General Overview of Article III
One of the main goals of the World Trade Organization (hereinafter WTO) is the liberalization of international trade. In the Marrakesh Declaration, contracting states declared that they believe that ‘the trade liberalization… will lead to a progressively more open world trading environment’. In order to liberalize international trade it is necessary if not to remove but at least reduce trade barriers such as taxes, customs and other levies. Therefore, Article III of the General Agreement on Tariffs and Trade of 1994 (hereinafter GATT) stipulates that contracting parties should not apply internal taxes, and other internal charges, and laws and regulations and requirements affecting purchase, transportation, distribution or use of goods, offering for sale, the internal trade to imported or domestic products so as to afford protection to domestic production. In simple terms, Article III stands against economic protectionism. Also Article III is designed to provide equality of competitive provisions. It is also true that Article III ‘focuses on the promotion of economic opportunities for importers through the elimination of discriminatory governmental measures which impair fair international trade’.
The requirements of the Article III do not mean that a country cannot have its own taxation and regulation system. Indeed, it is a sovereign right of any country to pass such laws as it considers necessary. However, it is well established that international law puts certain limits on exercising international powers. GATT is an international treaty that puts certain limits on sovereign powers. Thus, it is no different from any other international treaty, since it is in the nature of international law to restrict exercising certain sovereign powers. Article III places certain limits on a State’s sovereign power to pass tax laws and regulations which affect international trade. At the same time, the WTO Appellate Body admits that its members ‘are free to pursue their own domestic goals through internal taxation or regulation’ under condition that such laws and regulations do not violate Article III.
Article III (1) and Article III (2)
The violation of Article III (2) leads also to the violation of Article III (1). Therefore, it is logical to start from the discussion of Article III (2). Article III (2) prohibits discrimination between imported products and like domestic products. In particular, Article III (2) stipulates that imported products should not be taxed in excess of like domestic products. In order to determine whether there is the violation of Article III (2), it is necessary to consider the following questions: (1) whether domestic and imported products are like products; and (2) whether imported products are subject to taxation in excess of domestic products. The Appellate Body of the WTO determines whether imported and domestic products are like on a case by case basis. If imported and domestic products are not like products different tax regimes can be applied to these products. In other words if important and domestic products are alike the rules of Article III (2) do not apply. However, if there are like imported and domestic products and imported products are taxed in excess of domestic ones, there is the violation of Article III (2). Even insignificant amount of ‘excess’ signifies that there is the violation of Article III (2). The WTO Appellate Body points out that in order to find out whether there is an excess it is necessary to consider an actual tax burden rather than a nominal one. At the same time tax differences do not necessarily signify the violation of Article III (2). If such differences are not based on the country of origin of a product but on the nature, qualities and properties of a product, tax differences may not be considered as the violation of Article III (2).
One of the most important requirements of Article III (1) is to avoid the protection of domestic products. In general one may say that GATT prohibits taxation of imported products ‘so as to afford protection to domestic production’. According to the WTO Panel, this requirement should be understood in narrow terms. In particular, the Panel notes that this provision does not prohibit introducing tax and regulatory policies to achieve goals other than protection of domestic production. It may happen that non-protectionist government policies may still introduce some regulatory distinctions between imported and like domestic products. Considering this the Panel points out that such policies cannot be considered as such that afford protection to domestic production. The Panel explains that the primary purpose of the GATT is to reduce trade barriers but not to harmonize treatment of the products. Therefore, the Panel notes that the GATT does not prohibit the policy options.
In a wake of aforementioned consideration, an important question arises: which measures are considered to be such as affording protection to domestic production. The Appellate Body states: ‘We believe it is possible to examine objectively the underlying criteria used in a particular tax measure, its structure, and its overall application to ascertain whether it is applied in a way that affords protection to domestic products’. Thus, one may observe that in order to determine whether the tax measure induces protectionism, the Appellate Body looks at its application criteria, and structure rather than on the intention of legislators. In simple terms, if tax measures lead to protectionism, the legislator’s intent is irrelevant. Thus, in Chile — Alcoholic Beverages the Appellate Body rejected Chile’s contention that its internal taxation measures on alcoholic beverages were aimed to reduce alcohol consumption in the country. The Appellate Body once again drew attention that it declines to adopt an approach which considers the reasons for which legislators introduced tax measures in question. This position is in some contradiction with the Panel’s position that governments may pass policies with other than protectionist goals even if such policies may result in discrimination. The Appellate Body further points out that the magnitude of the tax differentials can be an evidence of protection to domestic production. In other words, explicitly dissimilar taxation can be an indication of protectionism. This argument should be considered together with provision of taxation in excess which has been discussed earlier in this paper. If a country taxes imported products in excess of like domestic products it induces tax differentials. Therefore, according to the logic of the Appellate Body an excess can be an indication of protection to domestic products. As it has been explained earlier in this paper, taxation of imported products in excess of like domestic products is the violation of Article III (2). This violations further leads to the violation of Article III (1), since an excess can be an indicator of protection to domestic products.
Overall one may observe that in assessing tax measures adopted by a country the Appellate Body considered the principles of their application and their structure. The Appellate Body ignores the legislative intent. This position is inconsistent with the position of the WTO Panel which argues that the GATT does not intend to limit policy options. However, the Chile case clearly shows that policy options are in fact limited: the country cannot set its health policy – to reduce consumption of alcohol. The Appellate Body’s position seems to be destructive since it limits the country’s sovereign power to introduce policies that a country considers necessary. Such position can be legally challenged. It is true that while committing to the GATT contracting states voluntarily agreed to limit certain sovereign powers – to pass laws designed to protect domestic products. However, contracting states did not agree to limit their rights to pass policies with objectives other than economic protectionism.