RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/429
7 March 2001
(01-1112)
Committee on Subsidies and
Countervailing MeasuresOriginal:  Spanish
IMPLEMENTATION-RELATED ISSUES REFERRED TO THE COMMITTEE
IN THE GENERAL COUNCIL'S DECISION OF 15 DECEMBER 2000
Discussion Paper Submitted by Colombia
The following communication, dated 6 March 2001, has been received from the Permanent
Mission of Colombia.
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PROPOSAL FOR THE AMENDMENT OF FOOTNOTE 61 OF THE SUBSIDIES
AGREEMENT
INTRODUCTION
1. As part of the preparation process for the Seattle Ministerial Conference, India submitted a
proposal concerning footnote 61 of the Subsidies Agreement relating to the Illustrative List in
Annex 1.1
2. Subsequently, in the discussions held last year on the implementation of the Uruguay Round
Agreements, Colombia expressed interest in eliminat ing the discriminatory treatment for the different
goods that are used in the production of exported goods.  As a result of that proposal, the issue was
included in the General Council's Decision of 15 December 2000.  Under point 6.3 of the Decision, it
was agreed that the SCM Committee "shall examine as an important part of its work the issues of
aggregate and generalized rates of remission of import duties and of the definition of 'inputs
consumed in the production process', taking into account the particular needs of developing-countryMembers."
3. In the Committee on Subsidies meeting held on 9 February 2001, procedures were agreed for
tackling implementation-related issues.  The deadline of 8 March 2001 was set for written
submissions, with 2 April agreed upon for the special meeting for initiating discussions on these
proposals.  It was also accepted that the Committee would be guided by the deadlines established bythe General Council on implementation issues.  Finally, it was agreed that the Committee would direct
the Chairperson to provide a report to the General Council with a view to concluding work by
31 July 2001.
4. Taking account of this background, this document was prepared with the aim of explaining to
the Committee on Subsidies the proposal relating to footnote 61 of the Subsidies Agreement.
                                                     
1 It may be recalled that, in defining measures that might be considered subsidies contingent de jure  or
de facto on export performance, the Illustrative List of Subsidies establishes the instruments that would be
incompatible with the multilateral rules.G/SCM/W/429
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5. To this end, the document comprises four sections.  The first sets out the problems of
developing countries with respect to access to capital goods and their importance for the
competitiveness of exports.  The second section analyses the multilateral development of fiscal
instruments assisting exports.  The third sets out the conclusions, and the fourth and last section
submits a proposal on consumed inputs to the Committee on Subsidies for consideration.
1. Problems of developing countries
6. The various mechanisms for increasing the competitiveness of exports have played a central
role in the industrial policy of developing countries during recent years.
7. All approaches agree in identifying access to technological developments as one of the key
elements in promoting exports.  Access to technolo gy in those exporting sectors is directly connected
with the possibility of acquiring capital goods whic h enable internationally competitive products to be
made.
8. The acquisition of capital goods under competitive conditions is possible in developed
countries because they are produced by their industries or can be imported with a minimal tax burden.
Only a small number of developing countries have the possibility of producing some capital goods.
For the rest, importation of these goods is the only alternative for them to incorporate new
technological developments into their industries.
9. In assessing the alternative of importing capital goods, exporting companies of developing
countries are faced with the prospect of higher tax rates than in the develope d countries, owing to the
serious problems of fiscal deficit and tariff policies which impose high tariffs and taxes on goods in
line with their greater degree of processing.
10. Unlike the situation for exporters, in the various domestic tax systems companies are able to
incorporate the cost of capital goods through the notion of depreciation.  Thus, in calculating the basis
on which, for example, income tax will be applied, the taxpayer may deduct depreciation of goods.
The concept of depreciable goods and the various systems of depreciation admitted by the respective
tax administrations are established for this purpose.
11. However, as regards indirect taxation, in particular value-added tax, domestic tax systems
have developed the concept of deduction whereby the taxpayer is authorized to subtract the tax paid in
purchasing goods or services used in the production process from the taxes to be paid for a particular
commodity.  It should be emphasized that in this case domestic legislation does not require the
physical incorporation of the goods used in the production process as a condition for authorizing the
deduction of the tax paid in acquiring them.
12. Consequently, the price of a final product, which is the basis on which any tax is applied, will
always incorporate in addition to physically consumed inputs (raw materials) a component of thedepreciation of the capital goods used in its production.  This fact is clearly supported in economic
theory, according to which the total cost of a final product is composed of its fixed cost and its
variable cost. Fixed costs comprise leases, interest on financial capital and depreciation of fixed
assets.  Variable costs are composed of, inter alia , wages and inputs.
13. Thus, the competitiveness of the final product in the international market is diminished by
taxes which affect any of the elements which form part of the above-mentioned total cost.
14. It is therefore clear why the multilateral system has been concerned with the concept of what
may be called "fiscal neutrality", by means of which Members are enabled to develop instruments
with the purpose of removing distortions in exports resulting from taxation.G/SCM/W/429
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15. However, the question arises whether multilateral disciplines should distinguish between the
types of goods which may be the subject of instruments intended to minimize the negative impact of
domestic tax systems, allowing some and prohibiting others.
16. Our reply to this question would be that it makes no sense for the multilateral rules to limit
the scope of measures intended to guarantee that the competitiveness of a country is not affected by itstariff and taxation policies.
17. Creating a distinction among the measures intended to guarantee fiscal neutrality, by
classifying some as permitted and others, such as export incentives, as incompatible, does not seem
efficient.  The result sought by developing countries is the acquisition of capital goods under
competitive conditions.  This result, which the current Illustrative List apparently seeks to avoid, may
be obtained in any case by a WTO Member, without gi ving rise to questions of any kind, by applying
specific tax policies or via trade agreements.
18. The following section shows clearly how the needs of the developing countries call for a clear
interpretation of the disciplines of the Illustrative List.
2. Fiscal instruments permitted by WTO
19. In defining measures regarded as export subsidies, the Illustrative List establishes criteria by
which the scope of instruments that conform to multilateral undertakings is defined.
20. In particular, paragraphs (g), (h) and (i) of the Illustrative List identify taxes that are the
subject of policies compatible with the multilateral system, the operations by means of which "fiscal
neutrality" might be developed, and the conditions associated with the object  per se of the tax.  Each
of these elements is referred to below.
(a) Taxes
21. Here the Illustrative List limits export incentiv es, i.e. instruments which could be regarded as
compatible with the multilateral undertakings, to those that refer to indirect taxation and import
charges.  As regards indirect taxes, the permitted instruments comprise both taxes on production and
distribution and those on goods and services used in the manufacture of exports.
(b) Authorized operations
22. With respect to authorized operations, the id ea is that exemption, i.e. exclusion from the
obligation to pay the tax or charge, is the biggest concession authorized.  Hence, any operation that
has an economic effect less than non-payment of the tax, such as remission, drawback or deferral,
would be permitted.
(c) Conditions associated with taxation
23. Here there could be two possible interpretations of the WTO disciplines.
24. In line with the first, any fiscal instrument  intended to eliminate the negative impact of
indirect tax or import charges must refer to inputs physically incorporated in the final product.
25. This interpretation is supported by footnote 61, which lays down the following definition of
inputs consumed:  "Inputs consumed in the production process are inputs physically incorporated,
energy, fuels and oil used in the production process and catalysts which are consumed in the course of
their use to obtain the exported product."G/SCM/W/429
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26. A second interpretation of the fiscal disciplines of the Illustrative List would lead us to
conclude that the WTO in some cases permits the drawback of indirect taxation for capital goods.
This conclusion is the result of analysis of the two suppositions in paragraph (h) of the Illustrative
List, which establishes a rather arbitrary distinction.
27. In referring to prior-stage indirect taxes on the production of exported products, the first part
of paragraph (h) certainly defines a considerably larg er universe than that set out in the second part.
Under this first assumption, the deduction of all taxes paid on goods or services used is permitted
provided that this deduction exists for products sold on the domestic market and the one granted to
exports is not greater.
28. It would then be possible under this interpretation, in countries where an export transaction
as such is exempt from the payment of indirect taxes, to permit incentives intended to minimize the
impact of indirect taxes paid, including on capital goods.  This would be possible provided that sometype of deduction was permitted in the country con cerned for indirect taxes paid in the production
process.
3. Conclusions
29. As a result of the interpretation of the multila teral disciplines, it can be said that the
developing countries which have mechanisms designed to avoid cumulative taxation could deductindirect taxes on capital goods used in the making of exported products from the indirect taxation
established for those products.  This option might be converted into a drawback in cases where the
final goods are exempt from the respective indirect taxation.  However, even if this interpretation is
accepted, it would only apply to indirect taxation and countries would not be able to apply any type of
incentive for capital goods in relation to import charges.
30. On the other hand, should paragraph (h) of the Illustrative List be interpreted differently and
any drawback be made conditional on the physical incorporation of inputs in accordance with
footnote 61, we would have a situation that discriminates against the developing countries by
excluding capital goods from the implementation of instruments intended to allow them to be
imported under favourable conditions aimed at enhancing the competitiveness of their exports.
31. Such exclusion of the taxes and charges on the import of capital goods from the WTO-
consistent instruments is contrary to the developments achieved in the domestic tax systems of
Members and has no justification from an economic perspective.
4. Proposal
32. Bearing in mind that under Articles IX and X of the Agreement Establishing the World Trade
Organization it is for the Ministerial Conference to interpret and amend the provisions of the
Multilateral Trade Agreements, it is suggested that a decision be adopted which includes capital goodsin the definition of inputs consumed in footnote 61 of the Subsidies Agreement.
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