DISPUTE SETTLEMENT

DS: Brazil — Certain Measures Concerning Taxation and Charges

This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.

  

See also:

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Current status

 

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Key facts

Short title:
Complainant:
Respondent:
Third Parties:
Agreements cited:
(as cited in request for consultations)
Request for Consultations received:
Panel Report circulated: 30 August 2017
Appellate Body Report circulated: 13 December 2018

  

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Latest document

  

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Summary of the dispute to date

The summary below was up-to-date at

Consultations

Complaint by the European Union. (See also DS497)

On 19 December 2013, the European Union requested consultations with Brazil with respect to certain measures concerning taxation and charges in the automotive sector, the electronics and technology industry, goods produced in Free Trade Zones, and tax advantages for exporters.

The European Union claims that the measures are inconsistent with:

  • Articles I:1, II:1(b), III:2, III:4 and III:5 of the GATT 1994;
     
  • Articles 3.1(a) and 3.1(b) of the SCM Agreement; and
     
  • Articles 2.1 and 2.2 of the TRIMs Agreement.

On 15 January 2014, Japan requested to join the consultations. On 16 January 2014, Argentina requested to join the consultations. On 17 January 2104, the United States requested to join the consultations.

 

Panel and Appellate Body proceedings

On 31 October 2014, the European Union requested the establishment of a panel. At its meeting on 18 November 2014, the DSB deferred the establishment of a panel.

At its meeting on 17 December 2014, the DSB established a panel. Argentina, Australia, China, India, Japan, Korea, the Russian Federation, Chinese Taipei, Turkey and the United States reserved their third-party rights. Subsequently, Canada, Colombia and South Africa reserved their third-party rights.

On 16 March 2015, the European Union requested the Director-General to compose the panel. On 26 March 2015, the Director-General composed the panel.

On 22 October 2015, the Chairperson of the panel notified the DSB that the panel in DS497 was composed with the same persons as the panel in this dispute. The Chairperson also notified the DSB that pursuant to Article 9.3 and in agreement with the parties, this dispute and DS497 are following a harmonized procedure.

On 30 August 2017, the panel report was circulated to Members.

Brazil's general defences

As an initial matter, the Panel addressed two broad defences raised by Brazil in respect of the claims against the ICT and INOVAR-AUTO programmes.

First, Brazil argued that the relevant measures at issue concern production processes and production steps imposed on producers, and which therefore are not within the scope of the GATT 1994, SCM Agreement, and TRIMs Agreement which regulate products per se.  In addition, for Brazil, Article III of the GATT 1994, Article 2 of the TRIMs Agreement, and Article 3.1(b) of the SCM Agreement are inapplicable to “pre-market” requirements, such as the requirements challenged in this dispute. The Panel rejected this argument on the basis that a long line of Appellate Body jurisprudence has clarified that the relevant disciplines of the GATT 1994 are indeed applicable to measures that impact products in the market, regardless of whether the measures are in the form of “pre-market” requirements. This reasoning is also applicable in respect of the relevant disciplines of the TRIMs Agreement and the SCM Agreement.

Second, Brazil argued that the ICT and INOVAR-AUTO programmes constitute subsidies paid to domestic producers within the meaning of Article III:8(b) of the GATT 1994, and therefore are exempted from the disciplines of Article III of the GATT 1994 and Article 2.1 of the TRIMs Agreement. Article III:8(b) states that the provisions of Article III “shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article”. The Panel rejected this argument on the basis that those aspects of a measure resulting in product discrimination are not exempted per se from these disciplines, even if the measure is in the form of a subsidy paid exclusively to domestic producers.

The ICT programmes

In respect of the incentivised final products (i.e. those products that actually receive the tax benefits under the programme) under the ICT programmes, the Panel considered that those aspects of the programmes that require the production of these final products in Brazil as a pre-condition to gaining the tax benefits, result in different levels of taxation, and detrimentally modify the conditions of competition, for like imported products. Similarly those aspects of the programmes that require the development (i.e. design) of these final products in Brazil, as a pre-condition to gaining the tax benefits, result in different levels of taxation, and detrimentally modify the conditions of competition for like imported products. The Panel therefore concluded that these aspects of the programmes impose tax and regulatory discrimination, inconsistently with Article III:2 and III:4 of the GATT 1994, and Article 2.1 of the TRIMs Agreement.

Turning to the complainants' allegations that the ICT programmes impose local content requirements, it is important to understand that there is a fundamental issue concerning  the precise meaning of “local content requirements” (what some experts call local content incentives) that are generally prohibited in WTO law.  This issue is at the heart of the so-called localisation requirements in investment or subsidy programmes.

It is long established that when a subsidy requires the purchase of a locally-produced product (i.e., a domestic product), such subsidy contains a  “local content requirement” that is inconsistent with Article III:4 of the GATT 1994. This prohibition of subsidies “contingent on the use of domestic over imported goods” was codified in Article 3.1(b) of the SCM Agreement. Indeed, it is a general principle of WTO law that a Member may not favour domestic products over imported products.

However, another principle of WTO law also enshrined in Article III of the GATT 1994 (in Article III:8(b)) is that Members may give subsidies “exclusively” to domestic producers, including production-subsidies. In practice, such production subsidies typically include conditions that must be satisfied by the recipient of the subsidy. The difficulty is in identifying which sorts of conditions linked to subsidies to domestic producers fall afoul of the prohibitions in Article III:4 of the GATT 1994 and Article 3.1(b) of the SCM Agreement on conditioning subsidies on the “use” of domestic goods. 

In the view of some Members (including the US and Canada as third parties in this dispute) consider that if a subsidy is conditional not on the purchase of a locally-made input product, but instead on the subsidy recipient's production of some inputs for its own final product, or is conditional on the subsidy recipient's performance of production-step requirements, such requirements would not constitute a WTO-inconsistent requirement to “use” domestic goods.   In the view of these Members, subsidies of these types are for “production”, not “use” of domestic goods, and thus are generally permitted. Under this interpretation of Article III:8(b) of the GATT 1994, it is necessary that the recipient of the subsidy itself perform the required production-steps or produce the inputs in question, for these requirements to be WTO-consistent.

On the other hand, some Members (including the EU and Japan as complainants in this dispute), consider that any production-step or other requirement that results in the creation of any input product (a component) that must be incorporated into the final product, is a WTO-inconsistent “local content requirement”, even where it is a subsidy recipient itself that is creating its own inputs in-house. Indeed, for the EU, the production step requirements on which the entire functioning of the Brazilian programmes is based, where benefits are subject to activities taking place in Brazil, constitute WTO-inconsistent local content requirements. Under this approach, any domestic-production-step requirement, because by definition it cannot be fulfilled by imports, constitutes WTO-inconsistent discrimination against imported products. This view therefore makes most production-step requirements associated with subsidies WTO-inconsistent requirements to “use” domestic goods. 

Brazil did not take a position on this debate. The Panel refused to adjudicate this issue. The Panel rather formed conclusions on only a part of the complainants' claims. Specifically, the Panel concluded that since all of the relevant challenged programmes allow for the production-steps to be performed by another manufacturer in Brazil (through so-called “third party clauses”), and not only the recipient of the subsidy, such provisions favour national production (and products) to the detriment of foreign products. The Panel therefore concludes that such third party clauses are forms of local content requirements that detrimentally modify the conditions of competition for like imported input products, inconsistently with Article III:2 and III:4 of the GATT 1994, and Article 2.1 of the TRIMs Agreement. Additionally, such local content requirements constitute, for purposes of the SCM Agreement, contingency on the use of domestic over imported goods, inconsistent with Article 3.1(b) of the SCM Agreement.

Importantly, the Panel concluded that the EU and Japan did not demonstrate any WTO-inconsistency in respect of the R&D investment requirements. The Panel also exercised judicial economy with respect to several other claims against the ICT programmes.

In respect of one of the challenged programmes, the PATVD programme, Brazil raised a defence under Article XX(a) of the GATT 1994 (pertaining to protection of public morals). Brazil argued that digital television is very important in Brazil, as a means of creating social inclusion and bridging the digital divide. According to Brazil, the discriminatory aspects of the measure were necessary in order to ensure “continuity of supply” of digital television to the Brazilian market, in order to achieve these objectives.

The Panel agreed with Brazil that social inclusion and bridging the digital divide are in principle public morals objectives in Brazil, within the meaning of Article XX of the GATT 1994. Furthermore, the Panel considered that it is possible that the discriminatory aspects of the programmes could potentially contribute to the creation of a competitive and stable domestic industry that could supply the domestic market. However, Brazil did not demonstrate that the measures were necessary in order to ensure “continuity of supply” to the market, because imports must be taken into account when assessing continuity of supply in a WTO Member. In particular, the Panel considered that the WTO-consistent alternative approaches (such as non-discriminatory subsidies or the lowering of trade barriers to imported digital television equipment) suggested by the complaining parties would be more effective at achieving the stated objectives. The Panel therefore concluded that the discriminatory aspects of the PATVD programme are not justified under Article XX of the GATT 1994.

The INOVAR-AUTO programme — National Treatment claims

In respect of tax reductions for certain categories of motor vehicles under the INOVAR-AUTO programme, the Panel considered that such tax reductions that are only available for motor vehicles produced in Brazil result in tax discrimination on imported like products, inconsistently with Brazil's obligations under Article III:2 of the GATT 1994.

In respect of the rules on accreditation in order to receive tax credits to offset taxes on the sale of motor vehicles, the Panel considered that such rules impose a higher burden on foreign manufacturers than domestic manufacturers, in order to receive the tax credits, resulting in different levels of taxation, and detrimental conditions of competition, for motor vehicles manufactured by those foreign manufacturers (in other words imported motor vehicles).

In addition, the Panel considered that the rules on accrual of tax credits favour those firms that purchase Brazilian strategic inputs and tools, meaning that these rules favour Brazilian manufacturers over foreign manufacturers, resulting in different levels of taxation, and detrimental conditions of competition, for imported motor vehicles.

Furthermore, the Panel considered that the rules on the use of tax credits (that are generated from expenditure in Brazil in strategic inputs and tools) favour domestic products, since such tax credits can only be used to offset taxes on sales of imported motor vehicles if any credits remain after offsetting the taxes on the sales of domestically manufactured motor vehicles, and also since such tax credits may only be used on a maximum of 4,800 imported motor vehicles per year. Therefore these rules also result in different levels of taxation, and detrimental conditions of competition, for imported motor vehicles.

The Panel concluded that all of these aspects of the INOVAR-AUTO programme impose tax and regulatory discrimination, inconsistently with Article III:2 and III:4 of the GATT 1994, and Article 2.1 of the TRIMs Agreement.

The Panel also considered that certain aspects of the rules on accreditation and accrual of tax credits constitute WTO-inconsistent local content requirements. Specifically, the Panel concluded that the aspect of the rules governing accreditation for domestic manufacturers that requires the performance of a minimum number of production-steps within Brazil, where the performance of a production-step would result in the creation of an input product (a component) that is to be incorporated into the finished motor vehicle, and when the performance of that production-step can be completed by a third party in Brazil, constitutes a WTO-inconsistent local content requirement. Just as for the ICT programmes, all relevant production-steps under the INOVAR-AUTO programme can be outsourced to third-party manufacturers in Brazil. Similarly to its analysis of the ICT programmes, the Panel did not address the issue of whether such production-step requirements would be WTO-inconsistent if they were required to be performed exclusively in-house, i.e.by the company that is the producer of the final product. The Panel also considered that one particular aspect of the accreditation requirements, by which expenditure on Brazilian laboratory equipment counts towards satisfying certain specific accreditation requirements, constitutes a local content requirement. Additionally, the aspect of the rules on accrual of tax credits, by which purchases of certain inputs and tools are deducted from the total value of the tax credits depending on the level of imported content in those inputs and tools, constitutes a local content requirement.

The Panel concluded that such local content requirements detrimentally modify the conditions of competition for like imported input products, inconsistently with Article III:2 and III:4 of the GATT 1994, and Article 2.1 of the TRIMs Agreement. Additionally, such local content requirements constitute subsidies contingent upon the use of domestic over imported goods, inconsistent with Article 3.1(b) of the SCM Agreement.

Brazil raised two defences in respect of the INOVAR-AUTO programme, under Article XX(b) (concerning protection of public health) and XX(g) (concerning conservation of natural resources) respectively.

Under Article XX(b), Brazil argued that the programme aims at improving vehicle safety and reducing CO2 emissions, and therefore contributes to the protection of public health. Under Article XX(g), Brazil argued that the programme contributes to the conservation of petroleum and its by-products. The Panel accepted that these objectives are within the scopes of Article XX(b) and XX(g) respectively. However, Brazil's arguments largely pertained to aspects of the programme that are not challenged by the complainants, on which the Panel did not make findings of inconsistency, and which therefore did not need to be justified under Article XX. Indeed, it is the discriminatory aspects of the programme that Brazil must justify under Article XX.

Brazil also made a broader argument, namely that it wishes to foster its domestic industry in order to acquire technology and know-how. The Panel acknowledged that it is possible that the discriminatory aspects of the measure could potentially have an impact on the development of the domestic industry which could ultimately result in increased vehicle safety and energy efficiency. However, Brazil did not provide any evidence to support the view that such a scenario would occur. 

Finally, under its analysis of necessity in respect of Article XX(b), the Panel considered that WTO-consistent alternative approaches (such as non-discriminatory subsidies or the lowering of trade barriers to imported motor vehicles that meet certain vehicle safety and energy efficiency standards) suggested by the complaining parties would be more effective at achieving the stated objectives than the discriminatory aspects of the programme. The Panel concluded that the discriminatory aspects of the INOVAR-AUTO programme are not justified under either Article XX(b) or Article XX(g) of the GATT 1994.

The Panel exercised judicial economy with respect to several other claims against the INOVAR-AUTO programme.

The INOVAR-AUTO programme — Most-Favoured-Nation claims

The Panel also concluded that the INOVAR-AUTO programme grants less favourable treatment to motor vehicles imported from the EU and Japan that that accorded to such products imported from MERCOSUR countries and Mexico, inconsistently with Article I:1 of the GATT 1994. Brazil argues, however, that any such WTO-inconsistency is nevertheless justified under several provisions of the Enabling Clause. The claims of the EU and Japan on Brazil's preferences for imports from MERCOSUR and Mexico involved several procedural issues not discussed here.

Brazil submitted that the differential and more favourable tax treatment accorded to motor vehicles from certain of those countries is justified under the Enabling Clause, because such tax treatment implements the obligations of certain regional trade agreements that were notified to the WTO as adopted under the Enabling Clause (specifically the 1980 Treaty of Montevideo, the MERCOSUR Agreement, and several Economic Complementarity Agreements (ECAs)). The parties debated whether the relevant treaties had been notified to the WTO, a debate that is ongoing in the CRTA where Latin American countries argue that they need only notify agreements adopted under the Montevideo framework agreement as modifications of the Montevideo Agreement, and not as independent RTAs. The views of the parties reflected the views expressed in the CRTA. 

The Panel avoided this issue and decided to proceed arguendo (assuming that the relevant RTAs/ECAs had been properly notified) by focusing on the content of the RTAs allegedly notified. The Panel noted that the relevant RTAs do not refer to internal taxation measures or to any tax preferences provisions that could justify the INOVAR-AUTO Programme. Since no link was demonstrated between the tax discrimination of this dispute and the relevant RTAs invoked by Brazil under paragraph 2(c) of the Enabling Clause, the Panel concluded that the relevant tax discrimination could not be justified under the Enabling Clause.

One panelist disagreed on this point, and concluded in a separate opinion that the EU and Japan were under an obligation to invoke paragraph 2(c) of the Enabling Clause in their panel request because they were aware of the tax preferences (or should have been). In the view of that panelist, their claims under Article I of the GATT 1994 were therefore outside the Panel's terms of reference.

The PEC and RECAP programmes

In respect of the PEC and RECAP programmes, which concern certain tax/subsidy benefits granted to companies accredited as “predominantly exporting”, Brazil argued inter alia, that due to the nature of the Brazilian tax system, the tax benefits accorded to the predominantly exporting companies are a tax administration measure to prevent the accumulation of tax credits by exporting companies, whose final products are exempted from taxes.

Although the Panel acknowledged that Brazilian companies whose final products are subject to low levels of taxation, or no taxation, may have a problem of credit-accumulation, and that a policy aimed at avoiding credit accumulation might be a legitimate policy objective,  the Panel noted that certain Brazilian companies that are credit-accumulating would not be entitled to receive the relevant tax treatment, and additionally some of the Brazilian firms that do receive the relevant tax treatment are not credit-accumulating. The Panel thus concluded that Brazil did not demonstrate the existence of a rule of general application to avoid the problem of credit accumulation The Panel therefore rejected Brazil's argument and concluded that the relevant programmes do constitute subsidies contingent upon export performance, inconsistent with Article 3.1(a) of the SCM Agreement.

On 28 September 2017, Brazil notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretations in the panel report. On 3 October, the European Union notified the DSB of its decision to cross-appeal.

On 27 November 2017, upon expiry of the 60-day period provided for in Article 17.5 of the DSU, the Appellate Body informed the DSB that it would not be able to circulate the Appellate Body report in this appeal by the end of the 60-day period, nor within the 90-day time-frame provided for in Article 17.5 of the DSU. The Appellate Body referred to the substantially enhanced workload it faced in 2017, the existence of several appeals proceeding in parallel, and the increasing overlap in the composition of the Divisions hearing the different appeals owing to the vacancies on the Appellate Body. The Appellate Body also referred to the scheduling issues arising from these circumstances, the number and complexity of the issues raised in this and concurrent appellate proceedings, together with the demands that these concurrent appeals place on the WTO Secretariat's translation services, and the shortage of staff in the Appellate Body Secretariat. The Appellate Body also informed the DSB that the circulation date of the Appellate Body report in this appeal would be communicated to the participants and third participants after the oral hearing.

Although the appeals in this dispute were initiated on 28 September 2017, due to the multiple appeals pending before the Appellate Body, the reduced number of Appellate Body Members, and the shortage of staff in the Appellate Body Secretariat, work on these appeals could gather pace only in March 2018. On 19 November 2018, the Chair of the Appellate Body informed the Chair of the DSB that the Reports in these proceedings would be circulated no later than 13 December 2018.

On 13 December 2018, the Appellate Body report was circulated to Members.

Taxation in excess and treatment no less favourable

With respect to the ICT programmes, the Appellate Body upheld the Panel's findings that imported finished and intermediate ICT products were taxed in excess of like domestic finished ICT products inconsistently with Article III:2, first sentence, of the GATT 1994. The Appellate Body found that imported finished ICT products are not eligible for either tax reductions or exemptions because foreign producers cannot be accredited under the ICT programmes and consequently, bear the full tax burden, as opposed to like domestic finished ICT products. The Appellate Body found that, under the Brazilian credit-debit system, purchases of non-incentivized imported intermediate ICT products involve the payment of a tax upfront that is not faced by companies that purchase incentivized like domestic intermediate ICT products. The Appellate Body considered that these situations have the effect of limiting the availability of cash flow for companies purchasing non-incentivized imported intermediate ICT products and result in the value of money (in the form of accrued tax credits) depreciating over time. The Appellate Body also found that the accreditation requirements under the ICT programmes result in less favourable treatment for imported ICT products in the form of the differential tax burden that imported ICT products are subjected to by virtue of the fact that foreign producers cannot be accredited under the ICT programmes and because imported intermediate ICT products face an administrative burden that is not faced and/or faced to a lesser extent by a purchaser of domestic intermediate ICT products that are incentivized. The Appellate Body thus upheld the Panel's findings under Article III:4 of the GATT 1994.

With respect to the INOVAR-AUTO programme, the Appellate Body found that the only viable way for foreign manufacturers to be able to enjoy the relevant tax benefit under that programme is to become accredited as importers/distributors. The Appellate Body considered that foreign manufacturers seeking accreditation as importers/distributors face a corresponding burden that necessarily comes with having to operate in, or establish themselves in, Brazil, unlike domestic manufacturers, who already operate or are established in Brazil. The Appellate Body found that the INOVAR‑AUTO programme is designed in such a manner that the accreditation requirements thereunder adversely modify the competitive conditions for imported products in comparison to like domestic products inconsistently with Article III:4 of the GATT 1994 and therefore upheld the Panel's findings in this regard.

The Appellate Body also upheld the Panel's findings that those aspects of the ICT and INOVAR‑AUTO programmes found to be inconsistent with Article III:4 of the GATT 1994 are also inconsistent with Article 2.1 of the TRIMs Agreement.

Payment of subsidies exclusively to domestic producers

The Appellate Body reversed the Panel's findings that “subsidies that are provided exclusively to domestic producers pursuant to Article III:8(b) of the GATT 1994 are not per se exempted from the disciplines of Article III of the GATT 1994” and that “aspects of a subsidy resulting in product discrimination (including requirements to use domestic goods, as prohibited by Article 3.1 of the SCM Agreement) are not exempted from the disciplines of Article III pursuant to Article III:8(b).”

The Appellate Body explained that, insofar as the payment of subsidies exclusively to domestic producers of a given product affects the conditions of competition between such a product and the like imported product, resulting in an inconsistency with the national treatment obligation, such a payment would be justified under Article III:8(b). The Appellate Body clarified that the conditions for eligibility for the payment of subsidies that define the class of eligible “domestic producers” by reference to their activities in the subsidized products' markets would also be justified under Article III:8(b). By contrast, the Appellate Body noted that a requirement to use domestic over imported goods in order to have access to the subsidy would not be covered by the exception in Article III:8(b) and would therefore continue to be subject to the national treatment obligation in Article III. Furthermore, the Appellate Body interpreted the term “payment of subsidies” in Article III:8(b) as excluding from its scope the exemption or reduction of internal taxes affecting the conditions of competition between like products. Thus, the Appellate Body concluded that none of the measures at issue in this dispute is capable of being justified under Article III:8(b) because they all involve the exemption or reduction of internal taxes affecting the conditions of competition between like products and therefore cannot constitute the “payment of subsidies” within the meaning of Article III:8(b).

One Member of the Division disagreed with the majority's interpretation of the term “payment of subsidies” in Article III:8(b) and expressed the view that the term refers to the provision by a WTO Member, whether through monetary or non‑monetary transfers having an equivalent effect, of a subsidy, as defined in Article 1.1 of the SCM Agreement.

Export subsidies:

Brazil argued that the Panel made several errors in finding that the tax suspensions granted under the PEC and RECAP programmes are subsidies within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. In particular, Brazil claimed that the Panel erred in the determination of a benchmark for comparison under Article 1.1(a)(1)(ii). The Appellate Body reversed the Panel's findings that Brazil has not demonstrated that the tax suspensions are the benchmark for comparison and that the appropriate benchmark is the treatment applicable to purchases by non‑accredited companies of the relevant products. As a result, the Appellate Body also reversed the Panel's findings that the tax suspensions granted to registered or accredited companies under the PEC and RECAP programmes constitute financial contributions in the form of government revenue otherwise due that is foregone or not collected and are hence subsidies within the meaning of Article 1.1 of the SCM Agreement that are contingent upon export performance under Article 3.1(a) of the SCM Agreement.

Import substitution subsidies

On appeal, Brazil argued that the Panel erred in finding that the basic productive processes (PPBs) and other production-step requirements under the four ICT programmes (Informatics, PADIS, PATVD, and Digital Inclusion programmes) are contingent upon the use of domestic goods, inconsistently with Article III:4 of the GATT 1994, and that they also constitute a contingency on the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement. The Appellate Body partially upheld the Panel's findings.

In particular, with respect to the Informatics programme, the Appellate Body: (i) upheld the Panel's findings that the main PPBs that incorporate nested PPBs under the Informatics programme are inconsistent with Article 3.1(b) of the SCM Agreement and (ii) reversed the Panel's findings that the main PPBs without nested PPBs under the Informatics programme are contingent upon the use of domestic over imported goods under Article 3.1(b) of the SCM Agreement. With respect to the PATVD programme, the Appellate Body upheld the Panel's findings of inconsistency under Article 3.1(b) of the SCM Agreement concerning the PATVD programme to the extent they relate to the main PPBs that contain nested PPBs, and reversed the Panel's findings to the extent they relate to the main PPBs that do not contain nested PPBs. With respect to the PADIS programme, the Appellate Body reversed the Panel's findings that the PADIS programme requires the use of domestic over imported goods inconsistently with Article 3.1(b) of the SCM Agreement. With respect to the Digital Inclusion programme, the Appellate Body did not consider that the Panel had a proper basis to conclude that the Digital Inclusion programme contains a requirement to use domestic over imported goods under Article 3.1(b) of the SCM Agreement and reversed the Panel's findings of inconsistency under that provision.

The Appellate Body agreed with the Panel that the PPBs and other production-step requirements under the PATVD, PADIS, and Digital Inclusion programmes provide an incentive to use domestic ICT products and upheld the Panel's findings that these programmes accord less favourable treatment to imported ICT products than that accorded to like domestic products, inconsistently with Article III:4 of the GATT 1994.

With respect to the INOVAR-AUTO programme, having reversed the Panel's findings with respect to the main PPBs that do not incorporate nested PPBs under the ICT programmes, the Appellate Body also reversed the Panel's findings of inconsistency with Article 3.1(b) regarding the requirement to perform a minimum number of manufacturing steps under the INOVAR-AUTO programme.

The Appellate Body reversed the Panel's findings, made in the context of its analysis under ICT and INOVAR-Auto programmes, to the extent that they could be understood as suggesting that the in-house scenario was not covered by the Panel's findings. The Appellate Body considered that the relevant Panel's findings applied also in the in-house scenario.

The Enabling Clause

The Appellate Body explained that a notification pursuant to paragraph 4(a) of the Enabling Clause has a direct bearing on a complaining party's knowledge and consequently, speaks to whether the complaining party is required to raise the Enabling Clause and identify the relevant provision(s) thereof in its panel request. The Appellate Body found that Brazil had not demonstrated that measure at issue (i.e. the differential tax treatment under the INOVAR‑AUTO programme in the form of internal tax reductions accorded to some but not other Members) was notified to the WTO as having been adopted under paragraphs 2(b) or 2(c) of the Enabling Clause, as required pursuant to paragraph 4(a). The Appellate Body therefore upheld the Panel's findings that there was no burden on the complaining parties to raise and identify paragraphs 2(b) or 2(c) of the Enabling Clause in their panel requests and their claims under Article I:1 of the GATT 1994 were therefore within the Panel's terms of reference.

With respect to paragraph 2(b) of the Enabling Clause, the Appellate Body found that, in light of the text, context, and circumstances surrounding the adoption of the Enabling Clause and thereafter with the establishment of the WTO, paragraph 2(b) does not concern non‑tariff measures governed by the provisions of the GATT 1994. Instead, paragraph 2(b) speaks to non‑tariff measures taken pursuant to S&D treatment provisions of “instruments multilaterally negotiated under the auspices of the [WTO]”. Turning to paragraph 2(c) of the Enabling Clause, the Appellate Body explained that if there is no genuine link between the measure at issue according the differential and more favourable treatment and the arrangements notified to the WTO, it is difficult to see how the measure at issue could be substantively justified under paragraph 2(c). The Appellate Body found that to the extent that the Panel relied upon its earlier analysis concerning whether or not the INOVAR‑AUTO programme, according the differential and more favourable treatment had a genuine link to 1980 Treaty of Montevideo and the ECAs notified to the WTO in determining if the differential and more favourable treatment was substantively justified under paragraph 2(c), it saw no error in the Panel's approach. The Appellate Body therefore upheld the Panel's findings that the tax reductions accorded under the INOVAR-AUTO programme to imported products from Argentina, Mexico, and Uruguay and found to be inconsistent under Article I:1 of the GATT 1994 are not justified under paragraphs 2(b) or 2(c) of the Enabling Clause.

Withdrawal of prohibited subsidy “without delay” under Article 4.7 of the SCM Agreement

The Appellate Body reversed the Panel's conclusions that Brazil withdraw the prohibited subsidies found to exist within 90 days because the underlying reasoning was not related to the specific circumstances of this case. The Appellate Body did not complete the legal analysis and specify the time period under Article 4.7 of the SCM Agreement, as requested by Brazil, but left undisturbed the Panel's recommendations that Brazil withdraw the prohibited subsidies at issue “without delay”. The Appellate Body explained that Article 4.7 requires a panel to specify a time period that constitutes “without delay” within the realm of possibilities in a given case, typically taking into account the nature of the measure(s) to be revoked or modified and the domestic procedures available for such revocation or modification, including any extraordinary procedures that may be available.

At its meeting on 11 January 2019, the DSB adopted the Appellate Body report and the panel reports, as modified by the Appellate Body report.

 

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