WTO: Japan Proposes Tax Exception for E-Commerce Joint Initiative
The Joint Initiative on Electronic Commerce1 negotiators are heading into a busy month in November, as they aim for “substantial conclusion” ahead of MC13. Even if “substantial conclusion” is reached there will still be lots to do next year to work out the legal technicalities around finalising the legal text of whatever is agreed.
In any case, potentially as part of the rush to get things done, we now have a proposed tax exception from Japan on the table and also in public (which is a nice bit of transparency in the negotiations).
Japan has proposed a relatively standard form of tax exception when it comes to digital trade rules that appears largely based on the relevant parts of the CPTPP taxation exception (Article 29.4).
There are some interesting elements at play here:
First, Japan has kept this simple and broad, consistent with FTA precedent. The exception essentially carves out all tax measures from the coverage of the agreement, and also ensures that the agreement doesn’t affect the participants’ rights or obligations under tax conventions. It does also clarify that “customs duties” aren’t carve-out, which will be important if the moratorium on customs duties on electronic transmissions makes it into the final agreement.
Second, in line with this simple approach, Japan hasn’t bothered to try and carve taxes back in to the proposed rule on non-discriminatory treatment of digital products. I assume they see the chances of this rule succeeding are less than zero and prefer a clean exception for maximum acceptance.
Third, while there isn’t anything too contentious here (the exception provides pretty maximal policy space) and so you’d hope it will be easy to agree, the exception does take a different and broader approach to tax than say GATS Article XIV (e.g. no chapeau test). It’s approach to defining “tax convention” is also slightly different. It may be that GATS-purists won’t appreciate the innovation, or worry about the implications of differing standards. Particularly given the overlap with GATS and some digital rules, this could mean a tax measure it justifiable under the JI E-Commerce exception but still fall afoul of GATS anti-discrimination provisions.
Finally, the copying from CPTPP has resulted in a couple of interesting drafting choices. It’s not clear to me why paragraph 2 starts with “Except as provided for in this Article…” before carving out taxation measures, given that nowhere in the rest of the Article are “taxation measures” carved back in. Paragraph 4’s consultation requirements could also be messier to apply in a bigger plurilateral setting than under the CPTPP, but its scope is so limited that this isn’t likely to be a big issue in practice.
I’d also reiterate that the transparency of these kind of proposals being made public is welcomed. For a proposal like this I just can’t see the sensitivity with it being made public and the same applies for a variety of other text issues. There will always be a need for confidentiality, but the balance at the moment is out of whack and should swing towards more disclosure.
This has been called various things - Joint Initiative, Joint Statement Initiative, and in the title of Japan’s submission “Joint Statement on Electronic Commerce”.