GATT rules may challenge discriminatory income tax measures

Journal of International Economic Law, 2018, 21, 547–566
doi: 10.1093/jiel/jgy033
Advance Access Publication Date: 31 July 2018
Article
Income Tax and Nondiscrimination in the

GATT
Downloaded from https://academic.oup.com/jiel/article-abstract/21/3/547/5062280 by guest on 13 March 2019

Vincent Beyer*
A BS TR A C T
This article argues that the nondiscrimination obligations of the General Agreement
on Tariffs and Trade (GATT) may apply to income tax measures to a larger degree
than has traditionally been assumed. It has been claimed that the GATT’s focus on
products largely excludes income taxes from the scope of Articles I and III. An inter-
pretation on the basis of customary rules of interpretation as mandated by the Dispute
Settlement Understanding, however, reveals that income tax measures may be subject
to these obligations. To illustrate the reach of the nondiscrimination rules as set out by
the GATT, the example of (im)proper transfer pricing is provided. It is reviewed how
discriminatory transfer pricing measures may be subject to challenge in WTO dispute
settlement proceedings. To do so, the article provides insights as to how transfer price
adjustments may result in discrimination and how the standard of arm’s length may be
incorporated in WTO dispute settlement. Additionally, the associated problem of
transfer price documentation is analyzed. This article, thus, on the one hand advances
a wide interpretation of the nondiscrimination rules and, on the other hand, illustrates
their application with a topical example.
I N TRO D UC T IO N
This article considers the intersection of income tax measures and the nondiscrimi-
nation rules contained in the General Agreement on Tariffs and Trade (GATT). For
many years, tax and trade have been regarded as distinct fields of study.1 However,
this view disregards the multilateral trading system’s aim to regulate nontariff barriers
to international trade. These may well comprise cases of income tax discrimination.
These considerations are particularly relevant in light of the fact that the fight against
tax evasion gained increased impetus through the Base Erosion and Profit Shifting
(BEPS) Project of the Organization for Economic Co-operation and Development
(OECD). States may adopt a multitude of measures under their income tax legisla-
tion or double taxation agreements to avoid profit shifting by multinational
* PhD Candidate, Graduate Institute of International and Development Studies. E-mail: vincent.beyer@
graduateinstitute.ch. The author would like to thank Joost Pauwelyn and Jan Bohanes for their valuable
comments as well as the anonymous reviewers of the Journal of International Economic Law. All errors and
omissions remain the sole responsibility of the author.
1 Arthur J. Cockfield and Brian J. Arnold, ‘What Can Trade Teach Tax? Examining Reform Options for Art
24 (Non-Discrimination) of the OECD Model’, 2(2) World Tax Journal 139 (2010), at 145; H. David
Rosenbloom, ‘What’s Trade Got To Do With It?’ 49 Tax Law Review 593 (1994).
C The Author(s) 2018. Published by Oxford University Press. All rights reserved.
V
547
548 Income Tax and Nondiscrimination in the GATT
enterprises. The outputs of the BEPS Project of the OECD as well as the resulting
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
BEPS in some way sought to widen the arsenal of States in their battle against tax
avoidance.2 While a detailed review of the BEPS package or the Multilateral
Convention exceeds the scope of this article, it appears that intersections between in-
come tax measures and GATT nondiscrimination obligations exist. Ultimately, a
proper understanding of the GATT nondiscrimination obligations with respect to in-

come taxes is essential to ensure that domestic measures seeking to tackle tax avoid-
ance are not rolled back in WTO dispute settlement. The Argentinian and
Colombian attempts to unilaterally deal with the tax haven Panama aptly illustrate
the difficulties States may encounter in this respect.3
There is currently no doubt that income tax measures are already subject to the
WTO obligations relating to subsidies.4 Furthermore, it is well established that taxes on
goods are subject to the nondiscrimination obligations of the GATT. This article in
turn explores the extent to which the rules contained in Articles I and III of the GATT
may serve to regulate discriminatory income tax measures. Many scholars continue to
reject the applicability of Articles I and III with respect to income tax measures and in-
stead assert that these provisions exclusively deal with taxes on goods or merely have a
remote connection to income taxes.5 Having advanced a wide interpretation of the
GATT nondiscrimination obligations, the article subsequently reviews the example of
discriminatory transfer price adjustments. The potential reach of the GATT nondiscri-
mination obligations with respect to complex income tax measures is thereby illustrated.
The proposition this article ultimately seeks to defend is that an interpretation of
the GATT nondiscrimination rules in accordance with the provisions of the Vienna
2 See generally the website of the OECD which provides an overview of the 15 measures that were adopted
within the framework of the BEPS Project, http://www.oecd.org/tax/beps/beps-actions.htm (visited 29
May 2018).
3 See generally the Reports in Argentina – Measures Relating to Trade in Goods and Services (Argentina –
Financial Services), WT/DS453, adopted 9 May 2016; the Reports in Colombia – Indicative Prices and
Restrictions on Ports of Entry (Ports of Entry), WT/DS366, adopted 20 May 2009; and Colombia – Measures
Relating to the Importation of Textiles, Apparel and Footwear, WT/DS461, adopted 22 June 2016.
4 See under the GATT, for example, GATT Panel Report, United States – Income tax legislation (DISC)
(1976) GATT BISD 23S/98, adopted 7 December 1981, paras 73f; see also the three related reports
GATT Panel Report, Income Tax Practices Maintained by France (1976) GATT BISD 23S/114, adopted 7
December 1981, GATT Panel Report, Income Tax Practices Maintained by Belgium (1976) GATT BISD
23S/127, adopted 7 December 1981, and GATT Panel Report, Income Tax Practices Maintained by the
Netherlands (1976) GATT BISD 23S/137, adopted 7 December 1981. Since the entry into force of the
SCM Agreement, a number of (alleged) income tax subsidies have been assessed under said agreement
whose Article 1.1(a)(1)(ii) explicitly refers to fiscal measures as well as Annex I item (e) which makes
mention of direct taxes in the context of export subsidies.
5 See, for example, Asif H. Qureshi, ‘Trade-Related Aspect of International Taxation: A New WTO Code of
Conduct?’, 30(2) Journal of World Trade 161 (1996), at 167; Michael Petritz, ‘National Report Austria’,
in Michael Lang, Judith Herdin and Ines Hofbauer (eds), WTO and Direct Taxation (The Hague: Kluwer
Law International, 2005) 143; Gary Clyde Hufbauer, ‘Tax Discipline in the WTO’, 44(4) Journal of World
Trade 763 (2010), at 769; Asif H. Qureshi, ‘Coherence in the Public International Law of Taxation:
Developments in International Taxation and Trade and Investment Related Taxation’, 10 Asian Journal of
WTO & International Health Law & Policy 193 (2015), at 202f; For a more detailed and nuanced picture
consult Jennifer E. Farrell, The Interface of International Trade Law and Taxation (Amsterdam: IBFD
2013); and Turki Althunayan, Dealing with the Fragmented International Legal Environment: WTO,
International Tax and Internal Tax Regulations (Heidelberg: Springer 2010).
Income Tax and Nondiscrimination in the GATT 549
Convention on the Law of Treaties (VCLTs), as mandated by DSU Article 3.2,

serves to establish their far reach into the field of income tax. WTO Members’ policy
space with respect to income tax measures is curtailed more substantially than often
recognized by proponents of arguments that rely on historical assumptions concern-
ing the nonapplicability of the nondiscrimination rules with respect to income tax
measures in the context of trade in goods. The GATT’s reach into the field of in-
come tax may ultimately serve to challenge tax measures that unduly restrain inter-

national trade.
I . T HE A P P L IC A B IL I TY O F TH E G A TT T O I N CO ME TA X M E A SU RE S
This first section briefly introduces the distinction between direct and indirect taxes
and its continuing relevance in the context of the WTO. This background might
serve to somewhat explain the origins of the belief that the GATT’s nondiscrimina-
tion provisions are not applicable to direct taxes. The subsequent analysis will first
discuss Articles III:2 and III:4, laying down the National Treatment (NT) obligation
and then Article I:1, the Most-Favored-Nation (MFN) provision.
In the context of WTO law, a distinction is often drawn between direct taxes,
which are imposed on producers, and indirect taxes, which are levied on products.
The GATT itself provides no guidance as to the definition of direct or indirect taxes.
The Subsidies and Countervailing Measures Agreement (SCM Agreement), how-
ever, which is equally applicable to trade in goods, defines direct taxes as ‘taxes on
wages, profits, interests, rents, royalties, and all other forms of income’.6
Additionally, the General Agreement on Trade in Services states that direct taxes in-
clude ‘all taxes on total income, on total capital or on elements of income or of cap-
ital’.7 Although neither of these definitions is directly applicable with respect to the
GATT, it follows that direct taxes can be understood to include income taxes, where-
as examples of indirect taxes include taxes such as sales tax and value added tax.
This distinction between direct and indirect taxes continues to be of relevance es-
pecially in the context of border tax adjustments. It is generally held that indirect
taxes, those imposed directly on products, are eligible for border tax adjustments
whereas direct taxes are not. The most convincing explanation for this distinction in
the context of border tax adjustments is based on the ground that indirect taxes are
generally levied ‘according to the principle of destination, in the country of consump-
tion’.8 From this, however, it does not logically follow that tax discrimination be-
tween foreign and domestic goods in the sense of Articles I and III may only occur
with respect to indirect taxes. It appears that valid assumptions, which may hold true
in the context of border tax adjustments, have falsely been imported into the general
nondiscrimination obligations of the GATT without exploring or questioning their
underlying logic. Thus, while this article does not advocate abandoning the distinc-
tion between direct and indirect taxes, particularly in the context of border tax
6 Agreement on Subsidies and Countervailing Measures (SCM Agreement), 1869 UNTS 14, Annex I item
(e), footnote 58.
7 General Agreement on Trade in Services (GATS), 1869 UNTS 183, Article XXVIII(o).
8 Report of the Working Party on Border Tax Adjustments, L/3464, adopted 2 December 1970, para 21;
While there is a rich literature on Border Tax Adjustments a discussion thereof exceeds the scope of this
article.
adjustments, the following section questions the validity and extent of this distinction
in the context of Articles I and III.
A . A R TI CL E II I :2 —NT A ND I N TE RN A L T A X ES
With respect to the NT obligation, the relevant part of Article III:2 reads as follows:
The products of the territory of any contracting party imported into the terri-

tory of any other contracting party shall not be subject, directly or indirectly,
to internal taxes or other internal charges of any kind in excess of those
applied, directly or indirectly, to like domestic products.9
As can be seen from the quote, the text of Article III:2 itself does not provide for a
distinction between direct and indirect taxes. It does, however, contain the words
‘directly or indirectly’. Rather than referring to a type of tax, meaning direct or indir-
ect taxes, these terms seek to circumscribe the scope of the impact a tax can have on
a product.10 According to the GATT Analytical Index, the term indirectly could,
hence, ‘cover even a tax not on a product as such but on the processing of the
product’.11 There is nothing in the text itself that would, thus, per se exclude the ap-
plication of the provision to income tax measures. Nevertheless, the argument that
Article III:2 exclusively applies to indirect taxes and consequently excludes income
taxes is not uncommon among trade lawyers and has equally been reiterated by
Panels.12
To determine the proper scope of application of the provision, it is necessary to
have regard to the customary rules of interpretation as mandated by the Dispute
Settlement Understanding.13 Articles 31 and 32 of the VCLTs, widely regarded to
codify these customary rules,14 require the determination of ‘the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object
and purpose’.15 Only if the approach under Article 31 leaves the meaning ambiguous
or obscure, is it warranted to have recourse to the travaux préparatoires of the treaty
in question.16
With respect to the ordinary meaning of the terms of Article III:2, it is important
to bear in mind that the Appellate Body (AB) explicitly acknowledges that the ‘prin-
ciples of interpretation neither require nor condone the imputation into a treaty of
9 General Agreement on Tariffs and Trade 1994, 1867 UNTS 187 (GATT), Article III:2.
10 Althunayan, above n 5, at 161.
11 WTO, GATT Analytical Index, https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_
art3_gatt47.pdf (visited 29 May 2018), at 141.
12 See, for example, Panel Report, Indonesia-Certain Measures Affecting the Automobile Industry, WT/DS54/
R, adopted 23 July 1998 in which it was stated: ‘When subsidies to producers result from exemptions or
reductions of indirect taxes on products, Article III:2 of GATT is relevant. In contrast, subsidies granted
in respect of direct taxes are generally not covered by Article III:2’ (emphasis added).
13 Understanding on Rules and Procedures Governing the Settlement of Disputes, 1869 UNTS 401 (DSU),
Article 3.2.
14 See, for example, WTO Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline (US – Gasoline), WT/DS2/AB/R, adopted 20 May 1996, at 16f.
15 DSU, Article 3.2.
16 Vienna Convention on the Law of Treaties, 1155 UNTS 331 (VCLT), Article 32(a).
words that are not there’.17 Thus, in the absence of any explicit direction as to the
provision’s application to income taxes, it is necessary to inquire if any distinction be-
tween income and product taxes is implicit in the wording adopted in Article III:2.
In this respect, the context of the provision is of relevance. Here, according to the
AB Article III:1 constitutes such relevant context.18
Article III:1 articulates the fundamental principle underlying the whole of Article
III that WTO Members may not adopt measures ‘so as to afford protection to do-

mestic production’.19 According to the AB, the provision acts ‘as a guide to under-
standing and interpreting the specific obligations contained in Article III:2’.20
Ultimately, it underlines the provisions purpose that measures should not be adopted
to negatively affect the competitive relationship of imported products vis-à-vis like
domestic products. In this respect, the observations of the Panel in Brazil-Taxes
regarding the whole of Article III are informative. The Panel found that ‘logically
there is no reason why a measure directed at a producer rather than a product’
should be excluded from the scope of Article III.21 Other provisions of the GATT
may constitute additional context with regard to Article III:2.22
One of these provisions is Article XVI, the GATT 1947 provision that historically
dealt with export subsidies. If income taxes were considered not to have an impact
on the price of goods, the GATT 1947 drafters seem to present contradicting ideas
with respect to Articles III and XVI.23 Article XVI(4) explicitly requires the existence
of a price differential between exported goods and those that are destined for domes-
tic consumption for a prohibited export subsidy to exist, meaning export prices that
are lower than comparable domestic prices.24 The 1960 GATT Working Party report
that expressly dealt with this provision foresaw the possibility that the remission of
direct taxes in relation to exports constitutes an export subsidy.25 If income taxes,
however, are considered not to affect the prices of products, such a price differential
could never be found. Producers would always retain the income tax subsidy in the
form of additional profit and abstain from lowering export prices. Early GATT panel
17 WTO Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical
Products (India – Patents (US)), WT/DS50/AB/R, adopted 16 January 1998, para 45.
18 WTO Appellate Body Report, Japan – Taxes on Alcoholic Beverages (Japan – Alcoholic Beverages II), WT/
DS8/AB/R, adopted 1 November 1996, at 17f.
19 GATT, Article III:1.
20 Japan – Alcoholic Beverages II, at 17.
21 Panel Report, Brazil-Certain Measures Concerning Taxation and Charges, WT/DS472/R; WT/DS497/R
(circulated 30 August 2017), para 7.63; the report is currently under appeal.
22 See, for example, the WTO Appellate Body Report, United States – Measures Affecting the Production and
Sale of Clove Cigarettes (US – Clove Cigarettes), WT/DS406/AB/R, adopted 24 April 2012, para 173
where it was found that the preamble of the TBT Agreement constitutes relevant context for the inter-
pretation of Article 2.1 of the TBT Agreement.
23 This contradiction was noted in Farrell, above n 5, at 50.
24 GATT, Article XVI(4) states: ‘contracting parties shall cease to grant . . . any form of subsidy on the ex-
port of any product [. . . that] results in the sale of such product for export at a price lower than the com-
parable price charged for [like domestic products]’.
25 GATT Working Party Report on Provisions of Article XVI:4, L/1381, BISD 9S/185, adopted 19
November 1960, at 186f.
reports, which apply Article XVI(4) found the existence of lower export prices as a
result of an income tax subsidy.26 As no conclusive economic evidence was proffered
in any of the cases, this finding was admittedly based on the presumption that the
subsidies contained in the illustrative list of the 1960 Report had this effect.
Consequently, it appears difficult to defend the proposition that for the purposes of
Article III, product prices are never affected by income tax measures while simultan-
eously in the context of subsidies product prices are always affected. GATT Article

VI(3) allows the imposition of countervailing duties, including for income tax subsi-
dies, up to the full amount of the subsidy. The implication would be that an income
tax subsidy translates in its entirety into lower export prices. Thus, if it is to be pre-
sumed that a direct tax subsidy can result in lower prices, the reverse should logically
be possible as well. A discriminatorily higher income tax burden, hence, should be
presumed to result in higher product prices and, thus, affect competitive opportuni-
ties. Therefore, as other provisions of the GATT allow for the possibility that income
taxes affect products, the context of Article III:2 confirms that income taxes may
have an effect on the conditions of competition and, hence, are not generally
excluded from the scope of the nondiscrimination obligations.
Last, the object and purpose of Article III and the GATT in general has been found to
be ‘promoting non-discriminatory competition among imported and like domestic prod-
ucts’.27 A stringent distinction between direct and indirect taxes is not only considered
questionable from the perspective of contemporary economic theory but could also defeat
the object and purpose of the provision as it allows states to circumvent the discipline
imposed by Article III:2 with respect to indirect taxes by simply adopting discriminatory
direct tax measures. In fact, ‘recent empirical evidence suggest[s] that the distinction be-
tween direct and indirect taxes . . . has become rather blurred’.28 In situations where de-
mand exceeds supply, where there is low price elasticity of demand as, for example, in the
case of live-saving medication, or in the absence of a competitive market for the product in
question, it is possible that a producer shifts the direct tax burden forward via increased
product prices. Similarly, under the right conditions, it is conceivable that indirect taxes are
at least partially borne by the producer rather than the consumer. In fact, ‘there is no com-
monly accepted method of estimation of the impact of direct taxes on the trade of
products’.29 Even within the WTO, it was recognized at least as early as 1970 that this issue
of the incidence of taxation ‘was full of difficulty and of a very complex nature’.30 More re-
cently, the panel in Argentina – Hides and Leather seemed to accept that the incidence of
taxation is not always clear cut and it may well be possible that conditions of demand and
supply elasticity allow for a shifting of the burden of taxation.31
26 See the cases in above n 4.

27 See, GATT Panel Report, Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and
Alcoholic Beverages (1987) GATT BISD 34S/83, adopted 10 November 1987, para 5(5)(c), endorsed by
the Appellate Body Report, Japan – Alcoholic Beverages II, above n 18, at 19.
28 Michael Daly, ‘The WTO and Direct Taxation’ (2005) Discussion Paper No. 9, WTO Publications,
https://www.wto.org/english/res_e/booksp_e/discussion_papers9_e.pdf (visited 29 May 2018), at 23.
29 George J. Pitsilis and Kalliopi I. Stougiannou, ‘National Report Greece’ in Lang et al., above n 5, at 366.
30 GATT Working Party Report on Border Tax Adjustments, L/3464 (2 December 1970), para 22.
31 Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather
(Argentina – Hides and Leather), WT/DS155/R, adopted 16 February 2001, para 11.151f and footnote
448.
As economic theory concurs that income taxes may affect products and their com-
petitive relationship with like products, the provision’s object and purpose supports a
wide reading of Article III:2. Therefore, an interpretation of Article III:2 under the
customary rules of interpretation appears to lead to the conclusion that both direct
and indirect taxes are covered by the aforementioned provision.
As the application of VCLT Article 31 neither leaves the meaning of GATT
Article III:2 ambiguous or obscure nor leads to a result that is manifestly absurd or

unreasonable, recourse to the travaux préparatoires under VCLT Article 32 is not
required. However, it is conceded that Article III:2 has historically been considered
to exclusively apply to indirect taxes.32 It has been found that ‘historic assumptions
about tax incidence were implicitly adopted’ in the GATT.33 This assumption is but-
tressed by the fact that the GATT refers to ‘products’ in contrast to the GATS refer-
ring to services and service suppliers. On this basis, it has been argued that ‘by means
of historical interpretation, Art. III GATT does not seem to apply to direct taxes’.34
WTO jurisprudence, in complete disregard of DSU Article 3.2 and its mandate to
apply customary rules of interpretation, exclusively relying on pre-WTO documents,
finds that ‘income taxes, because they are taxes not normally directly levied on prod-
ucts, are generally considered not to be subject to Article III:2’.35 Nevertheless, the
same panel that issued this statement found that income tax measures that provide a
sufficient link to products may fall within the ambit of Article III:2. In that particular
case, Argentina – Hides and Leather, it was found that the collection regime, establish-
ing a 3% levy on imported products as an advance income tax was subject to the
nondiscrimination obligations of Article III:2.36
As the above analysis shows, an interpretation in accordance with customary rules
reveals that Article III:2 does not draw an artificial distinction between direct and in-
direct taxes that finds no basis in the text, context, or purpose of the provision.
Where income tax measures directly, or more likely, indirectly affect products, they
are subject to Article III:2. Arguments based on the negotiating history appear espe-
cially unwarranted in light of the development in economic theory since the adop-
tion of the GATT 1947.
B . A RTI C L E I I I: 4—N T A N D L A WS , RE GU LA TI ON S , AN D
R E QUI R EM EN TS
Even if one were to rely on the textually unfounded distinction between direct and
indirect taxes for the purposes of Article III:2 and interpret the provision to exclude
direct taxes, the much broader language adopted in Article III:4 appears to, nonethe-
less, cover income tax measures. Article III:2 refers to internal taxes and internal
32 See, for example, the preparatory works in Havana Reports, UN Doc ICITO/1/8 (September 1948), at
63, para 44.
33 Gary Clyde Hufbauer, ‘Tax Discipline in the WTO’, 44(4) Journal of World Trade 763 (2010), at 769.
34 M Petritz, ‘National Report Austria’ in Lang et al., above n 5, at 143.
35 Panel Report, Argentina – Hides and Leather, above n 31, para 11.159, relying on the Working Party
Report on Border Tax Adjustments, above n 30.
36 In this context, it may be recalled that GATT, Ad Article III provides that a measure applying to imported
and like domestic products ‘and is collected or enforced in the case of the imported product at the time
or point of importation, is nevertheless . . . subject to the provisions of Article III’.
charges of any kind, as explained above. The language in Article III:4 is much wider
by referring to ‘all laws, regulations and requirements’. The weak argument that one
should exclusively adopt a historical interpretation does not hold in the context of
Article III:4 due to the difference in wording. The provision reads in relevant parts:
[imported products] shall be accorded treatment no less favourable than that

accorded to like products of national origin in respect of all laws, regulations

and requirements affecting their internal sale, offering for sale, purchase, trans-
portation, distribution or use37
Rules relating to income taxes may in this context be understood to constitute laws
and regulations. Even if one follows the above interpretation of Article III:2, subject-
ing income tax measures to said provision, there would still be room for the applica-
tion of Article III:4 in the context of income taxes. Article III:2, thus, applies to taxes
themselves, including tax rates and rules relating to the determination of the tax
base, in essence, the provision is all about the money. Article III:4 then additionally
encompasses, for example, administrative requirements on the filing of tax returns or
transfer price documentation as will be explained below. Therefore, there are two
ways one could conceptualize the respective scopes of application of Articles III:2
and 4. The preferred interpretation is to subject all taxes that directly or indirectly af-
fect products, including income taxes, to the requirements of Article III:2 and all
other nonprice-based measures to Article III:4. Under a different interpretation, in-
come tax measures are generally excluded from Article III:2 and subjected entirely to
Article III:4, this time including price-based measures.38
To better understand the scope of application of Article III:4, it is necessary to
briefly explain the terms ‘affecting’ and ‘less favorable treatment’. First of all, with re-
gard to ‘affecting’ the Panel in Italy-Agricultural Machinery found that ‘the text . . .
referred . . . to laws and regulations and requirements affecting internal sale, purchase,
etc., and not to laws, regulations and requirements governing the conditions of sale or
purchase’.39 Later, the AB affirmed this reading by stating that the term affecting has
‘a “broad scope of application”’.40 In fact, according to the AB in China—Auto Parts,
the measure need not even be aimed at regulating the sale of the product concerned
to fulfill the requirement of affecting its sale.41 Even more broadly, the panel in
Canada-Autos, referring back to the GATT 1947 Panel in Italy – Agricultural
Machinery states that ‘any laws or regulations which might adversely modify the
37 GATT, Article III:4.

38 This latter interpretation is advanced in Peter van den Bossche and Werner Zdouc, The Law and Policy of
the World Trade Organization, 3rd ed. (Cambridge: Cambridge University Press, 2013) 357, footnote 31.
39 GATT Panel Report, Italy – Discrimination Against Imported Agricultural Machinery (1958) GATT BISD
7S/60, adopted 23 October 1958, para 12 (emphasis added).
40 WTO Appellate Body Report, United States – Tax Treatment for ‘Foreign Sales Corporations’ (Article 21.5)
(US – FSC (Article 21.5)), WT/DS108/AB/R, adopted 29 January 2002, para 210.
41 WTO Appellate Body Report, China – Measures Affecting Imports of Automobile Parts, WT/DS339/AB/R,
adopted 12 January 2009, para 194, endorsing the findings in Panel Report, India – Measures Affecting the
Automotive Sector, WT/DS146/AB/R, adopted 5 April 2002, para 7.305.
conditions of competition between domestic and imported products’ are covered by

Article III:4.42
Second, the provision does not only cover instances of de jure less favorable treat-
ment but also applies to de facto less favorable treatment. This may be the case where
an origin-neutral measure disproportionally favors domestic over imported goods.
Thus, the measure imposes a heavier burden on imported products vis-à-vis like do-
mestic products.43 Inversely, formally different treatment does not necessarily consti-

tute less favorable treatment.44 In essence, the concept of treatment no less favorable
contained in Article III:4 calls for effective equality of competitive opportunities.45
Quite importantly, it is not necessary to base a finding of less favorable treatment on
actual trade effects but potential effects may suffice.46 This once again supports the
idea that market conditions which result in the shifting of the incidence of direct
taxes from producers to consumers are not required to exist for a finding of less fa-
vorable treatment.
In the following, a number of cases either involving income tax measures or sug-
gesting that Article III may cover income tax measure will be reviewed to illustrate
its scope.47 It is not always clear under which paragraph of Article III, the dispute
was approached as not all these disputes reached the stage where a Panel report was
issued. Thus, it is refrained from seeking to distinguish the cases on the basis of the
applicable paragraph. Nevertheless, the disputes serve to clearly demonstrate the
WTO Members acceptance that income tax measures may generally be subject to
the nondiscrimination rules of the GATT.
In the GATT 1947 case Italy—Agricultural Machinery, the panel reviewed an
Italian measure that granted more favorable interest rates for loans that were utilized
to purchase Italian agricultural machinery. As the measure favored domestic over
imported products, it was found to be in breach of Article III.48 By analogy it is con-
ceivable that measures, which limit income tax deductions for imported business
equipment, or reversely allow for accelerated depreciation in the case of domestic
goods, are in breach of Article III as they favor domestic products over imports.49 It
is important to bear in mind that this nondiscrimination obligation may equally apply
to de jure origin neutral measures where they are found to disproportionally impact
imported goods.
42 Panel Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/R, adopted 19
June 2000, para 10.80.
43 Lothar Ehring, ‘De Facto Discrimination in World Trade Law: National and Most-Favoured-Nation
Treatment – or Equal Treatment?’ 36(5) Journal of World Trade 921 (2002), at 925.
44 WTO Appellate Body Report, European Communities – Measures Affecting Asbestos and Products
Containing Asbestos, WT/DS135/AB/R, adopted 5 April 2001, para 100.
45 Panel Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/R, adopted
20 May 1996, para 6.10.
46 WTO Appellate Body Report, Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines,
WT/DS371/AB/R, adopted 15 July 2011, para 135.
47 For further examples of income tax cases submitted to the GATT/WTO see, for example, Asif H.
Qureshi, ‘Trade-Related Aspect of International Taxation: A New WTO Code of Conduct?’ 30(2)
Journal of World Trade 161 (1996), at 171ff; and M Daly, above n 28, 9ff.
48 Italy – Agricultural Machinery (1958), above n 39, para 25.
49 The second example could also potentially be understood to constitute a prohibited subsidy under the
SCM Agreement that prescribes a local content requirement.
In Turkey - Taxation of Foreign Film Revenues, the US requested consultations as

Turkey taxed the ‘revenues generated from the showing of foreign films in a manner
less favourable than its taxation of revenues generated from the showing of
domestic-origin films’.50 In particular, a breach of Article III was alleged as the re-
spondent imposed a 25% tax on the showing of foreign films. The notification of the
mutually agreed solution reads as if Turkey admits its failure to observe the NT obli-
gation. The passage ‘in accordance with Turkey’s obligations under Article III . . .,

Turkey will equalize any tax imposed’,51 can only be understood as both members
agreeing that Article III bars states from imposing a higher income tax burden in con-
nection with imported products. The wording adopted in the Request for
Consultations indicates that the USA, correctly or not, considered Article III:4 to be
the applicable provision.52 The fact that Turkey subsequently instituted a 10% tax on
the showings of all films, regardless of their origin,53 bears evidence of the fact that
both states consider Article III to apply to income tax measures.
Concerns as to the compliance with Article III:4 of certain US income tax provi-
sions were raised in the US-FSC Saga. The lengthy litigation has been extensively
reviewed in previous literature. In a nutshell, the AB confirmed that income tax
measures which make deductions contingent on the use of a certain percentage of
domestic products affect products in the sense of Article III:4.54 Furthermore, it was
found that as fulfillment of the prescribed condition provides ‘a clearly significant fi-
nancial benefit in the form of a tax exemption’,55 the measure ‘provides a consider-
able impetus, and, in some circumstances, in effect, a requirement, for manufacturers
to use domestic input products’.56 Hence, the measure treats imported products less
favorably than domestic products.
In China-Taxes, it was alleged that direct tax refunds, reductions, or exemptions
were inconsistent with Article III:4 in so far that they treated imported like products
less favorably than domestic goods.57 The dispute was settled in a Memorandum of
Understanding by China agreeing to repeal the WTO inconsistent provisions of its
Income Tax Law.58 The Panel, hence, never had to rule on the matter. Nevertheless,
the fact that proceedings were instituted and the subsequent settlement of the dis-
pute appears to confirm the member states’ belief that income tax measures fall with-
in the ambit of GATT III:4.
Last, and most recently, the Panel in Argentina – Financial Services appeared to set
a limit to what measures are considered to affect products. The case concerned a
50 WTO Request for Consultations, Turkey – Taxation of Foreign Film Revenues, WT/DS43/1, at 1.
51 WTO Notification of Mutually Agreed Solution, Turkey – Taxation of Foreign Film Revenues, WT/DS43/3.
52 Note the language in the Request for Consultations, above n 50, ‘taxation of revenues . . . in a manner
less favourable’ which is parallel to the wording in Article III:4.
53 Dirk Pulkowski, The Law and Politics of International Regime Conflict (Oxford: Oxford University Press,
2014) 168.
54 Appellate Body Report, US – FSC (Article 21.5), above n 40, para 212f.
55 Ibid, para 216.
56 Ibid, para 220.
57 WTO Request for Consultations, China – Certain Measures Granting Refunds, Reductions or Exemptions
from Taxes and Other Payments, WT/DS358/1 (2 February 2007), at 3.
58 WTO Notification of Mutually Agreed Solution, China – Certain Measures Granting Refunds, Reductions or
Exemptions from Taxes and Other Payments, WT/DS358/14 (4 January 2008), at 3.
total of eight measures that were challenged under various provisions of the GATT
and the GATS. These measures inter alia sought ‘to protect Argentina’s tax base by
preventing tax evasion, tax avoidance, and fraud’.59 One of these measures was
alleged to be in breach of GATT Article III, namely the requirement to apply the
transfer price regime to transactions between Argentinian taxpayers and persons
from uncooperative countries.60 The tax base of the Argentinian taxpayer was, thus,
assessed on basis of the transfer price regime, which in addition to fiscal consequen-

ces allegedly resulted in an increased administrative burden.
Generally, a transfer price regime is only applied to transactions between related
parties, for example, two companies under common ownership. Related parties are
able to set artificial, nonarm’s length prices in their transactions with each other and
thereby shift profits between tax jurisdictions through the over- and under-invoicing
of goods and services. The application of a transfer price regime, which seeks to
ensure transaction prices at arm’s length, aims to prevent this. Panama argued that
the administrative burden of applying these rules to all transactions, regardless of the
existence of a relationship between the parties, would discourage the purchase of
products imported from noncooperative countries.61 The panel was unwilling to go
so far as to find that this measure affects the sale of imported products.62 Instead it
stated that the previously broad interpretation ‘of the term “affect” does not mean
that any measure that might hypothetically affect the conditions of competition of
hypothetical products could be covered by Article III:4’.63
This reasoning appears questionable in light of the fact that the Panel found the
measure to affect trade in services in the sense of GATS Article I:1.64 When deter-
mining the scope of the term affecting in the context of GATS I:1, the AB in EC-
Bananas III relied on earlier jurisprudence related to GATT Article III:4, indicating
that the respective scopes of the two provisions are similar.65 The measure itself
does not distinguish between goods and services but applies to any transaction.
Hence, it is unclear how the measure affects transactions relating to the purchase of
services but does not affect transactions relating to the purchase of goods. The ad-
ministrative requirements for the purchase of, for example, accounting services are
the same as those imposed on the purchase of, for example, clothes. If anything, it
appears easier to defend the proposition that the measure does not fall within the
scope of Article III:4 as it does not affect the internal sale, offering for sale, etc. The
measure would then rather impact the decision to import goods from noncoopera-
tive countries and not their competitive opportunities once they entered the
59 Argentina – Financial Services, para 7.534.

60 Ibid, para 2.19.
61 Ibid, para 7.1027.
62 Ibid, para 7.1028.
63 Ibid, para 7.1028.
64 The Panel stated in Argentina – Financial Services, para 7.104 with respect to GATS Article I:1 that it
‘does not require the complainant to prove the existence of specific services or service suppliers, or the ex-
istence of actual transactions’. It is unclear how a transaction that is not actual is anything but hypothetic-
al/potential.
65 WTO Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of
Bananas, WT/DS27/AB/R, adopted 25 September 1997, para 220.
domestic market. This part of the report, however, was not appealed and it is, thus,
unknown if the Panel’s assessment would have withstood scrutiny by the AB.
The opinion that most income tax measures will not sufficiently affect products
so as to be subject to the NT obligation in Article III is not uncommon in academic
writing.66 However, it should also be clear from the above that a large number of in-
come tax measures seemingly not within the scope of Article III may be subject to
scrutiny under said provision if properly interpreted. Earlier academic writing dis-

counted the potential reach of Article III too quickly whether by falsely relying on a
historical interpretation of Article III:2 or by underestimating the ease with which
the AB finds measures to ‘affect’ products in the sense of Article III:4.
C . A RT IC L E I : 1—M F N T RE A TM EN T
The MFN obligation with respect to goods is set out in Article I:1 of the GATT.
Most importantly for the purposes of this article, the provision covers all matters fall-
ing within the scope of Articles III:2 and III:4 of the GATT. Thus, to the extent that
income tax measures fall within the purview of the NT obligation, they are equally
subject to the obligations set out in Article I:1. Much like Article III, the provision is
concerned with the protection of expectations of equality of competitive opportuni-
ties between like imported products.67 It equally applies to de facto and de jure less fa-
vorable treatment.68 The above examples of WTO case law, hence, could also serve
to illustrate potential violations of the MFN treatment clause where the measure dis-
tinguishes between products on basis of their different foreign origins.
Additionally, Article I:1 prohibits discrimination with respect to ‘charges of any
kind imposed on or in connection with importation or exportation’ as well as ‘all
rules and formalities in connection with importation and exportation’. In this respect,
it has been observed that ‘a case would have to be very persuasive to establish that a
direct tax is imposed “on or in connection with” the exportation or importation of a
good’.69 This difficulty of showing a connection to importation or exportation is
illustrated well in the Argentina-Financial Services Dispute. One of the measures at
issue in the dispute concerned a presumption of unjustified increase in wealth for
any funds that entered from noncooperative countries.70 Panama unsuccessfully
argued that this measure is a rule or formality in connection with exportation or al-
ternatively imposes charges in connection with exportation. The Panel rejected this
line of argument as the measure applied to any entry of funds, not only those that
constituted payment for exports. The Panel observed that ‘[t]he presumption . . . is
applied according to the geographical provenance of the funds and not according to
whether or not they derive from export operations.’71 Consequently, the measure’s
66 See, for example, Michael Lennard, ‘The GATT 1994 and Direct Taxes: Some National Treatment and
Related Issues’ in Lang et al., above n 5, at 101.
67 WTO Appellate Body Report, European Communities – Measures Prohibiting the Importation and
Marketing of Seal Products, WT/DS400/AB/R, adopted 18 June 2014, para 5.88.
68 WTO Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/
AB/R, adopted 19 June 2000, para 78.
69 Farrell, above n 5, at 56.
70 Argentina – Financial Services, paras 2.17-18.
71 Ibid, para 7.989.
core feature is not its relationship with exports.72 As stated above, however, Articles
III:2 and 4 do not require this connection to exports or imports. It would, thus, often
be easier to rely on the reference to these provisions contained in Article I:1 rather
than seeking to establish that an income tax measure constitutes a rule, formality or
charge ‘imposed on or in connection with importation or exportation’.
To conclude on the nondiscrimination provisions, Article I and III of the GATT,
any measure that de facto or de jure favors domestic over imported goods or goods of

different foreign origins by lowering the tax base, the applicable tax rate or by impos-
ing an unreasonable administrative burden may come within the reach of Articles III
and I:1. As this impact need only be potential, even where the market conditions do
not result in a forward shifting of the income tax burden via product prices, the non-
discrimination obligations are applicable. Since governments increasingly recognize
the importance of tax reform to prevent tax evasion, those states that see themselves
and their products targeted by such action, whether taken unilaterally or as a con-
certed effort of a group of states such as the OECD Members, may increasingly rely
on the WTO as a forum to challenge such measures. Therefore, it is of utmost im-
portance that policymakers aim to develop and implement de facto and de jure non-
discriminatory anti-tax avoidance measures. This way a potential rollback of tax
avoidance measures by means of a challenge in the WTO DSB can be avoided.
Noncompliant measures could potentially be saved by reliance on GATT XX.
However, unlike the GATS, the GATT does not contain exceptions specific to in-
come tax measures.73
II . TRA N S F ER PRI C E A D J U ST ME N TS A ND T HE G AT T
N ON D I SC R IM I NA T IO N R UL E S
The following section seeks to apply the general considerations on discriminatory in-
come taxes to the concrete issue of (im)proper transfer pricing between related enti-
ties. This section, thus, first and foremost seeks to illustrate how complex income tax
measures may, under certain circumstances, modify the conditions of competition
contrary to the requirements of Articles I and III. Before doing so, however, some
additional background is provided on what transfer pricing is and why it is so rele-
vant in the context of international tax.
Where an enterprise establishes multiple presences in different tax jurisdictions,
‘the relationship . . . may permit the group members to establish special conditions
in their intra-group relations that differ from those that would have been established
had the group members been acting as independent enterprises operating in open
markets’.74 Base erosion may occur where, for example, a company buys products at
inflated prices from foreign affiliates or underprices the products it sells to its foreign
affiliates. In both cases, the company effectively shifts profits out of the reach of the
domestic tax authorities. Countries generally object to such practices by its residents.
72 Ibid.
73 For income tax exceptions in the GATS, see generally, Vincent Beyer, ‘Direct Taxes and the GATS:
Substantive and Procedural Defences for Non-compliant Income Tax Measures’, 52(3) Journal of World
Trade 351 (2018).
74 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD
Publishing, 2017) 16.
To preserve the domestic tax base, tax authorities have the power to make determi-
nations as to the appropriateness of transfer prices for goods or services provided be-
tween related entities. Where these are considered not to reflect the prices that
would have existed if the related entities had acted at arm’s length, competent author-
ities may make adjustments to determine a company’s taxable income.75
According to the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations (OECD Guidelines), ‘[t]he arm’s length prin-

ciple has . . . been found to work effectively in the vast majority of cases.’76
Nowadays, thousands of double taxation agreements incorporate the standard that is
widely regarded to constitute international consensus.77 The OECD Guidelines pro-
vide guidance to establish what constitutes an arm’s length transfer price. For that
purpose, they articulate five different transfer pricing methods that allow tax author-
ities to determine if a transaction reflects the price that would have existed if the two
related entities had acted at arm’s length.78 That the establishment of appropriate
transfer prices continues to pose difficulties is amply evidenced by the frequent
updates to the OECD Guidelines as well as the prominent inclusion of transfer pric-
ing in the recent OECD BEPS project.
The following sections will review the applicability of the GATT nondiscrimina-
tion provisions to transfer price adjustments by tax authorities as well as the related
issue of transfer pricing documentation.
A . TR A NS F ER P R IC I NG D IS P U TE S U N D ER TH E G A TT
For the GATT to be applicable to transfer pricing disputes, it is indispensible that
the dispute concerns the transfer price of goods rather than exclusively services or
intangibles such as patents or trademarks. The difficulties relating to arm’s length
transfer prices are particularly pronounced in the field of services and hard-to-value
intangibles due to their often highly specific nature.79 Nevertheless, this should not
distract from the fact that transfer mispricing also occurs with respect to goods that
are commonly regarded to be highly homogeneous such as raw materials or basic
commodities. Conservative estimates find that commodity mispricing results in bil-
lions of dollars of losses, particularly to developing countries.80 One can imagine that
75 OECD, Model Tax Convention on Income and Capital 2014 (OECD Publishing 2015) (OECD Model Tax
Convention), Article 9(1).
76 OECD Transfer Pricing Guidelines, above n 74, at 36.
77 See generally, OECD Model Tax Convention, above n 75, Article 9.
78 See generally, Chapter II of the OECD Transfer Pricing Guidelines, above n 74; the chapter explains in
detail the three traditional transaction methods (comparable uncontrolled price method, resale price
method, and cost plus method) as well as the transactional profit methods (transactional net margin
method and transactional profit split method). Additionally, it provides insights as to the preferable
method for establishing an arm’s length price in a particular situation.
79 As a result of the specific difficulties resulting from intra-group services and intangibles a large part of the
OECD Guidelines introduces specific considerations in this respect. See particularly chapters VI and VII
of the OECD Guidelines dealing with intangibles and intra-group services, respectively.
80 See, for example, Alex Cobham, Petr Jansky and Alex Prats, ‘Estimating Illicit Flows of Capital via Trade
Mispricing: A Forensic Analysis of Data on Switzerland’, Centre for Global Development Working Paper
350 (2014), https://ideas.repec.org/p/cgd/wpaper/350.html (visited 29 May 2018), where the most
conservative estimate is that commodity exporting developing countries are facing a capital loss of 8 bil-
lion a year alone in their trade with Switzerland.
these difficulties only increase where tax authorities have to deal with highly special-
ized goods.
An associated issue relates to the question why a transfer pricing dispute would
end up in the WTO. Transfer pricing disputes that concern a particular taxpayer are
generally resolved through the so-called Mutual Agreement Procedure (MAP) gener-
ally provided for in double taxation agreements.81 The MAP is a highly successful
procedure of institutionalized diplomatic dispute settlement whereby the tax author-

ities of the two treaty partners come together to resolve the issues of double taxation,
including as a result of transfer price adjustments.82 A limited number of treaties add-
itionally provide for binding arbitration in tax matters. This, however, continues to
be an exception.83 Although hundreds of disputes are successfully resolved through
the MAP every year, in light of the widespread absence of binding arbitration, it is
conceivable that unresolved transfer pricing disputes are brought to WTO dispute
settlement. Additionally, and perhaps more importantly, the vast network of double
taxation agreements by no means extends to all countries. Where States resort to uni-
lateral self-help in their fight against tax havens, this is often done precisely because
of the absence of a double taxation agreement, including an agreement on mutual ad-
ministrative assistance in tax matters.84
To properly assess the scope of the GATT nondiscrimination provisions with re-
spect to transfer pricing, it is important to bear in mind that, first of all, products
need to be affected for the NT and MFN obligations to be triggered and, second,
the conditions of competition need to be adversely modified. It is, thus, necessary to
determine the circumstances under which the application of a transfer-pricing regime
adversely modifies the conditions of competition between domestic and foreign
products or between products of different foreign origin.
One may imagine the situation where a taxpayer purchases tax-deductible foreign
goods. If the tax authority now applies the transfer pricing regime to these goods and
finds that the tax resident paid an inflated price, it may adjust the transfer price
downward for the purposes of determining the tax base and, hence, the income tax
burden. This is not an adjustment of the price actually paid but only serves the pur-
poses of calculating the income tax base. The tax resident is no longer allowed to de-
duct the full expense but only the price determined by the competent authority,
which, in the case of a downward adjustment, increases the income tax burden and
81 See Article 25 of the OECD Model Tax Convention, above n 75, and Article 9(2), the latter particularly
with respect to transfer price adjustments.
82 For detailed statistics on the number of cases, the average time of resolving disputes, the agreed outcome,
etc. consult http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm (visited 29
May 2018).
83 The perhaps best-known example is Convention 90/436/EEC on the Elimination of Double Taxation in
Connection With the Adjustment of Transfers of Profits Between Associated Undertaking, OJ 1990 L
225/10; the Convention provides for binding arbitration where transfer pricing disputes have not been
resolved under the MAP within two years.
84 The example of Argentina may be illustrative in this respect. The attempt to deal with the tax haven
Panama, including matters involving transfer pricing documentation was ultimately subject to dispute
settlement in WTO proceedings. For more details on the Argentina – Financial Services dispute, see above
the section I.B. on Article III:4.
from the perspective of the purchaser of the goods, the net price of the imported
goods.
Usually, adjustments only occur with respect to foreign goods. From the perspec-
tive of the tax authorities, the transfer price of domestic goods is, assuming a single
corporate income tax rate, irrelevant as both related entities will be taxed domestical-
ly. The profits will not leave the country. When inputs of manufactured goods are
imported, however, an inflated price will have the result of eroding the domestic tax

base. As tax authorities seek to prevent this, they adjust transfer prices. Where the ad-
justment is proper and results in an arm’s length price, arguably no detrimental im-
pact on competitive opportunities can be found. Where such an adjustment does not
result in an arm’s length price, however, a detrimental impact on competitive oppor-
tunities could be observed.
Where a competent authority improperly increases the tax base by adjusting trans-
fer prices, the net price of the foreign goods essentially increases. A detrimental im-
pact on competitive opportunities of foreign products can, thus, be observed. As
Article III:4 is generally considered to also apply to isolated instances of discrimin-
atory treatment as opposed to general legislation,85 such practice could be chal-
lenged. Furthermore, where competent authorities regularly make improper
adjustments with respect to the products of certain WTO Members while disregard-
ing transfer prices of others, issues with respect to the MFN obligation could be
found. The difficulty in the latter case, indeed, would be for the complainant to es-
tablish that such practice occurs systematically.
Currently of greater concern in practice are adjustments, which result in a subsidy
to certain producers rather than adjustments that increase the net price of foreign
imported goods. A recent EU case of allegedly illegal state aid illustrates this situation
well.86 The Dutch Starbucks Manufacturing BV roasted green coffee beans it had
purchased at supposedly inflated prices from a Swiss-based Starbucks subsidiary.
Profits for which Dutch income taxes would have been due were, hence, shifted from
the Netherlands to Switzerland by means of the nonarm’s length transfer price. The
Dutch tax authorities explicitly approved of this practice beforehand. From the per-
spective of the GATT nondiscrimination obligations, this measure arguably makes
Dutch roasted coffee beans cheaper and, thus, more attractive than imported roasted
coffee beans. However, in this respect, the question arises if the measure constitutes
a domestic production subsidy under Article III:8(2) and is, hence, in conformity
with Article III.87 It could be argued that the nonarm’s length transfer price consti-
tutes an income tax subsidy to domestic producers. From this perspective, the SCM
Agreement might find application to the extent that the subsidy was contingent on
85 GATT Panel Report, Canada—Administration of the Foreign Investment Review Act (1983) GATT BISD
30S/140, adopted 7 February 1984, para 5.5.
86 European Commission, Netherlands-Alleged Aid to Starbucks C(2014)/3626final (11 June 2014); the
Netherlands and Starbucks have brought proceedings against the Commission’s decision. Both cases are
currently pending. For more information on the proceedings, see http://ec.europa.eu/competition/elo
jade/isef/case_details.cfm?proc_code¼3_SA_38374 (visited 29 May 2018).
87 Furthermore, if such measures should indeed fall under Article III:8(2), they would equally be exempted
from Article I:1 to the extent that a complainant relies on the ‘all matters referred to in paragraphs 2 and
4 of Article III’ phrase of the provision as clarified by Panel Report, European Communities—Measures
Affecting Trade in Commercial Vessels, WT/DS301/R, adopted 20 June 2005, para 7.90.
exports or otherwise constitutes an actionable subsidy. Ultimately, this example

amply illustrates the difficulties one encounters when dealing with specific fact pat-
terns in the transfer price area.
B. Incorporating arm’s length into the GATT

It is argued above that proper adjustments, resulting in an arm’s length price, do not
constitute less favorable treatment. The legal issue with respect to the NT and MFN

clauses is to determine what constitutes a proper adjustment for the purposes of the
WTO and how the arm’s length standard is incorporated into the respective provi-
sions. Generally, the international consensus appears to be that transfer prices need
to conform to the principle of arm’s length and adjustments, hence, would be im-
proper where they depart from this principle. It remains to be established, however,
on what basis this principle is applicable in the context of the GATT as the
Agreement itself does not contain any reference to arm’s length.
It has been argued that the arm’s length principle constitutes a rule of customary
law.88 If this were the case, the principle could be read into the term less favorable
treatment by means of VCLT Article 31(3)(c) and any adjustment that disregards
the arm’s length principle would be in breach of the nondiscrimination obligations
under the GATT. However, it appears questionable from the point of view of public
international law that the principle, despite its widespread acceptance, can be
regarded as a rule of international law as opinio juris and state practice are not as eas-
ily established as the proponent of the argument makes it seem. Moreover, doubts
remain if a Panel would, indeed, simply rely on Article 31(3)(c) to incorporate the
arm’s length standard into the provisions of the GATT.
Alternatively, it is proposed that the context of GATT Article III provides suffi-
cient reason to interpret ‘treatment no less favorable’ to incorporate the standard of
arm’s length. In the past, the AB has referred to related provisions, even where they
are contained in other agreements,89 to establish or confirm a certain interpretation.
90
GATT Article VII(2)(a), dealing with valuation for customs purposes, states that
‘value for customs purposes of imported merchandise should be based on the actual
value of the imported merchandise’.91 The Customs Valuation Agreement provides
more detail on this provision and explicitly requires the application of the principle
of arm’s length as evidenced by its Article 1(2).92 Other Agreements contained in
Annex 1A such as the SCM Agreement also refer to arm’s length. The SCM
Agreement does so in its footnote 59 where it provides that ‘[t]he Members reaffirm
the principle . . . [of] arm’s length.’93
88 Reuven S. Avi-Yonah, International Tax as International Law: An Analysis of the International Tax Regime
(Cambridge: Cambridge University Press 2007) 113, where the author states, ‘customary international
law . . . embodies the arm’s length standard’.
89 See, for example, US – Clove Cigarettes, para 176 where the AB referred to the GATT to determine the
meaning of Article 2.1 of the TBT Agreement.
90 See generally on the technique of cross-referencing as employed by the AB, Isabelle van Damme, Treaty
Interpretation by the WTO Appellate Body (Oxford: Oxford University Press, 2009) 235ff.
91 GATT, Article VII(2)(a).
92 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994
(Customs Valuation Agreement), 1868 UNTS 279, Article 1(2).
93 SCM Agreement, Annex I, item (e), footnote 59, second sentence.
Consequently, as a matter of fact rather than law, the arm’s length principle will
be relied upon for almost all international transactions. Thus, it is not so much the
interpretation of the nondiscrimination obligations that ultimately incorporates the
standard but rather the member states’ actions of widely relying on the principle that
would subject any deviation therefrom to scrutiny under the nondiscrimination pro-
visions. If a member consistently utilizes the standard to assess the appropriateness
of transfer prices between related entities, any departure to the detriment of foreign

goods would ultimately constitute less favorable treatment vis-à-vis domestic goods.
The difficulty of establishing what constitutes an arm’s length transfer, however,
remains unresolved. It is suggested that the transfer pricing guidelines of the OECD
may provide guidance in the establishment of arm’s length and, thus, ultimately less
favorable treatment.94
Without wanting to conceptualize the Panels’ and AB’s approach to nonbinding
OECD Guidelines, there are numerous instances where outside documents have
been relied upon in WTO Dispute Settlement. In Brazil-Aircraft, for example, the AB
explicitly relied on the OECD Arrangement on Guidelines for Officially Supported
Export Credits and essentially assessed Brazil’s compliance with the SCM Agreement
on basis of the OECD Arrangement.95 Similarly, the Panel in Argentina-Financial
Services extensively referred to the OECD and G20 defensive measures in assessing
Argentina’s defense under GATS Article XIV.96 One would, thus, not be surprised if
a Panel or the AB simply stated that the OECD Transfer Pricing Guidelines provide
useful guidance to assess a Member’s conformity with the arm’s length principle,
without disclosing on what basis this is done. Consequently, it can be concluded that
a member will encounter serious difficulties in defending its compliance with the
nondiscrimination provisions where it adjusts transfer prices in clear disregard of the
OECD Guidelines.
Last, as acknowledged above, the establishment of an arm’s length transfer price
is accompanied by many practical constraints. The Guidelines themselves find that
‘transfer pricing is not an exact science’.97 Consequently, on many occasions ‘the ap-
plication of the most appropriate method or methods produces a range of figures all
of which are equally reliable’.98 As a result of the fact that often a range of prices are
justified, tax authorities can rarely celebrate clear victories where tax payers seek to
shift profits out of their reach.99 Nevertheless, deviations from the OECD Guidelines
94 Alberto Vega, ‘International Governance Through Soft Law: The Case of the OECD Transfer Pricing
Guidelines’ (2012) Max Planck Institute for Tax Law and Public Finance Working Paper 2012–05,
http://dx.doi.org/10.2139/ssrn.2100341 (visited 29 May 2018), at 19 considers the guidelines ‘a basic
tool for the application of the arm’s length principle’.
95 Appellate Body Report, Brazil-Aircraft, WT/DS46/AB/R, adopted 20 August 1999, para 181; The
OECD Arrangement was applied under the first paragraph of item (k) of Annex 1 of the SCM
Agreement and not as foreseen by the Agreement itself under the safe haven provision of the second
paragraph.
96 See, for example, Argentina – Financial Services, para 7.715.
97 OECD Transfer Pricing Guidelines, above n 74, at 163.
98 Ibid.
99 Reuven S. Avi-Yonah, Advanced Introduction to International Tax Law (Cheltenham: Edward Elgar
Publishing, 2015) 29, considers that the 1979 judgment in El Dupont de Nemours & Co. v Commissioner
221 Ct.Cl. 333 (1979) ‘was the last unequivocal IRS victory in the transfer pricing area’.
or the application of clearly inappropriate methods could find challenge. Ultimately,

transfer pricing constitutes an area that is marked by many shades of gray rather than
clear black and white.
C. TR A NS F E R P R IC I N G D OC U ME N TA TI ON
The question of transfer price documentation may raise related concerns. Excessively
burdensome documentation requirements could find challenge under the nondiscri-

mination provisions of the GATT. In Colombia-Customs Measures on Importation of
Certain Goods from Panama, the complainant raised the issue that commercial invoi-
ces for certain goods from Panama needed to provide additional information exceed-
ing what was usually required.100 Furthermore, in Argentina-Financial Services, it was
among others the administrative burden that resulted from the application of the
transfer price regime to nonrelated party transactions that caused Panama to chal-
lenge the measure albeit ultimately unsuccessfully.101
While transfer pricing documentation is inherently burdensome and States have
the sovereign right to request from taxpayers whatever information they deem neces-
sary, a selective application may potentially find challenge under the nondiscrimina-
tion provisions. The commentary to Article 7 of the OECD Model Tax Convention
provides in this respect that transfer pricing documentation ‘requirements should
not be applied in such a way as to impose on taxpayers costs and burdens dispropor-
tionate to the circumstances’.102 Although it may be difficult to draw a clear line be-
tween proportionate and disproportionate requirements in the abstract, significantly
more burdensome requirements imposed on goods originating in specified jurisdic-
tions discriminate in contravention of the MFN obligation. A state may attempt to
justify such measures under Article XX where the specific relationship between the
trading partners, for example, the absence of an agreement on the exchange of infor-
mation, warrants such requirements. To determine the existence of disproportionate-
ly burdensome requirements, Chapter V of the OECD Transfer Pricing Guidelines
may be of relevance.103 The 2017 version of the Guidelines seeks to implement the
recommendations developed under BEPS Action 13 relating to transfer pricing docu-
mentation.104 The Guidelines identify in detail the required information and propose
model legislation to implement the documentation requirements.105 It appears ex-
tremely unlikely that States which correctly implement the recommendations would
face challenges in WTO dispute settlement.
I I I. C ON C LU S IO N
This article attempted to provide tentative answers on the reach of the GATT non-
discrimination provisions into the field of income tax. It has been argued that the
100 WTO Request for Consultations, Colombia—Customs Measures on Importation of Certain Goods from
Panama, WT/DS348/1 (20 July 2006), at 2.
101 Argentina – Financial Services, para 7.1038–1049.
102 OECD Model Tax Convention, above n 75, Commentary to Article 7, para 26.
103 OECD Transfer Pricing Guidelines, above n 74, at 229ff.
104 OECD, Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report,
OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing, 2015).
105 OECD Transfer Pricing Guidelines, above n 74, at 501ff.
mandate of DSU Article 3.2 to apply customary rules of interpretation leads to an

understanding of GATT Article III that considerably exceeds the scope of an inter-
pretation based on historic assumptions about the incidence of taxation.
Consequently, measures that impact the tax base, the applicable tax rate, or impose
an unreasonable administrative burden in a discriminatory manner may come within
the reach of GATT Articles III and I:1. Even where the existing market conditions
do not result in a forward shifting of the income tax burden via product prices, the

nondiscrimination obligations are applicable.
By means of illustration, it has been explored how improper transfer pricing, the
failure to apply the standard of arm’s length, may constitute a measure that fails to
meet the requirements of the nondiscrimination obligations as set out in the GATT.
For this purpose, it has been analyzed how the arm’s length standard finds applica-
tion in the WTO law. Furthermore, the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations provide authoritative guidance
on the application of the arm’s length principle. Therefore, governments that seek to
battle tax avoidance should aim to develop and implement measures that do not dis-
criminate, de jure or de facto, against products of foreign countries or between prod-
ucts of different foreign origins. Otherwise, such measures may be subject to
challenge in WTO dispute settlement. Generally, compliance with WTO rules on
trade in goods is necessary to ensure that sophisticated and nuanced measures
adopted in the fight against tax evasion withstand scrutiny in the WTO.

GATT rules may challenge discriminatory income tax measures

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Journal of International Economic Law, 2018, 21, 547–566

Income Tax and Nondiscrimination in the

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Convention on the Law of Treaties (VCLTs), as mandated by DSU Article 3.2,

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26 See the cases in above n 4.

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[imported products] shall be accorded treatment no less favourable than that

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37 GATT, Article III:4.

conditions of competition between domestic and imported products’ are covered by

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In Turkey - Taxation of Foreign Film Revenues, the US requested consultations as

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59 Argentina – Financial Services, para 7.534.

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exports or otherwise constitutes an actionable subsidy. Ultimately, this example

B. Incorporating arm’s length into the GATT

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or the application of clearly inappropriate methods could find challenge. Ultimately,

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mandate of DSU Article 3.2 to apply customary rules of interpretation leads to an

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