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Domestic tax issues in the WTO Agreement

Author: LongYingFeng
Tutor: GuGongYun
School: East China University of Politics and Law
Course: International Law
Keywords: WTO internal tax tariff GATT GATS TRIMs Agreement SCM Agreement
CLC: D996
Type: PhD thesis
Year: 2006
Downloads: 412
Quote: 1
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Abstract


There is a close relationship between the Agreement Establishing the Trade Organization (“WTO Agreement”) and tax. With the reducing of tariff, many countries turn to internal tax. All the functions of tariff could be replaced by internal tax. There is little research on internal tax in WTO Agreement in China, and even there are some misunderstandings, whereas scholars in other countries have paid attentions on it, and have got some research fruits.Internal tax is a special concept different from tariff. Although no definition of internal tax can be found in WTO Agreement, it doesn’t influence the determination of the scope of internal tax. As to China, it include value added tax, business tax, consumption tax, income tax and some special taxes be deemed as internal tax based on case by case. Income tax doesn’t fall in the scope of internal tax under General Agreement on Tariffs and Trade (“GATT”) circumstance. Whereas income tax does under General Agreement on Trade in Services (“GATS”), Agreement on Trade-related Investment Measures (“TRIMs Agreement”), and Agreement on Subsidies and Countervailing Measures (“SCM Agreement”).Article 3.1 and 3.2 of GATT are internal tax National Treatment clause, Article 3.1 set a principle, Article 3.2 is specified rule. There are two words in Article 3.2, first is for like products, second is for competitive or substitutable products. To like products, members should not tax imported products higher than domestic products; to competitive or substitutable products, should not tax in a way to protect domestic production. Article 3 doesn’t preclude members from exerting finance or administration power for the purpose otherwise to provide protection for domestic production. It doesn’t protect export amount, but to protect the anticipation of competitive relationship between imported products and domestic products. The possibility to violate of Article 3, should not be considered as actually violation. The different taxing on domestic products and imported products based on frontier tax adjustment doesn’t violate Article 3. While determining whether there is tax discrimination the factors should be considered include tax rate, taxing methods, and tax rules. The exemption of product tax has a similar economic effect with subsidy caused by benefit derived from product tax. Whereas subsidy is different from exemption of product tax, doesn’t violate Article 3.The scope of Article 3 should not limited to laws or regulations related with trade. Internal taxes in GATT are taxes which levied on products, a tax which can’t levied on products will not be deemed as internal tax of GATT. Income tax isn’t levied on products, so it doesn’t subject to Article 3.2 of GATT. We should distinguish between National Treatment of internal tax in GATT and National Treatment in international tax agreement.Article 1.1 of GATT is a MFN clause. Internal tax falls into the scope of MFN, but income tax don’t. MFN clause applies only to like products, however presents for sovereign, equipments for ambassador or consul organization and goods for representatives of foreign government are dealt by reciprocal treatment. Members have huge freely decision rights on tariff structure and tariff classification. Tariff difference is a legitimate method of trade policy. Members who claim injured by this method take the responsibility to testify it have deviated from the ordinary aim as to be a discriminating method in international trade.Enabling clause limited the preferential treatment provided according to GSP scheme by developed countries to developing countries in tariff preferences, didn’t cover non-tariff preferences. That only part of developing countries can get preferences under GSP scheme is against the spirit of MFN. There isn’t MFN clause in international tax treaties, non-discrimination clause refer to National Treatment only in international tax treaties. Those tax differences in tax treaties don’t violate MFN clause of GATT.Besides National Treatment and Most-Favourited-Nation clauses, Article 2.1(b), Article 3.8(b) and article 6.4 of GATT are related with internal tax. Other duties or charges of any kind in Article 2.1(b) are levied exclusively on importation. Internal taxes which levied at the time and places after entered into frontier can be levied on domestic products and imported products, ordinary customs duties which levied at the time and places entering frontier are levied on imported products only. The applied clause to internal tax is Article 3.2, those applied to ordinary custom duties and other duties or charges of any kind is Article 2.1(b). The purpose of a tax is nothing with the tax classification. Explanation and classification of a tax in internal laws or regulations are not the base to decide its final classification. Internal tax shall not be applied in a manner discriminating imported products. Whereas custom duties and other duties or charges of any kind, not exceeding the promised level, can be applied in a discriminating way. Article 3.8(b) of GATT doesn’t prevent the payment of subsidies exclusively to domestic producer.A subsidy is a benefit conferring financial contribution by a government or any public body. It made the acceptant in a more advantaged position. The prohibited subsidies must be specific subsidies. Subsidies contingent upon export performance and subsidies contingent upon the use of domestic over imported goods are specific subsidies. The exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption shall not be deemed to be a subsidy. The setting or change of generally applicable tax rates shall not be deemed to be a specific subsidy.Measures of avoiding double international taxation shall be exempted from examination of SCM Agreement. Taxpayer in whole world tax system shall be in a disadvantage position while competing with tax payer in foreign income exemption tax system country in a lower tax rate source country. Foreign income exemption tax system shall not be deemed as subsidy.TRIMs Agreement advantage developed country and disadvantage developing country. Measures violating National Treatment clause of GATT, not Measures violating MFN clause of GATT are prohibited by TRIMs Agreement. Before amending, the prohibited investment measures shall be limited in the five kinds measures in the annex of TRIMs Agreement. Developing countries should against the opinion that article 2 of TRIMs Agreement fledged from Article 3.4 of GATT.GATS adopted a unconditional MFN clause. Most-Favourited-Nation treatment applies to like services and like services suppliers. If the services are like then the suppliers are like. Trade in services is defined as four types: cross-border supply, consumption abroad, commercial presence, moving of natural persons. Member’s obligations under specific service sector are different according to service type. Service type has no impact on determining services likeness. No less favourable treatment in MFN of GATS include formal and actual treatments.National Treatment of GATS dealt with operation activities and don’t relate with marketing accession. Measures of avoiding double taxation in international agreements and measures of equitable or effective levying direct taxes are set in general exception, but the former can exempt from duties of National Treatment and Most-Favourited-Nation Treatment, the latter only can exempt from duties of National Treatment.China entered WTO according to Article 12 of WTO Agreement. There are many special clauses exclusively applied to China in the Protocol on the Accession of the People’s Republic of China. Article 3 of the protocol includes non-discrimination of goods, and of services, includes National Treatment and Most-Favourited-Nation treatment. What’s more, Article 3 of the protocol extends the privilege object to non-discrimination from imported products to foreign enterprises, foreign investment enterprises and foreign natural persons, lists the conditions under which goods are produced in the scope of non-discrimination.In the area of trade in services, according to Article 3 of the protocol, foreign enterprises and foreign natural persons can get privileges that they would not enjoy through the bridge of foreign investment enterprises. This will invalid the rule that National Treatment is limited in promised service sectors. China confirmed that not seek to invoke Articles 27.8,27.9,and 27.13 of the SCM Agreement and without recourse to Article 5 of TRIMs Agreement.The first case against China after entering WTO was China–Value–Added tax(“VAT”) on Integrated Circuits(“ICs”). The VAT rate on imported ICs domestically designed and manufactured outside of China and the VAT rate on other ICs are the same, it is hard to say that domestically produced ICs subjected to privileges other than imported ICs. Refund of the VAT on ICs were subsidies to domestic producer, Article 3.8(b) expressly regulates that Article 3 of GATT doesn’t prevent subsidies exclusively for domestic producers. The policy of VAT refund would not cause affecting in the meaning of Article 1.1 of GATS to services and services suppliers. The services of ICs design were input for ICs producing, VAT measures which were applied to ICs should subject to GATT not GATS.The second, third and fourth cases against china after entering WTO were China—Measures Affecting Imports of Automobile Parts instituted by European Communities, the United States and Canada respectively. The measures to determine whether imported automobile parts fulfill whole vehicle characteristics were methods of tariff classification. These methods didn’t change tariff structure or rise tariff rate. China has great freely decision rights on tariff classification and have not levied ordinary duties in excess of promised level, have not levied other duties or charges in excess of engaged date level. Under the circumstance that imported automobile parts with whole vehicle characteristics classified as whole vehicle, the VAT levied on imported products wasn’t higher than that on domestic like products.The purposes of the measures to determine whether imported automobile parts fulfill whole vehicle characteristics were avoiding tariff elusion not to protect domestic production. The measures might have effect of protecting domestic production, but it was caused by tariff itself. Article 3.4 and 3.5 are internal provisions with aim to provide equal competitive opportunities for domestic and imported products after imported products entered frontier, whereas the discussed measures were frontier measures. There wasn’t a subsidy in the meaning of Article 1 of SCM Agreement because the automobile producers didn’t benefit from the discussed measures. The promise made by China in paragraph 93 of the Report of the Working Party on the Accession of China could not be deemed as the tariff concession on completely knocked-down kits or semi-knocked down kits for motor was 10%. The benefits accrued from paragraph 93 just were anticipated benefits.

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