RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/442
8 May 2001
(01-2379)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
REPLIES TO QUESTIONS AND COMMENTS CONCERNING
PROPOSALS ON IMPLEMENTATION-RELATED ISSUES REFERRED
TO THE COMMITTEE IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Replies of Colombia
Introduction
At the informal meeting of the Committee on Subsidies on 2 April 2001, questions and
comments were raised by Members and have recently been issued by the Secretariat in documents
G/SCM/W/433 (Switzerland), G/SCM/W/434 (C hile), G/SCM/W/436 (Australia), G/SCM/W/437
(Canada), G/SCM/W/438 (Hong Kong, China), G/SCM/W/439 (European Communities) and
G/SCM/W/440 (United States).
Taking into account the General Council's mandate, this document was prepared with the
objective of contributing to the substantive debate on the proposal relating to the particular needs of
developing countries.
Accordingly, and bearing in mind that the questions and comments address the issue under
consideration from very different standpoints, these have been classed in four groups.
The first group comprises the questions and comments concerning the reasons why
developing countries require favourable treatment for capital goods.  In the second group there are
those concerning the coverage of the incentive for capital goods.  In the third, there are those
concerning some technical elements.  Lastly, a fourth group comprises the comments of a legal naturewhich relate to the interpretation of the illustrative list of subsidies and the legal scope of the proposal.
1. Incentive for capital goods
Australia refers to possible discrimination in the taxation policies of some developing
countries as the reason for the need to revise the export support instruments that are WTO-compatible.The United States appears to be suggesting that countries facing competitiveness problems should, as
an alternative to making implementation-related proposals in the WTO, consider reforming their
policies in order to promote access to capital goods at world market prices.
In its third question the United States also questions the theory of the share of capital goods in
the total cost of final goods, as a basis for considering the implementation-related proposal.  This
questioning is formulated in terms of the implicatio ns for coverage if this theory is accepted, for
example, with regard to real estate.
With respect to the problems relating to taxation policies of developing countries, we wish to
say that although from the theoretical standpoint we agree that ideally these policies should beG/SCM/W/442
Page 2
formulated essentially on the basis of export competitiveness principles, there are various
circumstances which prevent the latter from being the main basis of the tax system.  The need to
increase social expenditure linked to exceptional domestic circumstances makes it impossible to base
the tax systems of many developing countries on considerations relating to promotion of export-
oriented production.
As we see it, there are many ways by which a country may obtain capital goods under
competitive conditions.  Some countries achieve this result by adopting tariff and trade policies and
others by signing free-trade agreements.  Others do not need to resort to promoting imports of capital
goods under competitive conditions because they have a strong domestic capital goods sector,
resulting from a past combination of protectionism and a policy of State support.
However, there is another alternative for getting access to these capital goods under
competitive conditions, which is the one we are exploring, and which in some cases is the only one
for a group of developing countries.
Furthermore, with regard to the possible discrimination against exporters, it is important to
note that this was not mentioned in the document as an argument for a specific tax system in force in a
given developing country.  This unfavourable treatment for exporters would be the result of some
multilateral disciplines which give preference to the complex tax systems typical of developed
countries while shunning other kinds of instruments that are used in a number of developing countries
to encourage exporting activities.
Reference was also made to the implications of accepting the theory of total cost of final
goods, in view of the implications for other elements that are also cost factors other of an export good.
In this connection it is important to bear in mind that the costs of factors other than consumed inputs
and capital goods account for a small proportion of the price of final goods.  It should also beconsidered that factors other than consumed inputs and capital goods are not subject to import charges
or indirect taxes.
Taking the above elements into account, the conclusion is that there would be almost no
possible negative effects from accepting this theory as a basis for considering incentives aimed at
eliminating the tax impact on capital goods as compatible with the multilateral system.  It should also
be noted that insofar as the final proposal would refer to the concept adopted and not the reasons forreaching it, there would be no risk of a possible extension of the coverage to goods other than capital
goods and consumed inputs.
2. Coverage of the incentive
There have been references in the questions of Switzerland, Canada and Chile concerning the
coverage which the WTO-compatible incentive would have and, specifically, whether it would be
applied both to exports and to goods intended for domestic production.  Similarly, Hong Kong, China
has expressed concern about the way in which the proposal might be abused, considering that some
capital goods are used for manufacturing goods intended for both international and domestic markets.
For its part, the European Communities stresses the need for equal treatment of exports and goodsintended for domestic consumption, as a basic condition for the incentive not being considered as a
subsidy.
In replying to these questions, it is important to take into account that Members have started
out by assuming that the incentive for capital goods would be established exclusively for productionintended for the international market.G/SCM/W/442
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In addressing this question it is important to consider the existence of two different
implementation scenarios for incentives intended to guarantee fiscal neutrality for capital goods.
Firstly, the incentive could be restricted exclusively to export activity.  This scenario would be
appropriate for those developing countries whose programmes are based on tax systems directed
towards drawback of indirect taxes and import charges.
The second scenario would apply to those countries in which the system is directed towards
suspending the payment of indirect and import taxes on capital goods used in manufacturing goods
intended for export.  In these countries, it would not be indispensable to introduce some sort of
calculation system inasmuch as the tax is simply not paid or its payment is deferred.  We understand
that in some developing countries the incentive is applied exclusively to companies that export.
Nevertheless, the production of these companies is intended both for export and for the domesticmarket.
3. Technical elements
With respect to the technical aspects, Switzerland, Canada, the European Communities and
Chile have asked for details of how a capital goods incentive would operate.  It is important to takeinto account that, in the light of the previous se ction, these elements would only be indispensable if
the mechanism were implemented as a system of drawback of indirect and import taxes at the time of
exportation of the end-product.
Certainly, if it were simply a question of suspension or deferral of the payment of indirect and
import taxes, insofar as the good was used by an export company, we would be faced with a situation
similar to exemption, which would make it unnecessary to consider technical elements of this sort.
In this respect, we agree with Members that  countries wishing to implement an incentive
aimed at minimizing the impact of taxes on capital goods would have to settle certain points essentialto the operation in their domestic legislation.
Thus, for example, the term "capital goods" would have to be defined.  Nevertheless, it would
be easier to determine its scope inasmuch as there already exist rules for the drawback of indirect
taxes on inputs consumed.  The appropriate depreciation period, another element to be considered,
could be derived from the periods accepted in the different tax systems.
On the other hand, the data supplied by each enterprise concerning the contribution of the
capital good to its production could be evaluated on the basis of statistical information which, it is
understood, already exists in some countries insofar as they have established company profiles based
on export orientation for different sectors.  We consider that the Organization has already made very
considerable progress towards dealing with elements of this kind by developing the Annexes to theSubsidies Agreement.
4. Legal analysis
The delegations of Switzerland, the European Communities and the United States have raised
two different questions concerning legal matters.  The first concerns the instrument to be used toguarantee the WTO compatability of incentives and ensure fiscal neutrality for capital goods.  The
second relates to the interpretation of letter (h) of the Illustrative List of Export Subsidies.
The question of the instrument that should be used, whether it be a decision of the Ministerial
Conference or an amendment to the Agreement, will depend to a large extent on the conclusions ofthe debate in the Committee, as well as on the interpretation of the scope of the first part of letter (h)
of the Illustrative List.G/SCM/W/442
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This letter deals with the remission, exemption or deferral of indirect taxes and points to a
broader coverage for incentives that would be compatible.  Firstly, it refers to goods or services used
in the production of exported products, that is to say it would permit the deduction, rebating, deferral
or exemption of prior-stage indirect taxes levied in the process of producing goods for export.  Itshould be emphasized that letter (h) deals exclusively with indirect taxes, not import charges.
Secondly, it establishes a requirement which, in our opinion, would be met by structured
incentives for exporting companies whose production is intended partly but not exclusively for the
international market.
In conclusion, it should be noted that Hong Kong, China has asked whether there are any
indications of a possible impact of the proposal on trade-flows.  We appreciate Hong Kong, China's
interest, and can only point out that the recognition of fiscal neutrality for capital goods would benefit
all Members of the WTO, both producers and buyers, with indisputable advantages for rationalization.
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