6. Defence under Article XX(d) of the GATT 1994

(a) Overview of the parties' arguments and analytical approach followed

11.285 Article XX of the GATT 1994 reads in relevant part:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:
…
(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;

11.286 Argentina asserts that, should we find that the contested mechanisms for the collection of the IVA and IG are inconsistent with the provisions of Article III:2, first sentence, those mechanisms would nevertheless be justified under the provisions of Article XX of the GATT 1994. More particularly, Argentina submits that those mechanisms fall within the terms of Article XX(d).
 

11.287 The European Communities considers that Argentina has failed to demonstrate that the mechanisms at issue satisfy the requirements of Article XX(d). The European Communities also argues that Article XX must be interpreted narrowly.

11.288 We note that a measure found to be inconsistent with one or several of the substantive obligations of the GATT 1994 must withstand a two-tiered analysis in order for it to be justified under Article XX. Specifically, that measure must:

(i) fall within the scope of one of the recognised exceptions set out in paragraphs (a)
to (j) of Article XX in order to enjoy provisional justification and

(ii) meet the requirements of the introductory provisions of Article XX, the so-called chapeau.⁵⁵⁶  

11.289 In examining Argentina's affirmative defence under Article XX(d), we first analyse whether the contested measures fall within the terms of paragraph (d) of Article XX. If such is the case, we proceed to an analysis of the same measures under the chapeau of Article XX.

(b) Provisional justification under paragraph (d) of Article XX

11.290 It is apparent from the text of paragraph (d) of Article XX that it is incumbent upon Argentina to demonstrate three elements. Those three elements are:

(i) the measures for which justification is claimed secure compliance with other laws or regulations;

(ii) those other laws or regulations are not inconsistent with the provisions of the GATT 1994; and

(iii) the measures for which justification is claimed are necessary to secure compliance with those other laws or regulations.

11.291 Accordingly, our analysis proceeds in three steps.

(i) Existence of measures which secure compliance with other laws or regulations

11.292 Argentina contends that the contested mechanisms for the collection at source of the IVA and IG, i.e. RG 3431 and RG 3543, were put in place in order to avert actions which are illegal under the terms of the IVA Law and IG Law, such as failure to declare or pay the IVA or IG. Argentina argues, therefore, that those mechanisms were specifically designed to secure compliance with the IVA Law and IG Law respectively.

11.293 The European Communities does not contest that RG 3431 and RG 3543 are measures which, inter alia, secure compliance with the IVA Law and IG Law respectively.

11.294 We agree with the parties in this respect. As regards RG 3431, the fact that pre payments made in accordance with it are creditable at the time of settlement of the definitive IVA liability creates an incentive for importers to declare the re-sale of the imported products to the tax authorities, which re-sale is taxable under the IVA Law.⁵⁵⁷  RG 3543, on the other hand, helps secure compliance with the IG Law inasmuch as the pre payments for which it provides reduce evasion of the IG resulting from failure to declare taxable income.

11.295 We therefore conclude that RG 3431 and RG 3543 serve to secure compliance with the IVA Law and IG Law respectively.

(ii) Consistency with the GATT 1994 of those other laws or regulations

11.296 Argentina asserts that the IVA Law and IG Law are consistent with its obligations under the GATT 1994.⁵⁵⁸

11.297 The European Communities does not question the consistency with the GATT 1994 of either the IVA Law or the IG Law.

11.298 We continue, therefore, on the basis that the IVA Law and the IG Law must be presumed to be consistent with the GATT 1994.

(iii) Necessity of the measures taken to secure compliance

11.299 Argentina contends that Members invoking Article XX(d) are entitled to a certain degree of discretion in determining whether a measure is "necessary". Argentina considers that the Member taking a measure is best placed to assess whether that measure is necessary. Argentina also argues that paragraph (d) of Article XX does not say that a Member must evaluate a number of alternative measures which would ensure the observance of its laws and then choose the least trade-restrictive among them.

11.300 The European Communities argues that it is our task to examine whether Argentina's measures are "necessary" to achieve Argentina's desired level of enforcement of the IVA Law and IG Law. The European Communities considers that the relevant test for assessing the necessity of a measure can be found in the report of the GATT 1947 panel on United States – Section 337. The European Communities notes that that panel held that a Member cannot justify a measure as necessary in terms of Article XX(d) "if an alternative measure which [that Member] could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it".⁵⁵⁹  

11.301 Argentina asserts that, even if the European Communities' interpretation were correct, the contested mechanisms for the collection of the IVA and IG upon importation of goods are the only measures reasonably available to it for securing compliance with the IVA Law and IG Law. Argentina notes that tax evasion is an entrenched social ill in Argentina. According to Argentina, in such a situation, a government's primary focus must be on the prevention of tax evasion rather than its repression. Argentina contends that the aforementioned mechanisms are preventative in nature. Argentina points out in this regard that the creditable pre payments of the IVA and IG ensure the settlement of the definitive tax liability at the appropriate time and that the mechanisms concerned also make it possible to detect, and thus reduce, tax evasion by rendering transparent the business dealings of taxable persons.

11.302 The European Communities considers that Argentina's submissions may be relevant for purposes of demonstrating that the contested mechanisms are necessary to fight tax fraud. The European Communities notes, however, that those submissions fail to explain why it is necessary to impose a heavier tax burden on imported products than on like domestic products.

11.303 It must be stated, as a preliminary matter, that the question which we must examine here is whether the contested measures are "necessary" to secure compliance with the IVA Law and the IG Law.⁵⁶⁰  At this point in our analysis, we look at the relationship of Argentina's claimed policy objective of securing compliance with the IVA Law and the IG Law and the general design and structure of RG 3431 and RG 3543. ⁵⁶¹

11.304 Having clarified this point, it should be recalled, next, that the parties are in disagreement over the correct interpretation to be given to the term "necessary" as it appears in Article XX(d). For the European Communities, a measure can be said to be necessary only if no alternative measure which is consistent with the GATT 1994 is reasonably available to a Member. Argentina, on the other hand, rejects this approach as overly restrictive of a Member's right to invoke the exception set forth in Article XX(d). We see no need to resolve this interpretative issue.

11.305 We are satisfied that Argentina has adduced argument and evidence sufficient to raise a presumption that the contested measures, in their general design and structure, are "necessary" even on the European Communities' reading of that term. Argentina stresses the fact that tax evasion is common in its territory and that, against this background of low levels of tax compliance, tax authorities cannot expect to improve tax collection primarily through the pursuit of repressive enforcement strategies (e.g. aggressive criminal prosecution of tax offenders). In those circumstances, Argentina maintains, tax authorities must direct their efforts towards preventing tax evasion from occurring in the first place. According to Argentina, this is precisely what RG 3431 and RG 3543 are designed to accomplish.⁵⁶²  

11.306 The European Communities does not dispute that, in the circumstances of the present case, collection and withholding mechanisms are necessary to combat tax evasion.⁵⁶³  Nor has the European Communities submitted other arguments or evidence which would rebut the presumption raised by Argentina in respect of the "necessity" of RG 3431 and RG 3543.⁵⁶⁴  

11.307 In light of the foregoing, we conclude that, in view of their general design and structure, RG 3431 and RG 3543 are "necessary" measures within the meaning of Article XX(d).

11.308 Since it has thus been established that RG 3431 and RG 3543 satisfy all of the requirements set forth in Article XX(d), we further conclude that they enjoy provisional justification under the terms of Article XX(d).

(c) Consistency with the requirements of the chapeau of Article XX

(i) Interpretation and application of the chapeau

11.309 Argentina argues that the pre payment of the IVA and IG is intended to combat tax evasion and not to restrict trade. Argentina submits that, since increased trade means increased tax collection, the contested collection mechanisms cannot possibly be regarded as constituting a "disguised restriction on international trade".

11.310 Regarding the chapeau's additional requirement that those mechanisms not be a means of "arbitrary or unjustifiable discrimination between countries where the same conditions prevail", Argentina notes that the use of the terms "arbitrary" and "unjustifiable" indicates that there could be discrimination which is "not arbitrary" or "justifiable". Argentina further is of the view that the aforementioned requirement is concerned with discrimination between exporting countries, but not with discrimination between the importing country and exporting countries. Argentina argues that the fact that the Appellate Body in United States – Gasoline found otherwise does not detract from its view. According to Argentina, the Appellate Body did so only because, in that specific case, the parties had a common interpretation of the requirement in question.

11.311 The European Communities considers that the chapeau is concerned with discrimination between the importing country and exporting countries. The European Communities recalls that the Appellate Body accepted this interpretation in United States – Gasoline and that the Appellate Body later confirmed it in United States – Shrimp. The European Communities submits that the fact that a violation of Article III presupposes discrimination between an importing country and an exporting country does not make Article XX redundant since the discrimination at issue in the chapeau is of a different kind than that at issue in Article III.

11.312 It is well to recall at the outset that the fundamental purpose of the chapeau of Article XX is to avoid abuse or misuse of the particular exceptions set forth in Article XX, in the present case of the exception set forth in Article XX(d).⁵⁶⁵  Accordingly, whereas our focus was on the general design and structure of RG 3431 and RG 3543 when we examined whether these measures fall within the terms of Article XX(d), our focus here is on whether their application constitutes a misuse of that exception.⁵⁶⁶  

11.313 The chapeau sets forth three standards which a particular measure must meet.⁵⁶⁷  Those standards are cumulative in nature. As a result, if the measure for which justification is claimed fails to meet one of them, the measure ipso facto fails to satisfy the requirements of the chapeau. The order in which the standards are examined is therefore immaterial. In the present case, we consider it appropriate to analyse first whether the application of RG 3431 and RG 3543 constitutes a means of "unjustifiable discrimination between countries where the same conditions prevail".

11.314 According to the Appellate Body, the phrase "unjustifiable discrimination between countries where the same conditions prevail" is sufficiently broad to encompass not only discrimination between exporting Members, but also discrimination between exporting Members and the importing Member in question.⁵⁶⁸ To this we would add that, in our view, the phrase "discrimination between countries where the same conditions prevail" is also broad enough to encompass discrimination between products of the territories of those countries.⁵⁶⁹  

11.315 Since we have already found that RG 3431 and RG 3543 give rise to discrimination between imported products and like domestic products, the only remaining issue is whether the discrimination resulting from the application of RG 3431 and RG 3543 is "unjustifiable".⁵⁷⁰  It is important to bear in mind that the standard of "unjustifiable" discrimination is different in nature and quality from the standard of discrimination contained in Article III:2, first sentence.⁵⁷¹  As Argentina correctly points out, the prohibition on unjustifiable discrimination in the application of a measure by necessary implication leaves room for justifiable discrimination. On the other hand, this does not imply that some discrimination is always justifiable. Whether or not any discrimination is justifiable, in a given instance, and if so, to what extent, must be ascertained by way of analysis of the specific circumstances of each case.

(ii) Justifiability of discrimination

11.316 Argentina submits that the rates applicable to import transactions pursuant to RG 3431 and RG 3543 are warranted because Customs represents a point where there is a high concentration of formal transactions. Argentina notes that in cases where there is a comparable concentration of formal transactions in the internal market, Argentina applies rates equal to or higher than those applied at Customs. Argentina refers to the examples of RG 18, pursuant to which the IVA is to be withheld at a rate of 10.5 percent, and of General Resolution No. 3316/91, which envisages a 14 percent withholding on payments of certain professional fees.

11.317 Specifically with respect to the pre payment of the IVA, Argentina submits that any lowering of the 10 percent rate applicable to import transactions would undermine the goal of combating tax evasion and would lead to a loss of net tax revenue. Argentina argues that this is so because a reduction of the current rate would lessen the incentive for importers to declare their subsequent internal re-sale transactions, which transactions could therefore not be subjected to taxation. Argentina asserts that a one percentage point reduction of the 10 percent collection rate for imports would translate into a monthly tax revenue loss of US$10 million. Argentina points out in this regard that the revenue raised from the various mechanisms for the pre payment of the IVA and IG is used to comply with certain quarterly deficit commitments Argentina has made vis-à-vis the International Monetary Fund (IMF). Argentina maintains that a reduction of the rate currently applicable to imports would jeopardise Argentina's meeting those deficit targets.

11.318 Argentina further argues that an increase in the 5 percent rate for the pre payment of the IVA on internal sales by agentes de percepción to small local buyers would not further reduce tax evasion. According to Argentina, a rate increase would not make transactions at subsequent marketing stages more transparent, since the aforementioned transactions tend to take place almost at the end of the marketing chain. Argentina contends that, for that reason and also because of the greater number of pre payment mechanisms applying to internal sales transactions, there would be a risk that higher rates for the pre payment of the IVA would give rise to a situation of overpayment of the IVA. Argentina argues that an increase in the rate would therefore ultimately lead to a higher number of exemptions granted under RG 17, with the consequence that there would be more informal transactions and, as a result, a net decrease in tax revenue collected. Argentina points out that, even at the current rate, there has in recent years been a steady increase in the number of exemptions granted.

11.319 The European Communities argues that from the fact that the collection of pre payments is easier for imports it does not follow that it is necessary to collect those pre payments at rates which are higher than those applicable to internal sales. The European Communities further submits that it is not clear why the collection of pre payments of the IVA on imports at a rate of less than 10 percent would constitute a "disincentive" to declare subsequent transactions. The European Communities notes in this regard that it is difficult to understand why importers could be interested in not charging the IVA on their re-sales, since that would seem to be the easiest way for them to credit the IVA paid on their import transactions. The European Communities also wonders why the collection of pre payments of the IVA on internal sales by agentes de percepción to local buyers at a rate of only 5 percent does not create a "disincentive" to declare subsequent transactions. On this point, the European Communities maintains that Argentina has not provided evidence demonstrating that the payment of the IVA is more frequently evaded when imported goods are re-sold by importers than when domestic goods are re-sold by "domestic" sellers.

11.320 The European Communities also disputes that an increase in the 5 percent rate for the pre payment of the IVA on internal sales by agentes de percepción to small local buyers would produce the revenue loss predicted by Argentina. The European Communities submits that, while an increase in the collection rate may result in an increase in the number of exemptions, this would not necessarily reduce the revenue collected through the mechanism for the pre payment of the IVA. The European Communities recalls in this regard that exemptions are granted only in cases where the pre payments made exceed the definitive liability under the IVA law. The European Communities points out, in addition, that the increase in the number of exemptions granted in recent years may be the result of factors which are unrelated to the rate at which the pre payments are collected, such as greater familiarity of taxable persons with the exemption mechanism. The European Communities also notes that Argentina has not provided evidence which would show that exemptions are more frequently requested, in relative terms, by "domestic" sellers than by importers.

11.321 In response to a question of the Panel regarding why Argentina cannot refund the additional loss of interest suffered by importers, Argentina submits that it would be virtually impossible to quantify the interest lost, since this would require an analysis of a range of factors, such as the time-lapse between each payment on account and its corroboration in the tax statement. Argentina notes, furthermore, that the resulting cost to the government of verifying the appropriateness of a refund and of the quantification of the interest lost would be exorbitant, so much so that it would cause the failure of the various mechanisms for the pre payment of the IVA and IG.⁵⁷²  

11.322 We commence our examination by recalling that it is not the rate differentials⁵⁷³  per se which render RG 3431 and RG 3543 inconsistent with Article III:2, first sentence, but rather the fact that importers must forego or pay more interest than their "domestic" counterparts in the interval between the pre payment of the IVA and IG and its crediting against the definitive tax liability arising from the IVA Law and IG Law. Therefore, it is not the rate differentials themselves which require justification for purposes of our analysis under the chapeau of Article XX but the extra tax burden imposed on importers as a result of those rate differentials.

11.323 For purposes of assessing the justifiability of that extra tax burden, it is important to recall our earlier finding that RG 3431 and RG 3543 fall within the terms of Article XX(d) because they are necessary to secure compliance with the IVA Law and the IG Law respectively. The justifying protection of Article XX(d) does not and cannot extend beyond that limited purpose. Argentina has not argued that the extra tax burden imposed on importers in the form of interest lost or paid specifically serves to secure compliance with the IVA Law or IG Law. It is apparent, in our view, that it does not serve that specific purpose.

11.324 The question then becomes whether the extra tax burden imposed on importers in the form of interest lost or paid is nevertheless justifiable because it is unavoidable for the operation of RG 3431 and RG 3543, which, in our view, fall within the scope of protection of Article XX(d).

11.325 We note in this regard that one alternative course of action available to Argentina would be to reimburse importers for the additional interest foregone or paid. Similarly, Argentina could provide for the additional interest lost or paid to be creditable against the tax liability arising from the IVA Law and IG Law. Whichever way compensation of importers is achieved, it would not, in our view, call into question the usefulness of RG 3431 or RG 3543 as measures for securing compliance with the IVA Law or IG Law. We do not therefore consider that the extra tax burden imposed on importers in the form of interest lost or paid is unavoidable.

11.326 Argentina argues that compensating importers would not be an option because it would be virtually impossible to quantify an importer's additional loss or payment of interest. We do not find this argument convincing. It is true that relevant market rates for determining the interest lost or paid are subject to change over time and that the level of those rates tends to vary depending on the length of the term for which capital is invested or borrowed. It does not follow, however, that compensation is therefore impossible. Even if it were administratively too difficult to use actual market rates as a basis for calculating the additional loss or payment of interest (which has not been demonstrated to the Panel), it would still be possible, in our view, to use other appropriate rates ⁵⁷⁴, such as average market rates ⁵⁷⁵.⁵⁷⁶  We also agree that for purposes of quantification of the additional interest lost or paid it is necessary to determine the time-period between the pre payments of the IVA and IG and their subsequent crediting, which period may vary from transaction to transaction.⁵⁷⁷ In this regard, it seems to us that it should be possible, for example, for Argentina's customs authorities and/or the importers themselves to keep records regarding the date of the pre payments of the IVA and IG.

11.327 Argentina submits, in addition, that compensation of importers for the extra tax burden in the form of interest lost or paid would result in an excessive administrative cost for the government, which would cause the failure of RG 3431 and RG 3543. It must be acknowledged that compensation would entail some administrative cost for the government. However, so do the exemption mechanisms provided for in RG 17 (with respect to the pre payment of the IVA) and RG 2784 (with respect to the pre payment of the IG) as well as the refund mechanism set forth in RG 2224 (with respect to the pre payment of the IG). Argentina has not shown why compensating importers for the additional loss or payment of interest would be significantly more administratively burdensome than the operation of such mechanisms. In any event, Argentina could, in our view, alleviate the administrative burden, for instance by requiring importers to supply supporting documentation for purposes of claiming compensation.⁵⁷⁸ Moreover, we consider that the increase in net tax revenue which Argentina claims RG 3431 and RG 3543 make possible by far exceeds the administrative cost which would result from the compensation of importers.⁵⁷⁹ We are therefore not persuaded by Argentina's argument that compensating importers for the additional interest lost or paid would result in an excessive administrative cost and would cause the failure of RG 3431 and RG 3543.
 
11.328 Lastly, we turn to Argentina's assertion that no changes to the current pre payment mechanisms are possible, as this could preclude Argentina from meeting its deficit commitments to the IMF. In support of its assertion, Argentina has referred us to an Economic Policy Memorandum and a Technical Memorandum, which Argentina says are part of an agreement with the IMF.⁵⁸⁰ However, in neither Memorandum is there a statement to the effect that Argentina is under an obligation to impose a discriminatory tax burden on importers. Nor do we see a requirement in those Memoranda which would bar Argentina from compensating importers for the discrimination suffered. Furthermore, Argentina has in any event not presented argument and evidence sufficient for us to find that it would be impossible for Argentina to meet its deficit targets if it were to compensate importers for the additional interest lost or paid. It should also be recalled in this context that Argentina has not invoked Article XX(d) on the basis that RG 3431 and RG 3543 are necessary to secure compliance with IMF commitments, but on the basis that they are necessary to secure compliance with the IVA Law and IG Law.⁵⁸¹ For these reasons, we do not consider that, in the present case, Argentina's commitments to the IMF provide a justification for not compensating importers.

11.329 Another course of action available to Argentina would be to eliminate the rate differentials themselves. Argentina rejects this course of action as not viable. Argentina argues, in essence, that any narrowing of the current rate differentials would have as an inevitable consequence that tax evasion could not be combated as effectively because there would be less transparency on taxable transactions. Argentina has not fully convinced us that the extra tax burden imposed on importers is justifiable on this basis. In particular, we have not been provided with persuasive evidence in support of Argentina's assertion that the elimination of the rate differentials would lead to more tax evasion. In any event, we note this option only as an alternative, since we have already found that Argentina could act consistently with Article III:2, first sentence, even while maintaining the existing rate differentials, by compensating importers for the additional interest lost or paid.⁵⁸²

11.330 It follows from the foregoing considerations that the application of RG 3431 and RG 3543 results in "unjustifiable discrimination" within the meaning of the chapeau of Article XX, inasmuch as these measures impose on importers an extra tax burden in the form of interest lost or paid. Having reached this conclusion, it is unnecessary for us to proceed to an examination of the other standards contained in the chapeau.

11.331 We therefore conclude that RG 3431 and RG 3543 do not meet the requirements of the chapeau of Article XX. For that reason, and even though RG 3431 and RG 3543 fall within the terms of Article XX(d), we do not accept Argentina's claim of justification under Article XX as a whole.

XII. CONCLUSIONS

12.1 In light of our findings in Section XI.A, we conclude that it has not been proved that Resolution (ANA) No. 2235/96 is inconsistent with Argentina's obligations under Article XI:1 of the GATT 1994.

12.2 In light of our findings in Section XI.B, we conclude that Resolution (ANA) No. 2235/96 is inconsistent with Argentina's obligations under Article X:3(a) of the GATT 1994.

12.3 In light of our findings in Section XI.C, we conclude that General Resolution (DGI) No. 3431/91 is inconsistent with Article III:2, first sentence, of the GATT 1994.

12.4 In light of our findings in Section XI.C, we conclude that General Resolution (DGI) No. 3543/92 is inconsistent with Article III:2, first sentence, of the GATT 1994.

12.5 In light of our findings in Section XI.C, we conclude that General Resolutions (DGI) No. 3431/91 and 3543/92, although they fall within the terms of paragraph (d) of Article XX of the GATT 1994, fail to meet the requirements of the chapeau of Article XX and are therefore not justified under Article XX as a whole. ⁵⁸³

12.6 In light of the above and in accordance with Article 3.8 of the DSU, we further conclude that there is nullification or impairment of the benefits accruing to the European Communities under the GATT 1994.

12.7 We recommend that the Dispute Settlement Body request Argentina to bring Resolution (ANA) No. 2235/96 as well as General Resolutions (DGI) No. 3431/91 and 3543/92 into conformity with its obligations under the GATT 1994.