, as interpreted by this Agreement". The ordinary meaning of these provisions taken in their context leads us to the conclusion that the negotiators of the SCM Agreement clearly intended that, under the integrated WTO Agreement, countervailing duties may only be imposed in accordance with the provisions of Part V of the SCM Agreement and Article VI of the GATT 1994, taken together. If there is a conflict between the provisions of the SCM Agreement and Article VI of the GATT 1994, furthermore, the provisions of the SCM Agreement would prevail as a result of the general interpretative note to Annex 1A. ... The fact that Article VI of the GATT 1947 could be invoked independently of the Tokyo Round SCM Code under the previous GATT system does not mean that Article VI of GATT 1994 can be applied independently of the SCM Agreement in the context of the WTO. The authors of the new WTO regime intended to put an end to the fragmentation that had characterized the previous system."(527) 387. With respect to the relationship between Article XVI:4 and the SCM Agreement, see paragraphs 81-82 above. 388. The Panel on Indonesia - Autos considered the issue of whether a measure covered by the SCM Agreement can also be subject to the obligations contained in the TRIMs Agreement. The Panel first noted that the general interpretive note to Annex 1A of the WTO Agreement did not apply in this context and opined that it had to resort to the relevant provision of general international law. In so doing, the Panel emphasized the general international law presumption against conflicts: "We note first that the interpretive note to Annex IA of the WTO Agreement is not applicable to the relationship between the SCM Agreement and the TRIMs Agreement. The issue of whether there might be a general conflict between the SCM Agreement and the TRIMs Agreement would therefore need to be examined in the light of the general international law presumption against conflicts and the fact that under public international law a conflict exists in the narrow situation of mutually exclusive obligations for provisions that cover the same type of subject matter.
In this context the fact that the drafters included an express provision governing conflicts between GATT and the other Annex 1A Agreements, but did not include any such provision regarding the relationship between the other Annex 1A Agreements, at a minimum reinforces the presumption in public international law against conflicts. With respect to the nature of obligations, we consider that, with regard to local content requirements, the SCM Agreement and the TRIMs Agreement are concerned with different types of obligations and cover different subject matters. In the case of the SCM Agreement, what is prohibited is the grant of a subsidy contingent on use of domestic goods, not the requirement to use domestic goods as such. In the case of the TRIMs Agreement, what is prohibited are TRIMs in the form of local content requirements, not the grant of an advantage, such as a subsidy."(528) 389. The Panel on Indonesia - Autos proceeded to emphasize the different types of obligations and the different subject matters covered by the SCM Agreement on the one hand and the TRIMs Agreement on the other. It explored how bringing a national measure into consistency with one of the agreements could nevertheless fail to remove the incompatibility with the other agreement. The Panel ultimately concluded that both the TRIMs Agreement and the SCM Agreement were applicable to the dispute before it: "A finding of inconsistency with Article 3.1(b) of the SCM Agreement can be remedied by removal of the subsidy, even if the local content requirement remains applicable. By contrast, a finding of inconsistency with the TRIMs Agreement can be remedied by a removal of the TRIM that is a local content requirement even if the subsidy continues to be granted. Conversely, for instance, if a Member were to apply a TRIM (in the form of local content requirement), as a condition for the receipt of a subsidy, the measure would continue to be a violation of the TRIMs Agreement if the subsidy element were replaced with some other form of incentive. By contrast, if the local content requirements were dropped, the subsidy would continue to be subject to the SCM Agreement, although the nature of the relevant discipline under the SCM Agreement might be affected. Clearly, the two agreements prohibit different measures. We note also that under the TRIMs Agreement, the advantage made conditional on meeting a local content requirement may include a wide variety of incentives and advantages, other than subsidies. There is no provision contained in the SCM Agreement that obliges a Member to violate the TRIMs Agreement, or vice versa.
We consider that the SCM and TRIMs Agreements cannot be in conflict, as they cover different subject matters and do not impose mutually exclusive obligations. The TRIMs Agreement and the SCM Agreement may have overlapping coverage in that they may both apply to a single legislative act, but they have different foci, and they impose different types of obligations. ... We find that there is no general conflict between the SCM Agreement and the TRIMs Agreement. Therefore, to the extent that the ... programmes are TRIMs and subsidies, both the TRIMs Agreement and the SCM Agreement are applicable to this dispute.
We consider ... that the obligations contained in the WTO Agreement are generally cumulative, can be complied with simultaneously and that different aspects and sometimes the same aspects of a legislative act can be subject to various provisions of the WTO Agreement."(529) 390. Most panel reports on subsidy disputes contain a paragraph in their recommendations providing that the findings at issue constitute a case of prima facie nullification or impairment of benefits pursuant to Article 3.8 of the DSU. For instance, the following cases have made a reference to Article 3.8 of the DSU: Panel Report on Brazil - Aircraft, para. 8.3; Panel Report on Indonesia - Autos, para. 15.2; Panel Report on Canada - Aircraft, para. 10.2; Panel Report on Canada Dairy, para. 8.2; Panel Report on US - FSC, para. 8.2; Panel Report on Australia - Automotive Leather II, para. 10.2; Panel Report on US - Lead and Bismuth II, para. 7.2; Panel Report on Canada - Autos, para. 11.2; Panel Report on Canada - Aircraft Credits and Guarantees, para. 8.2; Panel Report on US - Softwood Lumber III, para. 8.4.(530) 391. Regarding the different disciplines applicable to prohibited subsidies and other illegal measures as regards compliance with panel recommendations, see paragraphs 174 and 178 above. 392. With respect to the relationship between Article 4.4 of the SCM Agreement and Article 4 of the DSU, see paragraphs 152-153 above. 393. With respect to the relationship between Article 4.2 of the SCM Agreement and Article 11 of the DSU, see paragraph 146 above. 394. With respect to Article 4.2 of the SCM Agreement and Article 13.2 of the DSU, see paragraph 147 above. 395. In Canada - Aircraft Credits and Guarantees, the Panel recalled the prospective nature of WTO dispute settlement remedies and that such an approach was also applicable to the SCM Agreement: "In any event, even if the WTO dispute settlement mechanism does only provide for prospective remedies, we note that it does so in respect of all cases, and not only those involving prohibited export subsidies. Article 23.1 of the DSU provides that Members shall resolve all disputes through the multilateral dispute system, to the exclusion of unilateral self-help. Thus, to the extent that the WTO dispute settlement system only provides for prospective remedies, that is clearly the result of a policy choice by the WTO Membership. Given this policy choice, and given the fact that Article 23.1 of the DSU applies to all disputes, including those involving (alleged) prohibited export subsidies, we see no reason why the (allegedly) prospective nature of WTO dispute settlement remedies should impact on our interpretation of the second paragraph of item (k)."(531) 396. The Appellate Body on Canada - Dairy (Article 21.5 - New Zealand and US) noted that the WTO-consistency of an export subsidy for agricultural products has to be examined, in the first place, under the Agreement on Agriculture. In this case, the Appellate Body considered that it was unable to determine whether the measures at issue "conform[] fully" to Articles 9.1(c) or 10.1 of the Agreement on Agriculture and therefore declined to examine the claim under Article 3.1(a) of the SCM Agreement.(532) See paragraphs 123-125 above. 397. As regards Article 3.1(a) and 4.7 above, see paragraph 110 above. 398. The Panel on Canada - Aircraft Credits and Guarantees held that it did not consider that the object and purpose of the SCM Agreement was necessarily the same as the object and purpose of the GATT Subsidies Code. For the Panel, the SCM Agreement provides for more extensive special and differential treatment for developing countries than the GATT Subsidies Code did. In addition, the preamble to the Marrakesh Agreement Establishing the World Trade Organization, of which agreement the SCM Agreement is an integral part, recognizes "that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development". No such "need" was identified in the GATT Subsidies Code. In addition, all WTO Members are bound by the SCM Agreement, whereas only a number of GATT Contracting Parties were signatories of the GATT Subsidies Code. Furthermore, the provisions of the SCM Agreement - unlike those of the GATT Subsidies Code - are subject to binding dispute settlement under the DSU.(533)
XXXV. Relationship with Ministerial Decisions and Declarations back to top Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade or Part V of the Agreement on Subsidies and Countervailing Measures Ministers,
Recognize, with respect to dispute settlement pursuant to the Agreement on Implementation of Article VI of GATT 1994 or Part V of the Agreement on Subsidies and Countervailing Measures, the need for the consistent resolution of disputes arising from anti-dumping and countervailing duty measures. 399. The Appellate Body on US - Lead and Bismuth II rejected the argument that, "by virtue of the Declaration, the standard of review specified in Article 17.6 of the Anti-Dumping Agreement also applies to disputes involving countervailing duty measures under Part V of the SCM Agreement."(534) The Appellate Body emphasized the hortatory language of the Declaration and the fact that the Declaration does not provide for the application of any particular standards of review to be applied. See also the Chapter on the DSU, paragraph 301. 400. With respect to this issue, see also paragraph 367 above.
XXXVI. Annex I back to top Annex I: Illustrative List of Export Subsidies (a) The provision by governments of direct subsidies to a firm or an industry contingent upon export performance.
(b) Currency retention schemes or any similar practices which involve a bonus on exports.
(c) Internal transport and freight charges on export shipments, provided or mandated by governments, on terms more favourable than for domestic shipments.
(d) The provision by governments or their agencies either directly or indirectly through government-mandated schemes, of imported or domestic products or services for use in the production of exported goods, on terms or conditions more favourable than for provision of like or directly competitive products or services for use in the production of goods for domestic consumption, if (in the case of products) such terms or conditions are more favourable than those commercially available(57) on world markets to their exporters.
(footnote original) 57 The term "commercially available" means that the choice between domestic and imported products is unrestricted and depends only on commercial considerations.
(e) The full or partial exemption remission, or deferral specifically related to exports, of direct taxes(58) or social welfare charges paid or payable by industrial or commercial enterprises.(59)
(footnote original) 58 For the purpose of this Agreement: The term "direct taxes" shall mean taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership of real property; The term "import charges" shall mean tariffs, duties, and other fiscal charges not elsewhere enumerated in this note that are levied on imports; The term "indirect taxes" shall mean sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and import charges; "Prior-stage" indirect taxes are those levied on goods or services used directly or indirectly in making the product; "Cumulative" indirect taxes are multi-staged taxes levied where there is no mechanism for subsequent crediting of the tax if the goods or services subject to tax at one stage of production are used in a succeeding stage of production; "Remission" of taxes includes the refund or rebate of taxes; "Remission or drawback" includes the full or partial exemption or deferral of import charges.
(footnote original) 59 The Members recognize that deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected. The Members reaffirm the principle that prices for goods in transactions between exporting enterprises and foreign buyers under their or under the same control should for tax purposes be the prices which would be charged between independent enterprises acting at arm's length. Any Member may draw the attention of another Member to administrative or other practices which may contravene this principle and which result in a significant saving of direct taxes in export transactions. In such circumstances the Members shall normally attempt to resolve their differences using the facilities of existing bilateral tax treaties or other specific international mechanisms, without prejudice to the rights and obligations of Members under GATT 1994, including the right of consultation created in the preceding sentence. Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of foreign-source income earned by its enterprises or the enterprises of another Member.
(f) The allowance of 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.
(g) The exemption or remission, in respect of the production and distribution of exported products, of indirect taxes(58) in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.
(h) The exemption, remission or deferral of prior-stage cumulative indirect taxes(60) on goods or services used in the production of exported products 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; provided, however, that prior-stage cumulative indirect taxes may be exempted, remitted or deferred on exported products even when not exempted, remitted or deferred on like products when sold for domestic consumption, if the prior-stage cumulative indirect taxes are levied on inputs that are consumed in the production of the exported product (making normal allowance for waste). This item shall be interpreted in accordance with the guidelines on consumption of inputs in the production process contained in Annex II.
(footnote original) 60 Paragraph (h) does not apply to value-added tax systems and border-tax adjustment in lieu thereof; the problem of the excessive remission of value-added taxes is exclusively covered by paragraph (g).
(i) The remission or drawback of import charges(58) in excess of those levied on imported inputs that are consumed in the production of the exported product (making normal allowance for waste); provided, however, that in particular cases a firm may use a quantity of home market inputs equal to, and having the same quality and characteristics as, the imported inputs as a substitute for them in order to benefit from this provision if the import and the corresponding export operations both occur within a reasonable time period, not to exceed two years. This item shall be interpreted in accordance with the guidelines on consumption of inputs in the production process contained in Annex II and the guidelines in the determination of substitution drawback systems as export subsidies contained in Annex III.
(j) The provision by governments (or special institutions controlled by governments) of export credit guarantee or insurance programmes, of insurance or guarantee programmes against increases in the cost of exported products or of exchange risk programmes, at premium rates which are inadequate to cover the long-term operating costs and losses of the programmes.
(k) The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.
Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.
(l) Any other charge on the public account constituting an export subsidy in the sense of Article XVI of GATT 1994. 1. Items (c), (d), (j) and (k) (a) "Provided or mandated by governments" 401. The Appellate Body on Canada - Dairy (Article 21.5 - New Zealand and US) after observing that Article 9.1(c) of the Agreement on Agriculture does not require that payments be financed by virtue of government "mandate," or other "direction," but rather government "action", noted that in comparison, items (c), (d), (j) and (k) of the Illustrative List seemed to imply the need to find some type of government mandate in the context of determining the existence of a subsidy. The Appellate Body stated: "Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the 'Illustrative List') of the SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of a subsidy provided through a third party."(535) 402. The Panel on Brazil - Aircraft, in a finding not subsequently addressed by the Appellate Body, described the test whether a measure is a prohibited export subsidy under item (d) as "a comparison of the terms and conditions of the goods or services being provided by the government with the terms and conditions that would otherwise be available to the exporters receiving the alleged export subsidy".(536) As a consequence, the Panel rejected the argument that the relevant test depends upon "whether the measure merely offsets advantages bestowed on competing products from another Member". The Panel noted that "the fact that a foreign competitor had access to the same goods or services on better terms than those available to the exporters in question would not be a defense."(537) 3. Items (e), (f), (g), (h) and (i) 403. Similarly to its finding with respect to item (d), the Panel on Brazil - Aircraft, in the context of items (e), (f), (g), (h) and (i), rejected the argument that whether a measure is a prohibited export subsidy should be decided based on whether the measure at issue merely serves to offset advantages bestowed on competing products from another Member.(538) Regarding items (e) to (i), the Panel stated that "there is no hint that a tax advantage would not constitute an export subsidy simply because it reduced the exporter's tax burden to a level comparable to that of foreign competitors."(539) (a) Fifth Sentence: "double taxation of foreign source-income" 404. In the context of footnote 59, the Appellate Body in US - FSC (Article 21.5 - EC),considered that the fifth sentence of footnote 59 applies to measures taken by a Member to avoid taxation of income earned by a taxpayer of that Member in a foreign state: "'[D]ouble taxation' occurs when the same income, in the hands of the same taxpayer, is liable to tax in different States. The fifth sentence of footnote 59 applies to a measure taken by a Member to avoid such double taxation of 'foreign-source income'. In examining the phrase 'foreign-source income', we observe that, in ordinary usage, the word 'source' can refer to the place where a thing originates, and that the words 'source' and 'origin' can be synonyms. We consider, therefore, that the word 'source', in the context of the fifth sentence of footnote 59, has a meaning akin to 'origin' and refers to the place where the income is earned. This reading is supported by the combination of the words 'foreign' and 'source' as 'foreign' also refers to the place where the income is earned. Used in this way, the word 'foreign' indicates a source which is external to the Member adopting the measure at stake. Footnote 59, therefore, applies to measures taken by a Member to avoid the double taxation of income earned by a taxpayer of that Member in a 'foreign' State."(540) (ii) Scope of discretion to avoid double taxation 405. The Appellate Body on US - FSC considered that Members have a discretion to avoid double taxation: "[I]t is 'implicit' in the requirement to use the arm's length principle that Members of the WTO are not obliged to tax foreign-source income, and also that Members may tax such income less than they tax domestic-source income. We would add that, even in the absence of footnote 59, Members of the WTO are not obliged, by WTO rules, to tax any categories of income, whether foreign- or domestic-source income. The United States argues that, since there is no requirement to tax export related foreign-source income, a government cannot be said to have "foregone" revenue if it elects not to tax that income. It seems to us that, taken to its logical conclusion, this argument by the United States would mean that there could never be a foregoing of revenue "otherwise due" because, in principle, under WTO law generally, no revenues are ever due and no revenue would, in this view, ever be "foregone". That cannot be the appropriate implication to draw from the requirement to use the arm's length principle."(541) 406. The Appellate Body on US - FSC (Article 21.5 - EC), noted that Members have the authority to determine their rules of taxation, provided they comply with WTO obligations. The Appellate Body upheld the panel's findings that footnote 59 does not require Members to adopt particular legal standards to define when income is foreign-source for the purposes of their double taxation-avoidance measures and noted that footnote 59 does not give Members an unlimited discretion to avoid double taxation of "foreign-source income" through the grant of export subsidies. Accordingly, for the Appellate Body, the term "foreign-source income", as used in footnote 59 cannot be interpreted solely by reference to the rules of the Member taking the measure to avoid double taxation of foreign-source income: "It is, however, no easy matter to determine in every situation when income is susceptible of being taxed in two different States and, thus, when a Member may properly regard income as "foreign-source income". We have emphasized in previous appeals that Members have the sovereign authority to determine their own rules of taxation, provided that they respect their WTO obligations. Thus, subject to this important proviso, each Member is free to determine the rules it will use to identify the source of income and the fiscal consequences - to tax or not to tax the income - flowing from the identification of source. We see nothing in footnote 59 to the SCM Agreement which is intended to alter this situation. We, therefore, agree with the Panel that footnote 59 does not oblige Members to adopt any particular legal standard to determine whether income is foreign-source for the purposes of their double taxation-avoidance measures.
At the same time, however, footnote 59 does not give Members an unfettered discretion to avoid double taxation of "foreign-source income" through the grant of export subsidies. As the fifth sentence of footnote 59 to the SCM Agreement constitutes an exception to the prohibition on export subsidies, great care must be taken in defining its scope. If footnote 59 were interpreted to allow a Member to grant a fiscal preference for any income that a Member chooses to regard as foreign source, that reading would seriously undermine the prohibition on export subsidies in the SCM Agreement. That would allow Members, relying on whatever source rules they adopt, to grant fiscal export subsidies for income that may not actually be susceptible of being taxed in two jurisdictions. Accordingly, the term "foreign-source income", as used in footnote 59 cannot be interpreted by reference solely to the rules of the Member taking the measure to avoid double taxation of foreign-source income."(542) (iii) Design, structure and architecture of double taxation to target foreign source income 407. The Appellate Body on US - FSC (Article 21.5 - EC), also considered that measures falling under footnote 59 should not necessarily be "perfectly tailored" to the actual double tax burden, but that such measures must target "foreign-source income." Following the Panel's approach, the Appellate Body, also examined the "design, structure and architecture" of the measures under consideration to determine if they fell under footnote 59.(543) "The avoidance of double taxation is not an exact science. Indeed, the income exempted from taxation in the State of residence of the taxpayer might not be subject to a corresponding, or any, tax in a "foreign" State. Yet, this does not necessarily mean that the measure is not taken to avoid double taxation of foreign-source income. Thus, we agree with the Panel, and the United States, that measures falling under footnote 59 are not required to be perfectly tailored to the actual double tax burden.
However, the fact that measures falling under footnote 59 to the SCM Agreement may grant a tax exemption even for income that is not taxed in another jurisdiction does not mean that such tax exemptions may be granted, under the fifth sentence of footnote 59, for any income. Footnote 59 prescribes that the income benefitting from a double taxation-avoidance measure must be 'foreign-source' and, as we have said, that means that the income must have links with a "foreign" State such that it could properly be subjected to tax in that State, as well as in the Member taking the double taxation-avoidance measure.
We also recognize that Members are not obliged by the covered agreements to provide relief from double taxation. Footnote 59 to the SCM Agreement simply preserves the prerogative of Members to grant such relief, at their discretion, for 'foreign-source income'. Accordingly, we do not believe that measures falling under footnote 59 must grant relief from all double tax burdens. Rather, Members retain the sovereign authority to determine for themselves whether, and to what extent, they will grant such relief."(544) 408. The Appellate Body on US - FSC analysed footnote 59 and rejected the argument that since there is no requirement to tax export-related foreign-source income, a decision not to tax that income cannot be said to constitute revenue "foregone." The Appellate Body noted that if it was to follow this approach, there could never be "a foregoing of revenue 'otherwise due'" because WTO law does not require the collection of any particular category of revenue. The Appellate Body considered that the arm's-length requirement in footnote 59 does not provide a solution because this principle operates independently of the choice that a Member makes on what categories of foreign-sourced income it will not tax or will tax less. The Appellate Body held: "Furthermore, we do not believe that the requirement to use the arm's length principle resolves the issue that arises here. That issue is not, as the United States suggests, whether a Member is or is not obliged to tax a particular category of foreign-source income. As we have said, a Member is not, in general, under any such obligation. Rather, the issue in dispute is whether, having decided to tax a particular category of foreign-source income, namely foreign-source income that is 'effectively connected with a trade or business within the United States', the United States is permitted to carve out an export contingent exemption from the category of foreign-source income that is taxed under its other rules of taxation. Unlike the United States, we do not believe that the second sentence of footnote 59 addresses this question. It plainly does not do so expressly; neither, as far as we can see, does it do so by necessary implication. As the United States indicates, the arm's length principle operates when a Member chooses not to tax, or to tax less, certain categories of foreign-source income. However, the operation of the arm's length principle is unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will not tax, or will tax less. Likewise, the operation of the arm's length principle is unaffected by the choice a Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source income that it has selected for itself. In short, the requirement to use the arm's length principle does not address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export subsidies within the meaning of Article 3.1(a) of the SCM Agreement."(545) (emphasis original) 409. For the Appellate Body in US - FSC (Article 21.5 - EC) the notion of "'foreign-source income', in footnote 59 to the SCM Agreement, refers to income generated by activities of a non-resident taxpayer in a 'foreign' State which have such links with that State so that the income could properly be subject to tax in that State."(546) The Appellate Body considered that the existence of a "foreign element" in itself does not necessarily indicate that "all" income from transactions covered by the measures under consideration constitute "foreign-source income." The Appellate Body concluded that in this case the used methodology did not accurately allocate covered income as foreign or domestic, with the result that the measure at stake "improperly combines domestic-source income and foreign-source income" in the calculation, causing it to "systematically" misallocate this income.(547) The Appellate Body held: "[T]he fact that a transaction involves some foreign element, such as the "foreign economic process", does not necessarily mean that all of the income generated by such a transaction will be "foreign-source income" within the meaning of footnote 59 to the SCM Agreement. ... In our view, under footnote 59 to the SCM Agreement, the 'foreign-source income' arising in such a transaction is only that portion of the total income which is generated by and properly attributable to activities that do occur in a 'foreign' State.(548) ... This reinforces our view that the approach embodied in the ETI measure can lead to very different allocations of income between domestic-and foreign-source in respect of precisely the same transaction. This implies to us that the different formulae for calculating QFTI result in a misallocation of income as between the domestic-and foreign-source and, through the election which the taxpayer can make between these formulae, allows the taxpayer to obtain the maximum benefit from the misallocation."(549) (i) Recourse to international tax law 410. The Appellate Body on US - FSC (Article 21.5 - EC) acknowledged that in international tax law there is no agreed meaning for the term "foreign-source income" but that on the basis of its recourse to international legal principles and its review of a number of bilateral and multilateral tax agreements, that the term "foreign-source income" may be interpreted as follows: "Although there is no universally agreed meaning for the term 'foreign-source income' in international tax law, we observe that many States have adopted bilateral or multilateral treaties to address double taxation. ...
Although these instruments do not define 'foreign-source income' uniformly, it appears to us that certain widely recognized principles of taxation emerge from them.121 In seeking to give meaning to the term "foreign-source income" in footnote 59 to the SCM Agreement, which is a tax-related provision in an international trade treaty, we believe that it is appropriate for us to derive assistance from these widely recognized principles which many States generally apply in the field of taxation. In identifying these principles, we bear in mind that the measure at issue seeks to address foreign-source income of United States citizens and residents - that is, income earned by these taxpayers in "foreign" States where the taxpayers are not resident.
We recognize, of course, that the detailed rules on taxation of non-residents differ considerably from State-to-State, with some States applying rules which may be more likely to tax the income of non-residents than the rules applied by other States. However, despite the differences, there seems to us to be a widely accepted common element to these rules. The common element is that a 'foreign' State will tax a non-resident on income which is generated by activities of the non-resident that have some link with that State. Thus, whether a 'foreign' State decides to tax non-residents on income generated by a permanent establishment or whether, absent such an establishment, it decides to tax a non-resident on income generated by the conduct of a trade or business on its territory, the 'foreign' State taxes a non-resident only on income generated by activities linked to the territory of that State. As a result of this link, the 'foreign' State treats the income in question as domestic-source, under its source rules, and taxes it. Conversely, where the income of a non-resident does not have any links with a 'foreign' State, it is widely accepted that the income will be subject to tax only in the taxpayer's State of residence, and that this income will not be subject to taxation by a 'foreign" State.'"(550) (ii) Link between income of taxpayers and their activities in a foreign State 411. The Appellate Body on US - FSC (Article 21.5 - EC) noticed the need for a link between the taxpayer's income and their activities in a foreign State to establish whether there is a foreign source of income. The Appellate Body examined rules on foreign leasing and rental income and referred to additional aspects of the measures under consideration and considered that domestic-source income was improperly treated as exempt foreign-source income.(551) The Appellate Body took the view that: "[I]n the absence of an established link between the income of such taxpayers and their activities in a 'foreign' State, we do not believe that there is 'foreign-source income' within the meaning of footnote 59 of the SCM Agreement.
... In our view, however, sales income cannot be regarded as 'foreign-source income', under footnote 59, for the sole reason that the property, subject-matter of the sale, is exported to another State, for use there. The mere fact that the buyer uses property outside the United States does not mean that the seller undertook activities in a 'foreign' State generating income there. Such an interpretation of footnote 59 would, in effect, allow Members to grant a tax exemption in favour of export-related income on the ground that the exportation by itself of the property renders the income 'foreign-source'. In our view, this reading would allow Members easily to evade the prohibition on export subsidies in Article 3.1(a) of the SCM Agreement and render this prohibition meaningless."(552) 412. The Appellate Body, in US - FSC (Article 21.5 - EC) considered that the flexibility under footnote 59 does not properly extend to allowing Members to adopt allocation rules that systematically result in a tax exemption for income that has no connection with a "foreign" country and that would not be regarded as foreign-source: "We have said that avoiding double taxation is not an exact science and we recognize that Members must have a degree of flexibility in tackling double taxation. However, in our view, the flexibility under footnote 59 to the SCM Agreement does not properly extend to allowing Members to adopt allocation rules that systematically result in a tax exemption for income that has no link with a "foreign" State and that would not be regarded as foreign-source under any of the widely accepted principles of taxation we have reviewed."(553) 413. The Appellate Body on US - FSC (Article 21.5 - EC) addressed the issue of the burden of proof under the fifth sentence of footnote 59 and upheld the findings of the Panel in this regard. In reviewing the Panel's findings, the Appellate Body considered whether the footnote provides the "proper scope" of the Article 3.1(a) obligations, or whether it determines an "exception" for a measure that is otherwise an export contingent subsidy.(554) The Appellate Body concluded that footnote 59 does not modify the scope of the definition of a "subsidy" in Article 1.1, the scope of item 1(e) of the Illustrative List, nor the meaning of export contingent subsidies under Article 3.1(a). The Appellate Body thus concluded that: (i) measures falling within the scope of footnote 59 may continue to be export subsidies under Article 1.1; and (ii) the fifth sentence of footnote 59 is an "exception" to the legal regime applicable to export subsidies under Article 3.1(a), by allowing Members to take or adopt measures to avoid the double-taxation of foreign-source income, while the latter may continue to be considered as export subsidies, within the meaning of Article 3.1(a). The Appellate Body also concluded that footnote 59 is an "affirmative defense" that may justify a prohibited export subsidy, and that the burden of proof is on the party invoking the exception: "We recall that, in the original proceedings in this dispute, we said that the fifth sentence of footnote 59 'does not purport to establish an exception to the general definition of a 'subsidy' ...'. Thus, a measure taken to avoid the double taxation of foreign-source income, falling within footnote 59, may be a 'subsidy' under the SCM Agreement.
Article 3.1 of the SCM Agreement provides specific obligations with respect to two types of subsidy: subsidies contingent upon export performance and subsidies contingent upon the use of domestic over imported goods. Subsidies of these defined types are prohibited under Article 3 of the SCM Agreement. Item (e) of the Illustrative List identifies a particular measure which is deemed to be a prohibited export subsidy under Article 3.1(a).
The fifth sentence of footnote 59 provides that item (e) 'is not intended to limit a Member from taking measures to avoid the double taxation of foreign-source income earned by its enterprises or the enterprises of another Member.' In the same way that we do not see the fifth sentence of footnote 59 as altering the scope of the definition of a 'subsidy' in Article 1.1 of the SCM Agreement, we do not see it as altering either the scope of item (e) of the Illustrative List or the meaning to be given to the term 'subsidies contingent ... upon export performance' in Article 3.1(a) of the SCM Agreement. Thus, measures falling within the scope of this sentence of footnote 59 may continue to be export subsidies, much as they may continue to be subsidies under Article 1.1 of the SCM Agreement.
The import of the fifth sentence of footnote 59 is that Members are entitled to 'take', or 'adopt' measures to avoid double taxation of foreign-source income, notwithstanding that they may be, in principle, export subsidies within the meaning of Article 3.1(a). The fifth sentence of footnote 59, therefore, constitutes an exception to the legal regime applicable to export subsidies under Article 3.1(a) by explicitly providing that when a measure is taken to avoid the double taxation of foreign-source income, a Member is entitled to adopt it.
Accordingly, as we indicated in US - FSC, the fifth sentence of footnote 59 constitutes an affirmative defence that justifies a prohibited export subsidy when the measure in question is taken 'to avoid the double taxation of foreign-source income'.(555) In such a situation, the burden of proving that a measure is justified by falling within the scope of the fifth sentence of footnote 59 rests upon the responding party."(556) (d) Relationship with other Articles 414. With respect to the relationship between footnote 59 and Article 3.1(a), see paragraphs 115 and 117 above. 415. In Canada - Aircraft Credits and Guarantees, the Panel concluded that in its view, "item (j) sets out the circumstances in which the grant of loan guarantees is per se deemed to be an export subsidy ... Item (j) certainly does not provide ... that all loan guarantees are per se prohibited by item (j)."(557) (a) First paragraph of item (k) - "material advantage" clause 416. In both Brazil - Aircraft and Brazil - Aircraft (Article 21.5 - Canada), Brazil asserted that the first paragraph of item (k) could be interpreted in an a contrario manner, so as to establish that subsidies constituting "payments", "of all or part of the costs incurred by exporters or financial institutions in obtaining credits", but which were not "used to secure a material advantage in the field of export credit terms", would not be prohibited export subsidies within the meaning of Article 3.1(a). The Appellate Body on Brazil - Aircraft did not follow the Panel's findings to the extent that it did not make an explicit finding on whether or not it was permissible to use item (k) in an a contrario manner. Rather, the Appellate Body found that Brazil had not met its burden of proof of showing that the PROEX payments were not used to secure a material advantage in the field of export credit terms. In Brazil - Aircraft (Article 21.5 - Canada), the Appellate Body made the same finding about the revised PROEX programme. In this report, however, the Appellate Body made an additional statement: "If Brazil had demonstrated that the payments made under the revised PROEX were not 'used to secure a material advantage in the field of export credit terms', and that such payments were 'payments' by Brazil of 'all or part of the costs incurred by exporters or financial institutions in obtaining credits', then we would have been prepared to find that the payments made under the revised PROEX are justified under item (k) of the Illustrative List. However, Brazil has not demonstrated that those conditions of item (k) are met in this case. In making this observation, we wish to emphasize that we are not interpreting footnote 5 of the SCM Agreement, and we do not opine on the scope of footnote 5, or on the meaning of any other items in the Illustrative List.
However, we do not believe it is necessary for us to rule on these general questions in order to resolve this dispute. We, therefore, hold that the Article 21.5 Panel's finding that 'the first paragraph of item (k) cannot be used to establish that a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) is 'permitted' is moot, and, thus, is of no legal effect."(558) (ii) "payments of all or part of the costs incurred by exporters or financial institutions in obtaining credits" 417. In interpreting the phrase "payments of all or part of the costs incurred by exporters or financial institutions in obtaining credits", the Panel on Brazil - Aircraft (Article 21.5 - Canada) started with the ordinary meaning of the terms and opined that "the word 'credits' refers to 'export credits' as used earlier in the paragraph. Next, it also found that the costs involved must relate to obtaining export credits, not to providing them."(559) Finally, the Panel rejected an argument by Brazil that cost incurred by a financial institution in raising capital could be equated with the cost of "obtaining" export credits."(560) The Appellate Body on Brazil - Aircraft (Article 21.5 - Canada) did not believe that it was necessary to examine this issue (the Appellate Body had found that Brazil had not proven that the PROEX interest equalization payments were not used to secure a material advantage) and therefore did not address the Panel's findings. The Appellate Body stated that "[t]hese findings of the Article 21.5 Panel are moot, and, thus, of no legal effect."(561) The Panel on Brazil - Aircraft (Article 21.5 - Canada II) reached the same conclusion as the Panel on Brazil - Aircraft (Article 21.5 - Canada) on this matter.(562) 418. With respect to the term "export credit practice" under the second paragraph of item (k), see paragraph 433 below. (iii) "used to secure a material advantage" General 419. The Panel on Brazil - Aircraft opined that a payment is used to "secure a material advantage in the field of export credit terms" when it provides the recipient with export credits on terms which are more favourable than those available in the absence of such payments, i.e. on the "marketplace". The Panel considered it "evident that PROEX payments result in the availability of export credit for Brazilian regional aircraft on terms which are more favourable than the terms that would otherwise be available with respect to the transaction in question."(563) In this context, the Panel on Brazil - Aircraft also recalled a statement by Brazil to the effect that PROEX would presumably always be more favourable to the purchaser than the terms it could obtain on its own.(564) However, the Appellate Body in Brazil - Aircraft rejected this interpretation by the Panel of the phrase "used to secure a material advantage". "material" 420. More specifically, the Appellate Body in Brazil - Aircraft criticized the Panel for not adequately considering the term "material" and disagreed with equating the term "material advantage" under item (k) of the Illustrative List to the term "benefit" under Article 1.1(b): "We agree with the Panel's statement that the ordinary meaning of the word 'advantage' is 'a more favorable or improved position' or a 'superior position'. However, we note that item (k) does not refer simply to 'advantage'. The word 'advantage' is qualified by the adjective 'material'. As mentioned before, in its ultimate interpretation of the phrase 'used to secure a material advantage' which the Panel finally adopted and applied to the export subsidies for regional aircraft under PROEX, the Panel read the word 'material' out of item (k). This, we consider to be an error. ... We note that the Panel adopted an interpretation of the 'material advantage' clause in item (k) of the Illustrative List that is, in effect, the same as the interpretation of the term 'benefit' in Article 1.1(b) ... . If the 'material advantage' clause in item (k) is to have any meaning, it must mean something different from 'benefit' in Article 1.1(b). It will be recalled that for any payment to be a 'subsidy' within the meaning of Article 1.1, that payment must consist of both a 'financial contribution' and a 'benefit'. The first paragraph of item (k) describes a type of subsidy that is deemed to be a prohibited export subsidy. Obviously, when a payment by a government constitutes a 'financial contribution' and confers a 'benefit', it is, a 'subsidy' under Article 1.1. Thus, the phrase in item (k), 'in so far as they are used to secure a material advantage', would have no meaning if it were simply to be equated with the term 'benefit' in the definition of 'subsidy'. As a matter of treaty interpretation, this cannot be so. Therefore, we consider it an error to interpret the 'material advantage' clause in item (k) of the Illustrative List as meaning the same as the term 'benefit' in Article 1.1(b) of the SCM Agreement."(565) Commercial Interest Reference Rate (CIRR) as market benchmark 421. Rather than considering the terms of export credits available to a purchaser in the absence of the PROEX interest equalization payments, the Appellate Body in Brazil - Aircraft held that the determination of whether a payment is "used to secure a material advantage" implies a comparison between the export credit terms available under the measure at issue and some other "market benchmark". The Appellate Body further viewed the second paragraph of item (k) as "useful context for interpreting the 'material advantage' clause in the text of the first paragraph".(566) In this respect, the Appellate Body stated that the Commercial Interest Reference Rate (the "CIRR"), defined in the Arrangement on Guidelines for Officially Supported Export Credits (the "OECD Arrangement"), could be "appropriately viewed as ... a market benchmark" for assessing whether a payment "is used to secure a material advantage".(567) 422. The Appellate Body on Brazil - Aircraft (Article 21.5 - Canada) agreed with the Panel that a Member may under the first paragraph of item (k), as interpreted by the Appellate Body, establish that a payment is not used to secure a material advantage in the field of export credit terms, even if it resulted in a below-CIRR interest rate.(568) The Appellate Body then set forth the manner in which Brazil could prove that the PROEX interest equalization payments did not secure a material advantage to Brazilian exporters: "To establish that subsidies under the revised PROEX are not 'used to secure a material advantage in the field of export credit terms', Brazil must prove either: that the net interest rates under the revised PROEX are at or above the relevant CIRR, the specific 'market benchmark' we identified in the original dispute as an 'appropriate' basis for comparison; or, that an alternative 'market benchmark', other than the CIRR, is appropriate, and that the net interest rates under the revised PROEX are at or above this alternative 'market benchmark'.
... Brazil contends ... that the revised PROEX is not 'used to secure a material advantage in the field of export credit terms' within the meaning of the first paragraph of item (k) of the Illustrative List.
To prove this argument, Brazil must establish both of two elements: first, Brazil must prove that it has identified an appropriate 'market benchmark'; and, second, Brazil must prove that the net interest rates under the revised PROEX are at or above that benchmark."(569) 423. The Panel on Brazil - Aircraft (Article 21.5 - Canada II), first interpreted the "material advantage" clause by referring to the Appellate Body report in Brazil - Aircraft (Article 21.5 - Canada) (see paragraph 422 above) The Panel concluded that if Brazil wanted to establish that the programme's payments were not used to secure a "material advantage," by reference to the CIRR, Brazil must show that export credits supported by PROEX III respect the CIRR and the applicable rules of the OECD Arrangement which relate to the application of the CIRR.(570) The Panel further held: "It could be argued that this interpretation of the 'material advantage' clause in effect re-creates in the first paragraph of item (k) the standard already provided for in the second paragraph of item (k), at least insofar as the interest rate benchmark used under the first paragraph of item (k) is the CIRR.(571) However, this is an unavoidable implication of the Appellate Body's adoption of the CIRR as an appropriate benchmark for determining the existence of a material advantage. ... To the extent that the first paragraph of item (k) could be used a contrario to establish that a payment that is not used to secure a material advantage is not prohibited - an issue addressed below - we would, in other words, not only have re-created a safe haven in the first paragraph, but, in fact, would have deprived the second paragraph of all useful effect with respect to the export credit practices at issue in the first paragraph."(572) 424. The Panel on Brazil - Aircraft (Article 21.5 - Canada II) found that given the nature of the CIRR as a constructed interest rate, a Member may also attempt to demonstrate that a rate below the CIRR would, at a particular point in time, constitute a more appropriate benchmark.(573) In Brazil - Aircraft (Article 21.5 - Canada II), the Panel further indicated that "to establish that PROEX III is not used to secure a material advantage in the field of export credit terms, Brazil must either: (i) demonstrate conformity with the relevant CIRR as well as with all those rules of the 1998 OECD Arrangement which operate to support or reinforce the CIRR; or (ii) identify an appropriate 'market benchmark', other than the CIRR, and establish that net interest rates resulting from PROEX III support are at or above that alternative 'market benchmark'".(574) (b) First paragraph of item (k) as an affirmative defence 425. The Panel on Brazil - Aircraft (Article 21.5 - Canada II) incorporated by reference its reasoning in Brazil - Aircraft (Article 21.5 - Canada) into its analysis and remained of the view that the relationship between the Illustrative List and Article 3.1(a) is governed by footnote 5 to the SCM Agreement, and that the first paragraph of item (k) does not "refer to" any measures as "not constituting export subsidies" within the meaning of the footnote as an affirmative defence. On this basis, the Panel concluded that the first paragraph of item (k) cannot, as a legal matter, provide an affirmative defence to a violation of Article 3.1(a).(575) As regards the use of the second paragraph see paragraph 445 below . (c) Second paragraph of item (k) - "the safe haven" 426. The Panel on Canada - Aircraft (Article 21.5 - Brazil) set forth the propositions that a Member would need to prove in order to qualify, with respect to specific individual transactions, for the "safe haven" provided under the second paragraph of item (k): "[F]irst, it would need to be determined that the transaction was in the form of either direct credits/financing, refinancing or interest rate support with repayment terms of at least two years, at fixed interest rates, and therefore was subject to the Arrangement generally and to the CIRRs (or a sector-specific minimum interest rate, if applicable) specifically. Second, it would need to be determined whether the interest rate was at or above the CIRR (or the applicable sector-specific rate). Third, it would need to be determined which of the other provisions of the Arrangement that operate to reinforce the minimum interest rate rule applied to that particular transaction (a determination that would need to be made on a case-by-case, transaction-specific basis). Fourth, the details of the transaction would need to be examined to determine whether or not it respected all such additional provisions, and did not involve any derogations or matching of derogations."(576) (d) "in the field of export credit terms" 427. With respect to the phrase "in the field of export credit terms", the Panel on Brazil - Aircraft held that in its ordinary meaning, that phrase would refer to "items directly related to export credits, such as interest rates, grace periods, transaction costs, maturities and the like."(577) Furthermore, the Panel opined that that the term "field of export credit terms" did not encompass the price at which a product is sold."(578) Although the Appellate Body in Brazil - Aircraft made no specific reference to this statement by the Panel, it rejected the Panel's interpretation of the phrase "used to secure a material advantage"(579) which was made in the same context as the above statements on the term "in the field of export credit terms".(580) (e) "international undertaking on official export credits" 428. In Canada - Aircraft (Article 21.5 - Brazil), Canada claimed that as part of the revision of its subsidies programmes following the Appellate Body Report on Canada - Aircraft, it had implement a new policy guideline for its Canada Account financing under which "any financing which does not comply with the OECD Arrangement would not be in the national interest". Canada argued that compliance with the OECD Arrangement meant that such financing would not be a prohibited export subsidy, according to the second paragraph of item (k). Although the Panel - whose report was not appealed - ultimately found against Canada, it did agree that the OECD Arrangement was an "international undertaking on official export credits" within the meaning of item (k): "[I]t is well accepted that the OECD Arrangement is an 'international undertaking on official export credits' in the sense of the second paragraph of item (k). Moreover, in practice the OECD Arrangement is at present the only international undertaking that fits this description. Thus, we understand the essence of the second paragraph of item (k) at least at present to be that 'an export credit practice' which is in 'conformity' with 'the interest rates provisions' of the OECD Arrangement 'shall not be considered an export subsidy prohibited by' the SCM Agreement".(581) 429. In Brazil - Aircraft (Article 21.5 - Canada II), the Panel had to decide which was the "successor undertaking" to the 1979 OECD Arrangement, i.e. the 1992 or 1998 version. The Panel started by interpreting the terms of "has been adopted" and concluded that it referred to the present of the addressees of the SCM Agreement rather than to an act of adoption prior to the entry into force of the SCM Agreement: "The parties differ, however, regarding whether the relevant "successor undertaking" is the 1992 version of the OECD Arrangement or the 1998 version. ... In interpreting the phrase 'a successor undertaking which has been adopted [...]', we focus first on the language 'has been adopted'. Brazil attaches great importance to the fact that that language is in the present perfect tense. The present perfect tense, Brazil maintains, refers to a time regarded as present. We agree. Brazil goes on to argue, however, that the relevant present is the time when the SCM Agreement entered into force. From this Brazil concludes that only those successor undertakings which had been adopted before the entry into force of the SCM Agreement are, textually, within the scope of the second paragraph of item (k). We are not persuaded by that view.
It should be noted, moreover, that, on our interpretation, the language 'has been adopted' retains meaning and effect. Thus, the use of the present perfect tense tells Members that any time they seek to determine the relevant successor undertaking, they should consider only those successor undertakings which, at that time, have been adopted by the relevant OECD Members. In other words, Members are not allowed to rely on, nor are they bound by the relevant provisions of a successor undertaking which has not yet been formally accepted by the relevant OECD Members. A successor undertaking which is merely being proposed for adoption or which exists only in draft form could not, therefore, constitute a successor undertaking which 'has been adopted'.
On the basis of the foregoing considerations, we find that the phrase 'has been adopted' is properly read as referring to the present of its addressees rather than as referring to an act of adoption prior to the entry into force of the SCM Agreement, i.e. prior to 1 January 1995."(582) 430. In Brazil - Aircraft (Article 21.5 - Canada II), the Panel continued its analysis by interpreting the terms "successor undertaking" and concluded that the relevant successor undertaking was the most recent one, provided that it had been adopted. The Panel then found that the most recent adopted successor undertaking was the 1998 OECD Arrangement: "Turning next to the term 'successor undertaking', we note that, in its ordinary meaning, this term refers to an undertaking which 'succeeds [i.e. follows] another in [...] function'.(583) There can be no question, in our view, that both the 1992 and the 1998 version of the OECD Arrangement constitute 'successor' undertakings to the OECD Arrangement in effect in 1979.(584) It should be pointed out, in this regard, that the 1998 OECD Arrangement is the latest adopted version of the OECD Arrangement and, as such, is currently in effect, whereas the 1992 OECD Arrangement is no longer in effect. This raises the question of which successor undertaking is the relevant successor undertaking if there is more than one. The text of the second paragraph of item (k) does not explicitly answer that question.(585)
We consider that the relevant successor undertaking is the most recent successor undertaking which has been adopted. It would not, in our view, have been rational for the drafters to consider, without specifying so, that, say, the fifth successor undertaking should be the relevant one. Indeed, the fact that the drafters used the simple and unqualified term "a successor undertaking" strongly suggests to us that they intended to incorporate, and thus give effect to, the relevant provisions of all adopted successor undertakings. This, however, would not logically be possible, unless effect is given also to the changes introduced by the most recent successor undertaking. On that basis, we find that, in the absence of other textual directives, the most recent successor undertaking is the relevant benchmark undertaking for purposes of the second paragraph of item (k), subject to the one condition that it must have been adopted. ... In view of the foregoing, we conclude that the 'successor undertaking' at issue in the second paragraph of item (k) is the most recent successor undertaking which has been adopted prior to the time that the second paragraph is considered. For purposes of these proceedings, we conclude that the most recent successor undertaking which has been adopted is the 1998 OECD Arrangement.(586)"(587) 431. Considering that "in practice eligibility for item (k)'s safe haven from the prohibition on export subsidies is defined entirely in terms of the OECD Arrangement, at least for the time being"(588), the Panel on Canada - Aircraft (Article 21.5 - Brazil) stated the following: "We take note of the reference to 'a successor undertaking' in the second paragraph of item (k). In this regard, first, it is clear from this reference that to the extent that the [OECD] Arrangement today is the only undertaking of the kind referred to in the second paragraph of item (k), if in the future a 'successor undertaking' were to take effect, export credit practices conforming with the interest rate provisions of that undertaking also would be eligible for the safe haven in that paragraph. Thus, our detailed analysis of the Arrangement in its present form is not in any way intended to exclude this possibility. Second, for purposes of our analysis of the Arrangement, we assume that the Sector Understandings on Export Credits for Ships, for Nuclear Power Plant, and for Civil Aircraft, contained in Annexes I-III of the Arrangement, form an integral part of the Arrangement itself. Even if in the strict sense this were not the case (an issue that we do not here decide), in our view these Sector Understandings at a minimum would constitute 'successor undertakings' in the sense of the second paragraph of item (k), as the Arrangement as originally implemented in 1979 did not contain these Annexes. ... The Sector Understandings were negotiated and implemented later, and incorporate by reference provisions of the Arrangement. Thus, if they are not formally integral to the Arrangement, there is no doubt that these Understandings at a minimum constitute successor undertakings, and thus, conformity with the 'interest rates provisions' of the Understandings would qualify an export credit practice for the safe haven in the second paragraph of item (k)."(589) 432. As regards the discussion on whether the relevant successor undertaking to the 1979 OECD Arrangement was the 1992 or 1998 version, see paragraphs 429-430 above. 433. In the context of Canada's defence under the second paragraph of item (k), the Panel on Canada - Aircraft (Article 21.5 - Brazil) considered that the phrase "export credit practice", must, in its ordinary meaning, be a relatively broad term.(590) The Panel, whose report was not appealed, continued: "[T]his term on its own suggests any practices that might be associated in some way with export credits (i.e., export financing). This certainly would involve export credits as such, but presumably other sorts of practices as well. The first paragraph of item (k) provides useful context in this regard. In particular, we note that the first paragraph refers exclusively to 'export credits' and 'credits', in contrast to the second paragraph's reference to 'export credit practices'. This supports the conclusion that the second paragraph of item (k) concerns a broader range of 'practices' than export credits as such."(591) 434. Following an analysis of the provisions of the OECD Arrangement, the Panel on Canada - Aircraft (Article 21.5 - Brazil) concluded that at the time of the dispute, only export credit practices in certain forms qualified for the "safe haven" under the second paragraph of item (k). Specifically, the Panel held that practices involving floating interest rates or support for export credits with shorter maturity were not eligible for this exception: "[T]he safe haven in the second paragraph of item (k) at present is potentially available only to export credit practices in the form of direct credits/financing, refinancing, and interest rate support at fixed interest rates with repayment terms of two years or more. In other words, any such practices involving floating interest rates, as well as official support for export credits with shorter maturity or in the forms of guarantees and insurance, because none are subject to the Arrangement's 'interest rates provisions', most especially the CIRR but also the sector-specific minimum interest rates in the Sector Understandings, would not be eligible for the safe haven, as it simply would not be possible to judge their 'conformity' with the relevant interest rate provisions of the Arrangement, all of which pertain exclusively to fixed rates."(592) 435. The Panel on Brazil - Aircraft (Article 21.5 - Canada II) held that based on "a reading which gives meaning to all of the terms used, the second paragraph suggests that export credit practices which are in conformity with the interest rates provisions of the relevant international undertaking are export subsidies - and, as such, would normally be prohibited under the provisions of Article 3 of the SCM Agreement -, but that they are nevertheless not prohibited under the SCM Agreement."(593) 436. The Panel on Brazil - Aircraft (Article 21.5 - Canada II), in a finding upheld by the Appellate Body, considered that if "the second paragraph of item (k) makes available an exception, it must be possible to invoke it as an affirmative defence to a claim of violation.(594)"(595) See also paragraph 445 below. (i) "in conformity" with "interest rates provisions" (i) "interest rate provisions" 437. In Brazil - Aircraft (Article 21.5 - Canada II), the Panel recalled that the only export credit practices that are subject to the OECD Arrangement are those which take the form of "official financing support," i.e., "direct credits/financing, refinancing and interest rate support." Therefore, the Panel considered whether PROEX III payments are "official financing support." In this regard, the Panel noted that the OECD Arrangement does not define the term "interest rate support," but merely states that "interest rate support" is a form of official financing support. It concluded that official interest rate support will normally involve government payments to providers of export credits, and that for such payments to amount to "support," they need to be made with the "aim or effect of securing net borrowing rates for the recipients of export credits which are below those that they would have been without an official financing support: "The Panel notes that the 1998 OECD Arrangement does not define the term 'interest rate support'. It merely states that 'interest rate support' is a form of official financing support. Since the 1998 OECD Arrangement does not give a special meaning to the term 'interest rate support', we must read it in accordance with its ordinary meaning in context.
We consider that, in its ordinary meaning, the term 'interest rate support' relates broadly to official support for one particular export credit term, namely the interest rate to be paid in connection with export credits. Moreover, as a matter of relevant context, it is clear from the 1998 OECD Arrangement that interest rate support is distinct from direct credits/financing, refinancing, export credit insurance and guarantees. From this it may be deduced that official interest rate support will normally involve government payments to providers of export credits. For such payments to amount to "support", we think they need to be made with the aim or effect of securing net borrowing rates for the recipients of export credits which are lower than they would have been in the absence of official financing support."(596) 438. The Panel on Brazil - Aircraft (Article 21.5 - Canada II), followed the interpretation of the Panel on Canada - Aircraft (Article 21.5 - Brazil) (see paragraph 439 below) and concluded that certain provisions of the OECD Arrangement explicitly pertain to interest rates as such. The Panel observed that the programme under consideration provided, inter alia, support for interest rates ("financing costs"), involved payments by the Brazilian Government to commercial providers of export credits, and was framed to lower the net interest rates charged by commercial lenders so that they were compatible with the interest rates in the international market. The Panel concluded that the programme support constituted "interest rate support," and was therefore an export credit practice subject to the interest rates provisions of the OECD Arrangement.(597) General 439. With respect to conformity with the interest rate provisions of export credit practices under the OECD Arrangement, the Panel on Canada - Aircraft (Article 21.5 - Brazil) concluded that "full conformity with the 'interest rates provisions' - in respect of 'export credit practices' subject to the CIRR - must be judged on the basis not only of full conformity with the CIRR but in addition full adherence to the other rules of the [OECD] Arrangement that operate to support or reinforce the minimum interest rate rule by limiting the generosity of the terms of official financing support."(598) (599) "Concept of conformity" under the OECD Arrangement 440. The Panel on Canada - Aircraft (Article 21.5 - Brazil) considered that the text of the OECD Arrangement provides the following guidance on how the term "conformity" should be understood: "In the first place, the Arrangement text provides explicitly that derogations from provisions of the Arrangement, and the matching of such derogations, do not 'conform' with the provisions of the Arrangement. Thus, any transaction that involves derogations or matching of derogations by definition cannot be in conformity with the interest rate provisions of the Arrangement, as ... conformity with the interest rate provisions requires conformity not just with the minimum interest rate rule but also with the other provisions that support/reinforce that rule. As such, an otherwise eligible transaction involving derogations or matching of derogations could not qualify for the safe haven of the second paragraph of item (k). On the other hand, the Arrangement explicitly defines permitted exceptions and the matching of permitted exceptions, within the allowed limits, to be in compliance, i.e., in conformity with the relevant provisions of the Arrangement. Therefore, ... making use of permitted exceptions, within the specified limits, would not disqualify an eligible transaction from the safe haven, so long as the transaction conformed with the minimum interest rate and all of the other applicable disciplines."(600) 441. The Panel on Canada - Aircraft (Article 21.5 - Brazil) found that the Canadian Policy Guideline did not qualify for the "safe haven" under the second paragraph of item (k) of the Illustrative List. The Panel first held that it was "incumbent upon Canada to provide an explanation not only of what in its view constituted conformity with the interest rate provisions of the OECD Arrangement, but also how the Policy Guideline ensured such conformity."(601) The Panel then turned to the Policy Guideline and found: "[E]ven if the Po |
