Jun 18, 1987

U.S. TAX ON IMPORTED PETROLEUM AND PRODUCTS HELD ILLEGAL.

GENEVA JUNE 16 (IFDA/CHAKRAVARTHI RAGHAVAN) -- A three-member GATT panel has ruled that the U.S. discriminatory tax on imported petroleum and petroleum products under its 1986 superfund act was contrary to U.S. obligations under GATT, and the U.S. should be asked to bring its tax in line with the general agreement.

The panel has however held that the superfund act's tax levy on certain imported "substances", which are derivatives of certain petrochemicals and inorganic chemicals is not a violation of GATT, though it could become so if its "penalty rate" provisions are not modified by administrative regulations, as could be done under the law.

The U.S. told the panel that in all probability the penalty tax would never be applied, and the panel recommended that the GATT Contracting Parties take note of this statement.

The U.S. superfund act was enacted by Congress soon after the Punta del Este declaration including its commitment on standstill. It has been challenged by Canada, the EEC and Mexico, and raised as a dispute under GATT's normal dispute settlement procedures, and also before the surveillance body set up under the Uruguay round on the standstill and rollback commitments.

The panel's report and conclusions are to be considered by the GATT Council at its meeting on June 17.

The surveillance body is meeting on June 18.

Congress enacted the law to create a fund to provide for the cleanup of the environment by levying a tax on those polluting.

The act levies a tax of 8.2 US cents a barrel on U.S. "crude oil", (defined to include also crude oil condensates and natural gasoline) received at a U.S. refinery, and 11.7 cents a barrel on imported "petroleum products" (defined to include "crude oil", as well as refined gasoline, refined and residual oils, and certain other liquid hydrocarbon products).

This tax has become effective from January 1, 1987.

The superfund act has also reimposed with effect from January 1, a tax on certain chemicals, petrochemicals and inorganic chemicals, produced in the U.S. In dollar value, the tax has been fixed at two percent of the 1980 wholesale price.

Effective January 1, 1989, imported substances which are derivatives of the chemicals taxed would be subject to tax at an amount equal to the tax imposed on the chemicals used in the manufacture of the imported substance.

But if the importer does not provide sufficient information on the inputs of the taxable chemicals, the imported substance is to be taxed at a penalty rate of five percent of its appraised valued.

The U.S. treasury Secretary is however enabled to eliminate the need for a penalty tax by stipulating by regulations a tax rate on the basis of the substance being produced by the predominant method of production.

Canada, Mexico and the EEC contended that the taxes on imported petroleum products violated GATT provisions in article III (2) requiring equal treatment for imported and domestic products.

The U.S. did not seriously challenge this before the panel, but argued that the tax differentials were minimal or nil, and did not have any adverse trade effects and hence did not nullify or impair benefits accruing to Canada, the EEC or Mexico.

Besides the three complainants, a number of other CPS (Australia, Indonesia, Kuwait, Malaysia, Nigeria, and Norway) also appeared before the panel to attack the U.S. tax on petroleum.

The panel held that the tax on petroleum and products was inconsistent with the U.S. obligations under article III (2).

It rejected the U.S. contention that since the trade effects were minimal or nil, there was no impairment or nullification of GATT rights, and said the evaluation of the trade impact was not relevant for this finding.

The GATT Contracting Parties, it said, should ask the U.S. to bring the tax on petroleum in conformity with its obligations under GATT.

On the dispute over tax on imported substances, the U.S. argued that the tax itself was to become effective only on January 1, 1989, after administrative regulations were instituted, and hence could not be challenged now before GATT.

The panel rejected this, noting that article III and its requirements for national treatment was not only intended to protect current trade, but also to create the predictability needed for future trade, and hence CPS could not be precluded from challenging existing laws until they are applied to their trade.

The U.S. argued that the tax on the substances would in effect be a "border tax adjustment" permitted by GATT (to equalise the burden on domestic producer through a tax by levying equivalent tax on the imported product).

The EEC and Canada had challenged the applicability of this border tax adjustment concept, by arguing that the domestic tax was levied for environmental purposes on the "polluter-pays principle", and since the imported substances did not affect U.S. environment in the production process, no tax was leviable on them.

The panel ruled against this, noting that the 1970 conclusions of GATT Contracting Parties on the border tax adjustment measures distinguished between taxes directly levied on products and those not directly levied. It did not distinguish between taxes with different policy purposes.

While a Contracting Party could distinguish between a domestic and imported substance on the "polluter-pays principle", it was not obliged to do so, the panel said.

Canada and EEC could however take up the issue before the GATT "group on environmental measures and international trade", set up in 1972 but which had never so far been convoked, the panel further ruled.

The panel said that the "penalty tax" on the basis of appraised value of the imported substance, provided for in the U.S. law, would not conform to the national treatment requirement of GATT.

However, it noted, the law enabled the administration to adopt regulations that would avoid the need to impose the penalty tax provisions. It also noted the U.S. statement that given this regulatory authority "in all probability the five percent penalty rate would never be applied".

The panel concluded that the tax on certain imported substances did not violate article III (2), that its provisions for penalty tax by itself would not be an infringement since the authorities had the power to eliminate it, and the Contracting Parties should take note of the U.S. statement that "the penalty rate would in all probability never be applied".