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XXXIV. Annex I back to top
A. Text of Annex I
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(60) 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(60) 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.
B. Interpretation and Application of Annex I
1. Items (c), (d), (j) and (k)
(a) “Provided or mandated by governments”
601.
The Appellate Body in 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.”(909)
2. Item (d)
602.
The Panel in 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”.(910) 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.”(911)
3. Items (e), (f), (g), (h) and
(i)
603.
Similarly to its finding with respect to item (d), the Panel in 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.(912) 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.”(913)
4. Footnote 59 of Item (e)
(a) Fifth Sentence: “double taxation of foreign source-income”
(i) Scope of application
604.
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.”(914)
(ii) Scope of discretion to avoid double taxation
605.
The Appellate Body in 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.”(915)
606.
The Appellate Body in 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.”(916)
(iii) Design, structure and architecture of double taxation to target
foreign source income
607.
The Appellate Body in 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.(917)
“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.”(918)
(b) “foreign-source income”
608.
The Appellate Body in 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.”(919)
609.
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.”(920)
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.(921) 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.(922)
…
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.”(923)
(i) Recourse to international tax law
610.
The Appellate Body in 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. 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.”(924)
(ii) Link between income of taxpayers and their activities in a
foreign State
611.
The Appellate Body in 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.(925) 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.”(926)
612.
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.”(927)
(c) Burden of proof
613.
The Appellate Body in 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.(928) 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’.(929) 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.”(930)
(d) Relationship with other Articles
614.
With respect to the relationship between footnote 59
and Article 3.1(a), see paragraphs 158 and
160 above.
5. Item (j)
(a) General
615.
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).”(931)
616.
In addressing the issue of whether premium rates under the
United States export credit guarantee programmes are inadequate to cover
long-term operating costs and losses to item (j), the Panel in US —
Upland Cotton elucidated the test for assessing whether or not a
particular export credit guarantee programme is consistent with item (j)
in the following way:
“In general terms, the test for determining whether an export
credit guarantee programme satisfies the terms of item (j)
is the net
cost to the government, as the service provider, of providing the
service under the export credit guarantee programmes. To discern this
overall cost to government, item (j) calls for an examination of whether
the premium rates of the export credit guarantee programme at issue are
inadequate to cover the long-term operating costs and losses of the
programmes. Beyond that, item (j) does not set forth, or require us to
use, any one particular methodological approach nor accounting
philosophy in conducting our examination. Nor are we required to
quantify precisely the amount by which costs and losses exceeded
premiums paid.”(932)
617.
In US — Upland Cotton (Article 21.5 — Brazil), the
Appellate Body made the following general remarks regarding the type of
analysis required under item (j):
“Thus, to the extent relevant data is available, an analysis under
item (j) will primarily involve a quantitative evaluation of the
financial performance of a programme. Such an analysis will focus on the
difference, if any, between the revenues derived from the premiums
charged under the programme and its long-term operating costs and
losses. An analysis under item (j) may examine both retrospective data
relating to a programme’s historical performance and projections of
its future performance. Evidence concerning a programme’s structure,
design, and operation may be relevant in situations where financial data
is not available. It may also serve as a supplementary means for
assessing the adequacy of premiums where relevant data are available.”(933)
(b) The definition of the terms
(i) “export credit guarantee … programmes”
618.
The Panel in US — Upland Cotton declined to read
caveats or conditions into the text of item (j), and rejected the
position of the United States that the nature of US export credit
guarantee programmes called for a cohort-specific examination by the
Panel under item (j):
“We see no explicit reference to the term “cohort” in the text
of item (j). Nor do we read any caveat or condition in the text of
item (j) which would require us to await the closure of any or all United
States export credit guarantee cohorts before being able to conduct an
objective assessment of the matter before us. Our task is not to
calculate with precision any difference between premiums and operating
costs and losses of certain cohorts on the basis of any specific
accounting methodology. Rather, our task is to evaluate whether the
premiums charged under the United States export credit guarantee
programmes are inadequate to cover long-term operating costs and losses.”(934)
(ii) “premiums”
619.
According to the Panel in US — Upland Cotton, the
ordinary meaning of “premium” is “an amount to be paid for a
contract of insurance”.(935)
(iii) “are inadequate to cover”
620.
The Panel in US — Upland Cotton determined that the
ordinary meaning of the phrase “are inadequate to cover” requires it
to examine “whether or not the premiums are insufficient to meet the
long-term operating costs and losses of the export credit guarantee
programmes”.(936) According to the Panel, this assessment does not
require it to quantify the precise amount of sufficiency or
insufficiency of the premiums.(937)
(iv) “long-term”
621.
In light of the ordinary meaning of the term “longterm” as
well as the arguments advanced and the evidence submitted by both Brazil
and the United States, the Panel in US — Upland Cotton understood
the term “long-term” in item (j) as it relates to the challenged US
export credit guarantee in the following manner:
“We understand the reference to “long-term” in
item (j) to
refer to a period of sufficient duration as to ensure an objective
examination which allows a thorough appraisal of the programme and which
avoids attributing overdue significance to any unique or atypical
experiences on a given day, month, trimester, half-year, year or other
specific time period. The reference to “long-term” guides us to
undertake an overall appraisal of the programme over a sufficiently long
period of time in order to gain a full appreciation of the functioning
of the programme and any relationship between premiums charged and
operating costs and losses.”(938)
(v) “operating costs and losses”
622.
After recalling the ordinary meaning of the words in the phrase
“operating costs and losses,” the Panel in US — Upland Cotton was
of the view that the immediate context of item (j)
does not necessarily
call for a single approach in evaluating the long-term “operating
costs and losses” under item (j):
“The context of item (j) indicates that the “operating costs and
losses” relate to export credit guarantee programmes. We recognize
that the terms “operating costs and losses” refer generally to an
economic, financial or accounting concept. Operating costs and losses in
that sense generally connote costs and losses in administering
programmes.(939) It is not at all clear to us that these terms in
item (j) have obtained a rigid or universally agreed definition. Even if such a
definition had arisen, we do not see any indication that it has been
included in item (j), or more broadly in the SCM Agreement, or in
any other covered agreement, as a common understanding among WTO
Members. Therefore, in our examination of the United States export
credit guarantee programmes at issue under item (j), we decline to adopt
one particular rigid definition of the terms “operating costs and
losses”, as those terms are used in item (j). Nor do we believe that
the meaning of operating costs and losses, as referred to in item
(j),
are necessarily to be determined purely by reference to the domestic
laws of the Member whose measures are subject to our examination, here,
the United States.”(940)
(c) Application of item (j)
623.
In its assessment of whether premiumrates under the United
States export credit guarantee programmes are inadequate to cover
long-term operating costs and losses to item (j), and in particular
whether there is a net loss to the US government in the administration
of the three challenged export credit guarantee programmes, the Panel in
US — Upland Cotton decided to first examine the past
performance of the programmes and secondly, to look at the programmes’
structure, operation and design.(941) As regards the past performance of
the programmes, the Panel found that the programmes are operated
at a net cost to the US government.(942) With respect to the structure,
design and operation of the programmes, the Panel was of the view that
the premiums are not geared toward ensuring adequacy to cover the
long-term operating costs and losses for the purposes of item
(j) in
light of the following three elements of the programmes: (1) there is a
statutory fee cap of 1 per cent of the amount of credit to be guaranteed
under two of the three programmes(943); (2) the premiums are not based on
risk with respect to country risk or the creditworthiness of the
borrower(944); and (3) additional evidence on record indicating that the
premiums are not the source of the income covering the long-term costs
and losses of the programmes.(945)
624.
In US — Upland Cotton, the Appellate Body upheld the
Panel’s findings that the US export credit guarantee programmes
constitute a per se export subsidy within the meaning of item (j)
of the Illustrative List of Export and that these programmes are export
subsidies for the purposes of Article 3.1 (a) of the SCM
Agreement,
inconsistent with Articles 3.1(a) and
3.2 of that agreement, on the
basis that the Panel had conducted a thorough financial analysis of the
United States’ export credit guarantee programs using three approaches
in determining that the premiums charged for such programmes are
inadequate to cover long-term operating costs and losses:
“In the light of the above, it is clear that the Panel undertook a
sufficiently detailed examination of the financial performance of the
United States’ export credit guarantee programs. Its analysis showed
that none of the methods proposed by the parties indicated that the
premiums charged under the United States’ export credit guarantee
programs are adequate to cover long-term costs and losses. In these
circumstances, we agree with the Panel that, in this particular case, it
was not necessary to choose a particular method nor determine the
precise amount by which long-term operating costs and losses exceeded
premiums. Although it did not provide a final figure for the long-term
operating costs and losses of the United States’ export credit
guarantee programs, as the United States suggests it should have, the
Panel found that the various methods put forward by the parties led to
the same conclusion, namely, that the premiums for the United States’
export credit guarantee programs are inadequate to cover the programs’
long-term operating costs and losses. The Panel’s decision not to
choose between methods or make a finding on the precise difference
between premiums and long-term costs and losses does not, in our view,
invalidate the Panel’s ultimate findings under Articles 3.1(a)
and 3.2
of the SCM Agreement.”(946)
625.
The Panel in US — Upland Cotton (Article 21.5 — Brazil) similarly
performed a quantitative analysis of the performance of the relevant US
programme, combined with an examination of the structure, design and
operation of that programme.(947) In the context of the quantitative
analysis, Brazil submitted evidence that the relevant premium rates were
lower than the minimum premium rates (“MPRs”) provided in the OECD
Arrangement on Officially Supported Export Credits (hereinafter
“the Arrangement”). The Panel found that the MPRs do not
directly apply in the context of item (j) because, unlike the second
paragraph of item (k), item (j)
does not refer to the Arrangement.(948)
That being said, the Panel concluded that the MPRs may, from an
evidentiary point of view, provide an indication of whether the relevant
fees were sufficient to cover the long-term operating costs and losses
of the programme.(949)
626.
The Appellate Body accepted the general approach adopted by the
Panel (including its treatment of the MPRs)(950), but found that the Panel’s
quantitative analysis “lacked evenhandedness”.(951) In particular, the
Appellate Body criticized the Panel’s treatment of evidence submitted
by the United States regarding re-estimates (i.e. revised projections)
of the performance of the programme. Whereas the Panel had relied more
on the initial estimates than the re-estimates, the Appellate Body found
that “[i]f anything, the re-estimates might be expected to be more
reliable because they reflect the historical performance of the
programme”.(952) In seeking to complete the Panel’s analysis of the
relevant evidence, the Appellate Body found that the quantitative
evidence could support two plausible, but conflicting, conclusions
regarding the performance of the programme. In such circumstances, the
Appellate Body considered whether “one of the two plausible outcomes
that emerge from the quantitative evidence [is] more likely than not”.(953)
The Appellate Body concluded that inter alia the evidence
regarding the structure, design and operation of the programme “provide[d]
a sufficient evidentiary basis for the conclusion that it is more likely
than not that the … programme operates at a loss.”(954)
6. Item (k)
(a) First paragraph of item (k) — “material advantage” clause
(i) General
627.
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 in Brazil — Aircraft did not follow the Panels’
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.’”(955)
(ii) “payments of all or part of the costs incurred by
exporters or financial institutions in obtaining credits”
628.
In interpreting the phrase “payments of all or part of the
costs incurred by exporters or financial institutions in obtaining
credits”, the Panel in 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.”(956)
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.(957) The Appellate Body in 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.”(958) The Panel in Brazil — Aircraft (Article 21.5 —
Canada II) reached the same conclusion as the Panel in Brazil —
Aircraft (Article 21.5 — Canada) on this matter.(959)
629.
With respect to the term “export credit practice” under the
second paragraph of item (k), see paragraph 644
below.
(iii) “used to secure a material advantage”
General
630.
The Panel in 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.”(960) In this context, the Panel in 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.(961) However, the Appellate Body in Brazil — Aircraft rejected
this interpretation by the Panel of the phrase “used to secure a
material advantage”.
“material”
631.
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.”(962)
Commercial Interest Reference Rate (CIRR) as market benchmark
632.
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”.(963) 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”.(964)
633.
The Appellate Body in 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.(965) 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.”(966)
634.
The Panel in 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 633 below) 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.(967) 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.(968) 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.”(969)
635.
The Panel in 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.(970) 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’.”(971)
(b) First paragraph of item (k) as an affirmative defence
636.
The Panel in 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).(972) As regards the
use of the second paragraph see paragraph 664
below.
(c) Second paragraph of item (k) — “the safe haven”
(i) General
637.
The Panel in 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.”(973)
(d) “in the field of export credit terms”
638.
With respect to the phrase “in the field of export credit
terms”, the Panel in 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.”(974) Furthermore, the Panel opined that
that the term “field of export credit terms did not encompass the
price at which a product is sold.”(975) 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”(976) which was made in the same context as
the above statements on the term “in the field of export credit terms”.(977)
(e) “international undertaking on official export credits”
639.
In Canada — Aircraft (Article 21.5 — Brazil), Canada
claimed that as part of the revision of its subsidies programmes
following the Appellate Body Report in Canada — Aircraft, it
had implemented 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 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.”(978)
(f) “a successor undertaking”
640.
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.”(979)
641.
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’.(980) 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.(981) 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.(982)
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.”(983),(984)
(g) OECD Arrangement
642.
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,”(985) the
Panel in 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).”(986)
643.
As regards the discussion on whether the relevant successor
undertaking to the 1979 OECD Arrangement was the 1992 or 1998 version,
see paragraphs 640–641 below.
(h) “export credit practice”
644.
In the context of Canada’s defence under the second paragraph
of item (k), the Panel in Canada — Aircraft (Article 21.5 —
Brazil) considered that the phrase “export credit practice”,
must, in its ordinary meaning, be a relatively broad term.(987) The Panel
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.”(988)
645.
Following an analysis of the provisions of the OECD Arrangement,
the Panel in 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.”(989)
646.
The Panel in 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.”(990)
647.
The Panel in 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.”(991),(992) See also
paragraph 656 below.
(i) “in conformity” with “interest rates provisions”
(i) “interest rate provisions”
648.
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.”(993)
649.
The Panel in Brazil — Aircraft (Article 21.5 — Canada II),
followed the interpretation of the Panel in Canada — Aircraft
(Article 21.5 — Brazil) (see paragraph 650 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.(994)
(ii) “in conformity”
General
650.
With respect to conformity with the interest rate provisions of
export credit practices under the OECD Arrangement, the Panel in 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.”(995)
(996)
“Concept of conformity” under the OECD Arrangement
651.
The Panel in 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.”(997)
652.
The Panel in 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.”(998) The Panel then
turned to the Policy Guideline and found:
“[E]ven if the Policy Guideline contained all of the details that
Canada has provided in its arguments concerning ‘conformity’ with
the ‘interest rates provisions’ of the Arrangement, we would
find on substantive grounds that it would not ensure that future Canada
Account transactions would so conform. We note, however, that in fact
the Policy Guideline contains no details at all, but simply indicates
that transactions that ‘do not comply’ with ‘the OECD Arrangement’
will not be considered to be in the national interest. Thus, we find
that the Policy Guideline is insufficient to accomplish what Canada says
it will accomplish, namely to ‘ensure that any future Canada Account
financing transactions will be in conformity with the interest rate
provisions of the [OECD] Arrangement and therefore the provisions
referred to in the second paragraph of item (k)’.
In particular, the Policy Guideline is both generally worded and
worded in the negative. In both of these aspects it seems to fall
considerably short of what might reasonably be considered the minimum
sufficient assurance which Canada wishes to provide. Concerning the
generality of the wording, as just noted, the Policy Guideline simply
refers to compliance with the OECD Arrangement. As has been
discussed in detail, however, general conformity with whichever
provisions of the Arrangement happen to apply to a given
transaction would not appear to be sufficient to qualify for the
relatively narrow safe haven in the second paragraph of item
(k).
Rather, only conformity with the Arrangement’s interest rate
provisions, which presupposes that those provisions apply (i.e.
that the practice in question is in the form of official financing
support at fixed interest rates), along with conformity with the Arrangement’s
other disciplines on financing terms, would qualify a practice for the
safe haven.”(999)
(j) Burden of proof
653.
The Appellate Body in Brazil — Aircraft (Article 21.5 —
Canada) found that “Brazil’s argument under item (k) constituted
an alleged ‘affirmative defence’ for which Brazil bore the burden of
proof.”(1000) Referring to its report on US — Wool Shirts and
Blouses, the Appellate Body confirmed that Brazil, as the party
asserting a defence, bore the burden of proof of proving that the
revised PROEX was justified under the first paragraph of item
(k).
(However, as noted in paragraph 627 above, the Appellate Body in Brazil
— Aircraft (Article 21.5 — Canada) did not make a finding on
whether the first paragraph of item (k) could in fact be used in an a
contrario manner as an affirmative defence.) The Appellate Body
then set forth in what manner Brazil could successfully prove that the
revised subsidies scheme was not “used to secure a material advantage
in the field of export credit terms”:
“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’.”(1001)
654.
The Panel in Canada — Aircraft (Article 21.5 — Brazil) did
not state explicitly that Canada bore the burden of proving that its
measure qualified for the “safe haven” clause under the second
paragraph of item (k) of the Illustrative List. However, the Panel
termed Canada’s invocation of the second paragraph of item (k) a “defense
to Brazil’s claim.”(1002)
655.
The Panel in Brazil — Aircraft (Article 21.5 — Canada II)
concluded that, while the programme as such allows the Member to
make payments in such a way that they do not secure a material advantage
in the field of export credit terms, payments under the programme are
not the payment by the Member of “all or part of the costs incurred by
exporters or financial institutions in obtaining credits.” Therefore,
the Panel considered that the Member failed to demonstrate the required
elements for its defence under the first paragraph of item
(k):
“[W]hile PROEX III, as such, allows Brazil to make PROEX III
payments in such a way that they do not secure a material advantage in
the field of export credit terms, PROEX III payments are not the payment
by Brazil of ‘all or part of the costs incurred by exporters or
financial institutions in obtaining credits’. Brazil has, therefore,
failed to demonstrate the required elements for its defence under the first paragraph of item
(k). We have further concluded that, in any
event, the first paragraph of item (k) cannot, as a legal matter, be
invoked as an affirmative defence.”(1003)
(i) Second paragraph of item (k) as an affirmative defence
656.
In Brazil — Aircraft (Article 21.5 — Canada II), the
Panel noted that the second paragraph of item (k) provides for an “exception”
from any prohibition on export subsidies, such that it may be invoked as
an affirmative defence to a claim of violation:
“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.
This interpretation leads us to the conclusion that the
second
paragraph of item (k) provides for an exception from any prohibition on
export subsidies laid down elsewhere in the SCM Agreement. The
fact that the second paragraph does not, itself, impose obligations supports
that conclusion.
Consistently with our view that 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. As is clear from relevant
WTO jurisprudence, the burden of establishing an affirmative defence
rests with the party raising it.”(1004),(1005)
(ii) “Matching of a derogation”
General
657.
The Panel in Canada — Aircraft (Article 21.5 — Brazil) considered
that:
“Member’s conformity with GATT/WTO rules [should not be] defined
by the behaviour of non-Members, the Panel considered that this concern
would arise even if the inclusion of the matching of a derogation in the
item (k) safe haven would mean that matching Members were acting in
accordance with their WTO obligations. This is because the inclusion of
the matching of a derogation in the
item (k) safe haven would not
establish any objective benchmark against which to determine whether or
not a Member is in accordance with its WTO obligations. In any given
case, the benchmark would be set by reference to the terms and
conditions of the non-conforming offer. To the extent that the
non-conforming offer were made by a non-WTO Member, the benchmark for
determining whether or not a matching Member acts in accordance with its
WTO obligations would therefore be the non-conforming terms and
conditions offered by the non-Member. Thus, the fact that the matching
of a derogation is included in the second paragraph of
item (k) would
not remove the potential for a “Member’s conformity with GATT/WTO
rules [to be] defined by the behaviour of non-Members”.(1006)
658.
The Panel in Canada — Aircraft Credits and Guarantees concluded
that, as a matter of law, the matching of a derogation is not “in
conformity with” the interest rates provisions of the OECD Arrangement
and therefore cannot fall within the scope of the item (k) safe haven.(1007) The Panel held:
“Indeed, if one were to accept that the matching of a derogation
could fall within the item (k) safe haven, one would effectively be
accepting that a Member could be ‘in conformity with’ the ‘interest
rates provisions’ of the OECD Arrangement even though that
Member failed to respect the CIRR (or a permitted exception). In our
view, such an interpretation would be unjustified.”(1008)
659.
For the Panel in Canada — Aircraft Credits and Guarantees,
the fact that the OECD Arrangement allows matching of derogations, or
the fact that participants’ view matching of derogations as a
means of disciplining export credits, does not necessarily mean that the
SCM Agreement should allow matching of derogations. The Panel considered
that unlike the OECD Arrangement, the SCM Agreement is not an “informal”
“gentleman’s agreement”. The SCM Agreement therefore does not need
to allow recourse to the matching of derogations in order to instil
discipline. The SCM Agreement is a binding instrument, and is therefore
enforceable through the WTO dispute settlement mechanism.(1009)
660.
The Panel in Brazil — Aircraft (Article 21.5 — Canada II)
recalled that practices that follow “permitted exceptions” under
the OECD Arrangement are “in conformity” with the interest rates
provisions, whereas practices pursuant to “derogations” are not. The
Panel in Brazil — Aircraft (Article 21.5 — Canada II), stated
that “to accept, for purposes of the SCM Agreement, that even
non-conforming departures from the provisions of the OECD Arrangement
were covered by the safe haven, would, in effect, remove any
disciplines on official financing support for export credits.” For the
Panel:
“[T]he fact that the OECD Arrangement allows matching of
derogations does not logically imply that it should also be allowed
under the SCM Agreement. Indeed, the OECD Arrangement and
the SCM Agreement are very different … In those circumstances,
matching may serve an important deterrent and enforcement function and
that rationale for matching does not apply to the SCM Agreement because
the SCM Agreement is a binding instrument, and it is enforceable
through the WTO dispute settlement mechanism.”(1010)
Burden of proof in the framework of a derogation
661.
The Panel in Canada — Aircraft Credits and Guarantees considered
that the transaction under consideration could not be justified under
the safe haven and that consequently such financing is a prohibited
export subsidy, contrary to Article 3.1(a) of the SCM Agreement because
Canada has failed to establish that the matching of a derogation could,
as a matter of law, be “in conformity with” the “interest rates
provisions” of the OECD Arrangement.(1011) For the Panel, the burden is
on the Member affirming that the matching of a derogation from the OECD
Arrangement could, as a “matter of law”, be “in conformity with”
the “interest rates provisions” of the OECD Arrangement, pursuant to
the safe haven. Only if the Member demonstrates this, would the Panel
then examine whether it had, in fact, complied with the “matching”
requirement of the OECD Arrangement:
“In order to avail itself of the item (k) safe haven, Canada must
first establish that the matching of a derogation could, as a matter of
law, be ‘in conformity with’ the “interest rates provisions” of
the OECD Arrangement. Only if Canada establishes that this is
possible as a matter of law, will we need to consider whether Canada has
met its burden of establishing that the Canada Account financing to Air
Wisconsin is matching according to the provisions of the OECD
Arrangement. Similarly, only if Canada establishes that matching a
derogation could, as a matter of law, fall within the item (k) safe
haven, will we need to address Brazil’s arguments regarding Canada’s
alleged failure to comply with the procedural requirements of Articles
47(a) and 53 of the OECD Arrangement.”(1012)
(iii) Mandatory/discretionary distinction in the context of an affirmative
defence under item (k) second paragraph
662.
In Brazil — Aircraft (Article 21.5 — Canada II), the
Panel recalled that the programme had been challenged “as such,” and
that the mandatory/discretionary distinction was therefore relevant.
Accordingly, the Panel considered whether the Member was required to
apply the programme under consideration “in a manner that gives rise
to a prohibited export subsidy “In doing so, the Panel first dealt
with the preliminary issue of whether the distinction between mandatory
and discretionary legislation is applicable in the context of an
affirmative defence under the second paragraph of item
(k):(1013)
“[T]he distinction between mandatory and discretionary legislation
is applicable in the context of the second paragraph of item
(k). It is
of course correct that, in the present context, we are concerned not
with conformity with a WTO obligation, but with conformity with
conditions attached to a WTO exception. This fact alone does not,
however, render the GATT/WTO distinction between mandatory and
discretionary legislation inapplicable or inappropriate.
In our understanding, the rationale underpinning the traditional
GATT/WTO distinction between mandatory and discretionary legislation is
that, when the executive branch of a Member is not required to act
inconsistently with requirements of WTO law, it should be entitled to a
presumption of good faith compliance with those requirements. We
consider that that rationale is no less valid in the context of WTO
exceptions than it is in the context of WTO obligations.
We have stated above that the Member invoking an exception as an
affirmative defence has the burden of establishing it. In our view, the
allocation of the burden of proof is a procedural issue which is
distinct from the substantive standard to be applied in assessing the
conformity of legislation with a particular provision of the WTO
Agreement.
Accordingly, the task before us is to examine whether, under PROEX
III, Brazil is required to act in a manner that is not in
conformity with the interest rates provisions of the 1998 OECD
Arrangement or, expressed otherwise, whether PROEX III allows
compliance with the interest rates provisions.”(1014)
663.
In Canada — Aircraft Credits and Guarantees, the Panel
found that the fact that export credit agencies provide export subsidies
does not answer the question of mandatory subsidization and that
“the existence of item (k) does not eliminate the requirement for a
complaining party to prove the mandatory nature of the programme in
order to prevail on an “as such” claim.”(1015)
664.
As regards the relevance of the mandatory/discretionary
distinction when challenging subsidy programmes “as such”, see
paragraphs 71–81 above.
(k) Relationship with other Articles
665.
With respect to the relationship with Article
1.1(b), see
paragraph 94 above.
XXXV. Annex II back to top
A. Text of Annex II
Annex II: Guidelines on Consumption of Inputs in the Production
Process(61)
(footnote original)
61 Inputs consumed in the production
process are 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.
I
1. Indirect tax rebate schemes can allow for exemption, remission or
deferral of prior-stage cumulative indirect taxes levied on inputs that
are consumed in the production of the exported product (making normal
allowance for waste). Similarly, drawback schemes can allow for the
remission or drawback of import charges levied on inputs that are
consumed in the production of the exported product (making normal
allowance for waste).
2. The Illustrative List of Export Subsidies in
Annex I of this
Agreement makes reference to the term “inputs that are consumed in the
production of the exported product” in paragraphs (h) and
(i).
Pursuant to paragraph (h), indirect tax rebate schemes can constitute an
export subsidy to the extent that they result in exemption, remission or
deferral of prior-stage cumulative indirect taxes in excess of the
amount of such taxes actually levied on inputs that are consumed in the
production of the exported product. Pursuant to paragraph (i), drawback
schemes can constitute an export subsidy to the extent that they result
in a remission or drawback of import charges in excess of those actually
levied on inputs that are consumed in the production of the exported
product. Both paragraphs stipulate that normal allowance for waste must
be made in findings regarding consumption of inputs in the production of
the exported product. paragraph (i) also provides for substitution,
where appropriate.
II
In examining whether inputs are consumed in the production of the
exported product, as part of a countervailing duty investigation
pursuant to this Agreement, investigating authorities should proceed on
the following basis:
1.
Where it is alleged that an indirect tax rebate scheme, or a
drawback scheme, conveys a subsidy by reason of over-rebate or excess
drawback of indirect taxes or import charges on inputs consumed in the
production of the exported product, the investigating authorities should
first determine whether the government of the exporting Member has in
place and applies a system or procedure to confirm which inputs are
consumed in the production of the exported product and in what amounts.
Where such a system or procedure is determined to be applied, the
investigating authorities should then examine the system or procedure to
see whether it is reasonable, effective for the purpose intended, and
based on generally accepted commercial practices in the country of
export. The investigating authorities may deem it necessary to carry
out, in accordance with paragraph 6 of Article
12, certain practical
tests in order to verify information or to satisfy themselves that the
system or procedure is being effectively applied.
2. Where there is no such system or procedure, where it is not
reasonable, or where it is instituted and considered reasonable but is
found not to be applied or not to be applied effectively, a further
examination by the exporting Member based on the actual inputs involved
would need to be carried out in the context of determining whether an
excess payment occurred. If the investigating authorities deemed it
necessary, a further examination would be carried out in accordance with
paragraph 1.
3. Investigating authorities should treat inputs as physically
incorporated if such inputs are used in the production process and are
physically present in the product exported. The Members note that an
input need not be present in the final product in the same form in which
it entered the production process.
4. In determining the amount of a particular input that is consumed
in the production of the exported product, a “normal allowance for
waste” should be taken into account, and such waste should be treated
as consumed in the production of the exported product. The term “waste”
refers to that portion of a given input which does not serve an
independent function in the production process, is not consumed in the
production of the exported product (for reasons such as inefficiencies)
and is not recovered, used or sold by the same manufacturer.
5. The investigating authority’s determination of whether the
claimed allowance for waste is “normal” should take into account the
production process, the average experience of the industry in the
country of export, and other technical factors, as appropriate. The
investigating authority should bear in mind that an important question
is whether the authorities in the exporting Member have reasonably
calculated the amount of waste, when such an amount is intended to be
included in the tax or duty rebate or remission.
B. Interpretation and Application of Annex II
1. Footnote 61
666.
On 15 December 2000, the General Council adopted a decision that
mandates the SCM Committee to examine as an important part of its work
the issues of aggregate and generalized rates of remission of import
duties and the definition of “inputs consumed in the production
process”, taking into account the particular needs of developing
country Members.(1016)
667.
According to the SCM Committee Chairman’s Reports to the
General Council, reflecting the work undertaken pursuant to this mandate
in relation to the issues of aggregate and generalized rates of
remission of import duties, Members have engaged constructively with
proponents including through sharing information on various Members’
domestic duty drawback procedures. This said, for a number of Members,
the system proposed represented an unworkable framework, due to its
technical complexity as well as the general complexity of the issue of
duty drawback, and their concerns over the accuracy and transparency of
the proposed system.(1017)
668.
The said Reports indicate, in relation to the definition of
inputs consumed in the production process, that divergent views remained
and it is in SCM Chairman’s view that consensus could not be reached
in the Committee, not because of lack of political will but because of
an enormous amount of technical problems which could not be resolved in
that process.(1018)
XXXVI. Annex III back to top
A. Text of Annex III
Annex III: Guidelines in the Determination if Substitution Drawback
Systems as Export Subsidies
I
Drawback systems can allow for the refund or drawback of import
charges on inputs which are consumed in the production process of
another product and where the export of this latter product contains
domestic inputs having the same quality and characteristics as those
substituted for the imported inputs. Pursuant to paragraph
(i) of the
Illustrative List of Export Subsidies in Annex I, substitution drawback
systems can constitute an export subsidy to the extent that they result
in an excess drawback of the import charges levied initially on the
imported inputs for which drawback is being claimed.
II
In examining any substitution drawback system as part of a
countervailing duty investigation pursuant to this Agreement,
investigating authorities should proceed on the following basis:
1. Paragraph
(i) of the Illustrative List stipulates that home market
inputs may be substituted for imported inputs in the production of a
product for export provided such inputs are equal in quantity to, and
have the same quality and characteristics as, the imported inputs being
substituted. The existence of a verification system or procedure is
important because it enables the government of the exporting Member to
ensure and demonstrate that the quantity of inputs for which drawback is
claimed does not exceed the quantity of similar products exported, in
whatever form, and that there is not drawback of import charges in
excess of those originally levied on the imported inputs in question.
2.
Where it is alleged that a substitution drawback system conveys a
subsidy, the investigating authorities should first proceed to determine
whether the government of the exporting Member has in place and applies
a verification system or procedure. Where such a system or procedure is
determined to be applied, the investigating authorities should then
examine the verification procedures to see whether they are reasonable,
effective for the purpose intended, and based on generally accepted
commercial practices in the country of export. To the extent that the
procedures are determined to meet this test and are effectively applied,
no subsidy should be presumed to exist. It may be deemed necessary by
the investigating authorities to carry out, in accordance with paragraph
6 of Article 12, certain practical tests in order to verify information
or to satisfy themselves that the verification procedures are being
effectively applied.
3. Where there are no verification procedures, where they are not
reasonable, or where such procedures are instituted and considered
reasonable but are found not to be actually applied or not applied
effectively, there may be a subsidy. In such cases a further examination
by the exporting Member based on the actual transactions involved would
need to be carried out to determine whether an excess payment occurred.
If the investigating authorities deemed it necessary, a further
examination would be carried out in accordance with paragraph
2.
4. The existence of a substitution drawback provision under which
exporters are allowed to select particular import shipments on which
drawback is claimed should not of itself be considered to convey a
subsidy.
5. An excess drawback of import charges in the sense of
paragraph (i)
would be deemed to exist where governments paid interest on any monies
refunded under their drawback schemes, to the extent of the interest
actually paid or payable.
B. Interpretation and Application of Annex III
1. Relationship with other Articles
(a) Article 3.1(a)
669.
With respect to export subsidies of Article
3.1(a), see
paragraphs 125 above.
(b) Article 27.2(a)
670.
With respect to the exceptions for developing and
least-developed countries in Article
27.2(a), see paragraphs 527–534
above.
XXXVII. Annex IV
back to top
A. Text of Annex IV
Annex IV: Calculation of the Total AD Valorem
Subsidization (Paragraph 1(a) of Article 6)(62)
(footnote original)
62 In cases where the existence of
serious prejudice has to be demonstrated.
1. Any calculation of the amount of a subsidy for the purpose of
paragraph 1(a) of Article 6 shall be done in terms of the cost to the
granting government.
2. Except as provided in paragraphs 3 through
5, in determining
whether the overall rate of subsidization exceeds 5 per cent of the
value of the product, the value of the product shall be calculated as
the total value of the recipient firm’s(63) sales in the most recent
12-month period, for which sales data is available, preceding the period
in which the subsidy is granted.(64)
(footnote original)
63 The recipient firm is a firm in the
territory of the subsidizing Member.
(footnote original)
64 In the case of tax-related subsidies the
value of the product shall be calculated as the total value of the
recipient firm’s sales in the fiscal year in which the tax-related
measure was earned.
3. Where the subsidy is tied to the production or sale of a given
product, the value of the product shall be calculated as the total value
of the recipient firm’s sales of that product in the most recent
12-month period, for which sales data is available, preceding the period
in which the subsidy is granted.
4. Where the recipient firm is in a start-up situation, serious
prejudice shall be deemed to exist if the overall rate of subsidization
exceeds 15 per cent of the total funds invested. For purposes of this
paragraph, a startup period will not extend beyond the first year of
production.(65)
(footnote original)
65 Start-up situations include instances
where financial commitments for product development or construction of
facilities to manufacture products benefiting from the subsidy have been
made, even though production has not begun.
5. Where the recipient firm is located in an inflationary economy
country, the value of the product shall be calculated as the recipient
firm’s total sales (or sales of the relevant product, if the subsidy
is tied) in the preceding calendar year indexed by the rate of inflation
experienced in the 12 months preceding the month in which the subsidy is
to be given.
6. In determining the overall rate of subsidization in a given year,
subsidies given under different programmes and by different authorities
in the territory of a Member shall be aggregated.
7. Subsidies granted prior to the date of entry into force of the WTO
Agreement, the benefits of which are allocated to future production,
shall be included in the overall rate of subsidization.
8. Subsidies which are non-actionable under relevant provisions of
this Agreement shall not be included in the calculation of the amount of
a subsidy for the purpose of paragraph 1(a) of Article
6.
B. Interpretation and Application of Annex IV
1. Expiry
671.
Article 6.1(a) of the SCM
Agreement, which refers to Annex IV in
footnote 14, has lapsed pursuant to Article
31. See also information
under the Informal Group of Experts under Article 24 in
paragraph 512 above.
2. Relationship with other Articles
672.
With respect to the relationship with Article
1.1(b), see
paragraph 96 above.
XXXVIII. Annex V
back to top
A. Text of Annex V
Annex V: Procedures for Developing Information
Concerning Serious Prejudice
1. Every Member shall cooperate in the development of evidence to be
examined by a Panel in procedures under paragraphs 4 through
6 of
Article 7. The parties to the dispute and any third-country Member
concerned shall notify to the DSB, as soon as the provisions of
paragraph 4 of Article 7 have been invoked, the organization responsible
for administration of this provision within its territory and the
procedures to be used to comply with requests for information.
2. In cases where matters are referred to the DSB under
paragraph 4
of Article 7, the DSB shall, upon request, initiate the procedure to
obtain such information from the government of the subsidizing Member as
necessary to establish the existence and amount of subsidization, the
value of total sales of the subsidized firms, as well as information
necessary to analyse the adverse effects caused by the subsidized
product.(66) This process may include, where appropriate,
presentation of questions to the government of the subsidizing Member
and of the complaining Member to collect information, as well as to
clarify and obtain elaboration of information available to the parties
to a dispute through the notification procedures set forth in Part
VII.(67)
(footnote original)
66 In cases where the existence of
serious prejudice has to be demonstrated.
(footnote original)
67 The information-gathering process
by the DSB shall take into account the need to protect information which
is by nature confidential or which is provided on a confidential basis
by any Member involved in this process.
3. In the case of effects in third-country markets, a party to a
dispute may collect information, including through the use of questions
to the government of the third-country Member, necessary to analyse
adverse effects, which is not otherwise reasonably available from the
complaining Member or the subsidizing Member. This requirement should be
administered in such a way as not to impose an unreasonable burden on
the third-country Member. In particular, such a Member is not expected
to make a market or price analysis specially for that purpose. The
information to be supplied is that which is already available or can be
readily obtained by this Member (e.g. most recent statistics which have
already been gathered by relevant statistical services but which have
not yet been published, customs data concerning imports and declared
values of the products concerned, etc.). However, if a party to a
dispute undertakes a detailed market analysis at its own expense, the
task of the person or firm conducting such an analysis shall be
facilitated by the authorities of the third-country Member and such a
person or firm shall be given access to all information which is not
normally maintained confidential by the government.
4. The DSB shall designate a representative to serve the function of
facilitating the information-gathering process. The sole purpose of the
representative shall be to ensure the timely development of the
information necessary to facilitate expeditious subsequent multilateral
review of the dispute. In particular, the representative may suggest
ways to most efficiently solicit necessary information as well as
encourage the cooperation of the parties.
5. The information-gathering process outlined in
paragraphs 2 through
4 shall be completed within 60 days of the date on which the matter has
been referred to the DSB under paragraph 4 of Article
7. The information
obtained during this process shall be submitted to the panel established
by the DSB in accordance with the provisions of Part
X. This information
should include, inter alia, data concerning the amount of the
subsidy in question (and, where appropriate, the value of total sales of
the subsidized firms), prices of the subsidized product, prices of the
non-subsidized product, prices of other suppliers to the market, changes
in the supply of the subsidized product to the market in question and
changes in market shares. It should also include rebuttal evidence, as
well as such supplemental information as the panel deems relevant in the
course of reaching its conclusions.
6. If the subsidizing and/or third-country Member fail to cooperate
in the information-gathering process, the complaining Member will
present its case of serious prejudice, based on evidence available to
it, together with facts and circumstances of the non-cooperation of the
subsidizing and/or third-country Member. Where information is
unavailable due to non-cooperation by the subsidizing and/or
third-country Member, the panel may complete the record as necessary
relying on best information otherwise available.
7. In making its determination, the panel should draw adverse
inferences from instances of non-cooperation by any party involved in
the information-gathering process.
8. In making a determination to use either best information available
or adverse inferences, the panel shall consider the advice of the DSB
representative nominated under paragraph 4 as to the reasonableness of
any requests for information and the efforts made by parties to comply
with these requests in a cooperative and timely manner.
9. Nothing in the information-gathering process shall limit the
ability of the panel to seek such additional information it deems
essential to a proper resolution to the dispute, and which was not
adequately sought or developed during that process. However, ordinarily
the panel should not request additional information to complete the
record where the information would support a particular party’s
position and the absence of that information in the record is the result
of unreasonable non-cooperation by that party in the
information-gathering process.
B. Interpretation and Application of Annex V
1. General
673.
Annex V procedures have been requested in several panel
proceedings to date, and are referenced in the panel reports in Indonesia
— Autos,(1019) US — Upland Cotton,(1020) Korea —
Commercial Vessels,(1021) EC and certain member States — Large
Civil Aircraft,(1022) and US — Large Civil Aircraft
(2nd
complaint).(1023)
2. Use of information gathered under Annex V for prohibited subsidy
claims
674.
In Korea — Commercial Vessels, the Panel declined to
rule that the complainant was precluded from using information that was
gathered under Annex V (regarding serious prejudice) in respect of its
prohibited subsidy claims:
“We must now consider whether or not the EC was entitled to use
that information for the additional purpose of supporting its Part II
claims. In particular, the question is whether information properly
gathered under the Annex V mechanism regarding the existence of alleged
subsidization, which was properly relied on by the EC in support of its
Part III serious prejudice claims against certain alleged subsidies,
could also be used in the context of Part II claims concerning the same
alleged subsidies
In the context of the EC’s
Part III claims, we must determine
whether or not the relevant APRG and PSL transactions constitute
subsidies. In doing so, we are bound by the provisions of Article 1 of
the SCM Agreement. At paragraphs 170 and
172 of the EC’s first
written submission, the EC is requesting us to perform the same analysis
of subsidization 20 in respect of the same measures in the context of
its Part II claims. We see nothing in
Annex V that would require us to
ignore our Part III analysis of subsidization when reviewing the EC’s
Part II claims which concern allegations of the same subsidization in
respect of the same measures. Nor indeed do we see any requirement in
the SCM Agreement to perform this analysis more than once for any
given measure alleged to be a subsidy.
In any event, even if we were precluded from relying on the relevant
Annex V information when determining the existence of subsidization in
the context of the EC’s Part II claims, at the very least any finding
of the existence of subsidization in respect of the EC’s Part III
claims would compel us to “seek” that very same information (i.e.
regarding the same alleged subsidies) from Korea under Article 13.1 of
the DSU. In other words, the very same information would in any
event be brought before the Panel, but only much later in the
proceedings, after the Panel had made findings regarding the existence
of subsidization in respect of the EC’s Part III
claims. We recall
that there is no textual basis for requiring us to rule that the
relevant Annex V information is not directly admissible in respect of
the EC’s Part II claims. We therefore see no basis for ruling that the
relevant information should only enter the record indirectly, and much
later in the proceedings, via Article 13.1 of the DSU.
For the above reasons, we decline to rule that the EC was precluded
from using information that was properly gathered under the Annex V
mechanism regarding the existence of alleged subsidization, and properly
relied on by the EC in respect of its Part III serious prejudice claims
against certain alleged subsidies, in support of additional Part II
claims concerning the same alleged subsidies.”(1024)
3. Whether Annex V procedure initiated
675.
In US — Large Civil Aircraft (2nd complaint), the
disputing parties disagreed on whether an Annex V procedure had been
initiated. The Panel found that it had not:
“The Panel is unable to rule that an Annex V
procedure was
initiated in this dispute. Paragraph 2 of Annex V of the SCM Agreement
provides that, in cases where matters are referred to the DSB under
Article 7.4 of the SCM Agreement, and serious prejudice has to be
demonstrated, “the DSB shall, upon request, initiate the procedure”
envisaged in Annex V. In this case, the European Communities requested
that an Annex V information-gathering process be initiated. However, the
United States refused, for various reasons, to consent to the initiation
of an Annex V procedure in this dispute. It is clear from the minutes of
the DSB meetings where this matter was discussed that the DSB never took
any action to initiate an Annex V procedure, or to designate a DSB
representative pursuant to paragraph 4 of Annex V. Rather, the DSB
merely “took note” of the statements made by Members at those
meetings.
The European Communities argues that the initiation of an
Annex V procedure is not a DSB “decision” which must be taken by consensus,
but is rather a DSB “action” that is not subject to consensus, and
which “occurs automatically” upon request unless there is negative
consensus not to take the action. The Panel is not convinced by the
European Communities’ argument. It may well be that the initiation of
an Annex V procedure is not a “decision” that is subject to
consensus within the meaning of Article 2.4 of the DSU. However, it does
not follow that the initiation of an Annex V procedure “occurs
automatically” in the absence of any action by the DSB to initiate the
procedure. We see no basis for such an interpretation in the text of
paragraph 2 of Annex V, which states that “the DSB shall, upon
request, initiate the procedure” envisaged in Annex V. The term “initiate”
means “[b]egin, introduce, set going, originate”. The ordinary
meaning of the term “initiate”, used in the immediate context of a
positive duty formulated in the active voice (“the DSB shall …
initiate”), implies that some form of action is required on the part
of the DSB. Furthermore, the European Communities’ interpretation of
paragraph 2 of Annex V would effectively remove the DSB from having any
role in the initiation of an Annex V procedure, which seems inconsistent
with the ordinary meaning of the terms of that provision. Finally,
accepting the European Communities’ argument that there are certain
so-called DSB “actions” that may be deemed to “occur automatically”
in the absence of any indication of agreement or actual action by the
DSB could have far-reaching and potentially surprising systemic
consequences that would be inconsistent with the object and purpose of
providing “security and predictability” to the multilateral trading
system. For these reasons, we conclude that, even though it may well be
that the initiation of an Annex V procedure is not subject to consensus,
the initiation of an Annex V procedure does not “occur automatically”
upon request, in the absence of any action by the DSB to initiate the
procedure.”(1025)
4. Adverse inferences from non-cooperation
676.
In Korea — Commercial Vessels, the Panel found that the
European Communities had failed to demonstrated “non-cooperation” on
Korea’s part that would warrant an adverse inference:
“As the December 1998 Agreement is not relevant to our examination
of the Daewoo workout, we fail to see how an earlier version of that
agreement could be of greater probative value, especially as it was
concluded over two years before the Daewoo workout. Furthermore, we note
that the EC asserts that the January 1998 Agreement “shows the degree
of intervention of the [GOK] in the corporate sector”. However,
government intervention in the corporate sector does not necessarily
amount to government entrustment or direction in respect of a particular
restructuring. For these reasons, we decline to treat Korea’s failure
to provide the January 1998 Agreement in the context of the Annex
V procedure as “non-cooperation” in the meaning of Annex V.7 of the SCM
Agreement. We therefore reject the EC’s request for an adverse
inference under that provision.
…
We consider that the EC’s request for adverse inferences regarding
the “KDB report” is unfounded, since there is nothing on the record
to suggest that any such report ever existed. In particular, Korea has
never referred to any such report. Korea has merely referred to a
workout plan proposed by the KDB (on 26 November 1999) on the basis of a
workout report prepared by Anjin (submitted in final form on 24 November
1999).
Regarding the EC’s request for adverse inferences concerning the 30
October 1999 summary workout earlier in these proceedings, we see no
reason why, having submitted an English version of the full Anjin
workout report under the Annex V procedure, Korea should also have
submitted an English version of the summary report. We note that Annex V
question 3.1.3(17) merely requested a copy of the “full report with
all annexes”, so we do not consider that Korea was required to provide
a copy of the summary report under the Annex V procedure. As for whether
or not Korea should in any event have submitted an English version of
Anjin’s summary report earlier in the Panel proceedings, we consider
it appropriate that Korea only submitted the summary report when it
sought to rely on it in response to a question from the Panel (which in
turn was prompted by arguments from the EC). Since the report had not
already been translated into English, we consider it reasonable that
Korea would not be able to make an English version of that report
available to the Panel until some time after the deadline for the reply
to the Panel’s question. For these reasons, we reject the EC’s
request for adverse inferences.”(1026)
677.
In EC and certain member States — Large Civil Aircraft,
the United States requested that the Panel draw adverse inferences on a
number of issues due to the European Communities’ failure to provide
information. In one instance, the Panel did so:
“We recall that paragraph 7 of Annex V provides that a panel ‘should
draw adverse inferences from instances of non-cooperation by any party
involved in the information-gathering process.’ In the light of the
foregoing, and consistent with our previous finding on the amount of the
loan payments made to Airbus under the challenged PROFIT programmes, we
conclude pursuant to paragraph 7 of Annex V, that the challenged
subsidies under the PROFIT I and II are specific within the meaning of
Article 2.1(c) of the SCM Agreement.”(1027)
678.
In US — Large Civil Aircraft (2nd complaint), the
European Communities requested the Panel to draw adverse inferences on a
number of issues (relating to the amounts of the alleged subsidies) in
the light of alleged non-cooperation by the United States in disclosing
certain information regarding the amounts of some alleged subsidies. The
Panel suggested that effectively the same result would be reached
through the operation of the normal rules on burden of proof:
“For each of the challenged measures, the European Communities has
presented the Panel with evidence and arguments in support of its
estimate of the amount of the subsidy allegedly provided to Boeing.
Where the United States disputes the European Communities’ estimate of
the amount of an alleged subsidy, it has provided the Panel with its own
evidence and/or arguments to support its own, generally lower, estimate.
If the Panel were to consider the evidence and/or arguments advanced by
the United States to be insufficient to rebut the evidence and arguments
presented by the European Communities, then the Panel would accept the
European Communities’ estimate. In such a situation, the Panel would
accept the European Communities’ estimate not by virtue of United
States “non-cooperation”, and not as a matter of drawing “adverse
inferences”, but simply by virtue of the operation of the normal
principles regarding the burden of proof in WTO dispute settlement
proceedings. Likewise, if the Panel were to consider the evidence and/or
arguments advanced by the United States to be sufficient to rebut the
evidence and arguments presented by the European Communities, then the
Panel would accept the United States’ estimate not by virtue of United
States “cooperation”, but simply by virtue of the operation of the
normal principles regarding the burden of proof in WTO dispute
settlement proceedings.”(1028)
XXXIX. Annex VI back to top
A. Text of Annex VI
Annex VI: Procedures for on-the-Spot Investigations Pursuant to
Paragraph 6 of Article 12
1. Upon initiation of an investigation, the authorities of the
exporting Member and the firms known to be concerned should be informed
of the intention to carry out on-the-spot investigations.
2. If in exceptional circumstances it is intended to include
non-governmental experts in the investigating team, the firms and the
authorities of the exporting Member should be so informed. Such
non-governmental experts should be subject to effective sanctions for
breach of confidentiality requirements.
3. It should be standard practice to obtain explicit agreement of the
firms concerned in the exporting Member before the visit is finally
scheduled.
4. As soon as the agreement of the firms concerned has been obtained,
the investigating authorities should notify the authorities of the
exporting Member of the names and addresses of the firms to be visited
and the dates agreed.
5. Sufficient advance notice should be given to the firms in question
before the visit is made.
6. Visits to explain the questionnaire should only be made at the
request of an exporting firm. In case of such a request the
investigating authorities may place themselves at the disposal of the
firm; such a visit may only be made if (a) the authorities of the
importing Member notify the representatives of the government of the
Member in question and (b) the latter do not object to the visit.
7. As the main purpose of the on-the-spot investigation is to verify
information provided or to obtain further details, it should be carried
out after the response to the questionnaire has been received unless the
firm agrees to the contrary and the government of the exporting Member
is informed by the investigating authorities of the anticipated visit
and does not object to it; further, it should be standard practice prior
to the visit to advise the firms concerned of the general nature of the
information to be verified and of any further information which needs to
be provided, though this should not preclude requests to be made on the
spot for further details to be provided in the light of information
obtained.
8. Enquiries or questions put by the authorities or firms of the
exporting Members and essential to a successful on-the-spot
investigation should, whenever possible, be answered before the visit is
made.
B. Interpretation and Application of Annex VI
679.
In US — Anti-Dumping and Countervailing Duties (China),
the Panel concluded that the term “questionnaires” in Article 12.1.1
refers to the initial comprehensive questionnaire (or set of
questionnaires) issued by an investigating authority at or following the
initiation of a countervailing duty investigation, and that the 30-day
deadline to respond to questionnaires stipulated in Article 12.1.1 does
not apply to responses to supplemental questionnaires. The Panel found
contextual support for its interpretation in Annex VI:
“We now consider which particular documents constitute the “questionnaires”
to which the 30-day rule applies. In our view, the same contextual
elements discussed above aid in answering this question. In particular,
the reference in paragraph 6 of Annex VI to “visits to explain the
questionnaire” suggests that such a questionnaire is a substantial
information request (to warrant a possible on-the-spot visit by the
investigating authority to a foreign country purely for the purpose of
explaining it). This provision further suggests that the questionnaire
is sent to the respondent entity relatively early in the investigation
(logically, an explanatory visit would only take place upon or after
receipt of the questionnaire, and to be useful presumably it would need
to take place well in advance of the due date for the response, and well
in advance of any verification visit as referred to in paragraph
7). The
provision in paragraph 7 of Annex VI that, because the main purpose of
the on-the spot investigation is to “verify information provided or
obtain further details” normally that visit should take place “after
the response to the questionnaire has been received”, provides a
further indication both that “the questionnaire” is a substantial
and significant enough information request to warrant a verification
visit, and that it is sent early in the investigation. The reference to
the verification visit in the singular (“the on-the-spot investigation”),
and the advance notice and agreement requirements related to such a
visit, referred to in Article 12.6 of the SCM
Agreement, and paragraphs 2, 3,
4, 5, and 7 of Annex
VI, indicate, similarly, that the
verification visit itself is substantial and significant, not something
that can be done lightly, or that is likely to occur frequently over the
course of an investigation.(1029) These textual signals of the weightiness
of a verification visit provide a further indication that “the
response to the questionnaire” which paragraph 7 identifies as a main
focus of the visit also is substantial and significant, as otherwise
such a visit would not be warranted.”(1030)
XL. Annex VII back to top
A. Text of Annex VII
Annex VII: Developing Country Members Referred to in Paragraph 2(A)
of Article 27
The developing country Members not subject to the provisions of
paragraph 1(a) of Article 3 under the terms of paragraph 2(a) of Article
27 are:
(a) Least-developed countries designated as such by the United
Nations which are Members of the WTO.
(b)
Each of the following developing countries which are Members of
the WTO shall be subject to the provisions which are applicable to other
developing country Members according to paragraph 2(b) of Article 27
when GNP per capita has reached $1,000 per annum:(68) Bolivia,
Cameroon, Congo, Côte d’Ivoire, Dominican Republic, Egypt, Ghana,
Guatemala, Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria,
Pakistan, Philippines, Senegal, Sri Lanka and Zimbabwe.
(footnote original)
68 The inclusion of developing country
Members in the list in paragraph (b) is based on the most recent data
from the World Bank on GNP per capita.
B. Interpretation and Application of Annex VII
1. Annex VII(b)
(a) Rectification to include Honduras
680.
On 15 December 2000, the General Council adopted a decision to
include Honduras in Annex VII(b):
“Taking into account the unique situation of Honduras as the only
original Member of the WTO with a GNP per capita of less than US$ 1000
that was not included in Annex VII(b) to the Agreement on Subsidies and
Countervailing Measures (SCM Agreement), Members call upon the
Director-General to take appropriate steps, in accordance with WTO usual
practice, to rectify the omission of Honduras from the list of Annex
VII(b) countries.”(1031)
(b) Graduation methodology
681.
With regard to the graduation methodology from Annex
VII(b),
paragraph 10.1 of the November 2001 Doha Ministerial Decision on
Implementation-Related Issues and Concerns provides for a modification
of a consecutive three-year period where the US$GNP per capita
requirement must be fulfilled accordingly:
“Agree[d] that Annex VII(b) to the Agreement on Subsidies and
Countervailing Measures includes the Members that are listed therein
until their GNP per capita reaches US $1,000 in constant 1990 dollars
for three consecutive years. This decision will enter into effect upon
the adoption by the Committee on Subsidies and Countervailing Measures
of an appropriate methodology for calculating constant 1990 dollars. If,
however, the Committee on Subsidies and Countervailing Measures does not
reach a consensus agreement on an appropriate methodology by 1 January
2003, the methodology proposed by the Chairman of the Committee set
forth in G/SCM/38, Appendix 2 shall be applied. A Member shall not
leave Annex VII(b) so long as its GNP per capita in current dollars has
not reached US $1000 based upon the most recent data from the World
Bank.”(1032)
682.
As of 1 January 2003, because no alternative methodologies were
proposed, the methodology set out in Annex 2 of G/SCM/38
applies.
683.
In 2002, four Members listed in Annex VII(b)(1033)
reserved
rights, as provided for in G/SCM/39, to seek extensions of the
transition period for the exemption from the prohibition on export
subsidies in Article 3.1(a), in the event that they graduate from
Annex
VII during the period in which other Members have extensions in effect
pursuant to G/SCM/39. See “Extension of
Article 27.4 transition period”
in paragraph 682 below.
684.
As foreseen in paragraph 10.1 of the Doha Ministerial Decision
on Implementation-Related Issues and Concerns, and in application of the
methodology in G/SCM/38, the Secretariat has annually informed the
Committee of updated calculations reflecting: (i) GNI per capita in
constant 1990 dollars covering the three most recent years for which
data are available; and (ii) GNI per capita in current dollars for the
years 2001 and 2002 (see documents G/SCM/110 and /Add.1). These annual
updates are found in the following documents: G/SCM/110
for 2003;
G/SCM/110/Add.1 for 2004; G/SCM/110/Add.2 for 2005; G/SCM/110/Add.3 for
2006; G/SCM/110/Add.4 for 2007; G/SCM/110/Add.5 for 2008;
G/SCM/110/Add.6 for 2009; G/SCM/110/Add.7 for 2010; G/SCM/110/Add.8 for
2011.
(c) Re-inclusion of Member in Annex VII(b)
685.
With regard to re-inclusion in Annex VII(b), paragraph 10.4 of
the Doha Ministerial Decision on Implementation-Related Issues and
Concerns provides that “if a Member has been excluded from the list in
paragraph (b) of Annex VII to the Agreement on Subsidies and
Countervailing Measures, it shall be reincluded in it when its GNP per
capita falls back below US$ 1,000.”(1034)
XLI. Relationship with other WTO Agreements
back to top
A. GATT 1994
1. Article III
(a) Absence of conflict between the SCM Agreement and Article III of
the GATT 1994
686.
Considering whether there is a general conflict between the SCM
Agreement and Article III of the GATT
1994, the Panel in 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.”(1035)
687.
The Panel in Indonesia — Autos further acknowledged
that while Article III of the 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.”(1036)
(b) Absence of conflict between the SCM
Agreement and Article III:2 of the GATT 1994
688.
The Panel in Indonesia
— Autos rejected the argument that “the obligations contained in
Article III:2 of GATT and the SCM Agreement are mutually exclusive”(1037)
because “the SCM Agreement ‘explicitly authorizes’ Members to
provide subsidies that are prohibited by Article III:2 of
GATT.”(1038)
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.”(1039)
689.
As regards the relationship with Article 27.3 on a transition
period for developing countries and least developing countries and
Article III:2 of the GATT 1994, see also paragraph 535
above.
2. Article VI
690.
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.”(1040) In
phrasing this issue, the Panel in Brazil — Desiccated Coconut made
clear that the SCM Agreement did not supersede Article VI of the 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.(1041) The Appellate
Body in Brazil — Desiccated Coconut confirmed the
statement by the Panel that the SCM Agreement did not supersede Article
VI of the GATT 1994.(1042) 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 the GATT 1947 were now incorporated into the
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.”(1043)
691.
The Appellate Body in 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.”(1044) 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.”(1045)
692.
The Appellate Body in 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.”(1046)
3. Article XVI
693.
With respect to the relationship with Article XVI:4 of the GATT
1994, see paragraphs 99–100
above.
B. TRIMS Agreement
694.
The Panel in 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 principle 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.”(1047)
695.
The Panel in 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.”(1048)
C. DSU
1. Article 3.8
696.
Regarding the different disciplines applicable to prohibited
subsidies and other illegal measures as regards compliance with panel
recommendations, see paragraphs 225 and
234 above.
2. Article 4
697.
With respect to the relationship between Article 4.4 of the SCM
Agreement and Article 4 of the DSU, see
paragraphs 202–203
above.
3. Article 11
698.
With respect to the relationship between Article 4.2 of the SCM
Agreement and Article 11 of the
DSU, see paragraph 193 above.
4. Article 13.2
699.
With respect to the relationship between Article 4.2 of the SCM
Agreement and Article 13.2 of the
DSU, see paragraph 194 above.
5. Article 23.1
700.
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).”(1049)
D. Agreement on Agriculture
701.
The Appellate Body in 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. (1050)
E. GATT Subsidies Code
702.
The Panel in 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.(1051)
XLII. 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 back to top
A. Text of Declaration
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.
B. Interpretation and Application
703.
In US — Lead and Bismuth II, the United States argued
that, by virtue of the Declaration, the standard of review set forth in
Article 17.6 of the Anti-Dumping Agreement is also applicable to reviews
of countervailing duty investigations under the SCM Agreement. The
Appellate Body disagreed:
“We consider this argument to be without merit. By its own terms,
the Declaration does not impose an obligation to apply the
standard of review contained in Article 17.6 of the Anti-Dumping
Agreement to disputes involving countervailing duty measures under
Part V of the SCM Agreement. The Declaration is couched in
hortatory language; it uses the words “Ministers recognize”.
Furthermore, the Declaration merely acknowledges “the need for
the consistent resolution of disputes arising from anti-dumping and
countervailing duty measures.” It does not specify any specific action
to be taken. In particular, it does not prescribe a standard of review
to be applied.”(1052)
704.
The Panel in US — Corrosion-Resistant Steel Sunset Review considered
the issue of “whether prior panel and Appellate Body decisions on
countervailing measures can be taken into account by, and provide
guidance for, panels dealing with disputes under the Anti-dumping
Agreement (and vice versa)”, and stated that it found
support in the Declaration “for the application of a similar
interpretative analysis by this Panel in addressing analogous issues
under the Anti-dumping Agreement”.(1053) Subsequent panels have
made similar statements.(1054)
Footnotes:
909. Appellate Body Report, Canada — Dairy (Article 21.5 —
New Zealand and US II), footnote 113. back to text
910. Panel Report, Brazil — Aircraft,
para. 7.25. back to text
911. Panel Report, Brazil — Aircraft,
para. 7.25. back to text
912. Panel Report, Brazil — Aircraft,
para. 7.25. back to text
913. Panel Report, Brazil — Aircraft,
para. 7.25. back to text
914. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 137. back to text
915. Appellate Body Report, US — FSC,
para. 98. back to text
916. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 139–140. back to text
917. The Panel in US — FSC (Article 21.5 — EC) held
that the relationship between the measure and the purpose of avoiding
the double taxation of foreign-source income must be “reasonably
discernible.” Panel Report, US — FSC (Article 21.5 — EC),
para. 8.95. back to text
918. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 146–148. back to text
919. Appellate Body Report, US — FSC,
paras. 98–99. back to text
920. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 145. back to text
921. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 154–156, 165–167, and 177–179. back to text
922. (footnote original) We note that Isenbergh states
that, in the case of sale of goods by a producer, the income generated
by the sales transaction is attributable to “easily distinguishable
activities” which are “often combined”, namely “production and
sale” activities. Isenbergh indicates that in an international sales
transaction, these production and sales activities may take place “in
different countries”. These activities, therefore, generate income
that has different sources which are “compounded” unless the income
from the different sources is separated. Isenbergh states that “ideally”
the different “elements of the transaction” would be “disengaged”
using arm’s length pricing rules. The manufacturer would be treated as
if it had sold the goods to an independent distributor at arm’s length
prices, who in turn resold the goods. This would “dissect” the
transaction on the basis of the place where the different activities
occurred. (J. Isenbergh, supra, footnote, Vol. I, para. 10.9, p.
10:16) back to text
923. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 154 and 168. back to text
924. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 141–143. back to text
925. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 169. back to text
926. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 175–176. back to text
927. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 185. back to text
928. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 128. back to text
929. (footnote original) Appellate Body Report, supra,
footnote, para. 101. back to text
930. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 129–133. back to text
931. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.395. back to text
932. Panel Report, US — Upland Cotton,
para. 7.804. back to text
933. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), para. 278. back to text
934. Panel Report, US — Upland Cotton,
para. 7.804. back to text
935. Panel Report, US — Upland Cotton,
para. 7.817. back to text
936. Panel Report, US — Upland Cotton,
para. 7.824. back to text
937. Panel Report, US — Upland Cotton,
para. 7.825. back to text
938. Panel Report, US — Upland Cotton,
para. 7.832. back to text
939. (footnote original) For example, the term “operating
cost” may mean “a term for prime or variable costs” (see, for
example, Dictionary of Economics (The Economist Books, 1999)). To
the extent the term “operating” in item (j) also refers to the term
“losses”, the term “operating loss” can mean a loss, before tax
and interest, usually on the principal trading activities of the
business, excluding extraordinary items (see, for example, Dictionary
of International Finance (The Economist Books, 1999) or the
accounting loss made by a business from its business activities in a
given period (see, for example, Moles and Terry, The Handbook of
International Financial Terms (Oxford University Press, 1999)). back to text
940. Panel Report, US — Upland Cotton, para. 7.838.
back to text
941. Panel Report, US — Upland Cotton,
para. 7.841. back to text
942. Panel Report, US — Upland Cotton,
para. 7.856. back to text
943. Panel Report, US — Upland Cotton,
para. 7.860. back to text
944. Panel Report, US — Upland Cotton,
para. 7.861. back to text
945. Panel Report, US — Upland Cotton,
para. 7.864. back to text
946. Appellate Body Report, US — Upland Cotton,
para.
672. back to text
947. Panel Report, US — Upland Cotton (Article 21.5 —
Brazil), paras. 14.69–14.131. back to text
948. Panel Report, US — Upland Cotton (Article 21.5 —
Brazil), para. 14.94. back to text
949. Panel Report, US — Upland Cotton (Article 21.5 —
Brazil), para. 14.95. back to text
950. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), paras. 302–307. back to text
951. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), para. 292. back to text
952. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), para. 287. back to text
953. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), para. 301. back to text
954. Appellate Body Report, US — Upland Cotton (Article 21.5
— Brazil), para. 321. back to text
955. Appellate Body Report, Brazil — Aircraft (Article 21.5
— Canada), paras. 80–81. back to text
956. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada), para. 6.71. back to text
957. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada), para. 6.72. back to text
958. Appellate Body Report, Brazil — Aircraft (Article 21.5
— Canada), para. 78. back to text
959. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.274–5.275. back to text
960. Panel Report, Brazil — Aircraft,
para. 7.34. back to text
961. Panel Report, Brazil — Aircraft,
para. 7.34. back to text
962. Appellate Body Report, Brazil — Aircraft,
paras.
177 and 179. back to text
963. Appellate Body Report, Brazil — Aircraft,
paras.
177 and 179. back to text
964. Appellate Body Report, Brazil — Aircraft,
para.
181. back to text
965. Appellate Body Report, Brazil — Aircraft (Article 21.5
— Canada), para. 63. See also Panel Report, on Brazil —
Aircraft (Article 21.5 — Canada), paras. 6.84 and 6.92. back to text
966. Appellate Body Report, Brazil — Aircraft (Article 21.5
— Canada), paras. 67–69. back to text
967. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.234–5.252 back to text
968. See Article 21.5 Panel Report, Brazil — Aircraft, supra,
para. 6.87. Of course, the second paragraph of item (k) is broader in
scope than the first paragraph of item (k), which only refers to two
types of export credit practices. To that extent, the second paragraph
of item (k) retains independent meaning also on our interpretation of
the “material advantage” clause. back to text
969. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.251. back to text
970. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.265. back to text
971. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.266. back to text
972. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.272–5.275. back to text
973. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.153. back to text
974. Panel Report, Brazil — Aircraft,
para. 7.28. back to text
975. Panel Report, Brazil — Aircraft,
para. 7.28. back to text
976. Appellate Body Report, Brazil — Aircraft,
para.
186. back to text
977. Appellate Body Report, Brazil — Aircraft,
para.
286. back to text
978. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.78. back to text
979. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), paras. 5.73 and 5.75–5.79. back to text
980. (footnote original) The New Shorter Oxford English
Dictionary, Vol. II, Oxford (1993), pp. 3127 and 3128. back to text
981. (footnote original) For the 1998 OECD Arrangement,
see its Introduction, p. 7 (“Status”). back to text
982. (footnote original) It is clear to us, however, that
the drafters could not have left the addressees of the second paragraph
free to choose among different successor undertakings. Were it
otherwise, complainants could select the strictest successor undertaking
with as much justification as respondents could select the most generous
successor undertaking. The second paragraph would then fail to do what
it is there to do, i.e. to inform Members regarding what their rights
and obligations are. back to text
983. (footnote original) It should be reiterated here that
the 1992 OECD Arrangement is no longer in effect. back to text
984. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.80–5.81 and 5.83. back to text
985. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.79. back to text
986. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.78, footnote 69. back to text
987. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.80. back to text
988. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.80. See also Panel Report, Brazil — Aircraft
(Article 21.5 — Canada II), paras. 5.65–5.66. back to text
989. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.106. back to text
990. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.61. back to text
991. (footnote original) See the Appellate Body Report on United
States — Measure Affecting Imports of Woven Wool Shirts and Blouses
from India, adopted 23 May 1997, WT/DS33/AB/R, p. 16; Article 21.5
Appellate Body Report on Brazil — Aircraft, supra, para.
66. back to text
992. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.63. back to text
993. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.131–132. back to text
994. Brazil — Aircraft (Article 21.5 — Canada II),
paras. 5.133–134. back to text
995. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.114. back to text
996. The Panel in Brazil — Aircraft (Article 21.5 — Canada
II) followed the interpretation of the Panel in Canada —
Aircraft (Article 21.5 — Brazil). back to text
997. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.126. back to text
998. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.142. back to text
999. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), paras. 5.143–5.144. back to text
1000. Appellate Body Report, Brazil — Aircraft,
para.
65. back to text
1001. Appellate Body Report, Brazil — Aircraft (Article 21.5
— Canada), paras. 66–67. back to text
1002. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.73. back to text
1003. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.276. back to text
1004. (footnote original) See the Appellate Body Report on United
States — Measure Affecting Imports of Woven Wool Shirts and Blouses
from India, adopted 23 May 1997, WT/DS33/AB/R, p. 16;
Article 21.5 Appellate Body Report on Brazil — Aircraft, supra,
para. 66. back to text
1005. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.61–5.63. back to text
1006. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.177. back to text
1007. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.164. back to text
1008. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.165. back to text
1009. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.176. back to text
1010. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), para. 5.115. back to text
1011. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.180–7.181. back to text
1012. Panel Report, Canada — Aircraft Credits and Guarantees,
para.
7.161. back to text
1013. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.119–5.120. back to text
1014. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.123–5.126. back to text
1015. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.82. back to text
1016. See paragraph 6.3 of the General Council Decision of 15
December 2000 (WT/L/384).
back to text
1017. G/SCM/34, p. 2; G/SCM/36, p. 9 and G/SCM/38, p. 23.
back to text
1018. G/SCM/34, p. 2; G/SCM/36, p. 10 and G/SCM/38, p. 23.
back to text
1019. Panel Report, Indonesia — Autos,
paras. 1.17–1.19. back to text
1020. Panel Report, US — Upland Cotton,
para. 1.3. back to text
1021. Panel Report, Korea — Commercial Vessels,
paras.
1.11–1.14. back to text
1022. Panel Report, EC and certain member States
— Large Civil
Aircraft, paras. 1.7–1.8. back to text
1023. Panel Report, US — Large Civil Aircraft
(2nd
complaint), paras. 1.7–1.12, 7.19 and 7.22. back to text
1024. Panel Report, Korea — Commercial Vessels,
para.
7.5, sub-paras. 4–7. back to text
1025. Panel Report, US — Large Civil Aircraft
(2nd
complaint), paras. 7.19–7.20. back to text
1026. Panel Report, Korea — Commercial Vessels,
paras.
7.401, 7.450–7.451. back to text
1027. Panel Report, EC and certain member States
— Large Civil
Aircraft, para. 7.1580. back to text
1028. Panel Report, US — Large Civil Aircraft
(2nd
complaint), para. 7.38. back to text
1029. (footnote original) We do not mean to imply that the
SCM Agreement prohibits multiple verification visits to a given entity
during the course of an investigation, but rather to emphasize that due
to the weightiness of the exercise an investigating authority would be
unlikely to conduct multiple visits. back to text
1030. Panel Report, US — Anti-Dumping and Countervailing
Duties (China), para. 15.28. back to text
1031. Paragraph 6.1 of the General Council Decision of 15
December 2000 (WT/L/384). See Procès-Verbal of Rectification of the
Agreement on Subsidies and Countervailing Measures, rectifying the text
of Annex VII(b) to include Honduras in the list of countries.
(WT/LET/371, 20 January 2001).
back to text
1032. WT/MIN(01)/17.
back to text
1033. Bolivia; Honduras; Kenya and Sri Lanka.
back to text
1034. WT/MIN(01)/17.
back to text
1035. Panel Report, Indonesia — Autos,
paras. 14.33 and
14.36. back to text
1036. Panel Report, Indonesia — Autos,
paras. 14.39 and
14.56. back to text
1037. Panel Report, Indonesia — Autos,
para. 14.97. back to text
1038. Panel Report, Indonesia — Autos,
para. 14.98. back to text
1039. Panel Report, Indonesia — Autos,
paras. 14.98–14.99. back to text
1040. Panel Report, Brazil — Desiccated Coconut,
para.
227. back to text
1041. Panel Report, Brazil — Desiccated Coconut,
para.
227. back to text
1042. Appellate Body Report, Brazil — Desiccated Coconut,
p. 14. back to text
1043. Appellate Body Report, Brazil — Desiccated Coconut,
p. 15. back to text
1044. Appellate Body Report, Brazil — Desiccated Coconut,
p. 16. back to text
1045. Panel Report, Brazil — Desiccated Coconut,
para.
246; Appellate Body Report, Brazil — Desiccated Coconut, p. 17.
back to text
1046. Appellate Body Report, Brazil — Desiccated Coconut,
pp. 16 and 18. back to text
1047. Panel Report, Indonesia — Autos,
para. 14.50. back to text
1048. Panel Report, Indonesia — Autos,
paras. 14.51–14.52
and 14.55–14.56. back to text
1049. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.170. back to text
1050. Appellate Body Report, Canada — Dairy (Article 21.5
— New Zealand and US), para. 125. back to text
1051. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.171. back to text
1052.
Appellate Body Report, US — Lead and Bismuth II,
para. 49. back to text
1053. Panel Report, US — Corrosion-Resistant Steel Sunset
Review, footnote 39.
back to text
1054. Panel Reports, US — Softwood Lumber VI,
para.
7.18; US — Countervailing Duty Investigation on DRAMS, para.
7.351; US — Countervailing Measures on Certain EC Products (Article
21.5 — EC), para. 7.81; US — Oil Country Tubular Goods Sunset
Reviews (Article 21.5 — Argentina), footnote 45; Japan —
DRAMs (Korea), para. 7.354. back to text
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