Last year a World Trade Organization (“WTO”) dispute settlement panel reviewed several claims raised by Panama against Argentina’s imposition of certain tax measures against services and service suppliers from countries deemed “not cooperating for tax transparency purposes” under the Argentine government’s Decree No. 589/2013. While Panama did not challenge the decree directly, it challenged eight of the retaliatory measures imposed by Argentina against countries designated “non-cooperating.” The panel held that Argentina’s measures were inconsistent with certain of its WTO obligations under the General Agreement on Trade in Services (“GATS”). [See Mayer Brown’s October 7, 2015, Legal Update, “WTO Panel Rejects Argentina’s Tax Transparency Penalties.”]

Panama and Argentina each asked the WTO Appellate Body to examine certain issues of law and legal interpretations developed by the panel. On April 14, 2016, the Appellate Body issued its report, overturning several of the panel’s decisions. The Appellate Body’s report addresses key concepts under the GATS and provides clarifications that will advance the body of WTO law that concerns trade in services.

First, the report clarifies aspects of how to determine when competing foreign services and service providers are “like” domestic service providers. This clarification is critical because, if the services are not “like,” any discrimination against the foreign service does not violate WTO obligations. Second, the report rejects the panel’s attempt to bless regulatory differences between countries as legitimate efforts to “level the playing field” and neutralize what would ordinarily be considered discrimination. As described further below, the report states that regulatory distinctions should be taken into account when considering the exceptions that GATS permits WTO members to make from their non-discrimination obligations. At the same time, the Appellate Body avoided interpreting some provisions that will likely be the source of future trade tensions, such as the exception for certain tax measures and the anti- circumvention provision in the GATS Financial Services exception for prudential regulations.

Key Findings

With respect to Article II:1 of the GATS (“Most Favored Nation” treatment):

  • The report overturns the panel’s conclusion that services and service suppliers from non- cooperating countries and cooperating countries were “like services and service suppliers.” However, the report also notes that the Appellate Body did not make a finding  that the services were not “like;” the Appellate Body only overturned the panel’s method as flawed.
  • Because the services and service suppliers of cooperating and non-cooperating countries are not “like,” the report also overturns the panel’s finding that Argentina’s policies treated some WTO Members (non- cooperating countries) less favorably than similarly situated Members (cooperating countries).
  • The Appellate Body was particularly concerned by, and overturned, the panel’s finding that regulatory aspects relating to services and service suppliers that may affect conditions of competition may be considered in assessing whether the treatment provided is “less favorable.” The Appellate Body concluded that the fact that a measure modifies the conditions of competition to the detriment of imported products is, in itself, sufficient for a finding that the measure confers “less favorable treatment,” and does not require a separate analysis regarding the regulatory aspects.

With respect to Article XVII of the GATS (National Treatment):

  • For the reasons described above, the Appellate Body overturned the panel’s finding that three of Argentina’s measures did not provide less favorable treatment to foreign services and service suppliers as compared to “like services and service suppliers” in Argentina.
  • With respect to the Panel’s application of Article XIV(c) of the GATS:
  • The Appellate Body found that the panel did not err in finding that paragraph 2(a) of the Annex on Financial Services “covers all types of measures affecting the supply of financial services within the meaning of paragraph 1(a)” of the Annex.

The Appellate Body concluded that Panama had not demonstrated the merits of its other claims raised in the appeal.

Discussion

This dispute concerns eight financial, taxation, foreign exchange and registration measures imposed by Argentina mostly on services and service suppliers from jurisdictions that do not exchange information with Argentina for the purposes of fiscal transparency (“non- cooperative jurisdictions”). The measures at issue in this dispute were the following:

  • Withholding tax on payments of interest or remuneration (measure 1);
  • Presumption of unjustified increase in wealth (measure 2);
  • Transaction valuation based on transfer prices (measure 3);
  • Payment received rule for the allocation of expenditure (measure 4);
  • Requirements relating to reinsurance services (measure 5);
  • Requirements for access to the Argentine capital market (measure 6);
  • Requirements for the registration of branches (measure 7); and,
  • Foreign exchange authorization requirement (measure 8).

1. CLAIMS CONCERNING ARTICLES II:1 AND XVII OF THE GATS (MOST FAVORED NATION AND NATIONAL TREATMENT)

The panel found that the relevant services and service suppliers are “like” under both Articles II:1 and Article XVII of the GATS, because the eight challenged measures provide for differential treatment on the basis of the origin  of the services and service suppliers at issue. Argentina claimed on appeal that the panel erred in its analysis of the likeness of services and service suppliers under Articles II:1 and XVII of the GATS.

The Appellate Body found that the likeness of services and service suppliers may be established on the basis of evaluating certain criteria relating to the competitive relationship between the services and service suppliers at issue. Alternatively, likeness may be presumed where a measure provides for differential treatment based exclusively on the origin of the services and service suppliers concerned. The Appellate Body concluded that the panel had failed to make a finding that the distinction between cooperative and non-cooperative countries in the measures at issue was based exclusively on origin. As a result, the Appellate Body found that the panel had erred in finding likeness “by reason of origin” in the absence of such a finding. The Appellate Body considered that the panel was thus required to undertake an analysis of likeness on the basis of various criteria relevant for an assessment of the competitive relationship of the services and service suppliers of cooperative and non- cooperative countries, but had failed to do so. Consequently, the Appellate Body reversed the panel’s findings of likeness of the services and service suppliers at issue under Articles II:1 and XVII of the GATS. However, the Appellate Body also noted that they were not making a finding that the services were not “like;” they solely overturned the panel’s analysis of this issue as flawed.

After concluding that the services and service suppliers at issue were “like” both the services an service suppliers of all other WTO Members, including Argentina, the panel then found that the eight measures are inconsistent with the most-favored nation obligation in Article II:1 because they accord less favorable treatment to services and service suppliers of non-cooperative countries in comparison to those from cooperative countries. Separately, the panel held that the three measures (measures 2, 3, and 4) that Panama claimed violated Argentina’s national treatment obligation did not favor Argentine services and service suppliers in violation of Article XVII of the GATS. Panama alleged that the panel erred in finding that an assessment of “treatment no less favorable” under Articles II:1 and XVII of the GATS had to take into account “regulatory aspects” relating to services and service suppliers.

The Appellate Body found that, under Article II:1 and Article XVII of the GATS, a measure fails to confer “treatment no less favorable” if it  modifies the conditions of competition to the detriment of services or service suppliers of any other Member in comparison to like services or service suppliers of, respectively, any other country or the Member imposing the contested measure. In the Appellate Body’s view, the panel adopted an erroneous legal standard under these provisions whereby an analysis of the  “regulatory aspects” could potentially render a measure consistent with Articles II:1 and XVII, even if the measure modifies the conditions of competition to the detriment of like services or service suppliers of any other Member. The Appellate Body considered that, where a  measure is inconsistent with the non- discrimination provisions of the GATS, regulatory aspects or concerns that could potentially justify such a measure are more appropriately addressed in the context of the relevant exceptions. The Appellate Body therefore found that the panel erred in its interpretation of Articles II:1 and XVII of the GATS reversed the panel’s conclusions under both Article II:1 and Article XVII of the GATS. At the same time, the Appellate Body also noted that their analysis does not require that evidence relating to the regulatory aspects of a measure must be automatically excluded; it left open that to the extent that regulatory aspects have a bearing on the conditions of competition, they might be taken into account in the analysis of whether the measure at issue modified the conditions of competition to the detriment of foreign service providers.

2. CLAIMS CONCERNING ARTICLE XIV OF THE GATS (GENERAL EXCEPTIONS)

Before the panel, Argentina sought to defend six of its measure (measures 1, 2, 3, 4, 7 and 8) under Article XIV(c) of the GATS, but did not succeed because the panel found that it granted cooperative country status to countries with which it does not have an agreement that allows effective exchange of such information, and thus did not comply with the chapeau of Article XIV.

Although Argentina did not appeal the panel’s ultimate rejection of its defense, Panama appealed the panel’s intermediate finding that the six measures concerned were “necessary to secure compliance with” certain GATS- consistent Argentine laws and regulations within the meaning of paragraph (c) of Article XIV. The Appellate Body rejected Panama’s allegation that, in applying Article XIV(c) to the six measures, the panel failed to focus its analysis  on the relevant aspects of the measures that gave rise to the findings of inconsistency with Article II:1 of the GATS. The Appellate Body further found that Panama did not demonstrate that the panel erred in finding that the measures at issue were designed and “necessary” to secure compliance with the relevant Argentine laws or regulations. In particular, the Appellate Body found that the panel analyzed whether the measures secure compliance not only with the objectives of the relevant laws or regulations but also with specific provisions of such laws and regulations. As for the analysis of “necessity,” the Appellate Body found that Panama had not established that the panel had erred in its assessment of the contribution and trade- restrictiveness of the measures at issue or in its weighing and balancing of the relevant necessity factors. The Appellate Body seemed to implicitly bless the panel’s consideration of regulatory aspects here (e.g., for determining the objective of the GATS-compliant measure and its nexus to achieving that objective). However, the Appellate Body also went out of its way to note that Panama’s appeal of this provision was narrowly drawn, thus holding open a more fulsome and definitive interpretation of this exception.

3. CLAIMS CONCERNING PARAGRAPH 2(A) OF THE GATS ANNEX ON FINANCIAL SERVICES (MEASURES TAKEN FOR “PRUDENTIAL REASONS”)

Paragraph 2(a) of the GATS Annex on Financial Services allows Members to take “measures for prudential reasons …[n]otwithstanding any other provisions” of the GATS, provided that certain conditions are met. The panel concluded that two of the challenged measures (measures 5 and 6) were not justified by paragraph 2(a) of the GATS Annex on Financial Services because they were not adopted “for prudential reasons” (emphasis added) within the meaning of the provision.

Argentina did not appeal this conclusion, although Panama appealed an aspect of the panel’s interpretation under this provision. The Appellate Body disagreed with Panama’s assertion that paragraph 2(a) of the Annex covers only measures constituting “domestic regulation,” and found that the provision does not restrict the types of measures that may fall within the scope of this provision. Neither the panel nor the Appellate Body reached the anti- circumvention portion of the exception, namely: “[w]here such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.” Future disputes involving the prudential exception will likely turn on this language.