WORLD TRADE WT/DS31/AB/R
30June1997
ORGANIZATION(97-2653)
Appellate Body
CANADA -CERTAIN MEASURES CONCERNING PERIODICALS
AB-1997-2
Report oftheAppellate BodyWT/DS31/AB/R
Page1
WORLD TRADE ORGANIZATION
APPELLATE BODY
Canada -Certain Measures Concerning
Periodicals
Canada, Appellant/Appellee
United States, Appellant/AppelleeAB-1997-2
Present:
Matsushita, Presiding Member
Ehlermann, Member
Lacarte-Muró, Member
I. Introduction
Canada andtheUnited States appeal from certain issues oflawandlegal interpretations in
thePanel Report, Canada -Certain Measures Concerning Periodicals1(the"Panel Report"). ThePanel
wasestablished toconsider acomplaint bytheUnited States against Canada concerning threemeasures:
TariffCode99582,whichprohibitstheimportationintoCanadaofcertainperiodicals,includingsplit-run
editions; PartV.1oftheExcise TaxAct3,which imposes anexcise taxonsplit-run editions of
periodicals;andtheapplicationbyCanadaPostCorporation("CanadaPost")ofcommercial"Canadian",
commercial"international"and"funded"publicationsmailpostalrates,thelatterthroughthePublications
Assistance Program (the"PAP") maintained bytheDepartment ofCanadian Heritage ("Canadian
Heritage") andCanada Post.4
1WT/DS31/R, 14March 1997.
2Customs Tariff, R.S.C. 1985, c.41(3rdSupp.), s.114, Schedule VII,Item9958.
3AnActtoAmend theExcise TaxActandtheIncome TaxAct,S.C. 1995, c.46.
4Canada PostCorporation Act,R.S.C. 1985, c.C-10; Publications MailPostal Rates, Canada PostCorporation, effective
4March 1996; Canadian Publication MailProducts Sales Agreement, 1March 1995; International Publications MailProduct
(Canadian Distribution) Sales Agreement, 1March 1994; Memorandum ofAgreement concerning thePublications Assistance
Program between theDepartment ofCommunications andCanada PostCorporation (the"MOA").WT/DS31/AB/R
Page2
ThePanel Report wascirculated totheMembers oftheWorld Trade Organization (the"WTO")
on14March 1997. Itcontains thefollowing conclusions:
(a)Tariff Code 9958isinconsistent withArticle XI:1ofGATT 1994
andcannot bejustified under Article XX(d) ofGATT 1994; (b)Part
V.1oftheExcise TaxActisinconsistent withArticle III:2, first
sentence, ofGATT 1994; (c)theapplication byCanada Postoflower
"commercial Canadian" postal rates todomestically-produced
periodicals thantoimported periodicals, including additional discount
options available onlytodomestic periodicals, isinconsistent with
Article III:4ofGATT 1994; but(d)themaintenance ofthe"funded"
ratescheme isjustified under Article III:8(b) ofGATT 1994.5
ThePanel made thefollowing recommendation:
ThePanel recommends thattheDispute Settlement Body request
Canada tobring themeasures thatarefound tobeinconsistent with
GATT 1994 intoconformity withitsobligations thereunder.6
On29April 1997, Canada notified theDispute Settlement Body7(the"DSB") ofitsintention
toappeal certain issues oflawcovered inthePanel Report andlegalinterpretations developed bythe
Panel, pursuant toparagraph 4ofArticle 16oftheUnderstanding onRules andProcedures Governing
theSettlement ofDisputes (the"DSU"),andfiledaNotice ofAppeal withtheAppellate Body, pursuant
toRule20oftheWorking Procedures forAppellate Review (the"Working Procedures ").On12May
1997, Canada filedanappellant 'ssubmission.8On14May1997, theUnited States filedanappellant 's
submission pursuant toRule23(1) oftheWorking Procedures. On26May1997, Canada filedan
appellee 'ssubmission pursuant toRule23(3) oftheWorking Procedures andtheUnited States filed
anappellee 'ssubmission pursuant toRule22oftheWorking Procedures .Theoralhearing provided
forinRule27oftheWorking Procedures washeldon2June1997, atwhich theparticipants presented
theirarguments andanswered questions fromtheDivision oftheAppellate Body hearing theappeal.
5Panel Report, para. 6.1.
6Panel Report, para. 6.2.
7WT/DS31/5, 2May 1997.
8Pursuant toRule 21(1) oftheWorking Procedures.WT/DS31/AB/R
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II. Arguments oftheParticipants
A. Canada
Canada submits thatthePanel erred inlawbycharacterizing PartV.1oftheExcise TaxAct
asameasure regulating trade ingoods subject totheGATT 1994. Inthealternative, Canada argues
that,evenontheassumption thattheGATT 1994applies, thePanel erred inlawwhen itfound PartV.1
oftheExcise TaxActtobeinconsistent withArticle III:2, firstsentence, oftheGATT 1994. In
particular, Canada submits thatthePanel erred inlawinfinding thatimported United States 'split-run
periodicals9andCanadian non-split-run periodicals arelikeproducts; andinfailing toapply theprinciple
ofnon-discrimination thatisembodied inArticle III:2, firstsentence, oftheGATT 1994. Canada
agrees withthePanel'sconclusion thatthe"funded" postal ratescheme isapermissible subsidy in
accordance withtheterms andconditions ofArticle III:8(b) oftheGATT 1994.
1. Applicability oftheGATT 1994 toPartV.1oftheExcise TaxAct
Canada submits thatthePanel erred inlawwhen itapplied Article III:2, firstsentence, ofthe
GATT 1994toameasure affecting advertising services. Canada asserts thattheGATT 1994applies,
astheGATT 1947hadalways applied previously, tomeasures affecting tradeingoods, butithasnever
beenaregime fordealing withservices intheirownright. InCanada 'sview, iftheGATT 1994applied
toallaspects ofservices measures onthebasis ofincidental, secondary orindirect effects ongoods,
theGATT 1994would effectively beconverted intoaservices agreement. More precisely, theGATT
1994should notapply merely ontheground thataservice makes useofagoodasatangible medium
ofcommunication. Assuming thatthemeasure atissueisdesigned essentially torestrict access tothe
services market, themere factthataservice makes useofagood asavehicle oramedium isan
insufficient ground onwhich tobaseachallenge under theGATT 1994.
Canada asserts thatthePanel'sdecision toconsider PartV.1oftheExcise TaxActasameasure
subject toArticle IIIoftheGATT 1994 wasbased largely upon anunwarranted generalization ofthe
terms ofArticle III:4, aswellasamisconstruction oftheword"indirectly" inArticle III:2, firstsentence.
Canada argues thatitisevident fromitstextthatArticle III:4oftheGATT 1994governs onlyservices
measures thataffect theability offoreign goods tocompete onanequal footing withdomestic goods.
9Weusetheterms "periodical" and"magazine" interchangeably inthisReport.WT/DS31/AB/R
Page4
Canada submits thatadvertising services areonlysubject toArticle III:4totheextent thattheyaffect
the"internal saleoroffering forsale,purchase, transportation, distribution oruse"ofaproduct that
isentitled tonational treatment under Article IIIoftheGATT 1994. Theinference thatadvertising
services ingeneral arecovered byArticle III:2oftheGATT 1994 iswithout foundation.
Canada stresses thattheconcept of"indirectly" inArticle III:2oftheGATT 1994isintended
tocapture taxes which apply to"inputs" thatcontribute totheproduction ordistribution ofagood,
suchasrawmaterials, services inputs andintermediate inputs. Itisimportant todistinguish services
inputs thataredirectly involved intheproduction ormarketing ofagoodfromservices thatare"end-
products" intheirownright. InCanada 'sview, theadvertising services ofapublisher arenot,like
labour intheproduction ofacar,aninput intotheproduction ofagood. Canada asserts thatservices
areoften delivered bymeans ofagood, andthatthetaxation ofservices thatareassociated withgoods
inthiswaydoesnot"subject" those goods "indirectly" tothetax,because thetaxdoesnotaffect the
costsoftheproduction,distributionandmarketingofthegoods.Canadaarguesthat,althoughmagazines
serve asatangible medium inwhich advertising isincorporated, thisassociation, however close, does
notmeetthetestsappropriate totheinterpretation ofArticle III:2oftheGATT 1994. Canada maintains
thatadvertising isnotaninput oracostintheproduction, distribution oruseofmagazines asphysical
products. Therefore, thetaxation ofmagazine advertising services isnotindirect taxation ofmagazines
asgoods within themeaning ofArticle III:2.
Canada asserts thatthePanel mischaracterized PartV.1oftheExcise TaxActasameasure
affecting trade ingoods. Itisameasure regulating access tothemagazine advertising market. Most
magazines represent twodistinct economic outputs, thatofagood andanadvertising medium for
providing aservice, depending ontheperspective ofthepurchaser. According toCanada, thetax
isnotapplied totheconsumer goodbecause itisnotbased on,norapplied to,thepriceofamagazine.
Instead, thetaxiscalculated using thevalue ofadvertising carried inasplit-run edition ofamagazine
andisassessed against thepublisher ofeachsplit-run magazine astheseller oftheadvertising service.
InCanada 'sview, since theprovision ofmagazine advertising services fallswithin thescope
oftheGeneral Agreement onTrade inServices (the"GATS"), andCanada hasnotundertaken any
commitmentsinrespectoftheprovisionofadvertisingservicesinitsScheduleofSpecificCommitments,
Canada isnotbound toprovide national treatment toMembers oftheWTO withrespect totheprovision
ofadvertising services intheCanadian market.WT/DS31/AB/R
Page5
2. Consistency ofPartV.1oftheExcise TaxActwithArticle III:2oftheGATT
1994
Should theAppellate Body conclude thatPartV.1oftheExcise TaxActisproperly subject
tothejurisdiction oftheGATT 1994, Canada submits, asanalternative argument, thatsuchmeasure
isconsistent withArticle III:2, firstsentence, oftheGATT 1994. First, Canada asserts thatthePanel
erred initsfinding thatimported split-run periodicals andCanadian non-split-run periodicals are"like
products" within themeaning ofArticle III:2, firstsentence, oftheGATT 1994. ThePanel disregarded
theevidence before it,andbased itsfinding onaspeculative hypothesis, thusfailing tomake "an
objective assessment ofthefactsofthecase" asrequired byArticle 11oftheDSU.InCanada 'sview,
the"likeproduct" testunder Article III:2, firstsentence, requires acomparison ofanimported product
withadomestic product. While thePanel acknowledged thecorrectness ofthistest,thePanel failed
toapply itbyusing ahypothetical example foritscomparison rather thanactual examples ofsplit-run
andnon-split-run magazines provided byCanada. Canada notes thatthePanel asserted thatits
hypothetical example wasnecessary because there werenoimported split-run periodicals inCanada
duetotheimport prohibition under Tariff Code 9958. However, Canada argues thattherearecertain
"grandfathered" split-run magazines produced inCanada, andthatthose magazines provide anaccurate
representation ofthecontent andproperties ofasplit-run edition based onanon-Canadian parent
magazine. ThePanel didnotconsider theevidence which hadbeenfiledbyCanada10,itdidnotprovide
anyreason whythatevidence wasnotrelevant, andinstead based itsanalysis upon anhypothetical
scenario. Therefore, Canada argues, thePanel followed anapproach which isinconsistent withthe
letter andspirit ofArticle 11oftheDSU.
Furthermore, Canada submits thatthePanel made twoerrors initshypothetical analysis of
"likeproducts". First, thePanel failed tocompare animported product withadomestic product, and
instead itcompared twoimported "Canadian" editions. Second, thePanel failed tocompare products
which could bemarketed simultaneously intheCanadian market. Canada alsoargues thatthePanel's
decision failstoreflect thenarrow construction andcase-by-case approach required bytheAppellate
Body Report inJapan -Taxes onAlcoholic Beverages ("Japan -Alcoholic Beverages ").11Thecase-by-
caseapproach requires ananalysis based upon thespecific properties ofthemagazines inaCanadian
context.
10Comparing TIME (aUnited States 'magazine) andTIME Canada (asplit-run magazine) withMaclean 's(adomestic
non-split runmagazine).
11WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996.WT/DS31/AB/R
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Thechiefand,forallpractical purposes, theonlydistinguishing characteristic ofamagazine
isitscontent. Although Canada recognizes thatthePanel didnot,inprinciple, reject theideathat
content canberelevant, Canada argues thatthePanel evaded adetermination ofwhether split-run
periodicals containing foreign content aresubstantially identical tomagazines developed specifically
foraCanadian readership.
Canada submits thatcontent developed forandaimed attheCanadian market cannot bethe
sameasforeign content. Content fortheCanadian market willinclude Canadian events, topics, people
andperspectives. Thecontent maynotbeexclusively Canadian, butthebalance willberecognizably
andevendramatically different thanthatwhich isfound inforeign publications which merely reproduce
editorial content developed forandaimed atanon-Canadian market.
Canada alsosubmits that,evenifUnited States 'split-run periodicals andCanadian non-split-
runperiodicalsare"likeproducts",PartV.1oftheExciseTaxActdoesnotdiscriminateagainstimported
products. Canada affirms thatthetaxisnon-discriminatory, inform andinfact,andhasnogreater
impact onimported products thanondomestic products. Because thelegislation doesnotmake any
distinctionbetweendomesticandimportedproducts,thetaxisfreefromanytaintofovertdiscrimination.
Canada asserts thatthere canbenoviolation ofArticle III:2, firstsentence, unless imported products,
asaclass, aretaxed inexcess oflikedomestic products. Canada submits thatthemere potential that
anindividual, imported itemmight betaxed atahigher ratethanalikedomestic product cannot create
anautomatic violation, when itresults fromfiscal classifications thatarenotthemselves discriminatory
informorinfact. Article III:2wasnotintended toimpose fiscal harmonization intaxrates, methods
orclassifications. Canada states thatitsinterpretation doesnotinvolve thesubjectivity ofthenow-
discredited "aims andeffects" test. Canada suggests onlythatifthefiscal categories ofameasure
areorigin-neutral andexhibit noinherent bias, thenthemere existence ofsuchcategories, with
differential ratesoftaxation, doesnotviolate Article III:2. Inthepresent case, Canada asserts there
isnodejureordefacto discrimination, andthedefinitions (orfiscal categories) usedintheExcise
TaxActdisplay noinherent biasagainst imported products.
With respect tothesecond sentence ofArticle III:2oftheGATT 1994, Canada argues that
imported split-run anddomestic non-split-run periodicals arenotdirectly competitive orsubstitutable
products according tothecriteria inJapan -Alcoholic Beverages .Because content issospecific in
magazines andbecause readers arelooking forsomething fairly specific, magazines arenotWT/DS31/AB/R
Page7
interchangeable orsubstitutable. Readers buymultiple magazines. These arecomplex questions of
fact.
Canada argues that,inthecaseathand, therearetwoseparate determinations tobemade under
Article III:2. Thefirstsentence relates towhether ornotthereisdiscrimination against likeproducts.
Only ifthere isnoviolation ofthefirstsentence cantheAppellate Body decide whether themeasure
isconsistent withthesecond sentence ofArticle III:2. Onthispoint, Canada argues, itisnottheactual
decision ofthePanel thatisinquestion, butthefactthatthePanel made nodecision atallonthesecond
sentence ofArticle III:2. Anexamination ofthesecond sentence would involve anexamination of
factual elements which havenotbeendealtwithonewayortheother bythePanel inthefirstinstance.
Canada 'sposition isthatthesecond sentence ofArticle III:2isnotanappropriate subject for
appellate review inthiscase. Canada argues thatthejurisdiction oftheAppellate Body islimited to
matters thatarespecifically appealed asconstituting errors oflaworinterpretation inthePanel Report
within themeaning ofparagraph 17.6oftheDSU.TheUnited States failed toraisethePanel'sfindings
onArticle III:2, second sentence, asapoint ofappeal, andtherefore, theAppellate Body hasno
jurisdiction tolookintothisissue. IftheAppellate Body decides toreverse thePanel'sfindings on
Article III:2, firstsentence, thatshould betheendofthematter.
3. Consistency ofthe"Funded" Postal RateScheme withArticle III:8(b) ofthe
GATT 1994
Canada submits that,consistent withthePanel'sfindings, thepayments made byCanadian
Heritage toCanada Posttoprovide Canadian publishers withreduced postal ratesarepayments of
subsidies exclusively todomestic producers within themeaning ofArticle III:8(b) oftheGATT 1994.
Canada asserts thatnothing intheexpression, "payment ofsubsidies exclusively todomestic
producers" implies anylimitations onthemanner inwhich thepayment mustbemade. Inthiscase,
thepayments made byCanadian Heritage toCanada Postaremade forthesolebenefit ofCanadian
publishers. InCanada 'sview, Canadian Heritage ispurchasing abenefit fordomestic producers.
Canada argues thatthephrase "exclusively todomestic producers" doesnotsupport theUnited
States 'assertion thatapayment must actually bemade directly tothepublishers. Rather, thewordWT/DS31/AB/R
Page8
"exclusively" isconcerned withthedistinction between "domestic" asopposed to"non-domestic"
producers. Canada submits thatthegeneral thrust ofArticle IIIisagainst discrimination between
imported anddomestic products. Inthiscontext, Canada considers thatgranting agovernment subsidy
"exclusively"todomesticproducersmeansgrantingasubsidyonlytotheproducersofdomesticproducts,
inthesense thatitispaidtothem alone andnottoforeign producers.
Canada asserts thattheUnited States 'position isbased onadifference ofform, notsubstance,
andthatthespecific forminwhich thesubsidy ispaidisirrelevant totheoperation ofArticle III:8(b)
oftheGATT 1994. Theword "including" inalegal textisillustrative, notexhaustive, andit
demonstrates thattheMembers intended tocover averybroad range ofsubsidies, regardless ofthe
particular form ofthesubsidy orthemanner ofpayment. InCanada 'sview, the1990 panel report
inEuropean Economic Community -Payments andSubsidies PaidtoProcessors andProducers of
Oilseeds andRelated Animal-Feed Proteins ("EEC-Oilseeds ")12confirms thatthepayment ofsubsidies
canbeindirect, provided thatthecondition ofexclusivity ismet.Canada submits thatindirect payment
merely creates apresumption thatapayment notmade directly toproducers isnotmade exclusively
tothem. However, thepanel report inEEC-Oilseeds clearly leaves open thepossibility thatthe
presumption canberebutted intherightcircumstances. InCanada 'sview, indirect payment creates
atmost apresumption, butitisarebuttable presumption.
Canada submits thatthebroad meaning of"payment" inArticle III:8(b) isconfirmed bythe
factthattheword "payment" intheFrench textoftheGATT 1994 appears as"attribution", andnot
as"paiement". Theexpression "payment ofsubsidies" istranslated intoFrench as"attribution de
subventions", i.e.granting ofsubsidies. Canada argues theexpression "attribution desubventions"
clearly doesnotrequire thattheremustbeanactual transfer ofgovernment funds todomestic producers.
Canada points outthatitsinterpretation ofArticle III:8(b) oftheGATT 1994doesnotdiminish
theprotection offered under Article IIIgenerally. Whether thecheques arewritten toCanada Post
ortothepublishers willnotchange thecompetitive conditions between magazines. Canada submits
thatitmakes nosense tosuggest thatArticle III:8(b) should beinterpreted inamanner thatcanonly
leadtogovernment inefficiencies indelivering subsidies toproducers.
12Adopted 25January 1990, BISD 37S/86.WT/DS31/AB/R
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Canada alsoargues thatthepanel reports quoted bytheUnited States initsappellant 's
submission13donotsupport theconclusion thatasubsidy mustbepaiddirectly todomestic producers
toqualify under theprovisions ofArticle III:8(b). Those panel reports donotapply tothefactsin
thisdispute. Themethod ofsubsidy payment isnot,inandofitself, conclusive indetermining whether
Article III:8(b) oftheGATT 1994applies. Theessential factor isthatthepayment mustbemade by
thegovernment forthebenefit ofdomestic producers.
B. United States
TheUnited States agrees withthePanel'sfindings andconclusions concerning Tariff Code
9958, PartV.1oftheExcise TaxActandthelower "commercial Canadian" postal rates, assummarized
inparagraph 6.1ofthePanel Report, buttheUnited States submits thatthePanel erred indetermining
thatCanada 's"funded" postal ratescheme isjustified byArticle III:8(b) oftheGATT 1994.
1. Applicability oftheGATT 1994 toPartV.1oftheExcise TaxAct
TheUnited States submits thatCanada 'sexcise taxisnotexempt fromArticle IIIoftheGATT
1994 ontheground thatitisa"services measure" subject onlytotheGATS. Canada hasfailed to
demonstrate anysignificant conflict between theGATT 1994 andtheGATS arising from thiscase
orthat,inanyevent, theGATS should beaccorded priority overtheGATT 1994. TheUnited States
argues thatCanada isincorrect insuggesting thattheGATT 1994 cannot apply tomeasures whose
application affects bothgoods andservices.
TheUnited States asserts thatthequestion ofwhether theGATT 1994 andtheGATS may
overlap tosome extent isirrelevant. Thefundamental legalquestion, which thepanel addressed, is
whether thetwoagreements impose conflicting obligations withrespect toCanada 'sexcise tax,and
whether oneagreement should begiven priority overtheother. TheUnited States submits thatthe
Panel wascorrect inpointing outthatnothing intheMarrakesh Agreement Establishing theWorld
13Panel Report, Italian Discrimination Against Agricultural Machinery, ("Italian Agricultural Machinery "),adopted 23
October 1958, BISD 7S/60; Panel Report, United States -Measures Affecting Alcoholic andMaltBeverages ,("United States -
MaltBeverages "),adopted 19June1992, BISD 39S/206; Panel Report, United States -Measures Affecting theImportation,
Internal SaleandUseofTobacco, ("United States -Tobacco "),DS44/R, adopted 4October 1994; Panel Report, EEC -
Oilseeds ,adopted 25January 1990, BISD 37S/86.WT/DS31/AB/R
Page10
Trade Organization (the"WTO Agreement ")14suggests thatameasure thatcomes within thescope
oftheGATS cannot beequally subject totheGATT 1994.
TheUnited States maintains thatbecause Canada 'sgeneral argument forbidding anysignificant
overlap between thetwoagreements isincorrect, sotooisCanada 'smore specific argument thatPart
V.1oftheExcise TaxActcannot besubject totheGATT 1994because itapplies toadvertising services.
Measures affecting imported products arenotexcluded from thepurview oftheGATT 1994 simply
because theytaketheformofataxorother measure applied to"services". According totheUnited
States, Canada 'sviewthatmeasures affecting imported goods areexempt fromscrutiny under Article III
oftheGATT 1994whenever theytaketheformoftaxation orregulation ofservices would giveWTO
Members licence toimpose awiderange ofdiscriminatory taxandregulatory measures onimported
goods. Should Canada 'sviewprevail, aMember could, consistently withtheGATT 1994, impose
anexclusive taxontherental offoreign cars,placeaprohibitive surcharge ontelephone services carried
outusing imported telecommunications equipment ortaxmedical services using foreign diagnostic
machinery.
TheUnited States asserts thatforthepurposes ofArticle IIIoftheGATT 1994, itisirrelevant
whether Canada 'sexcise taxcould becharacterized asameasure affecting tradeinadvertising services
within theterms oftheGATS. Thetaxmeasure alters theterms ofcompetition forimported split-run
periodicals vis-à-vis likedomestic magazines fortheplacement ofadvertisements --asindeed itis
intended todo--andthusfallssquarely within thepurview ofArticle III:2, firstsentence, oftheGATT
1994.
TheUnitedStatesalsosubmitsthatCanada'sexcisetaxapplies"directlyorindirectly"tosplit-run
periodicals. Thesweeping language ofArticle III:2, firstsentence, ensures coverage oftaxes (such
astaxes imposed ongoods orservices) thathavethepotential toaffect thecompetitive position of
imported anddomestic goods. Thus, thePanel wascorrect tofindthattheterms "directly orindirectly"
specifically encompass Canada 'sexcise taxonsplit-run periodicals. TheUnited States points outthat
thetaxisassessed ona"perissue" basis, which plainly linksthetaxtothephysical good, aparticular
issue ofamagazine. TheUnited States alsostresses thatPartV.1oftheExcise TaxActisentitled
"Tax onSplit-Run Periodicals", andtheterms oftheExcise TaxActprovide thatthetaxisimposed
"inrespect of"split-run editions ofperiodicals.
14Done atMarrakesh, Morocco, 15April 1994.WT/DS31/AB/R
Page11
TheUnited States submits thatadvertisements, together witheditorial content, constitute
fundamental, physical components ofmany, ifnotmost, magazines. Itisinconsistent toargue, as
Canada does, thatataxconcerning inputs isataxdirectly orindirectly onaproduct, butataxconcerning
amajor component ofthatproduct isnot.Furthermore, theUnited States asserts thatadvertisements
affect amagazine 'sprice, costandcompetitive position asmuch asanyinput usedintheproduction
ofaproduct.
TheUnited States alsomaintains that,byitsterms, thefirstsentence ofArticle III:2applies
onlywhen imported products are"subject" tointernal taxes. Since thelanguage ofthatsentence includes
bothdirect andindirect taxes onproducts, itisplain thatthefirstsentence applies evenwhen the
immediate object ofthetaxation isnotanimported product. Even ifCanada 'sassertion thatthetax
applies to"advertising services" iscorrect, thatwould hardly betheendoftheinquiry; thequestion
would thenbewhether thetaxnevertheless applies atleast"indirectly" tosplit-run periodicals. The
answer tothatquestion isplainly "yes", asthelanguage oftheExcise TaxActmakes clear. Thenotion
thatrestricting amajor useofaproduct --inthiscase, thecarrying ofcertain types ofadvertising -
-cannot affect competitive conditions isuntenable. Byapplying aconfiscatory taxbased on
advertisementsplacedinsplit-runperiodicals,Canadavirtuallyensurestheeliminationofsuchperiodicals
from theCanadian marketplace --which indeed isthewhole point ofthetax.
2. Consistency ofPartV.1oftheExcise TaxActwithArticle III:2oftheGATT
1994
TheUnitedStatessubmitsthatsplit-runperiodicalsare"like"domesticnon-split-runperiodicals.
IntheUnited States 'view, noneofthethreeseparate claims oflegalerrorraised byCanada withrespect
tothePanel'sfindings andconclusions onArticle III:2, firstsentence, arepersuasive.
TheUnited States asserts thatCanada 'sargument thatthePanel erred byusing ahypothetical
example asabasisforcomparison iswithout merit. ThePanel correctly determined thattheapplication
ofthetaxturned onfactors other thanthecharacteristics oftheproduct soldinCanada andthat,as
aresult,importedsplit-runperiodicalsanddomesticnon-split-runperiodicalscouldbepracticallyidentical
products. TheUnited States points outthattheExcise TaxActdoesnotdraw anydistinctions based
ontypeofeditorial content and,consequently, under theExcise TaxActasplit-run periodical could
theoretically beentirely Canadian-oriented. Bythesame token, anon-split-run periodical neednot
haveanyarticles withaparticular Canadian focus. Thus, according totheUnited States, Canada 'sWT/DS31/AB/R
Page12
attempt todemonstrate thatTIME Canada andMaclean 'sreflect adifferent editorial orientation issimply
irrelevant because theapplication oftheExcise TaxActisnotbased onanysuchdifference.
TheUnited States alsosubmits that,evenifonecould credit Canada 'sargument thatitisseeking
through theexcise taxtoensure "original content" inmagazines soldinCanada, thisresult would be
contrary totheobject andpurpose ofArticle III.IntheUnited States 'view, iftheGATT 1994permitted
Members torequire thatimported goods bedesigned exclusively orprimarily fortheirmarkets, they
could easily insulate theirmarkets fromthecomparative economic advantages enjoyed byproducers
inother countries. Byrequiring "originality", WTO Members could exclude products thataresold
inmultiple markets orthatenjoy theeconomies ofscale thatresult from suchsales.
TheUnited States stresses thatCanada hasbanned importation ofsplit-run periodicals forover
30years. Forthisreason, thePanel wasentirely justified tousehypothetical examples initsreasoning
onthe"like product" issue.
According totheUnited States, Canada 'sargument thattheExcise TaxActdoesnotimpose
ahigher taxonimported products thanonlikedomestic products isdifficult inthelightofthefact
that,(1)theActmakes onlyoneclassofmagazines --split-runs --subject tothespecial 80percent
excise tax; and(2)thePanel found that,forpurposes ofGATT Article III:2, imported split-run
periodicals are"like" non-split-run domestic Canadian magazines. TheUnited States argues that
manifestly imported split-run periodicals aresubject toahigher rateoftaxation thanlikedomestic
non-split-run periodicals. Thatistheendoftheinquiry forpurposes ofArticle III:2, firstsentence.
TheUnited States alsomaintains thatCanada 's80percent excise taxalters thecompetitive environment
intheCanadian magazine market against imported split-run magazines andthusfavours "like"
domestically-produced periodicals. Thus, Canada 'sproposed "discrimination" testbased on"imports
asaclass" isinconsistent withtherecent panel andAppellate Body reports inJapan -Alcoholic
Beverages15,where noadditional "discrimination" testbased on"classes" ofimported products was
accepted.
TheUnited States requests theAppellate Body toaffirm thePanel'sconclusions thatPartV.1
oftheExcise TaxActisinconsistent withArticle III:2, firstsentence, oftheGATT 1994.
15Panel Report, WT/DS8/R, WT/DS10/R, WT/DS11/R, andAppellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R, adopted 1November 1996.WT/DS31/AB/R
Page13
Withrespect towhether imported split-run periodicals anddomestic non-split-run periodicals
aredirectly competitive orsubstitutable products within themeaning ofthesecond sentence ofArticle
III:2, theUnited States asserts thatitisclearthatiftherewasnocompetition forreaders, therewould
benoneedforPartV.1oftheExcise TaxAct.Initsexcise tax,Canada hastargeted those magazines
thatarelikely tobethemost competitive withCanadian magazines forreaders.
Regarding thejurisdictional arguments presented byCanada concerning whether theAppellate
Body canexamine aclaim under thesecond sentence ofArticle III:2, theUnited States responds that
there were nogrounds fortheUnited States toclaim thatthePanel hadmade alegal error innot
addressing thealternative argument raised bytheUnited States under Article III:2, second sentence.
ThePanel hadresolved theissue byfinding aviolation ofArticle III:2, firstsentence, oftheGATT
1994 andtherefore, hadcorrectly stopped atthatpoint. TheUnited States alsorefers totherecent
Appellate Body Report inUnited States -Measure Affecting Imports ofWoven Wool Shirts andBlouses
fromIndia16which upheld thejudicial economy approach taken bypanels.
IntheUnited States 'view, thissituation isanalogous totheAppellate Body'sreasoning
concerning Article XXoftheGATT 1994 inUnited States -Standards forReformulated and
Conventional Gasoline ("United States -Gasoline ").17Theprocedure suggested byCanada isnot
consistent withthegoals ofArticle 3.3oftheDSU.Theparties tothedispute made anumber of
arguments before thePanel relating tothesecond sentence ofArticle III:2aswellastoArticle III:4
oftheGATT 1994. TheUnited States asserts thatthere isasufficient legalbasis fortheAppellate
Body toapply thelawtothefactsinthepanel record inanalyzing aclaim under thesecond sentence
ofArticle III:2should theAppellate Body decide toreverse thePanel'sfindings onArticle III:2, first
sentence, oftheGATT 1994.
3. Consistency ofthe"Funded" Postal RateScheme withArticle III:8(b) ofthe
GATT 1994
TheUnited States submits thatthePanel erred indetermining thatCanada 's"funded" postal
rateregime fallswithin thescope ofArticle III:8(b) oftheGATT 1994. According totheUnited States,
neither theintra-governmental transfers offunds between theCanadian governmental entities northe
16WT/DS33/AB/R, adopted 23May 1997, p.18.
17WT/DS2/AB/R, adopted 20May 1996.WT/DS31/AB/R
Page14
application byCanada Postoflower postage ratestodomestic periodicals amounts to"thepayment
ofsubsidies exclusively todomestic producers" within themeaning ofArticle III:8(b).
TheUnited States argues thatany"payment" under Canada 's"funded" postal ratescheme is
made fromonegovernment entity toanother, notfromtheCanadian government todomestic producers
asrequired byArticle III:8(b). Canada Post'sfavourable postage ratesfordomestic periodicals do
not,inthemselves, amount toapayment "exclusively todomestic producers", because whether ornot
thereisany"subsidy" reflected inthe"funded" postal rates, theytaketheformofadvantageous transport
anddelivery ratesfordomestic periodicals. Inmaking itsfindings, thePanel ignored boththeplain
language ofArticle III:8(b) andaseries ofadopted panel reports under theGATT 1947thatcorrectly
interpreted Article III:8(b) asapplying onlytotheactual payment ofsubsidies todomestic producers.18
TheUnited States alsosubmits thatthePanel didnotclarify howapostal charge could amount toa
subsidy payment, norwhypostal feesimposed ondomestic periodicals should beviewed aspayments
todomestic periodical producers.
According totheUnited States, thetextofArticle III:8(b) plainly requires: (1)thatthere be
apayment, and(2)thatthispayment bemade exclusively todomestic producers. TheUnited States
asserts thattheuseoftheword "payment" inthephrase "payment ofsubsidies" --instead ofmore
general terms suchas"provision", "furnishing" or"granting" --indicates thatthescope ofArticle
III:8(b) islimited tomeasures involving anactual transfer ofgovernment funds todomestic producers.
Furthermore, thetwospecific examples ofexempted measures setoutinArticle III:8(b) --"payments
todomestic producers derived fromtheproceeds ofinternal taxes orcharges applied consistently with
theprovisions ofthisArticle andsubsidies effected through governmental purchases ofdomestic
products" --confirm thisinterpretation. IntheUnited States 'view, bothtypes ofsubsidies aretypically
effected through monetary payments made byagovernment todomestic producers.
Inresponse toCanada 'sreference totheFrench translation oftheword "payment" inArticle
III:8(b), theUnited States points outthatintheSpanish version oftheWTO Agreement ,adopted at
Marrakesh, thetranslation of"payment" waschanged from"concesión" intheGATT 1947to"pago"
intheGATT 1994. Theterm"concesión" means "grant", whereas "pago" means "payment".
18Panel Report, Italian Agricultural Machinery, adopted 23October 1958, BISD 7S/60; Panel Report, United States -
MaltBeverages ,adopted 19June1992, BISD 39S/206; Panel Report, United States -Tobacco ,DS44/R ,adopted 4October
1994; Panel Report, EEC -Oilseeds ,adopted 25January 1990, BISD 37S/86.WT/DS31/AB/R
Page15
TheUnited States alsomaintains thattheuseofthephrase "exclusively todomestic producers"
indicates thatthepayment mustactually bemade totheproducers, andexcludes advantages provided
bygovernments todomestic products thatmayprovide indirect benefits todomestic producers. Article
III:8(b) reflects awillingness onthepartoftheframers oftheGATT 1947toallow governments some
ability tosubsidize domestic production. Ontheother hand, theUnited States considers thatthenarrow
terms oftheprovision suggests thatthedrafters wished torestrict suchsubsidies toaparticular form,
i.e.direct payments, thatwould notundermine thebasic purpose ofArticle III.
According totheUnited States, thedistinction between (a)payments todomestic producers
and(b)advantages conferred withrespect todomestic products issignificant inthecontext oftheobject
andpurpose ofArticle III.First, governmental advantages directed todomestic products, suchaslower
transportation ordelivery rates, directly andimmediately undercut Article III'sfundamental prohibition
oflessfavourable treatment ofimported products. Bycontrast, payments made todomestic producers
donotautomatically distort competition between domestic andimported products. Second, measures
thatarereflected inintra-governmental transfers, rate-setting andthelikemaymoreeasily escape public
attention thandirect monetary transfers toproducers, andthusmaybelessopen topublic scrutiny
anddebate. Third, governments mayfinditmore costly andadministratively complex toestablish
asystem ofdirect payments toproducers thantoprovide advantages directly tiedtothetreatment of
products. Forthepreceding reasons, thelimitation ofArticle III:8(b) todirect payments toproducers
mayreducetheincidenceandmagnitudeofgovernmentadvantagesprovidedsolelytodomesticinterests,
thereby reducing thepossibility ofcompetitive distortions thatcould undermine Article III'sobjective
ofmaintaining equal competitive conditions fordomestic andimported products.
TheUnited States asserts thatthePanel failed toaddress thequestion ofwhether payment was
actually made todomestic producers. Instead, thePanel assumed, without articulating itsreasoning,
thatthepayment toCanada Postconstituted payment ofasubsidy todomestic producers, andthatthe
onlyissue indispute withrespect totheapplication ofArticle III:8(b) waswhether thatpayment was
made "exclusively" todomestic producers. Neither Canadian Heritage norCanada Postmakes any
"payment" toCanadian producers under Canada 's"funded" postal rateprogramme. Rather, Canadian
Heritage periodically transfers funds toCanada Post,andthelatterdoesnotpaythose funds toCanadian
producers. Canada Postusesthefunds tounderwrite, inpart,thecostofproviding transportation
anddelivery services fordomestic periodicals atlow,"funded" postal rates. TheUnited States argues
thatwhether ornotCanada 'sdiscriminatory "funded" ratescheme reflects agovernment "subsidy",
anysuchsubsidy isnotgranted directly intheform ofpayments todomestic periodical producers.WT/DS31/AB/R
Page16
Rather, thesubsidy isreflected inthepreferential ratecharged inconnection withthetransportation
anddelivery ofCanadian-produced periodicals.
Ifsustained,theUnitedStatessubmits,thePanel'sfindinginthiscasewouldfreeWTOMembers
touseawide range ofreduced-price governmental services andtaxmeasures toconfer advantages
exclusively ondomestically-produced goods. Such aresult would notonlyundermine theequality
ofcompetitive opportunities forimported anddomestic goods thatArticle IIIismeant toensure, but
would alsoupset thebalance ofrights andobligations reflected inArticles III:2andIII:4, ontheone
hand, andArticle III:8(b), ontheother.
III. Issues Raised inthisAppeal
Theappellant, Canada, raises thefollowing issues inthisappeal:
(a) Whether PartV.1oftheExcise TaxActisameasure affecting tradeingoods towhich
Article III:2oftheGATT 1994 applies, orwhether itisameasure affecting trade in
services towhich theGATS applies;
(b) IfArticle III:2oftheGATT 1994 isapplicable toPartV.1oftheExcise TaxAct,
whether imported split-run periodicals anddomestic non-split-run periodicals are"like
products" within themeaning ofArticle III:2, firstsentence, oftheGATT 1994; and
(c) Even ifimported split-run periodicals anddomestic non-split-run periodicals are"like
products" within themeaning ofArticle III:2, firstsentence, oftheGATT 1994, is
itnecessary todemonstrate thatPartV.1oftheExcise TaxActdiscriminates against
imported products.
Theappellant, theUnited States, raises thefollowing issue inthisappeal:
(a) Whether Canada 'sspecial "funded" postal ratesprogramme qualifies as"apayment
ofsubsidies exclusively todomestic producers" pursuant toArticle III:8(b) oftheGATT
1994.WT/DS31/AB/R
Page17
IV. Applicability oftheGATT 1994
Canada 'sprimary argument withrespect toPartV.1oftheExcise TaxActisthatitisameasure
regulating tradeinservices "intheirownright" and,therefore, issubject totheGATS. Canada argues
thatthePanel'sconclusion thatPartV.1oftheExcise TaxActisameasure affecting trade ingoods,
and,therefore, issubject toArticle III:2oftheGATT 1994, isanerror oflaw.19
Weareunable toagree withCanada 'sproposition thattheGATT 1994 isnotapplicable to
PartV.1oftheExcise TaxAct.Firstofall,themeasure isanexcise taximposed onsplit-run editions
ofperiodicals. WenotethatthetitletoPartV.1oftheExcise TaxActreads, "TAX ONSPLIT-RUN
PERIODICALS", not"taxonadvertising". Furthermore, the"Summary" ofAnActtoAmend the
Excise TaxActandtheIncome TaxAct20,reads: "TheExcise TaxActisamended toimpose anexcise
taxinrespect ofsplit-run editions ofperiodicals". Secondly, aperiodical isagoodcomprised oftwo
components: editorial content andadvertising content.21Bothcomponents canbeviewed ashaving
services attributes, buttheycombine toform aphysical product --theperiodical itself.
Themeasure inthisappeal, PartV.1oftheExcise TaxAct,isacompanion toTariff Code
9958, which isaprohibition onimports ofspecial edition periodicals, including split-run orregional
editions thatcontain advertisements primarily directed toamarket inCanada andthatdonotappear
inidentical form inalleditions ofanissue distributed inthatperiodical 'scountry oforigin. Canada
agrees thatTariff Code 9958isameasure affecting trade ingoods, eventhough itapplies tosplit-run
editions ofperiodicals asdoesPartV.1oftheExcise TaxAct. AsCanada stated intheoralhearing
during thisappeal:
Tariff Code 9958isbasically animport prohibition ofaphysical good,
i.e.,themagazine itself. Inthatsense theentire debate wasasto
whether ornotthere wasapossible defence against theapplication
ofArticle XIoftheGATT. Inthatcase, therefore, there weredirect
effects andCanada recognized thatthere wereeffects onthephysical
good --themagazine asitcrossed theborder.22
19Canada 'sAppellant 'sSubmission, 12May 1997, pp.2-3,paras. 6,9,13and15.
20S.C. 1995, c.46.
21Panel Report, para. 3.33.
22Canada 'sStatement attheoralhearing, 2June 1997.WT/DS31/AB/R
Page18
ThePanel found thatTariff Code 9958isanimport prohibition, although itapplies tosplit-run
editions ofperiodicals which aredistinguished bytheiradvertising content directed attheCanadian
market. Canada didnotappeal thisfinding ofthePanel. Itisclear thatPartV.1oftheExcise Tax
Actisintended tocomplement andrender effective theimport banofTariff Code 9958.23Asa
companion totheimport ban,PartV.1oftheExcise TaxActhasthesame objective andpurpose as
Tariff Code 9958 and,therefore, should beanalyzed inthesame manner.
Anexamination ofPartV.1oftheExcise TaxActdemonstrates thatitisanexcise taxwhich
isapplied onagood, asplit-run edition ofaperiodical, ona"perissue" basis. Byitsverystructure
anddesign, itisataxonaperiodical. Itisthepublisher, orintheabsence ofapublisher resident
inCanada, thedistributor, theprinter orthewholesaler, whoisliable topaythetax,nottheadvertiser.24
Based ontheabove analysis ofthemeasure, which isessentially anexcise taximposed on
split-run editions ofperiodicals, wecannot agree withCanada 'sargument thatthisinternal taxdoes
not"indirectly" affect imported products. Itisawell-established principle thatthetrade effects of
adifference intaxtreatment between imported anddomestic products donothavetobedemonstrated
forameasure tobefound tobeinconsistent withArticle III.25Thefundamental purpose ofArticle
IIIoftheGATT 1994istoensure equality ofcompetitive conditions between imported andlikedomestic
products.26Wedonotfinditnecessary tolooktoArticle III:1orArticle III:4oftheGATT 1994
togivemeaning toArticle III:2, firstsentence, inthisrespect. InJapan -Alcoholic Beverages ,the
Appellate Body stated that"Article III:1articulates ageneral principle" which "informs therestof
Article III".27However, wealsosaidthatitinforms thedifferent sentences inArticle III:2indifferent
23Panel Report, paras. 3.25 and3.26.
24AnActtoAmend theExcise TaxActandtheIncome TaxAct,S.C. 1995, c.46,s.35(1).
25Appellate Body Report, Japan -Alcoholic Beverages ,WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted
1November 1996, p.16.
26Panel Report, United States -Tobacco ,DS44/R, adopted 4October 1994, para. 99;Panel Report, United States -
MaltBeverages ,adopted 19June1992, BISD 39S/206, para. 5.6; Panel Report, Canada -Import, Distribution andSale
ofCertain Alcoholic Drinks byProvincial Marketing Agencies ,adopted 18February 1992, BISD 39S/27, para. 5.6; Panel
Report, United States -Section 337oftheTariff Actof1930,("United States -Section 337"),adopted 7November 1989,
BISD 36S/345, para. 5.13; Panel Report, United States -Taxes onPetroleum andCertain Imported Substances ,adopted
17June1987, BISD 34S/136, para. 5.1.9; Panel Report, Brazilian Internal Taxes ,adopted 30June1949, BISD IIS/181,
para. 15.
27WT/DS8/AB/R, WT/DS10/AB/R,WT/DS11/AB/R, adopted 1November 1996, p.18.WT/DS31/AB/R
Page19
ways. Withrespect toArticle III:2, second sentence, weheldthat"Article III:1informs Article III:2,
second sentence, through specific reference".28
Article III:2, firstsentence, usesthewords "directly orindirectly" intwodifferent contexts:
oneinrelation totheapplication ofataxtoimported products andtheother inrelation totheapplication
ofataxtolikedomestic products. Anymeasure thatindirectly affects theconditions ofcompetition
between imported andlikedomestic products would come within theprovisions ofArticle III:2, first
sentence, orbyimplication, second sentence, given thebroader application ofthelatter.
Theentry intoforce oftheGATS, asAnnex 1BoftheWTO Agreement ,doesnotdiminish
thescope ofapplication oftheGATT 1994. Indeed, Canada concedes thatitsposition "with respect
totheinapplicability oftheGATT would havebeenexactly thesame under theGATT 1947, before
theGATS hadeverbeenconceived".29
Weagree withthePanel'sstatement:
Theordinary meaning ofthetextsofGATT 1994 andGATS aswell
asArticle II:2oftheWTO Agreement, taken together, indicates that
obligations under GATT 1994 andGATS canco-exist andthatone
doesnotoverride theother.30
Wedonotfinditnecessary topronounce ontheissueofwhether therecanbepotential overlaps
between theGATT 1994andtheGATS, asbothparticipants agreed thatitisnotrelevant inthisappeal.31
Canada stated thatits
...principal argument isnotbased ...ontheneedtoavoid overlaps
andpotential conflicts. Onthecontrary itisbased onatextual
interpretation oftheprovision, ontheplain meaning ofthewords in
Article III:2--more precisely theword ‘indirectly ’interpreted inits
legalcontext andinlightoftheobject andpurpose oftheprovision.32
28Ibid.,p.23.Inthisrespect, wedraw attention toparagraphs 4.8,5.37and5.38ofthePanel Report, andwenote
thataPanel finding thathasnotbeenspecifically appealed inaparticular caseshould notbeconsidered tohavebeenendorsed
bytheAppel lateBody. Suchafindingmaybeexami nedbytheAppel lateBody when theissueisraisedproperlyinasubsequent
appeal.
29Canada 'sAppellant 'sSubmission, 12May 1997, p.3,para. 14.
30Panel Report, para. 5.17.
31Canada 'sAppellant 'sSubmission, 12May1997, p.3,para. 14;United States 'Appellee 'sSubmission, 26May1997,
p.13,para. 29.
32Canada 'sStatement attheoralhearing, 2June 1997.WT/DS31/AB/R
Page20
Weconclude, therefore, thatitisnotnecessary and,indeed, would notbeappropriate, inthis
appeal toconsider Canada 'srights andobligations under theGATS. Themeasure atissueinthisappeal,
PartV.1oftheExcise TaxAct,isameasure which clearly applies togoods --itisanexcise taxon
split-run editions ofperiodicals. Wewillnowproceed toanalyze thismeasure inlightofCanada 's
points ofappeal under Article III:2oftheGATT 1994.
V. Article III:2, First Sentence, oftheGATT 1994
With respect totheapplication ofArticle III:2, firstsentence, weagree withthePanel that:
...thefollowing twoquestions need tobeanswered todetermine
whether there isaviolation ofArticle III:2ofGATT 1994: (a)Are
imported"split-run"periodicalsanddomesticnon"split-run"periodicals
likeproducts?; and(b)Areimported "split-run" periodicals subject
toaninternal taxinexcess ofthatapplied todomestic non"split-run"
periodicals? Iftheanswers tobothquestions areaffirmative, there
isaviolation ofArticle III:2, firstsentence.138Iftheanswer tothe
firstquestion isnegative, weneedtoexamine further whether there
isaviolation ofArticle III:2, second sentence.33
______________________
138Inthiscontext, weneed notexamine theapplicability ofArticle III:1separately,
because, astheAppellate Body noted initsrecent report, thefirstsentence ofArticle
III:2is,ineffect, anapplication ofthegeneral principle embodied inArticle III:1.
Therefore, iftheimported anddomestic products are"likeproducts", andifthetaxes
applied totheimported products are"inexcess of"those applied tothelikedomestic
products, thenthemeasure isinconsistent withArticle III:2, firstsentence. Appellate
Body Report onJapan -Taxes onAlcoholic Bever ages, op.cit.,pp.18-9.
A. LikeProducts
Weagree withthelegalfindings andconclusions inparagraphs 5.22-5.24ofthePanel Report.
Inparticular, thePanel correctly enunciated, intheory, thelegaltestfordetermining "likeproducts"
inthecontext ofArticle III:2, firstsentence, asestablished intheAppellate Body Report inJapan -
Alcoholic Beverages .34Wealsoagree withthesecond point made bythePanel. AsArticle III:2, first
sentence, normally requires acomparison between imported products andlikedomestic products, and
astherewerenoimports ofsplit-run editions ofperiodicals because oftheimport prohibition inTariff
33Panel Report, para. 5.21.
34WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, pp.19-20.WT/DS31/AB/R
Page21
Code 9958, which thePanel found (andCanada didnotcontest onappeal) tobeinconsistent withthe
provisions ofArticle XIoftheGATT 1994, hypothetical imports ofsplit-run periodicals havetobe
considered.35AsthePanel recognized, theproper testisthatadetermination of"like products" for
thepurposes ofArticle III:2, firstsentence, mustbeconstrued narrowly, onacase-by-case basis, by
examining relevant factors including:
(i) theproduct 'send-uses inagiven market;
(ii) consumers 'tastes andhabits; and
(iii) theproduct 'sproperties, nature andquality.36
However, thePanel failed toanalyze these criteria inrelation toimported split-run periodicals
anddomestic non-split-run periodicals.37Firstly, wenotethatthePanel didnotbaseitsfindings on
theexhibits andevidence before it,inparticular, thecopies ofTIME, TIME Canada andMaclean 's
magazines, presented byCanada, andthemagazines, Pulp&Paper andPulp&Paper Canada, presented
bytheUnited States38,ortheReport oftheTaskForce ontheCanadian Magazine Industry (the"Task
Force Report ").39
Secondly, weobserve thatthePanel based itsfindings thatimported split-run periodicals and
domestic non-split-run periodicals "can" belikeproducts, onasingle hypothetical example constructed
using aCanadian-owned magazine, Harrowsmith Country Life. However, thisexample involves a
comparison between twoeditions ofthesamemagazine, bothimported products, which could nothave
beenintheCanadian market atthesame time. Thus, thediscussion atparagraph 5.25ofthePanel
Report isinapposite, because theexample isincorrect.40
35Panel Report, para. 5.23.
36Appellate Body Report, Japan -Alcoholic Beverages ,WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted
1November 1996, p.20.
37Panel Report, para5.26.
38TIME andPulp&Paper arenon-split-run United States 'magazines which areimported intoCanada. TIME Canada
isaUnited States 'split-run magazine produced inCanada. Maclean 'sandPulp&Paper Canada areCanadian non-split-run
magazines.
39"AQuestion ofBalance", Report oftheTaskForce ontheCanadian Magazine Industry ,Canada 1994, FirstSubmission
oftheUnited States tothePanel, 5September 1996, Exhibit A.
40Both theUnited States andCanada agreed thattheexample ofHarrowsmith Country Lifewasincorrect: Canada 's
Appellant 'sSubmission, 12May1997, pp.17-18, paras. 64-71; United States 'Appellee 'sSubmission, 26May1997, p.
32,para. 80;Canada 'sStatement attheoralhearing, 2June1997; United States 'Statement attheoralhearing, 2June
1997.WT/DS31/AB/R
Page22
ThePanel leaptfrom itsdiscussion ofanincorrect hypothetical example41to
...conclude thatimported "split-run" periodicals anddomestic non
"split-run" periodicals canbelikeproducts within themeaning of
Article III:2ofGATT 1994. Inourview, thisprovides sufficient
grounds toanswer intheaffirmative thequestion astowhether the
twoproducts atissue arelikebecause, ...thepurpose ofArticle III
istoprotect expectations oftheMembers astothecompetitive
relationship between theirproducts andthose ofother Members, not
toprotect actual trade volumes.42(Emphasis added)
Itisnotobvious toushowthePanel came totheconclusion thatithad"sufficient grounds"
tofindthetwoproducts atissuearelikeproducts fromanexamination ofanincorrect example which
ledtoaconclusion thatimported split-run periodicals anddomestic non-split-run periodicals canbe
"like".
Wetherefore conclude that,asaresult ofthelackofproper legalreasoning based oninadequate
factual analysis inparagraphs 5.25and5.26ofthePanel Report, thePanel could notlogically arrive
attheconclusion thatimported split-run periodicals anddomestic non-split-run periodicals arelike
products.
Wearemindful ofthelimitation ofourmandate inArticles 17.6and17.13 oftheDSU.
According toArticle 17.6, anappeal shallbelimited toissues oflawcovered inthePanel Report and
legalinterpretations developed bythePanel. Thedetermination ofwhether imported anddomestic
products are"likeproducts" isaprocess bywhich legalruleshavetobeapplied tofacts. Inanyanalysis
ofArticle III:2, firstsentence, thisprocess isparticularly delicate, since "likeness" mustbeconstrued
narrowly andonacase-by-case basis. Wenotethat,duetotheabsence ofadequate analysis inthe
Panel Report inthisrespect, itisnotpossible toproceed toadetermination oflikeproducts.
Wefeelconstrained, therefore, toreverse thelegalfindings andconclusions ofthePanel on
"like products". AsthePanel itself stated, there aretwoquestions which needtobeanswered to
determine whether there isaviolation ofArticle III:2oftheGATT 1994: (a)whether imported and
domestic products arelikeproducts; and(b)whether theimported products aretaxed inexcess of
thedomestic products. Iftheanswers tobothquestions areaffirmative, there isaviolation ofArticle
41Panel Report, para5.25.
42Panel Report, para5.26.WT/DS31/AB/R
Page23
III:2, firstsentence. Iftheanswer toonequestion isnegative, thereisaneedtoexamine further whether
themeasure isconsistent withArticle III:2, second sentence.43
Having reversed thePanel'sfindings on"likeproducts", wecannot answer bothquestions in
thefirstsentence ofArticle III:2intheaffirmative asisrequired todemonstrate aviolation ofthat
sentence. Therefore, weneedtoexamine theconsistency ofthemeasure withthesecond sentence
ofArticle III:2oftheGATT 1994.
B. Non-Discrimination
Inlightofourconclusions onthequestion of"likeproducts" inArticle III:2, firstsentence,
wedonotfinditnecessary toaddress Canada 'sclaim of"non-discrimination" inrelation tothat
sentence.44
VI. Article III:2, Second Sentence, oftheGATT 1994
Wewillproceed toexamine theconsistency ofPartV.1oftheExcise TaxActwiththesecond
sentence ofArticle III:2oftheGATT 1994.
A. Jurisdiction
Canada asserts thattheAppellate Body doesnothavethejurisdiction toexamine aclaim under
Article III:2, second sentence, asnoparty hasappealed thefindings ofthePanel onthisprovision.
IntheUnited States 'view, theprocedure suggested byCanada isnotconsistent withthefundamental
goals stated inArticle 3.3oftheDSU,according towhich theprompt settlement ofdisputes isessential
totheeffective functioning oftheWTO andthemaintenance ofaproper balance ofrights andobligations
ofMembers. Contrary toCanada, theUnited States asserts thatthereisasufficient basisinthepanel
record fortheAppellate Body toapply thelawtothese facts.
43SeePanel Report, para. 5.21, cited withapproval atpage 20herein.
44SeeCanada 'sAppellant 'sSubmission, 12May1997, p.3,para. 12,where Canada makes thisargument asanalternative
point ofappeal.WT/DS31/AB/R
Page24
Webelieve theAppellate Body can,andshould, complete theanalysis ofArticle III:2ofthe
GATT 1994 inthiscasebyexamining themeasure withreference toitsconsistency withthesecond
sentence ofArticle III:2, provided thatthere isasufficient basis inthePanel Report toallow usto
doso.Thefirstandsecond sentences ofArticle III:2areclosely related. Thelinkbetween thetwo
sentences isapparent fromthewording ofthesecond sentence, which begins withtheword"moreover".
Itisalsoemphasized inAdArticle III,paragraph 2,which provides: "Ataxconforming tothe
requirements ofthefirstsentence ofparagraph 2would beconsidered tobeinconsistent withthe
provisions ofthesecond sentence onlyincases where ...".Anexamination oftheconsistency ofPart
V.1oftheExcise TaxActwithArticle III:2, second sentence, istherefore partofalogical continuum.
TheAppellate Body found itself inasimilar situation inUnited States -Gasoline .Having
reversed thePanel'sconclusions onthefirstpartofArticle XX(g) andhaving completed theArticle
XX(g) analysis inthatcase, theAppellate Body thenexamined themeasure 'sconsistency withthe
provisions ofthechapeau ofArticle XX,based onthelegalfindings contained inthePanel Report.45
Asthelegal obligations inthefirstandsecond sentences aretwoclosely-linked steps in
determining theconsistency ofaninternal taxmeasure withthenational treatment obligations ofArticle
III:2, theAppellate Body would beremiss innotcompleting theanalysis ofArticle III:2. Inthecaseat
hand, thePanel made legalfindings andconclusions concerning thefirstsentence ofArticle III:2, and
because wereverse oneofthose findings, weneedtodevelop ouranalysis based onthePanel Report
inorder toissue legalconclusions withrespect toArticle III:2, second sentence, oftheGATT 1994.
B. TheIssues Under Article III:2, Second Sentence
InourReport inJapan -Alcoholic Beverages ,weheldthat:
...three separate issues must beaddressed todetermine whether an
internal taxmeasure isinconsistent withArticle III:2, second sentence.
These three issues arewhether:
(1) theimported products andthedomestic products are
"directly competitive orsubstitutable products" which
areincompetition witheachother;
(2) thedirectly competitive orsubstitutable imported and
domestic products are"notsimilarly taxed";and
45WT/DS2/AB/R, adopted 20May 1996, pp.22-29.WT/DS31/AB/R
Page25
(3) thedissimilar taxation ofthedirectly competitive or
substitutable imported domestic products is"applied
...soastoaffordprotectiontodomesticproduction".46
1. Directly Competitive orSubstitutable Products
InJapan -Alcoholic Beverages ,theAppellate Body stated thataswith"likeproducts" under
thefirstsentence ofArticle III:2, thedetermination oftheappropriate range of"directly competitive
orsubstitutable products" under thesecond sentence must bemade onacase-by-case basis.47The
Appellate Body alsofound itappropriate tolookatcompetition intherelevant markets asoneamong
anumber ofmeans ofidentifying thebroader category ofproducts thatmight bedescribed as"directly
competitive orsubstitutable", astheGATT isacommercial agreement, andtheWTO isconcerned,
afterall,withmarkets.
According tothePanel Report, Canada considers thatsplit-run periodicals arenot"directly
competitive orsubstitutable" forperiodicals witheditorial content developed fortheCanadian market.
Although theymaybesubstitutable advertising vehicles, theyarenotcompetitive orsubstitutable
information vehicles.48Substitution implies interchangeability. Oncethecontent isaccepted asrelevant,
itseems obvious thatmagazines created fordifferent markets arenotinterchangeable. They serve
different end-uses.49Canada draws attention toastudy bytheeconomist, Leigh Anderson, onwhich
theTaskForce Report wasatleastpartially-based, which notes:
USmagazines canprobably provide areasonable substitute for
Canadian magazines intheir capacity asanadvertising medium,
although some advertisers maybebetter served byaCanadian vehicle.
Inmany instances however, theywould provide averypoorsubstitute
asanentertainment andcommunication medium.50
Canada submits thattheTaskForce Report characterizes therelationship asoneof"imperfect
substitutability" --farfrom thedirect substitutability required bythisprovision. Themarket share
ofimported anddomestic magazines inCanada hasremained remarkably constant overthelast30-plus
46WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, p.24.
47Ibid.,p.25.
48Panel Report, para. 3.113.
49Panel Report, para. 3.115.
50Panel Report, para. 3.119.WT/DS31/AB/R
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years. Ifcompetitive forces hadbeeninplaytothedegree necessary tomeetthestandard of"directly
competitive" goods, onewould haveexpected some variations. Allthiscastsserious doubt onwhether
thecompetition orsubstitutability between imported split-run periodicals anddomestic non-split-run
periodicals issufficiently "direct" tomeetthestandard ofAdArticle III.51
AccordingtotheUnitedStates,theveryexistenceofthetaxisitselfproofofcompetitionbetween
split-run periodicals andnon-split-run periodicals intheCanadian market. AsCanada itself has
acknowledged,split-runperiodicalscompetewithwhollydomestically-producedperiodicalsforadvertising
revenue, which demonstrates thattheycompete forthesame readers. Theonlyreason firms place
advertisements inmagazines istoreach readers. Afirmwould consider split-run periodicals tobe
anacceptable advertising alternative tonon-split-run periodicals onlyifthatfirmhadreason tobelieve
thatthesplit-run periodicals themselves would beanacceptable alternative tonon-split-run periodicals
intheeyesofconsumers. According totheUnited States, Canada acknowledges that"[r]eaders attract
advertisers" andthat,"...Canadian publishers areready tocompete withmagazines published allover
theworld inorder tokeeptheirreaders, butthecompetition isfierce".52
According totheUnited States, theTaskForce Report together withstatements made bythe
Minister ofCanadian Heritage andCanadian officials, provide further acknowledgment ofthe
substitutability ofimported split-run periodicals anddomestic non-split-run periodicals intheCanadian
market.53
WefindtheUnited States 'position convincing, while Canada 'sassertions donotseem tous
tobecompatible withitsowndescription oftheCanadian market forperiodicals.
According tothePanel:
Canada explained thatthereisadirect correlation between circulation,
advertising revenue andeditorial content. Thelarger thecirculation,
themore advertising amagazine canattract. Withgreater advertising
revenue, apublisher canafford more tospend oneditorial content.
Themoreapublisher spends, themoreattractive themagazine islikely
tobetoitsreaders, resulting incirculation growth. Similarly, aloss
51Panel Report, para. 3.119.
52Panel Report, para. 3.117.
53Panel Report, para. 3.118.WT/DS31/AB/R
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ofadvertising revenue willproduce a"downward spiral". Less
advertising entails lesseditorial, areduction inreadership and
circulation andadiminished ability toattract advertising. Magazines
canbesoldonnewsstands, orthrough subscriptions, ordistributed
atnocosttoselected consumers ...Canadian English-language
publications facetough competition onnewsstands; theyaccount for
only18.5 percentofEnglish-language periodicals distributed on
newsstands, where space isdominated byforeign publications ...54
...Canadian periodical publishers faceamajor competitive challenge
intheirbusiness environment thatisnotcommon totheircounterparts
incountries withalarger population toserve. Thepivotal factisthe
penetration oftheCanadian market byforeign magazines. Canadian
readers haveunrestricted access toimported magazines. Atthesame
time, Canadian readers havedemonstrated thattheyvalue magazines
thataddress theirdistinct interests andperspectives. However, foreign
magazines dominate theCanadian market. They account for81.4per
centofallnewsstand circulation andslightly more thanhalf(50.4 per
cent)oftheentire circulation ofEnglish-language magazines destined
forthegeneral public inCanada.55
Thisdescription oftheCanadian market forperiodicals corresponds tothefollowing passages
oftheTaskForce Report ,asquoted inthePanel Report:
"[Canadian publishers ']English-language consumer magazines face
significant competition forsalesfromimported consumer magazines.
Inlarge measure, thisisbecause themajority ofthemagazines are
fromtheUnited States andareaclose substitute. ...Itisreasonable
toexpect thatthecontent ofAmerican magazines willbeofinterest
toCanadians ...".
Thisreport alsoobserves that"there isconsiderable pricecompetition"
onnewsstands between domestic andimported magazines", andthat:
"theinitial effect oftheentry ofCanadian regional editions offoreign
magazines intotheCanadian advertising market would bealossof
advertising pages inCanadian publications offering advertisers a
readership withsimilar demographics".56
54Panel Report, para. 3.28.
55Panel Report, para. 3.29.
56Panel Report, para. 3.118.WT/DS31/AB/R
Page28
Thisdescription corresponds alsotothestatement made bythethenMinister ofCanadian
Heritage, theHonourable Michel Dupuy:
Canadians aremuch more interested inAmerican daily life,beit
political orsports lifeoranyother kind, thanviceversa. Therefore,
thereality ofthesituation isthatwemust protect ourselves against
split-runs coming fromforeign countries and,inparticular, fromthe
United States.57
Thestatementbytheeconomist,LeighAnderson,quotedbyCanadaandtheTaskForceReport's
description oftherelationship asoneof"imperfect substitutability" doesnotmodify ourappreciation.
Acaseofperfect substitutability would fallwithin Article III:2, firstsentence, while weareexamining
thebroader prohibition ofthesecond sentence. Wearenotimpressed either byCanada 'sargument
thatthemarket share ofimported anddomestic magazines hasremained remarkably constant overthe
last30-plus years, andthatonewould haveexpected some variation ifcompetitive forces hadbeen
inplaytothedegree necessary tomeetthestandard of"directly competitive" goods. Thisargument
wouldhaveweightonlyifCanadahadnotprotectedthedomesticmarketofCanadianperiodicalsthrough,
among other measures, theimport prohibition ofTariff Code 9958 andtheexcise taxofPartV.1of
theExcise TaxAct.
Ourconclusion thatimported split-run periodicals anddomestic non-split-run periodicals are
"directly competitive orsubstitutable" doesnotmean thatallperiodicals belong tothesame relevant
market, whatever theireditorial content. Aperiodical containing mainly current news isnotdirectly
competitive orsubstitutable withaperiodical dedicated togardening, chess, sports, music orcuisine.
Butnewsmagazines, likeTIME, TIME Canada andMaclean 's,aredirectly competitive orsubstitutable
inspiteofthe"Canadian" content ofMaclean 's.Thecompetitive relationship isevencloser inthe
caseofmore specialized magazines, likePulp&Paper ascompared withPulp&Paper Canada, two
trade magazines presented tothePanel bytheUnited States.
Thefactthat,among these examples, onlyTIME Canada isasplit-run periodical, andthat
itisnotimported butisproduced inCanada, doesnotaffect atallourappreciation ofthecompetitive
relationship. Thecompetitive relationship ofimported split-run periodicals destined fortheCanadian
market isevencloser todomestic non-split-run periodicals thanthecompetitive relationship between
57Panel Report, para. 3.118.WT/DS31/AB/R
Page29
importednon-split-runperiodicalsanddomesticnon-split-runperiodicals.Importedsplit-runperiodicals
contain advertisements targeted specifically attheCanadian market, while imported non-split-run
periodicals donotcarry suchadvertisements.
We,therefore,concludethatimportedsplit-runperiodicalsanddomesticnon-split-runperiodicals
aredirectly competitive orsubstitutable products insofarastheyarepartofthesame segment ofthe
Canadian market forperiodicals.
2. NotSimilarly Taxed
Having found thatimported split-run anddomestic non-split-run periodicals ofthesame type
aredirectlycompetitiveorsubstitutable,wemustexaminewhethertheimportedproductsandthedirectly
competitive orsubstitutable domestic products arenotsimilarly taxed. PartV.1oftheExcise Tax
Acttaxes split-run editions ofperiodicals inanamount equivalent to80percentofthevalue ofall
advertisements inasplit-run edition. Incontrast, domestic non-split-run periodicals arenotsubject
toPartV.1oftheExcise TaxAct.Following thereasoning oftheAppellate Body inJapan -Alcoholic
Beverages58,dissimilar taxation ofevensome imported products ascompared todirectly competitive
orsubstitutable domestic products isinconsistent withtheprovisions ofthesecond sentence ofArticle
III:2. InUnited States -Section 337,thepanel found:
...thatthe“nolessfavourable ”treatment requirement ofArticle III:4
hastobeunderstood asapplicable toeachindividual caseofimported
products. ThePanel rejected anynotion ofbalancing more favourable
treatment ofsome imported products against lessfavourable treatment
ofother imported products.59
With respect toPartV.1oftheExcise TaxAct,wefindthattheamount ofthetaxation isfar
above thedeminimis threshold required bytheAppellate Body Report inJapan -Alcoholic Beverages .60
Themagnitude ofthistaxissufficient toprevent theproduction andsaleofsplit-run periodicals in
Canada.61
58WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, p.27.
59Adopted 7November 1989, BISD 36S/345, para. 5.14.
60WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, p.27.
61Indeed, thiswastheexplicit objective oftheCanadian policy. SeePanel Report, paras. 3.118 and5.25.WT/DS31/AB/R
Page30
3. SoastoAfford Protection
TheAppellate Body established thefollowing approach inJapan -Alcoholic Beverages for
determiningwhetherdissimilartaxationofdirectlycompetitiveorsubstitutableproductshasbeenapplied
soastoafford protection:
...webelieve thatanexamination inanycaseofwhether dissimilar
taxation hasbeen applied soastoafford protection requires a
comprehensive andobjective analysis ofthestructure andapplication
ofthemeasure inquestion ondomestic ascompared toimported
products. Webelieve itispossible toexamine objectively the
underlying criteria usedinaparticular taxmeasure, itsstructure, and
itsoverall application toascertain whether itisapplied inawaythat
affords protection todomestic products.
Although itistruethattheaimofameasure maynotbeeasily
ascertained, nevertheless itsprotective application canmostoften be
discerned fromthedesign, thearchitecture, andtherevealing structure
ofameasure. Theverymagnitude ofthedissimilar taxation ina
particular casemaybeevidence ofsuchaprotective application, ...
Most often, there willbeother factors tobeconsidered aswell. In
conducting thisinquiry, panels should givefullconsideration toall
therelevant factsandalltherelevant circumstances inanygiven case.62
With respect toPartV.1oftheExcise TaxAct,wenotethatthemagnitude ofthedissimilar
taxation between imported split-run periodicals anddomestic non-split-run periodicals isbeyond
excessive, indeed, itisprohibitive. There isalsoample evidence thattheverydesign andstructure
ofthemeasure issuchastoafford protection todomestic periodicals.
TheCanadian policy which ledtotheenactment ofPartV.1oftheExcise TaxActhadits
origins intheTaskForce Report .Itisclearfrom reading theTaskForce Report thatthedesign and
structure ofPartV.1oftheExcise TaxActaretoprevent theestablishment ofsplit-run periodicals
inCanada, thereby ensuring thatCanadian advertising revenues flowtoCanadian magazines. Madame
Monique Landry, Minister Designate ofCanadian Heritage atthetimetheTaskForce Report was
62WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1November 1996, p.29.WT/DS31/AB/R
Page31
released, issued thefollowing statement summarizing theGovernment ofCanada 'spolicy objectives
fortheCanadian periodical industry:
TheGovernment reaffirms itscommitment toprotect theeconomic
foundationsoftheCanadianperiodicalindustry,whichisavitalelement
ofCanadian cultural expression. Toachieve thisobjective, the
Government willcontinue tousepolicy instruments thatencourage
theflowofadvertising revenues toCanadian magazines anddiscourage
theestablishment ofsplit-run or‘Canadian ’regional editions with
advertising aimed attheCanadian market. Wearecommitted to
ensuring thatCanadians haveaccess toCanadian ideasandinformation
through genuinely Canadian magazines, while notrestricting thesale
offoreign magazines inCanada.63
Furthermore,theGovernmentofCanadaissuedthefollowingresponsetotheTaskForceReport:
TheGovernment reaffirms itscommitment tothelong-standing policy
ofprotecting theeconomic foundations oftheCanadian periodical
industry. Toachieve thisobjective, theGovernment usespolicy
instrumentsthatencouragetheflowofadvertisingrevenuestoCanadian
periodicals, since aviable Canadian periodical industry musthavea
secure financial base.64
During thedebate ofBillC-103, AnActtoAmend theExcise TaxActandtheIncome Tax
Act,theMinister ofCanadian Heritage, theHonourable Michel Dupuy, stated thefollowing:
...thereality ofthesituation isthatwemustprotect ourselves against
split-runs coming fromforeign countries and,inparticular, fromthe
United States.65
Canada alsoadmitted thattheobjective andstructure ofthetaxistoinsulate Canadian magazines
fromcompetition intheadvertising sector, thusleaving significant Canadian advertising revenues for
theproduction ofeditorial material created fortheCanadian market. With respect totheactual
application ofthetaxtodate, ithasresulted inonesplit-run magazine, Sports Illustrated, tomove
itsproductionfortheCanadianmarketoutofCanadaandbacktotheUnitedStates.66Also,Harrowsmith
63Task Force Report ,Appendix 5,p.92.
64Ibid.,p.94.
65Panel Report, para. 3.118.
66Panel Report, para. 3.121.WT/DS31/AB/R
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Country Life,aCanadian-owned split-run periodical, hasceased production ofitsUnited States 'edition
asaconsequence oftheimposition ofthetax.67
Wetherefore conclude onthebasis oftheabove reasons, including themagnitude ofthe
differential taxation, theseveral statements oftheGovernment ofCanada 'sexplicit policy objectives
inintroducing themeasure andthedemonstrated actual protective effect ofthemeasure, thatthedesign
andstructure ofPartV.1oftheExcise TaxActisclearly toafford protection totheproduction of
Canadian periodicals.
VII. Article III:8(b) oftheGATT 1994
Article III:8(b) oftheGATT 1994 reads asfollows:
(b) Theprovisions ofthisArticle shall notprevent the
payment ofsubsidies exclusively todomestic producers, including
payments todomestic producers derived fromtheproceeds ofinternal
taxesorcharges applied consistently withtheprovisions ofthisArticle
andsubsidies effected through governmental purchases ofdomestic
products.
Bothparticipants agree thatCanada 's"funded" postal ratesinvolve "apayment ofsubsidies".
Theappellant, theUnited States, argues, however, thatthe"funded" postal ratesprogramme involves
atransfer offunds from onegovernment entity toanother, i.e.from Canadian Heritage toCanada
Post, andnotfrom theCanadian government todomestic producers asrequired byArticle III:8(b).
Asweunderstandit,throughthePAP,CanadianHeritageprovidesCanadaPost,awholly-owned
Crown corporation, withfinancial assistance tosupport special ratesofpostage foreligible publications,
including certain designated domestic periodicals mailed anddistributed inCanada. Thisprogramme
hasbeenimplementedthroughaseriesofagreements,theMOA,betweenCanadianHeritageandCanada
Post, which provide thatinconsideration ofthepayments made toitbyCanadian Heritage, Canada
Postwillaccept fordistribution, atspecial "funded" rates, allpublications designated byCanadian
Heritage tobeeligible under thePAP. TheMOA provides thatwhile Canadian Heritage willadminister
67Panel Report, paras. 3.99 and5.25.WT/DS31/AB/R
Page33
theeligibility requirements forthePAPbased oncriteria specified intheMOA, Canada Postwillaccept
fordistribution allpublications thatareeligible under thePAPatthe"funded" rates.
Theappellant, theUnited States, cited fourGATT 1947 panel reports asauthorities forits
interpretation ofArticle III:8(b).68However, thesepanel reports arenotalldirectly onpoint. InItalian
Agricultural Machinery andEEC-Oilseeds ,thepanels found thatsubsidies paidtopurchasers of
agricultural machinery andprocessors ofoilseeds werenotmade "exclusively todomestic producers"
ofagricultural machinery andoilseeds, respectively. InUnited States -MaltBeverages andUnited
States -Tobacco ,theissue waswhether areduction inthefederal excise taxonbeeroraremission
ofaproduct taxontobacco constituted a"payment ofsubsidies" within themeaning ofArticle III:8(b).
InUnited States -MaltBeverages ,thepanel found thatareduction oftaxes onagooddidnotqualify
asa"payment ofsubsidies" forthepurposes ofArticle III:8(b) oftheGATT 1994.69InUnited States -
Tobacco ,having found thatthemeasure atissue wasnotataxremission, thepanel concluded that
itwasapayment which qualified under Article III:8(b) oftheGATT 1994.70
InEEC-Oilseeds ,thepanel stated that"itcanreasonably beassumed thatapayment notmade
directly toproducers isnotmade ‘exclusively ’tothem".71Thisstatement ofthepanel isobiter dicta,
asthepanel found inthatreport thatsubsidies paidtooilseeds processors werenotmade "exclusively
todomestic producers", andtherefore, theEEC payments ofsubsidies toprocessors andproducers
ofoilseeds andrelated animal feedproteins didnotqualify under theprovisions ofArticle III:8(b).72
Aproper interpretation ofArticle III:8(b) mustbemade onthebasisofacareful examination
ofthetext,context andobject andpurpose ofthatprovision. Inexamining thetextofArticle III:8(b),
webelieve thatthephrase, "including payments todomestic producers derived from theproceeds of
internal taxes orcharges applied consistently withtheprovisions ofthisArticle andsubsidies effected
through governmental purchases ofdomestic products" helps toelucidate thetypes ofsubsidies covered
byArticle III:8(b) oftheGATT 1994. Itisnotanexhaustive listofthekinds ofprogrammes that
wouldqualifyas"thepaymentofsubsidiesexclusivelytodomesticproducers",butthosewordsexemplify
68Panel Report, Italian Agricultural Machinery ,adopted 23October 1958, BISD 7S/60; Panel Report, United States -
MaltBeverages ,adopted 19June1992, BISD 39S/206; Panel Report, United States -Tobacco ,DS44/R, adopted 4October
1994; andPanel Report, EEC -Oilseeds ,adopted 25January 1990, BISD 37S/86.
69Adopted 19June 1992, BISD 39S/206, para. 5.12.
70DS44/R, adopted 4October 1994, paras. 109and111.
71Adopted 25January 1990, BISD 37S/86, para. 137.
72Ibid.WT/DS31/AB/R
Page34
thekinds ofprogrammes which areexempted from theobligations ofArticles III:2andIII:4ofthe
GATT 1994.
Ourtextual interpretation issupported bythecontext ofArticle III:8(b) examined inrelation
toArticles III:2andIII:4oftheGATT 1994. Furthermore, theobject andpurpose ofArticle III:8(b)
isconfirmed bythedrafting history ofArticle III.Inthiscontext, werefertothefollowing discussion
intheReports oftheCommittees andPrincipal Sub-Committees oftheInterim Commission forthe
International Trade Organization concerning theprovision oftheHavana Charter foranInternational
Trade Organization thatcorresponds toArticle III:8(b) oftheGATT 1994:
Thissub-paragraph wasredrafted inorder tomake itclearthatnothing
inArticle 18could beconstrued tosanction theexemption ofdomestic
products frominternal taxesimposed onlikeimported products orthe
remission ofsuchtaxes. AtthesametimetheSub-Committee recorded
itsviewthatnothing inthissub-paragraph orelsewhere inArticle 18
would override theprovisions ofSection CofChapter IV.73
Wedonotseeareason todistinguish areduction oftaxratesonaproduct from areduction
intransportation orpostal rates. Indeed, anexamination ofthetext,context, andobject andpurpose
ofArticle III:8(b) suggests thatitwasintended toexempt fromtheobligations ofArticle IIIonlythe
payment ofsubsidies which involves theexpenditure ofrevenue byagovernment.
Weagree withthepanel inUnited States -MaltBeverages that:
Article III:8(b) limits, therefore, thepermissible producer subsidies
to"payments" aftertaxes havebeencollected orpayments otherwise
consistent withArticle III.Thisseparation oftaxrules, e.g.ontax
exemptions orreductions, andsubsidy rulesmakes sense economically
andpolitically. Eveniftheproceeds fromnon-discriminatory product
taxes maybeusedforsubsequent subsidies, thedomestic producer,
likehisforeign competitors, must paytheproduct taxes due. The
separation oftaxandsubsidy rulescontributes togreater transparency.
Italsomayrenderabusesoftaxpoliciesforprotectionistpurposesmore
difficult, asinthecasewhere producer aidsrequire additional
legislative orgovernmental decisions inwhich thedifferent interests
involved canbebalanced.74
73Interim Commission fortheInternational Trade Organization, Reports oftheCommittees andPrincipal Sub-Committees:
ICITO I/8,Geneva, September 1948, p.66.Article 18andSection CofChapter IVoftheHavana Charter foranInternational
Trade Organization correspond, respectively, toArticle IIIandArticle XVIoftheGATT 1947.
74Adopted 19June 1992, BISD 39S/206, para. 5.10.WT/DS31/AB/R
Page35
Asaresult ofouranalysis ofthetext,context, andobject andpurpose ofArticle III:8(b), we
conclude thatthePanel incorrectly interpreted thisprovision. Forthesereasons, wereverse thePanel's
findings andconclusions thatCanada 's"funded" postal ratesscheme forperiodicals isjustified under
Article III:8(b) oftheGATT 1994.
VIII. Findings andConclusions
Forthereasons setoutinthisReport, theAppellate Body:
(a) upholds thePanel'sfindings andconclusions ontheapplicability oftheGATT 1994
toPartV.1oftheExcise TaxAct;
(b) reverses thePanel'sfindings andconclusions onPartV.1oftheExcise TaxActrelating
to"likeproducts" within thecontext ofArticle III:2, firstsentence, thereby reversing
thePanel'sconclusions onArticle III:2, firstsentence, oftheGATT 1994;
(c) modifies thePanel'sfindings andconclusions onArticle III:2oftheGATT 1994, by
concluding thatPartV.1oftheExcise TaxActisinconsistent withCanada 'sobligations
under Article III:2, second sentence, oftheGATT 1994; and
(d) reverses thePanel'sfindings andconclusions thatthemaintenance byCanada Post
ofthe"funded" postal ratesscheme isjustified byArticle III:8(b) oftheGATT 1994,
andconcludes thatthe"funded" postal ratesscheme isnotjustified byArticle III:8(b)
oftheGATT 1994.
Theforegoing legalfindings andconclusions modify theconclusions ofthePanel inPartVI
ofthePanel Report, butleave intact thefindings andconclusions ofthePanel thatwerenotthesubject
ofthisappeal.
TheAppellate Body recommends thattheDispute Settlement Body request Canada tobring
themeasures found inthisReport andinthePanel Report, asmodified bythisReport, tobeinconsistent
withtheGATT 1994 intoconformity withCanada 'sobligations thereunder.WT/DS31/AB/R
Page36
Signed intheoriginal atGeneva this23rddayofJune1997 by:
______________________________
Mitsuo Matsushita
Presiding Member
______________________________ ______________________________
Claus-Dieter Ehlermann Julio Lacarte-Muró
Member Member