RESTRICTED
WORLD TRADE S/C/W/13
30January 1996
ORGANIZATION
(96-0367)
Council forTrade inServices
INTERIM REPORT ONTHE STATUS OFCONSULTATIONS
ONTAXES AND SUBSIDIES ATTHE SUB-CENTRAL LEVEL
Note bytheSecretariat
Since thesubmission bytheUnited States ofitsCommunication concerning Subsidies andTaxes
attheSub-Federal Level on30June1994 (PC/SCS/W/4), there havebeenfoursessions ofinformal
consultations among interested delegations, themostrecent ofwhich tookplace on18December 1995.
After eachofthefirstthree consultations theSecretariat made short oralreports, firsttotheSub-
Committee onServices andsubsequently totheCouncil. AttheDecember meeting theSecretariat
suggested, anditwasagreed, thatitwould bedesirable tocirculate inwriting aninterim report to
theCouncil ontheconsultations heldsofar,bothinorder toinform allMembers oftheirstatus and
topreserve themain elements ofthediscussions. Thisreport bythesecretariat istherefore intended
toprovide maximum transparency ontheprocess. Itisnotarecord ofthediscussions, butaresume
ofthemainpoints made, anditdoesnotprejudice either theoutcome oftheconsultations ortheposition
ofanydelegation. Additional written information hasbeenprovided bytheUnited States inanumber
ofinformal communications. These areavailable fromtheSecretariat onrequest. Inthefollowing,
abriefhistory oftheconsultations isfollowed byasummary ofthediscussions ongeneral issues and
thenoneachofthespecific taxmeasures listed intheU.S.communication.
I. History oftheConsultations
1. AttheendoftheUruguay Round, certain delegations raised aconcern thattheywould beunable
tocomplete theprocess ofscheduling acomplete listoftheirmeasures relating tosubsidies andtaxes
atthesub-central level which were inconsistent withArticle XVII oftheGATS bythedeadline of
15December. Accordingly, bymeans ofthestatement bytheChairman oftheGroup ofNegotiations
onServices dated 13December 1993 (MTN.GNS/50), participants were given anadditional period
oftime, until15June1994, during which theycould complete thescheduling ofsuchmeasures. It
wasunderstood thatthisprocess would notresult inanyalteration inthenegotiated balance ofrights
andobligations, butduring aperiod ofthirty daysstarting on16June1994, ifanyparticipant considered
thatsuchbalance hadbeenaltered asaresult ofscheduling additional measures, itmight request
consultations withtheparticipant orparticipants concerned withaview toreaching asatisfactory
adjustment.
2. Canada submitted alistofreservations ontaxandsubsidy measures atthesub-central level
on15June1994. Asubsequent technical rectification wasintroduced byCanada on15Julyofthe
same year. On26August itwasconfirmed thatnorequest forconsultation hadbeenmade byother
countries onthesubmission, andtheadditional reservations were added totheschedule ofCanada.
TheUnited States stated that,duetotechnical difficulties inconsulting withfiftyStategovernments,
thesubmission ofitsreservations would bedelayed foraperiod nottoexceed twoweeks from15June
1994. Upon thissubmission, thethirty dayperiod forconsultation wastocommence withrespect
totheU.S.reservations. TheUnited States submitted theirlistofreservations onnational treatment
inrelation totaxes andsubsidies imposed bysub-federal jurisdictions intheir Communication
(PC/SCS/W/4) dated 30June1994. Upon request fromdelegations, thecommunication wassubjectS/C/W/13
Page2
tomultilateral consultations under theauspices oftheSub-Committee onServices during 1994.
Consultations continued under theauspices oftheCouncil forTrade inServices during 1995. During
thisperiod, foursessions ofinformal consultations were held, inSeptember 1994 andinFebruary,
October andDecember 1995. Thediscussions atthese informal sessions wereintended toclarify the
content ofthesubmission bytheUnited States andwerewithout prejudice topositions onthesubstance
ofthematter. Thedelegation oftheUnited States hasbeenproviding responses toquestions byother
delegations,someofwhichwereprovidedinwritinginthreeinformalcommunications,dated26January,
11April and18December 1995.
3. Todatethese consultations havenotbeenconclusive withrespect tothereservations ontaxes,
andsubstantive discussions havenottaken place yetwithrespect tosubsidies.
II. Discussions onGeneral Issues
4. TheU.S.submission contains some reservations which areintended toreplace existing entries
inthecurrent U.S.schedule, andsome which areadditional. TheUnited States hadexplained that
thesubmission wastheoutcome ofextensive consultations withState taxauthorities, during which
thelistofmeasures hadbeensubstantially reduced inlength. ItwastheviewoftheU.S.delegation
thatthereservations contained inthecommunication would nothavematerial impact ontheoverall
balance ofrights andobligations under theGATS, since theireconomic significance wasveryslight.
TheUnited States further explained thatonlytwooftheeleven categories oftaxmeasures listed in
thesubmission involved dejurediscrimination against foreign service suppliers; therestapplied to
U.S.suppliers fromoutside thesub-federal jurisdiction ortoU.S.suppliers notmeeting certain criteria
aswellastoforeign suppliers, andconsequently werenotcleardepartures from national treatment.
However, thelegaluncertainty created bythepanel report ontheso-called "Beer II"caseregarding
theinterpretation ofthenational treatment obligation intheGATT, hadledtoconcern thatsome of
these measures might bechallenged onthebasis thattheyresulted indefacto discrimination against
foreign suppliers. Itwastherefore found necessary toschedule these measures under theGATS. The
United States confirmed thatmostofthemeasures listed covered bothdirect andindirect taxes, although
some,suchasthoserelatedtoinsurancepremiumtaxes,concernedindirecttaxesonly.Somereservations
would alsocover measures thatmight betaken inthefuture bysub-federal jurisdictions, sincechanges
intaxsystems were unavoidable.
5. Other delegations raised anumber ofgeneral concerns about theU.S.communication. First,
theythoughtitunnecessarytoschedulemeasureswhichappearednottoinvolveanybreachofthenational
treatment obligation -andinappropriate, sincesuchscheduling would imply theexistence ofanational
treatment problem where noneexisted inreality. Itwaspointed outthatdifferential levels oftaxation
applied atsub-central levels inmost ifnotallcountries, notjustinthose withfederal systems, and
thatthescheduling ofreservations onsuchgrounds bytheU.S.would create animplication thatother
countries, which hadnotthought itappropriate toschedule thembecause nobreach ofnational treatment
wasinvolved, should havedone so.Itwasalsosaidthatthedescription oftheU.S. measures was
excessively broad, covering largecategories ofhypothetical measures rather thanspecifying individual
measures; thismade anyassessment oftheimpact ofthesereservations extremely difficult. Acomplete
inventory ofindividual measures wasrequested byother delegations, butwasnotavailable except for
insurance premium taxrates. Delegations stated thatonlyaftercomplete information hadbeenprovided
andthedrafting made more precise could countries correctly assess whether animbalance hadbeen
created intherights andobligations under theGATS anddetermine theirreactions. Thepoint was
alsomade thatreservations mustbeconfined tospecific existing measures andcould notbemade to
cover unknown future measures. Theneedtoschedule reservations atthesub-federal levelformeasures
thatexisted insimilar form attheFederal level, forwhich noreservations were made, wasalso
questioned.S/C/W/13
Page3
6. Thebasic positions ofdelegations havenotchanged through theinformal consultations. The
United States maintained thatthere wasaneedtoschedule these measures, although some drafting
changes might bemade andthere might beapossibility ofwithdrawing some reservations ifsome
formofasuitable understanding could bereached. Other delegations heldthatmostofthemeasures
need notbescheduled according tothecommon understandings between participants regarding
Article XIV(d)anditsfootnote andArticle XVII, which werelaiddown indocuments MTN.GNS/49
andalsoinearlier working documents oftheGNS. Toschedule them would undermine thecommon
understandings, andwould imply thatother countries withsimilar systems should alsoschedule them;
ifnot,theywould bevulnerable bothpolitically andlegally topossible future disputes. TheUnited
States disagreed thatthescheduling ofitsmeasures would create additional vulnerability forother
countries, since afuture panel would notinterpret acaseinvolving onecountry onthebasis ofwhat
another country hadorhadnotscheduled. Thefearwasstillexpressed, however, thatapanel ruling
onanational treatment issuemight beinfluenced bythereservations scheduled bytheUnited States.
7. Though thereservations differ greatly indetail, itappeared thatfromgeneral issues could be
seenasarising from them:
- theapplication bydifferent States ofdifferent taxtreatment tolikeservices orlikeservice
suppliers;
- theapplication byagiven Stateofdifferential taxtreatment asbetween out-of-State services
orservice suppliers (including foreign (non-U.S.) services orservice suppliers) andin-State
services orservice suppliers;
- dejurediscrimination against foreign (non-U.S.) services orservice suppliers, whereby foreign
services orservice suppliers willreceive lessfavourable treatment thanlikeU.S.services or
service suppliers onthebasis oftheirnational origin; and,
- defactodiscrimination against foreign (non-U.S.) services orservice suppliers, whereby foreign
services orservice suppliers willnotformally receive lessfavourable treatment thanlikeU.S.
services orservice suppliers based ontheirnational origin, butmaystillhavedifficulties in
obtaining treatment nolessfavourable thanthatoflikeU.S.services orservice suppliers for
indigenous orother reasons.
8. During theconsultations, itwassuggested thatonepossible wayofaddressing thelegal
uncertainty would betodevelop acommon understanding onhownational treatment would apply under
theGATS withrespect totaxes atthesub-central level. Such anunderstanding could takedifferent
forms, suchasaninterpretative notetotheGATS orastatement bytheChairman oftheCouncil.
TheUnited States indicated thatanunderstanding which would clarify theinterpretation ofArticle XVII
oftheGATS could permit thewithdrawal ofsome reservations, although anumber ofthem would
stillremain.
9. Asyetnoconsensus hasbeenreached onthedesirability ofworking towards suchacommon
understanding, andnodrafting hastherefore beenundertaken. Itwaspointed outthatonemustthink
carefully ofanyimplications thatsuchanunderstanding might haveoutside theareaoftaxes. Itwas
recognized, however, thatfurther informal sessions directed atfact-finding werenotlikely toproduce
breakthroughs, andthatserious effort should bemade todetermine thepositions ofcountries onthe
resolution ofthisissue. Itwasgenerally agreed thatasolution should besought which would provide
legalcertainty andtransparency without weakening Article XVII orundermining theintegrity ofthe
GATS. Inaccordance withthestatement oftheChairman oftheGNS, suchasolution should notresult
inanyalteration inthenegotiating balance ofrights andobligations.S/C/W/13
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III. Discussions onSpecific Measures
Inthefollowing, thetextofeachU.S.reservation, asexpressed intheoriginal submission,
isrepeated foreachitem, followed byasummary oftheU.S.description ofthereservation andof
themainpoints made indiscussion. More extensive descriptions ofthemeasures havebeenprovided
bytheU.S.inthewritten communications referred toabove.
A. Taxes
1. Sub-federal taxmeasures which afford lessfavourable treatment toservices orservice suppliers
within asub-federal jurisdiction thanthetreatment which would beprovided tothose services orservice
suppliers byanother sub-federal jurisdiction.
Description: Theeffect ofthisreservation isthatasub-central jurisdiction would notberequired
bythenational treatment obligation toprovide aforeign service supplier withthebesttreatment that
maybeavailable under thetaxlawsofanother sub-central jurisdiction. There wasgeneral agreement
among participants ininformal consultations thatitwasindeed nottheintention ofArticle XVII of
theGATS torequire aMember toaccord aforeign service orservice supplier suchtreatment. However,
theUnited States asserted thatthePanel Report oftheGATT Panel of7February 1992 concerning
measures affecting alcoholic andmaltbeverages (theso-called "Beer II"case) made State-to-State
comparisons andmentioned thatthenational treatment provisions required "contracting parties toaccord
toimported products treatment nolessfavourable thanthataccorded toanylikedomestic product"
andthat"Article III(oftheGATT) consequently requires treatment ofimported products noless
favourable thanthataccorded tothemost-favoured domestic products". TheUnited States added that
thisreservation could beremoved ifanunderstanding could bereached which would clarify themeaning
ofArticle XVII inthiscontext.
Discussions: Other delegations pointed outthatdifferences intaxtreatment ofservices andservice
suppliers bydifferent sub-central jurisdictions existed inmany countries, andthatthescheduling of
thisitemwould undermine thecommon understanding between Members thatArticle XVIIoftheGATS
didnotrequire asub-central jurisdiction toapply themost-favoured treatment accorded byother sub-
central jurisdictions toforeign services orservices suppliers. Taking areservation would undermine
thisunderstanding andwould create difficulties forother countries notmaking similar reservations.
Thenational treatment requirement wasthatasub-central jurisdiction should accord toforeign services
orservice suppliers treatment nolessfavourable thanthataccorded to"like" services orservice suppliers
ofnational origin. Some delegations wereoftheviewthattheChairman 'sStatement intheGNS of
11December 1993(MTN.GNS/49) hadestablished thatservice suppliers indifferent taxjurisdictions
werenot"like" fortaxpurposes. Itwastherefore irrelevant tocompare thetaxtreatment ofaservice
supplier established inonejurisdiction withthatgiven toanother supplier fromanother jurisdiction.
Theanalogy withthe"Beer II"case, which dealtwithanindirect taxapplied toagood, could notbe
extended todirect taxes imposed onservice suppliers, whose establishment inanother taxjurisdiction
could create legitimate grounds fordifferential treatment.
Inresponse toaquestion, theUnited States would provide information onthetreatment of
these issues under theNAFTA.
2. Sub-federal taxmeasures which afford lessfavourable treatment toaservice thatisperformed
orconsumed, ortoaservice supplier thatislocated, outside thesub-federal jurisdiction (with respect
tothisdistinction, treatment willnotbelessfavourable thanthetreatment accorded bythesub-federal
jurisdiction imposing thetaxmeasure toaservice performed orconsumed, ortoaservice supplier
located, inanyother sub-federal jurisdiction).S/C/W/13
Page5
Description: Thisreservation isintended toallow forcases inwhich foreign services performed
orconsumed ("located") andservice suppliers located outside aState oftheUnited States would not
receive themost-favoured treatment granted toaservice orservice supplier located within theState,
andwould rather receive "most-favoured-other-State" treatment. TheUnited States recognized that
theChairman 'sStatement of11December 1993 (MTN.GNS/49) stated that"ataxmeasure which
distinguishes between thesetwosuppliers onthebasisofresidency would notviolate national treatment",
butfeltthatthelanguage wasnotsufficiently precise; thephrase "totheextent thatservice suppliers
indifferent jurisdictions arenotlike" seemed tobeamajor qualifier. TheUnited States feared that
thedefinition ofnational treatment under Article XVII oftheGATS might beheldtoimply thatsub-
central jurisdictions would berequired toprovide bestin-State treatment toforeign services andservice
suppliers.
Discussions: Other delegations stated thatthereservation didnotseem necessary since aresident
andanon-resident service supplier werenot"like" suppliers fortaxpurposes. Itwaspointed outthat
thereservation would cover future discriminatory measures andwasdrafted intoogeneral terms;
onlyifthemeasures werelisted State-by-State could delegations judge theirsignificance. Therelation
between thisreservation andthatinthesixthtirettoitem4.below wasalsoquestioned: theexistence
ofthelatter seemed tolimitthescope of"most-favoured-other-State" treatment. TheUnited States
disagreed, andstated thattheexistence oftheMultistate TaxCompact andotheragreements orcompacts
among theStates would result inbetter treatment forforeign service suppliers thanwould otherwise
bethecase.
Itwaspointed outthatthephrase "totheextent that" intheChairman 'sStatement of
11December 1993 wascarefully balanced language which wasdesigned topreserve thedifference
between resident andnon-resident taxing rights while preventing discrimination. TheUnited States
agreed thattheintention oftheChairman 'sStatement wastoclarify whether residents andnon-residents
wereinsimilar circumstances fortaxpurposes, butfound thelanguage notclearenough. Itwasalso
necessary toconsider theimplications forareas other thantaxes iftheChairman 'sStatement wasto
beclarified.
Inresponse toaquestion, theUnited States promised tosupply inwriting theprovisions of
itsConstitution designed toremedy overreaching bytheStates andtoensure thatStates taxout-of-State,
including foreign, businesses uniformly. TheUnited States would alsoindicate inwhatcases most-
favoured in-State treatment would beaccorded toforeign services orservice suppliers.
3. Sub-federal taxmeasures which afford lessfavourable treatment toservices orservice suppliers
ofanother Member based onthemethod ofallocating orapportioning theincome, profit, gain, losses,
deductions, credits, assets ortaxbaseofsuchservice suppliers ortheproceeds ofaservices transaction.
Description: TheUnited States indicated thatthisreservation wasnecessary tocover indirect taxes.
Thenature ofthediscrimination which might arise wasdefacto,notdejure. They accepted that
covering direct taxesalsointhisreservation waslargely duplicative ofArticle XIV(d)anditsfootnote.
However, thechapeau andthefootnote toArticle XIVgaverisetoconcern thatthemeasures might
besubject tochallenge, andthatsome issues suchastheallocating orapportioning oftaxes pertaining
toitems otherthanthose (income, profit, gain,loss,deduction orcredit) described inthefootnote would
notbecovered bythefootnote. Inresponse toaquestion theUnited States agreed thatthesereservations
atsub-federal levelprovided moreprotection thanthereservations taken atFederal level, butmaintained
thatunless anappropriate understanding could bereached itwasnotpossible tonarrow thescope of
thereservations atthesub-federal level.S/C/W/13
Page6
Discussions: Other delegations stated thatthereservation wasnotnecessary, atleastfordirect taxes.
Toquestion theadequacy ofthechapeau toArticle XIVwould ineffect reopen theverydifficult
negotiation onthisissue attheendoftheUruguay Round andshould beavoided.
4. Sub-federal taxmeasures affording lessfavourable treatment toservice suppliers ortoservices
based onanyofthefollowing criteria:
- thesizeorincome ofservice suppliers orthescaleormethods (including environmental
andhealth andsafety measures) ofperformance;
Description: Thisreservation wasbased ontheconcerns expressed intheinformal notebythe
United States of11April 1995, andstemming fromthe"Beer II"case, overthescope ofreservations
tonational treatment obligations. Themeasures inquestion werenotdiscriminatory onthebasis of
national origin, butcould bejudged asdefactodiscrimination andhence abreach ofnational treatment
byapanel.
Discussions: Other delegations didnotseewhysuchameasure needed tobescheduled, since it
involved nobreach ofthenational treatment obligation. Itwaspointed outthatifalltaxmeasures
thatapply differential treatment according tothesizeorincome ofaservice supplier hadtobescheduled,
theprogressive income taxsystems adopted inalmost allcountries would havetobedealtwith. Some
delegations wereoftheviewthatsuchcases would fallwithin thescope ofthethirdparagraph ofthe
Chairman 'sstatement of11December 1993 which states:
"..distinctions without alinktonational origin andbased onobjective criteria would
notnormally violate thenational treatment provisions."
- theextent ofownership orparticipation byminority orother disadvantaged groups
(whether ornotsubject tocitizenship orresidence requirements);1
Description: Sub-federal taxmeasures mayfavour persons classified asmembers ofminorities or
other disadvantaged groups, andsome ofthese benefits areavailable onlytocitizens oftheUnited
States and/or residents ofaparticular jurisdiction. Therefore thiswasnotentirely adefacto
discrimination issue. Although itseemed likely thatinmostcases aminority inonecountry would
notbeconsidered aminority inanother country, andtherefore, aforeign service supplier coming from
asimilar group would notbeconsidered "like" toaU.S. service supplier runbyaminority, there
wasstillconcern about apossible panel judging otherwise.
Discussions: Other delegations could notseeinwhatparticular cases national treatment under the
GATS could beinvoked withregard tosuchmeasures. Itwaspointed outthatallormostcountries
maintained differential taxregimes forsocial reasons andthatsuchmeasures should notbecovered
bytheGATS. Itwasalsosaidthatthisreservation required more clarification astotheexact content
ofthemeasures inquestion.
- theeligibility fordifferential taxtreatment ofIndians (Native Americans), anIndian
Tribe, tribal orother Indian land, acorporation organized under alawforthe
protection ofsuchpersons, oflandowned bysuchcorporations, orofother persons
based onarelationship tosuchpersons, entities, orland;
1Thisreservation maynotbeneeded should discussions onthescope oftheGATS resolve that
measures ofthisnature areoutside thescope oftheGATS. [These discussions arenowconcluded:
see"Issues Relating totheScope theGATS" (S/C/1, 1(5)February 1995).]S/C/W/13
Page7
Description: Indian Tribes haveprivileges thatarenotavailable toother U.S.citizens orforeigners
under sub-federal taxsystems. Thisreservation recognizes thefactthatStates donothavethesame
powers totaxIndians asopposed toother U.S.citizens orforeigners.
Discussions: Other delegations stated thatthiswasperhaps oneofthefewcases thatfell
straightforwardly intothescope ofmeasures thatshould bescheduled according totheChairman 's
Statement.
- eligibility fortaxexemption andother taxbenefits derived fromnon-profit status;
Description: Thepurpose ofthisreservation wastopreserve differential treatment applied toout-of-
stateservice suppliers withrespect toeligibility forcertain taxbenefits derived fromnon-profit status.
Nocasewasfound intheUnited States inwhich foreign service suppliers weretreated differently from
out-of-state U.S. suppliers inthisregard. However, there could becases under thisreservation in
which differential treatment wasapplied toforeign service suppliers asopposed toout-of-state U.S.
suppliers, which isnotthecaseinItem2.above.
Discussions: Other delegations didnotbelieve thatadistinction made onthebasisofobjective criteria
suchasnon-profitstatuswithrespecttoasub-federaljurisdictionwouldbeabreachofnationaltreatment,
andfeltitunnecessary toschedule suchareservation. Itseemed tothemtofallunder thesamecategory
asthereservation initem2.above. Itwasalsoacaseofareservation covering unspecified future
measures, which wasnotacceptable.
- eligibility forexemption fromorreduction ofsub-federal taxonobligations ofthesub-
federal jurisdiction oroncontracts withthesub-federal jurisdiction;
Description: Thiswasalsoacaseofpossible defacto rather thandejurediscrimination, inthat
while foreign service suppliers would beeligible toreceive thebenefits provided under thesub-federal
taxregime, theyandother out-of-state suppliers might inpractice belessabletobenefit from them
thanin-state suppliers forreasons ofcircumstance which would make them lesslikely toparticipate
inlocalstatecontracts, forexample. Sales taxandperhaps other taxes would beforgiven inthecase
ofcontracts. ItwastheviewoftheUnited States thattheexception forgovernment procurement in
Article XIIIoftheGATS would notextend tosuchtaxtreatment, although there might besome
connection.
Discussions: Other delegations asked formoreinformation onthemeasures involved, andforclarity
ontherelationship withgovernment procurement. Itwaspointed outthatthefootnote toArticle XVII
might apply tosuchcases; ifso,itwould obviate theneedforthereservation. Inresponse, the
United States remarked thatthisfootnote wasintended tocover disadvantages suchaslanguage and
cultural differences, anditwasnotclear whether itwould apply insuchcases. Itwasalsopointed
outthatsuchmeasures might beconsidered assubsidies.
- whether theservice isperformed orconsumed, ortheservice provider islocated, in
ajurisdictionwithwhichasub-federaljurisdictionhasarrangementsfortaxco-operation
andassistance orfortheprevention ofdouble taxation;
Description: TheUnitedStatesexplainedthatthisreservationcoveredcasesinwhichaforeignservice
supplier could benefit fromanarrangement between twoStates inwhich thesource Staterelinquished
taxing jurisdiction totheresidence state, iftheforeign service supplier qualified forresidence inaS/C/W/13
Page8
State which hadsuchanagreement withthesource State. Some examples ofsuchagreements or
compacts were given intheinformal communication of15December 1995.
Discussions: Other delegations asked forclarification onwhether Statetaxes fellwithin thescope
ofinternational agreements between Members relating totheavoidance ofdouble taxation, interms
ofArticle XXII 3.;ifthiswasthecase, theexemption provided byArticle XXII 3.would make it
unnecessary totakeareservation against Article XVII. TheUnited States responded thatinprinciple
thenon-discrimination provisions ofsuchagreements would cover allkinds oftaxes atalllevels of
government; butsome agreements didnotextend toalllevels ofgovernment. Inresponse toarequest
fordetailed information onwhich States wereparties tosuchagreements, theUnited States undertook
tomake efforts toprovide thedataandalsotoprovide information onthenumber ofGATS Members
withwhich theUnited States didnothavebilateral agreements covering sub-federal taxes.
Toaquestion about therelationship between thisitemandthesecond reservation listed above
thatprovides formost-favoured-out-of-State treatment, theUnited States replied thattheexistence of
theMultistate TaxCompact andother agreements orcompacts among theStates would result inbetter
treatment forforeign service suppliers thanwould otherwise bethecase.
- theapplicationofasub-federaljurisdiction'spropertytaxclassificationsystem,including
appraisal methods applicable totheclassification;
Description: Although taxmeasures ofthistypedidnotdifferentiate onthebasis ofthenational
originoftheservicesupplier,defactodiscriminationcouldariseasaconsequenceofone-timedistinctions
resulting fromchanges inthesystem overtimeinthetaxation ofproperty ortheuseofdifferent methods
oftaxation depending onthetypeofproperty. Thiswasoneoftheleastconsequential ofthereservations
ineconomic terms butitdealtwithacontested areaintaxlawgiving risetolitigations intheUnited
States.
Discussions: Other delegations found itverydifficult tounderstand theneedforsuchareservation,
since nodiscrimination wasmade onthebasisofnational origin. Theexplanation oftheUnited States
seemed tobebased oncomparison between service suppliers thatwerenot"like", ortobebased on
farreaching assumptions about movements intheproperty market. Suchacaseshould fallunder the
scope ofthethirdparagraph oftheChairman 'sstatement of11December 1993, according towhich
"distinctions without alinktonational origin andbased onobjective criteria would notnormally violate
thenational treatment provisions". Thewording ofthemeasure wasalsoverywideandcould beused
inthefuture tointroduce discriminatory measures.
- theapplication ofmeasures, including compliance measures, toprevent theavoidance
orevasion ofthetaxofasub-federal jurisdiction.
Description: TheUnited States explained thatthisreservation notonlycovered indirect taxeswhich
were notcovered bythetaxcarve-out ofArticle XIV(d) intheGATS, butalsodirect taxes because
ofconcern thatmeasures toprevent theavoidance orevasion oftaxcould bechallenged under the
chapeau toArticle XIV(d), which provides thattheexceptions under Article XIVaresubject tothe
requirement that"such measures arenotapplied inamanner which would constitute ameans ofarbitrary
orunjustifiable discrimination between countries where likeconditions prevail, oradisguised restriction
ontrade inservices".
Discussions: Other delegations didnotagree totheneedtoschedule suchareservation, notonly
because Article XIV(d) provided protection fordirect taxes, andshould notbeundermined byneedless
duplication, butalsobecause Article VIrequired thatdomestic regulations should beadministered in
areasonable, objective andimpartial manner. TheUnited States recognized therelevance oftheS/C/W/13
Page9
protection under Article VI,butfound thatitslanguage lacked precision, andsuggested thattherewas
always anelement ofsubjectivity indetermining whether ameasure wasreasonable ornot.
5. Sub-federal measures substantially incorporating provisions offederal lawsubject toanational
treatment reservation under thisAgreement.
Description: Thisreservation covers sub-federal measures thatsubstantially incorporate federal tax
measures forwhich national treatment reservations were made intheU.S. schedule. Theterm
"substantially incorporating" wasintended toencompass state-specific variations onthefederal tax
code. Some examples ofsuchmeasures werecitedintheinformal communication bytheUnited States
of15December 1995.
Discussions: Other delegations found thatthewording ofthereservation, especially thephrase
"substantially incorporating", wasnotprecise. Itwould beunacceptable ifthiswere toincorporate
State measures thatwentfurther thantheequivalent Federal measure.
6. Sub-federal taxmeasures reflecting restrictions placed onsub-federal taxing power byfederal
law.
Description: Thisreservation applies toanyfederal lawprovision thatrestricts States fromtaxing
residents ofanother jurisdiction ormultijurisdictional activity. Twoexamples were given inthe
15December communication, which weretheonlyexisting orpending measures thatfallunder this
reservation. TheUnited States added thatthisreservation covered anyexisting orfuture measures
ofthistype. Federal preemption ofState taxlawswasbeyond thecontrol oftheStates, andfuture
changes insub-federal taxes were inevitable.
Discussions: Other delegations asked whether suchmeasures should correctly havebeenscheduled
attheFederal level, since theywould merely beareflection ofprovisions inFederal law.TheUnited
States responded thattheyshould bescheduled attheState level, since themeasures were taken at
theStatelevelunder Federal guidance. Delegations didnotunderstand whysuchprohibitions totax
certain service suppliers attheStatelevelwould constitute anational treatment violation. They also
pointed outthatdifferent types ofservices given intheexamples, e.g.transport byroadandbyrail,
didnotseemtobe"like". Delegations expressed concern thatonecould notjudge whattheimplications
ofthereservation would be,iftheextent offuture measures were notknown.
7. Sub-federal franchise orcorporation taxmeasures (totheextent considered tobetaxes other
thandirect taxes) imposing adistinction fortheequitable oreffective imposition orcollection
offranchise orcorporation taxes, including distinctions described infootnote 6ofArticle XIV(d)
andrelated Chairman 'sStatement.2
Description: Thiswasoneofthelessconsequential ofthereservations, since itdidnotcarry any
other implications thantoensure thatcertain taxmeasures infranchise orcorporation taxes atthesub-
federal levelwereincluded inthemeasures covered under Article XIV(d) andtherelated Chairman 's
Statement.
Discussions: Other delegations stated thatsuchareservation wasnotnecessary, since thefootnote
toArticle XIVoftheGATS permitted theinterpretation thatsuchtaxes were "direct" taxes forthe
2MTN.GNS/49 of11December 1993, consolidating andamplifying MTN.GNS/W/178 andits
addendum andinW/210.S/C/W/13
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purpose ofthisArticle. Onedelegation stated, however, thatiftherewasneedforprecision, anentry
should bemade intheschedule.
8. Sub-federal compensating taxes (other thandirect taxes) thatarenon-discriminatory byvirtue
oftheirrelationship toother measures (such asreporting orbonding requirements).
Description: Thisreservation wasnecessitated primarily toprotect theusetaxfromanyarguments
thatitinherently discriminates against foreign services orthatthedifficulties ofcollecting theusetax
discriminate against aforeign service supplier. Theimpact oftheusetaxwould notalways bethe
same asthesalestax.
Discussions: Other delegations asked formore precision inthedrafting; ifthereservation were
required withrespect totheusetax,thisshould bespecified. Iftheusetaxwasimposed inanon-
discriminatory manner inrelation tothesalestax,paragraph 3.ofArticle XVII would indicate that
thetreatment should notbeconsidered tobelessfavourable. Inresponse tothis,theUnited States
mentioned thatthetreatment under theusetaxmight beequivalent tothatunder thesalestax,butnot
necessarily equal. TheU.S. delegation promised toreflect further onmaking thelanguage ofthe
reservation more precise, andtoprovide additional explanation ontheneedforthereservation.
9. Taxmeasures ofasub-federal jurisdiction which apply adifferent insurance premium taxrate
oradifferent typeoftaxtodomestic insurers orreinsurers thantoother insurers orreinsurers.3
Description: TheUnited States explained thatthiswasavariation ofthereservation under item2.
above, whereby differential treatment isapplied toout-of-State insurers compared toin-State insurers
ininsurance premium taxes. There wasnodifference intreatment between out-of-State andnon-U.S.
insurers. Itwasanexample ofpossible defactodiscrimination, since non-U.S. insurers weretreated
equally without-of-State U.S.insurers. OnlythreeStates (Alabama, Kansas andOregon) applied such
differential taxtreatment.
Discussions: Other delegations stated thatthiswasacaseofdejurediscrimination against foreign
insurers andcreated serious distortion, since foreign insurers supplying thesame kindofinsurance
services cross-border were paying heavier taxes thanin-State insurers intheState where theywere
bothdoing business. Thereservation should bemade more specific inorder todetermine whether
thebalance ofrights andobligations waschanged asaresult ofthisreservation.
10. Taxmeasures ofasub-federal jurisdiction providing differential treatment toinsurers or
reinsurers thataredomestic insurers withrespect toasecond jurisdiction, based upon the
treatment accorded bythesecond jurisdiction toinsurers thataredomestic insurers withrespect
tothefirstjurisdiction.
Description: These taxmeasures weredesigned toretain areciprocal balance between thetaxburden
oninsurers ofoneState andanother State. Thiswasalsoadefacto casebecause aforeign insurer
established inanother U.S.Statewould betreated equally withanout-of-State insurer established in
thesame other State.
3Withrespect toasub-federal jurisdiction, theterm"domestic insurer" means aninsurer orreinsurer
thateither isorganized inthatsub-federal jurisdiction orisaUSbranch ofanon-US insurer orreinsurer
thatenters theUSthrough thatjurisdiction.S/C/W/13
Page11
Discussions: Other delegations questioned whether themeasures inquestion wereexisting; ifnot,
future measures could notbescheduled. Itwashardtoseetheneedtoschedule thismeasure ifthere
wasnodiscrimination onthebasis ofnational origin. TheUnited States responded thatthese were
current measures, andthatforeign insurers might berequired topayhigher taxes thanaU.S.insurer
selling policies tothesame State, which could constitute anational treatment violation.
11. Taxmeasures ofasub-federal jurisdiction granting insurers orreinsurers acredit, deduction,
orexemption formaintaining anestablishment orconducting anactivity within thejurisdiction.
Description: TheUnited States explained thatthiswasalsoadefactotypeofcircumstance inwhich
theindigenous localsupplier, forpractical reasons, might bemore likely toobtain these taxbenefits
thanaforeign supplier, eventhough thelatter would inprinciple beeligible forthem. Thisreservation
wouldnottreatforeignsuppliersdifferentlyfromout-of-StateU.S.suppliers.TheChairman'sStatement
of11December 1993 stated thatadistinction without alinktonational origin andbased onobjective
criteria would not"normally" violate thenational treatment provisions. Itstated explicitly asanexample
ataxcredit thatisallowable onthebasis ofthelocation oftheactivity. Therefore, thisreservation
would notbenecessary iftheword "normally" wasnotthere, andifaclear understanding could be
made onthispoint.
Discussions: Other delegations didnotunderstand theneedtoschedule thisreservation, since the
Chairman 'sStatement already covered theU.S. concern. Itwasmentioned thatthedrafting ofthe
Chairman 'sStatement might nothavebeenprecise enough, inparticular withrespect tothemeaning
oftheterm"like".Acommonunderstandingmightbenecessaryonwhetherservicesuppliersestablished
indifferent sub-central jurisdictions were"like" suppliers fortaxpurposes. Itwasstated thatifthere
hadnotbeenanunderstanding thatservice suppliers established indifferent jurisdictions werenot"like",
alarge number ofreservations would havebeenmade byMembers. TheUnited States wastoalarge
extent trying torestate thecommon understanding initsschedule.S/C/W/13
Page12
B. Subsidies
Asmentioned above, nosubstantive discussions havetaken place sofaronsubsidies.
TheUnited States submits thefollowing amendment toitslistoflimitations onnational treatment
inrelation tosubsidies atthesub-federal level:
1. Sub-federal subsidies measures which afford more favourable treatment tosocially or
economically disadvantaged groups, including measures which provide incentives, benefits or
other assistance. These groups mayinclude women, veterans, racial minorities, physically
disadvantaged persons, students, youths, elderly persons andsmall businesses.4
2. Subsidies measures ofasub-federal jurisdiction which areavailable onlytojuridical persons
ofanother Member which areincorporated ororganized inthatjurisdiction.
3. Subsidies measures ofasub-federal jurisdiction which areavailable onlytoentities witha
principal place ofbusiness inthesub-federal jurisdiction orwithasubstantial orsignificant
commercial presence inthesub-federal jurisdiction.
4. Subsidies measures taken byAlaska which areavailable onlytoUnited States citizens residing
inAlaska andsubsidies measures taken byHawaii which areavailable onlytoHawaiian natives.
4Thisreservation maynotbenecessary should discussion onthescope oftheGATS resolve that
measures ofthisnature areoutside thescope oftheGATS. (Thediscussions havebeenconcluded -
seedocument S/C/1.)