CANADA - CERTAIN MEASURES CONCERNING PERIODICALS
WT/DS31/AB/R
AB-1997-2
30 June 1997

Report of the Appellate Body

II. Arguments of the Participants
A. Canada
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1. Applicability of the GATT 1994 to Part V.1 of the Excise Tax Act

Canada submits that the Panel erred in law when it applied Article III:2, first sentence, of the GATT 1994 to a measure affecting advertising services. Canada asserts that the GATT 1994 applies, as the GATT 1947 had always applied previously, to measures affecting trade in goods, but it has never been a regime for dealing with services in their own right. In Canada's view, if the GATT 1994 applied to all aspects of services measures on the basis of incidental, secondary or indirect effects on goods, the GATT 1994 would effectively be converted into a services agreement. More precisely, the GATT 1994 should not apply merely on the ground that a service makes use of a good as a tangible medium of communication. Assuming that the measure atissue is designed essentially to restrict access to the services market, the mere fact that a service makes use of a good as a vehicle or a medium is an insufficient ground on which to base a challenge under the GATT 1994.

Canada asserts that the Panel's decision to consider Part V.1 of the Excise Tax Act as a measure subject to Article III of the GATT 1994 was based largely upon an unwarranted eneralization of the terms of Article III:4, as well as a misconstruction of the word "indirectly" in Article III:2, first sentence. Canada argues that it is evident from its text that Article III:4 of the GATT 1994 governs only services measures that affect the ability of foreign goods to compete on an equal footing with domestic goods. Canada submits that advertising services are only subject to Article III:4 to the extent that they affect the "internal sale or offering for sale, purchase, transportation, distribution or use" of a product that is entitled to national treatment under Article III of the GATT 1994. The inference that advertising services in general are covered by Article III:2 of the GATT 1994 is without foundation.

Canada stresses that the concept of "indirectly" in Article III:2 of the GATT 1994 is intended to capture taxes which apply to "inputs" that contribute to the production or distribution of a good, such as raw materials, services inputs and intermediate inputs. It is important to distinguish services inputs that are directly involved in the production or marketing of a good from services that are "end-products" in their own right. In Canada's view, the advertising services of a publisher are not, like labour in the production of a car, an input into the production of a good. Canada asserts that services are often delivered by means of a good, and that the taxation of services that are associated with goods in this way does not "subject" those goods "indirectly" to the tax, because the tax does not affect the costs of the production, distribution and marketing of the goods. Canada argues that, although magazines serve as a tangible medium in which advertising is incorporated, this association, however close, does not meet the tests appropriate to the interpretation of Article III:2 of the GATT 1994. Canada maintains that advertising is not an input or a cost in the production, distribution or use of magazines as physical products. Therefore, the taxation of magazine advertising services is not indirect taxation of magazines as goods within the meaning of Article III:2.

Canada asserts that the Panel mischaracterized Part V.1 of the Excise Tax Act as a measure affecting trade in goods. It is a measure regulating access to the magazine advertising market. Most magazines represent two distinct economic outputs, that of a good and an advertising medium for providing a service, depending on the perspective of the purchaser. According to Canada, the tax is not applied to the consumer good because it is not based on, nor applied to, the price of a magazine. Instead, the tax is calculated using the value of advertising carried in a split-run edition of a magazine and is assessed against the publisher of each split-run
magazine as the seller of the advertising service.

In Canada's view, since the provision of magazine advertising services falls within the scope of the General Agreement on Trade in Services (the "GATS"), and Canada has not undertaken any commitments in respect of the provision of advertising services in its Schedule of Specific Commitments, Canada is not bound to provide national treatment to Members of the WTO with respect to the provision of advertising services in the Canadian market.
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B. United States
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1.Applicability of the GATT 1994 to Part V.1 of the Excise Tax Act

The United States submits that Canada's excise tax is not exempt from Article III of the GATT 1994 on the ground that it is a "services measure" subject only to the GATS. Canada has failed to demonstrate any significant conflict between the GATT 1994 and the GATS arising from this case or that, in any event, the GATS should be accorded priority over the GATT 1994. The United States argues that Canada is incorrect in suggesting that the GATT 1994 cannot apply to measures whose application affects both goods and services.

The United States asserts that the question of whether the GATT 1994 and the GATS may overlap to some extent is irrelevant. The fundamental legal question, which the panel addressed, is whether the two agreements impose conflicting obligations with respect to Canada's excise tax, and whether one agreement should be given priority over the other. The United States submits that the Panel was correct in pointing out that nothing in the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement")6 suggests that a measure that comes within the scope of the GATS cannot be equally subject to the GATT 1994.

The United States maintains that because Canada's general argument forbidding any significant overlap between the two agreements is incorrect, so too is Canada's more specific argument that Part V.1 of the Excise Tax Act cannot be subject to the GATT 1994 because it applies to advertising services. Measures affecting imported products are not excluded from the purview of the GATT 1994 simply because they take the form of a tax or other measure applied to "services". According to the United States, Canada's view that measures affecting imported goods are exempt from scrutiny under Article III of the GATT 1994 whenever they take the form of taxation or regulation of services would give WTO Members licence to impose a wide range of discriminatory tax and regulatory measures on imported goods. Should Canada's view prevail, a Member could, consistently with the GATT 1994, impose an exclusive tax on the rental of foreign cars, place a prohibitive surcharge on telephone services carried out using imported telecommunications equipment or tax medical services using foreign diagnostic machinery.

The United States asserts that for the purposes of Article III of the GATT 1994, it is irrelevant whether Canada's excise tax could be characterized as a measure affecting trade in advertising services within the terms of the GATS. The tax measure alters the terms of competition for imported split-run periodicals vis-à-vis like domestic magazines for the placement of advertisements -- as indeed it is intended to do -- and thus falls squarely within the purview of Article III:2, first sentence, of the GATT 1994.

The United States also submits that Canada's excise tax applies "directly or indirectly" to split-run periodicals. The sweeping language of Article III:2, first sentence, ensures coverage of taxes (such as taxes imposed on goods or services) that have the potential to affect the competitive position of imported and domestic goods. Thus, the Panel was correct to find that the terms "directly or indirectly" specifically encompass Canada's excise tax on split-run periodicals. The United States points out that the tax is assessed on a "per issue" basis, which plainly links the tax to the physical good, a particular issue of a magazine. The United States also stresses that
Part V.1 of the Excise Tax Act is entitled "Tax on Split-Run Periodicals", and the terms of the Excise Tax Act provide that the tax is imposed "in respect of" split-run editions of periodicals.

The United States submits that advertisements, together with editorial content, constitute fundamental, physical components of many, if not most, magazines. It is inconsistent to argue, as Canada does, that a tax concerning inputs is a tax directly or indirectly on a product, but a tax concerning a major component of that product is not. Furthermore, the United States asserts that advertisements affect a magazine's price, cost and competitive position as much as any input used in the production of a product.

The United States also maintains that, by its terms, the first sentence of Article III:2 applies only when imported products are "subject" to internal taxes. Since the language of that sentence includes both direct and indirect taxes on products, it is plain that the first sentence applies even when the immediate object of the taxation is not an imported product. Even if Canada's assertion that the tax applies to "advertising services" is correct, that would hardly be the end of the inquiry; the question would then be whether the tax nevertheless applies at least "indirectly" to split-run periodicals. The answer to that question is plainly "yes", as the language of the Excise Tax Act makes clear.. The notion that restricting a major use of a product -- in this case, the carrying of certain types of advertising -- cannot affect competitive conditions is untenable. By applying a confiscatory tax based on advertisements placed in split-run periodicals, Canada virtually ensures the elimination of such periodicals from the Canadian marketplace -- which indeed is the whole point of the tax.
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IV. Applicability of the GATT 1994
（注：争议问题：GATT 1994是否适用）
Canada's primary argument with respect to Part V.1 of the Excise Tax Act is that it is a measure regulating trade in services "in their own right" and, therefore, is subject to the GATS. Canada argues that the Panel's conclusion that Part V.1 of the Excise Tax Act is a measure affecting trade in goods, and, therefore, is subject to Article III:2 of the GATT 1994, is an error of law.

We are unable to agree with Canada's proposition that the GATT 1994 is not applicable to Part V.1 of the Excise Tax Act. First of all, the measure is an excise tax imposed on split-run editions of periodicals. We note that the title to Part V.1 of the Excise Tax Act reads, "TAX ON SPLIT-RUN PERIODICALS", not "tax on advertising". Furthermore, the "Summary" of An Act to Amend the Excise Tax Act and the Income Tax Act, reads: "The Excise Tax Act is amended to impose an excise tax in respect of split-run editions of periodicals". Secondly, a periodical is a good comprised of two components: editorial content and advertising content. Both components can be viewed as having services attributes, but they combine to form a physical product -- the periodical itself.

The measure in this appeal, Part V.1 of the Excise Tax Act, is a companion to Tariff Code 9958, which is a prohibition on imports of special edition periodicals, including split-run or regional editions that contain advertisements primarily directed to a market in Canada and that do not appear in identical form in all editions of an issue distributed in that periodical's country of origin. Canada agrees that Tariff Code 9958 is a measure affecting trade in goods, even though it applies to split-run editions of periodicals as does Part V.1 of the Excise Tax Act. As Canada stated in the oral hearing during this appeal:
Tariff Code 9958 is basically an import prohibition of a physical
good, i.e., the magazine itself. In that sense the entire debate was
as to whether or not there was a possible defence against the
application of Article XI of the GATT. In that case, therefore,
there were direct effects and Canada recognized that there were
effects on the physical good -- the magazine as it crossed the
border.

The Panel found that Tariff Code 9958 is an import prohibition, although it applies to split-run editions of periodicals which are distinguished by their advertising content directed at the Canadian market. Canada did not appeal this finding of the Panel. It is clear that Part V.1 of the Excise Tax Act is intended to complement and render effective the import ban of Tariff Code 9958. As a companion to the import ban, Part V.1 of the Excise Tax Act has the same objective and purpose as Tariff Code 9958 and, therefore, should be analyzed in the same manner.

An examination of Part V.1 of the Excise Tax Act demonstrates that it is an excise tax which is applied on a good, a split-run edition of a periodical, on a "per issue" basis. By its very structure and design, it is a tax on a periodical. It is the publisher, or in the absence of a publisher resident in Canada, the distributor, the printer or the wholesaler, who is liable to pay the tax, not the advertiser.

Based on the above analysis of the measure, which is essentially an excise tax imposed on split-run editions of periodicals, we cannot agree with Canada's argument that this internal tax does not "indirectly" affect imported products. It is a well-established principle that the trade effects of a difference in tax treatment between imported and domestic products do not have to be demonstrated for a measure to be found to be inconsistent with Article III. The fundamental purpose of Article III of the GATT 1994 is to ensure equality of competitive conditions between imported and like domestic products. We do not find it necessary to look to Article III:1 or Article III:4 of the GATT 1994 to give meaning to Article III:2, first sentence, in this respect. In Japan – Alcoholic Beverages, the Appellate Body stated that "Article III:1 articulates a general principle" which "informs the rest of Article III". However, we also said that it informs the different sentences in Article III:2 in different ways. With respect to Article III:2, second sentence, we held that "Article III:1 informs Article III:2, second sentence, through specific reference".

Article III:2, first sentence, uses the words "directly or indirectly" in two different contexts: one in relation to the application of a tax to imported products and the other in relation to the application of a tax to like domestic products. Any measure that indirectly affects the conditions of competition between imported and like domestic products would come within the provisions of Article III:2, first sentence, or by implication, second sentence, given the broader application of the latter.（注：对GATT 1994 第3条的解读）

The entry into force of the GATS, as Annex 1B of the WTO Agreement, does not diminish the scope of application of the GATT 1994. Indeed, Canada concedes that its position "with respect to the inapplicability of the GATT would have been exactly the same under the GATT 1947, before the GATS had ever been conceived".

We agree with the Panel's statement:
The ordinary meaning of the texts of GATT 1994 and GATS as
well as Article II:2 of the WTO Agreement, taken together,
indicates that obligations under GATT 1994 and GATS can
coexist and that one does not override the other.
（注：GATT 1994和GATS可同时适用）

We do not find it necessary to pronounce on the issue of whether there can be potential overlaps between the GATT 1994 and the GATS, as both participants agreed that it is not relevant in this appeal. Canada stated that its
         ... principal argument is not based ... on the need to avoid overlaps
and potential conflicts. On the contrary it is based on a textual
interpretation of the provision, on the plain meaning of the words
in Article III:2 -- more precisely the word ‘indirectly’ interpreted
in its legal context and in light of the object and purpose of the
provision.

We conclude, therefore, that it is not necessary and, indeed, would not be appropriate, in this appeal to consider Canada's rights and obligations under the GATS. The measure at issue in this appeal, Part V.1 of the Excise Tax Act, is a measure which clearly applies to goods -- it is an excise tax on split-run editions of periodicals. We will now proceed to analyze this measure in light of Canada's points of appeal under Article III:2 of the GATT 1994.
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VIII. Findings and Conclusions
For the reasons set out in this Report, the Appellate Body:
(a) upholds the Panel's findings and conclusions on the applicability of the GATT 1994 to Part V.1 of the Excise Tax Act; (…)

The Appellate Body recommends that the Dispute Settlement Body request Canada to bring the measures found in this Report and in the Panel Report, as modified by this Report, to be inconsistent with the GATT 1994 into conformity with Canada's obligations thereunder.
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