Direct Taxes and the GATS: Substantive and Procedural Defences for Non-compliant Income Tax Measures

Abstract

This article reviews the applicability of substantive and procedural defences for non-compliant income tax measures. It is argued that increasing legislative action on the domestic level will require detailed knowledge not only of the substantive obligations of the General Agreement on Trade in Services (GATS) but also its various exception clauses. GATS Article XXII:3 is reviewed that shields violations of the national treatment (NT) requirement from challenge in WTO dispute settlement proceedings where the measure falls within the scope of a double taxation agreement (DTA). The ambiguous wording and the lack of jurisprudence on the provision leave states with little guidance on its application. This article explores issues that arise under the provision ratione materiae, temporis, and personae. The quantitative reach of the provision is equally examined. Subsequently, the once-off opportunity to immunize violations of the most-favoured-nation (MFN) clause by means of inclusion in the List of Article II Exemptions is reviewed. Few states have submitted tax exemptions all of which are, with the exception of the US’, narrowly framed. Lastly, the scope of the subparagraphs of the general exception clause, Article XIV, is analysed. In addition to subparagraph c) which may serve to justify a wide range of violations, subparagraphs d) and e), relating to national and MFN treatment respectively, are scrutinized.