10:35 AM Nov 23, 1993

SERVICE NEGOTIATORS BAULK AT US TAX CARVE-OUT

Geneva 22 Nov (Chakravarthi Raghavan) -- Services negotiators in the Uruguay Round baulked Monday at US attempts to completely except its tax laws and regulations from the General Agreement on Trade in Services (GATS) and the initial commitments on services in its schedules, and warned the US tax officials that their stand would completely unravel the GATS agreement.

The US Assistant Secretary of Treasury on tax policy, Leslie Samuels, is reported to have attempted to explain the Treasury view on this at an informal meeting of the Group of Negotiations on Services (GNS), but failed to convince any of the others, even though he claimed that his own view was shared by tax administrations of the other negotiators.

Samuels told newsmen later "this is an issue that not only our executive branch cares about, but also our legislative branch. They have looked at the language and they have concerns about the ambiguity in the language and how it might impede their ability to pass laws".

"It was a case of 114 (other participants in the Round) marching out of step with the US", one trade negotiator later commented sarcastically.

Services negotiators said that other US officials (in seeking the tax carve-out) had sought to explain the problem as one where the US Treasury and Congress do not want to have their powers of tax legislation, administrative rulings and decisions, becoming subject to multilateral dispute settlement and adjudication and that this was an issue of 'sovereignty'.

One negotiators said later, all the others who spoke at the GNS came out against the US stand and warned that if the US were to persist in its present position, the entire agreement and Uruguay Round package would unravel.

As Singapore put it in the GNS, "at a time when political attempts are being made to conclude the round, these (technical) issues being raised undermine the political attempts".

Others said come December 15 (the deadline for completing substantial negotiations), the participants would be faced with the prospect of either abandoning for the present Services agreement itself in the Uruguay Round package, because of lack of time to renegotiate the linked issues - as Singapore reportedly said -- or change the definition of trade in services to exclude supply of a service by a foreign service supplier through investments or commercial presence - as India suggested - or everyone following the US example and excepting their own tax laws too, thus structurally damaging the GATS and its benefits.

Outside observers doubt either of the first two propositions prevailing -- unless negotiators and their capitals publicly make clear that they are willing to face the prospect of failure of negotiations rather than pay 'any price' for their desire for success and a rule-based trading system.

The redefinition of 'trade in services' to exclude delivery via investments or commercial presence, would not be acceptable to the EC and Japan either.

The third alternative of everyone doing a similar tax carve-out, one negotiator said, would probably affect the US more than the others in major Third World markets -- because the US TNCs are the major actors and players (and none of the Third World countries have any hopes of entering US service markets through investments and commercial presence). The US investors and service enterprises would be hurt more than others by discriminatory direct taxation laws. Only those with major investments in the US would set up tax-treaties with US; others would act on their own.

The negotiator said that though the other US stance of a two-tier approach on financial services -- extending the benefits of the agreement and its MFN provisions to all participants only in terms of assuring their existing levels of access in US markets, and making all other benefits on a non-MFN reciprocal basis -- did not figure in Monday's discussions, the two approaches, pushed by US treasury, would virtually negate a multilateral approach to services in favour of a bilateralism and unilateralism favoured by the US.

Other observers said that in trade matters now, with the US adopting an aggressive neo-mercantalist policy, other countries, and more so Third World countries face the same situation as Europe did visavis Hitler (politically and in security terms) in the 1930s: "the more they tried to avoid a fight and compromise, the more was demanded of them, until a fight became inevitable".

While failing to convince any of his interlocutors Monday, Samuels asked to meet a smaller group of services negotiators Tuesday to persuade them to accept the US position.

Samuels is reported to have tried to present the US view at the informal GNS in terms of trade vs tax laws and giving an exposition of tax philosophies -- in effect saying that trade negotiators may be experts on trade policy but knew nothing about tax and had better listen to him.

One of the negotiators later said that the hour-long presentation by Samuels about tax philosophies and bilateral tax-treaties was boring, pompous and unconvincing and premised in the belief that trade officials could be fooled so easily.

Others said that it was clear that this was one more example of the US position -- whether on tax, anti-dumping, S.301 or anything else: other trading partners should accept multilateral disciplines and derogate their own sovereignty when it suits the US, but the US itself must retain sovereignty and sovereign rights of legislation when it suits the US interests.

The chairman of the GNS, David Hawes of Australia, reportedly said at the meeting, after the presentation by Samuels, that all the concerns expressed by Samuels had been raised by US negotiators and US tax officials. These were extensively discussed and the text that had finally emerged was the best that could be evolved. It was hence difficult to understand the same concerns being raised again now at this late stage.

Another negotiator who did not want to be identified said that all the views advanced for tax exceptions had been carefully considered before the compromise in Art XIV, 'General Exception clause', was agreed to. The special problems relating to direct taxation, as between residents and non-residents, and issues governed by bilateral tax treaties, was specifically addressed in Art, XIV (d) and (e) and its footnotes.

Art XIV, the general exception clause in GATS, similar to the Art XX in the GATT, enables in (d) actions by countries, inconsistent with their commitments on national treatment, to discriminate in taxation between domestic and foreign suppliers for effective imposition or collection of direct taxes. A similar exception to the MFN requirement of GATS was provided in XIV (e) in respect of difference in treatment among countries flowing out of tax treaties for avoidance of double taxation.

One Third World participant said that India's Amb. Balkrishan Zutshi, a key services negotiator, led the attack on the US efforts to reopen the question now and demolished the US positions on every point. He was followed up by the EC, Hong Kong, Singapore (for Asean), Brazil, the Nordics and some others. Not one supported the US. Only Mexico nuanced the opposition with the remark that any US request for further textual changes could be explored.

Zutshi reportedly reminded Samuels that the issue has been dealt with since 1982 (when the US originally proposed that 'services' should be included in the GATT by amending its provisions to substitute 'products and services' or 'goods and services' wherever only products or goods were mentioned), through various stages of discussion and negotiation to arrive at the draft GATS.

After considerable discussions, the definition of 'trade in services' to permit services supply through investments and commercial presence inside a country (unlike goods trade that take place internationally only after crossing the border), was arrived at and for different modes of delivery.

"No one has made the proposition that investments would not be subject to changes in conditions of competition (as between the foreign service supplier and domestic supplier) through the application of direct taxation," Zutshi reportedly told Samuels. If that was so, the GATS had to have a provision relating to direct taxation to ensure that the "concession" given by a Party in the form of investment or establishment for delivery of a service is not diluted or reduced through discriminatory taxation.

All tax systems understood the need for distinction between residents and non-residents to safeguard the tax base and ensure the ability to collect taxes, and the GATS had provided for this and laid out the possibility for different treatment, including special treatment arising out of bilateral tax treaties.

But where there was a difference between Parties, it had to be settled by adjudication in the GATS.

Other comments brought out that in the face of the US position, others would be faced with the choice of either abandoning for the present attempts to include a Services agreement in the Uruguay Round package (as Singapore reportedly said) in lieu of lack of time to renegotiate the linked issues, or everyone following the US example and excepting their own tax laws too.

The US moves, now threatening the Services accord was made at GNS on October 22, both for a two-tier approach to the financial services and for the tax carve-out, and has thrown the entire services negotiations out of kilter. There have been warnings that unless the Americans changed their position it might jeopardise the entire Uruguay Round package.

As one of the negotiators put it, other countries would now take back all their "offers" for further liberalisation in the financial services sector, and the entire definition would need to be changed or at the minimum the framework made meaningless by enabling countries to take away by taxation the benefits they agree to give through market access commitments.

The issue whether 'investments' to provide 'services' should qualify as 'trade in services' and subject to multilateral rights and obligations, was an issue that had been before them from 1982 when the US first brought up the services issue and tried to include services into GATT. Through two years of national studies and exchange of information, through the preparatory process and launching the negotiations at Punta del Este and seven years of negotiations thereafter, there had been extensive discussions and the final compromises were reached.

To forget all this, and to talk now of 'sovereignty' and 'ability to pass tax laws', was the surest way to wreck the negotiations or create a GATS without any content, another negotiator said.

In explaining the US position, a senior US official attempted to distinguish between 'trade' and 'taxation' matters and claimed that the US concerns on taxation was shared by other tax administrations with which the US had bilateral tax treaties. The US had nearly 60 bilateral treaties and all of them had worked well, and the US saw no reason why there was need for a multilateral treaty on the 'hypothetical' case of a service concession likely to be affected by taxation.

The official also sought to cite the example and experience in the OECD (involving 22 industrialized countries) but seemed unable to appreciate that the Uruguay Round involved 115 participants at various levels of development.

The official also tried to make out a case by noting that GATT as a trade agreement had always distinguished between direct taxes and indirect taxes and GATT provisions (in Art III) affected only the indirect taxes.

Again he seemed unable to appreciate that in the GATT, since the only taxation that would affect an imported product after it crossed the border in terms of the market concession (by paying the customs duties bound in the GATT) would be the indirect taxes, Art III had only made references to it, while in GATS which enabled service delivery through investments inside a country the role of direct taxation had also to be subject to disciplines.

The official had no answer either to the view that the 'bilateral' approach favoured by the US worked only to the advantage of the strong and that the entire Uruguay Round negotiations really was to end Byzantine ways of bilateralism and create a body of multilateral rules that would apply to the weak and the strong and that the US seemed to be very reluctant to forego its bilateral prerogatives whether on taxation or S.301 or anything else.