We have read with interest recently the potential of the Trump Administration to introduce Border Adjustment Taxes against goods being imported into the United States (Exports should be zero rated if implemented).

In addition, it seems that President Trump also seeks to ensure the country’s environmental ambitions remain on track and wherever possible improved.

The ‘Conundrum’, is it possible to entwine the two policies at the Customs Barrier?

I believe it is possible.

Whilst there are a myriad of issues to consider, the key is whether the WTO Agreement provides the necessary support for such a dual approach at the Customs Border. Taxation measures at the barrier have at times been seen as a potential for the introduction of a BAT regime, as the WTO Agreement allows for adjustments based on certain grounds, as per the following WTO panel extract: –

“209. While the parties to the Argentina — Hides and Leather dispute agreed that RG 3543, another Argentine tax measure imposing a collection regime of income taxes with respect to import transactions, was an internal measure within the meaning of Article III, they disagreed with respect to the question whether the same tax regime existed for domestic goods, i.e. whether RG 2784, the income tax measure applicable with respect to domestic transactions, was the “internal analogue” of RG 3431. While RG 3543 established a collection regime and defined the purchaser as the taxable person, RG 2784 established a withholding regime and defined the seller as the taxable person. The Panel did not consider these differences significant enough for the Argentine regime to fall outside the scope of Note Ad Article III:

“[I]t is clear that the fact that RG 3543 creates a collection regime and not a withholding regime does not establish, in itself, that RG 2784 is not equivalent to RG 3543. The use of a different method of taxation may be justified by objective reasons. In this regard, it seems logical to us to collect pre-payments of an income tax from the sellers of a product, as indeed RG 2784 envisages. As we understand it, RG 3543 does not do so, inter alia, because foreign sellers are not normally subject to income taxation in Argentina. In those circumstances, Argentina apparently saw fit to adjust for the adverse competitive effect of RG 2784 on domestic products by collecting pre-payments from importers in accordance with RG 3543.…

For these reasons, we find that RG 3543 establishes a mechanism for the collection of the IG at the border which is equivalent in nature to the IG withholding mechanism established by RG 2784. In accordance with the Note Ad Article IIIwe therefore conclude that RG 3543 is an internal measure within the meaning of Article III:2.”         

Naturally, a key attribute seems to be that the domestic tax laws are replicated at the Customs Barrier for sellers of product that normally are not subject to Income Tax in the domestic jurisdiction and a BAT style system appears to be acceptable under these circumstances, provided other conditions are met in respect of like goods and similar market etc.

The text and explanatory material for Article III can be found at https://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_02_e.htm#article3

It is further noted the interpretation of Article III provided by the WTO panel as follows: –

“The terms of Article III must be given their ordinary meaning — in their context and in the light of the overall object and purpose of the WTO Agreement. Thus, the words actually used in the Article provide the basis for an interpretation that must give meaning and effect to all its terms. The proper interpretation of the Article is, first of all, a textual interpretation. Consequently, the Panel is correct in seeing a distinction between Article III:1, which ‘contains general principles’, and Article III:2, which ‘provides for specific obligations regarding internal taxes and internal charges’. Article III:1 articulates a general principle that internal measures should not be applied so as to afford protection to domestic production. This general principle informs the rest of Article III.

The purpose of Article III:1 is to establish this general principle as a guide to understanding and interpreting the specific obligations contained in Article III:2 and in the other paragraphs of Article III, while respecting, and not diminishing in any way, the meaning of the words actually used in the texts of those other paragraphs. In short, Article III:1 constitutes part of the context of Article III:2, in the same way that it constitutes part of the context of each of the other paragraphs in Article III. Any other reading of Article III would have the effect of rendering the words of Article III:1 meaningless, thereby violating the fundamental principle of effectiveness in treaty interpretation. Consistent with this principle of effectiveness, and with the textual differences in the two sentences, we believe that Article III:1 informs the first sentence and the second sentence of Article III:2 in different ways.”(333)

Consequently, it would seem acceptable to have some form of a BAT based on taxing the seller’s ‘like goods’ at say 20%, provided symmetry applied to domestic taxes for like goods or markets.

“…… With regard to Argentina’s argument that RG 3431 and RG 3543 are measures designed to achieve efficient tax administration and collection and as such do not fall under Article III:2, it should be noted that Argentina has provided no support for this argument, except to say that it is up to Members to decide how best to achieve efficient tax administration. We agree that Members are free, within the outer bounds defined by such provisions as Article III:2, to administer and collect internal taxes as they see fit. However, if, as here, such ‘tax administration’ measures take the form of an internal charge and are applied to products, those measures must, in our view, be in conformity with Article III:2There is nothing in the provisions of Article III:2 to suggest a different conclusion. If it were accepted that ‘tax administration’ measures are categorically excluded from the ambit of Article III:2, this would create a potential for abuse and circumvention of the obligations contained in Article III:2. It must be stated, moreover, that the applicability of Article III:2 is not conditional upon the policy purpose of a tax measure.(381) On that basis, we cannot agree with Argentina that charges intended to promote efficient tax administration or collection ‘a prior’ fall outside the scope of Article III:2.”(382)”

If we then intertwine carbon or environmental taxes or levies as a secondary level of BAT, so that countries of low emissions are afforded a reduction on the 20% border tax, would this be equitable and justifiable to the WTO?

Difficult to conclude, however the WTO states in Article XX the following: –

The text of GATT Article XX

“Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement [the GATT] shall be construed to prevent the adoption or enforcement by any contracting party of measures: …

(b) necessary to protect human, animal or plant life or health;…

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. …” 

(Article XIV of the GATS contains the same introductory clause and the same paragraph (b) — but it does not contain an equivalent to paragraph (g)”

In conclusion, the WTO provides the following guidance on environmental protection via international trade measures: –

The design of the measure

Finally, an environmental measure may not constitute a “disguised restriction on international trade”, i.e. may not result in protectionism. In past cases, it was found that the protective application of a measure could most often be discerned from its “design, architecture and revealing structure”. For instance, in US — Shrimp (Article 21.5), the fact that the revised measure allowed exporting countries to apply programmes not based on the mandatory use of TEDs, and offered technical assistance to develop the use of TEDs in third countries, showed that the measure was not applied so as to constitute a disguised restriction on international trade.”


A TED (turtle excluder device) is a trapdoor installed inside a trawling net which allows shrimp to pass to the back of the net while directing sea turtles and other unintentionally caught large objects out of the net.)

Hence, the reduction in BAT’s, from an income tax perspective, could provide the necessary “encouragement” for countries of high emissions to engage in meaningful reduction programs so to gain access to the reduction of BAT applied at the Customs Barrier.

I look forward to receiving approving or dissenting opinions.

Russell Wilkinson

CEO – Trusted Trader International


Date: 24 January 2017