Taxation, Non- Discrimination and
International Trade in Services
A Concise Guide
University of Calgary, Alberta, Canada
December, 2006
*Special Thanks to Julie Krivitsky, LLB, LLM University of Calgary for her work on this project
and to the Social Sciences and Humanities Research Council (SSHRC).
OVERVIEW
Trade in services is a growing and important part of both the Canadian and world economy. Issues
about whether service providers are being treated fairly is also a global issue. Canada is signatory
to two international trade agreements, impacting trade in services, the General Agreement on
Trade in Services (GATS)1 and North American Free Trade Agreement (NAFTA).2 Service
providers will no doubt be most interested in the rights or protections provided by such
agreements. Policy makers and legislators, must also be concerned with the obligations assumed
and in particular whether national laws or policies are in violation of trade obligations. All will also
be concerned about whether Canadian’s ability to operate in the global market place is affected by
the national laws of other signatories.
This Manual is intended to provide some of this information in a straightforward and pragmatic
way. Its focus will be on direct taxation and the taxation of service providers. Where relevant,
reference is also made to the tax treatment of goods and investment.
North American service providers are potentially impacted by both the NAFTA and GATS. These
agreements operate differently. The fundamental difference between the GATS and NAFTA is
that the GATS is a multilateral agreement that uses the “bottom-up” approach, whereas the latter is
a trilateral accord which employs the “top-down” approach. The “bottom-up” approach requires
governments to specifically state what commitments in which sectors of economy they undertake;
otherwise the matter falls outside the scope of the GATS. By contrast, the “top-down” approach
requires governments to specify what exceptions apply in which sectors of economy, thus
everything falls within the scope of the NAFTA unless specifically excluded. Compared to the
GATS, the NAFTA is a more comprehensive and ambitious agreement. A complainant can choose
whether it is more beneficial to invoke the rights and obligations under the GATS or NAFTA. In
one particular aspect, however, both agreements are similar – direct taxation has been largely
carved out from both the GATS and NAFTA if a tax treaty is I place between the two
governments. .
This Manual is structured as follows. Part I of this Manual provides a general overview of the
GATS and its main obligations. Part I also outlines how tax treaties interact with the GATS and
what remedies are available to cross-border service providers facing differential tax treatment
under the GATS.
Part II contains a general overview of the NAFTA and its main obligations. Part II then analyses
how tax treaties interact with the NAFTA and what remedies are available to service providers
under the NAFTA.
Part III offers some guidelines enabling one to determine whether it would be possible to seek
recourse under the GATS or NAFTA.
1
General Agreement on Trade in Services, April 15, 1995, WTO Agreement, Annex 1B.
North American Free Trade Agreement, December 17, 1992, 32 I.L.M. 289 (1992) (entered into force January 1,
1994).
2
2
Part IV reviews some examples of discriminatory tax provisions or treatment in Canada and the
United States.
Part V examines some of the outstanding issues under the GATS.
Part VI explores some of the outstanding issues under the NAFTA.
Part VII discusses some of the issues arising in the context of trade with the European Union.
Part VIII comments on the Canadian tax treaty practice.
Part IX addresses the issue of obligations of national and local governments.
Appendices A, B, and C reproduce key provisions affecting direct taxation of cross-border service
providers under the GATS, NAFTA, and GATT, respectively.
Appendices D, E, and F outline some of the key provisions of tax treaties concluded between the
NAFTA countries.
Appendix G contains a table providing a summary of the taxes covered and the non-discrimination
articles in the NAFTA tax treaties.
3
TABLE OF CONTENTS
OVERVIEW
2
TABLE OF CONTENTS
4
INTRODUCTION
8
PART I:
10
1.
THE GENERAL AGREEMENT ON TRADE IN SERVICES
General Overview of the GATS
10
1.1
What Is the GATS?
10
1.2
Who Are the Players?
10
1.3
What Is a “Service”?
10
1.4
What Is “Trade in Services”?
11
1.5
When Does the GATS Apply?
12
1.6
What’s In?
13
1.7
What’s Out?
13
1.8
The GATS and Direct Taxation
15
1.9
How Does the GATS Apply to Direct Tax Measures?
16
1.10
1.9.1
The Most-Favoured-Nation Obligation – Article II
16
1.9.2
Exceptions to the Most-Favoured-Nation Obligation
16
1.9.3
The National Treatment Obligation – Article XVII
18
1.9.4
Exceptions to the National Treatment Obligation
19
1.9.5
Consultation and Dispute Settlement – Article XXII
20
Direct Taxation in Trade in Goods and in Trade in Services
20
4
1.11
Investment and Tax Measures
22
1.12
Method of Analysis
22
1.13
Where to Find What Obligations And Commitments Have Been
Undertaken by Canada Or Any Other WTO Member?
23
1.13.1 Undertaken Commitments
23
1.13.2 Case Law
23
THE NORTH AMERICAN FREE TRADE AGREEMENT
25
PART II:
2.
General Overview of the NAFTA
25
2.1
What Is the NAFTA?
25
2.2
Who Are the Players?
25
2.3
What Is a “Service”?
26
2.4
What Is “Cross-Border Trade in Services”?
26
2.4.1
Chapter 12 – Cross-Border Trade in Services
26
2.4.2
Chapter 11 – Investment, Services and Related Matters
26
2.4.3
Chapter 16 – Temporary Entry of Business Persons
27
2.5
When Does the NAFTA Apply?
28
2.6
What’s In?
28
2.7
What’s Out?
29
2.8
2.7.1
Chapter 12 – Cross-Border Trade in Services
29
2.7.2
Chapter 14 – Financial Services
30
2.7.3
Chapter 13 – Telecommunication Services
30
2.7.4
Chapter 11 – Investment, Services and Related Matters
30
Taxation in Trade in Services Under the NAFTA
31
5
2.9
2.8.1
Standard of Treatment
31
2.8.2
The Most-Favoured-Nation Obligation – Article 1203
31
2.8.3
The National Treatment Obligation – Article 1202
32
2.8.4
Exceptions to the Most-Favoured-Nation and National
Treatment Obligations
32
How Does the NAFTA Apply to Direct Tax Measures?
2.9.1
2.10
33
Income and Capital Tax Measures Affecting the Purchase
and Consumption of Cross-Border and Financial Services
33
2.9.2
Other Taxes Affecting Services in Investments
34
2.9.3
Tax Measures Linked to Performance Requirements
34
The NAFTA and Tax Treaties
35
2.10.1 The General Rule
35
2.10.2 Exceptions to the Primacy of Tax Treaties
35
2.11
Investment and Tax Measures
36
2.12
Taxation in Trade in Goods
37
PART III:
THE GATS OR THE NAFTA?
39
PART IV:
EXAMPLES OF DISCRIMINATORY TAX PROVISIONS
OR TREATMENT IN CANADA AND THE UNITED STATES
41
OUTSTANDING ISSUES UNDER THE GATS
47
PART V:
1.
Subsidies in Trade in Services
47
2.
Non-Discrimination Articles in Tax Treaties
48
3.
Export Taxes
48
6
PART VI:
OUTSTANDING ISSUES UNDER THE NAFTA IN
TRADE IN SERVICES
49
1.
Non-Discrimination Articles in Tax Treaties
49
2.
Export Taxes
49
PART VII:
TRADE WITH THE EUROPEAN UNION
50
PART VIII: CANADIAN TAX TREATY PRACTICE
52
PART IX:
53
NATIONAL AND LOCAL GOVERNMENT OBLIGATIONS
Appendix A: GATS
54
Appendix B: NAFTA
58
Appendix C: GATT
62
Appendix D: Canada – U.S. Tax Treaty
68
Appendix E: Canada – Mexico Tax Treaty
71
Appendix F: U.S. – Mexico Tax Treaty
73
Appendix G: Summary of Tax Treaty Provisions
75
7
INTRODUCTION
A number of terms are used in this material including “cross-border service provider” and
“discrimination.”
A cross-border service provider for purposes of these materials is simply a person from one tax
jurisdiction who provides services to a person from another tax jurisdiction. Services may be
provided in a wide variety of ways including travel by the service provider to the foreign taxpayer
or travel by the foreign taxpayer to the service provider, or through no travel at all by either. The
important point is that the parties are from different tax jurisdictions and therefore potentially
subject to two tax regimes and to potentially different tax treatment .
The term “discrimination” is also frequently used. It is acknowledged throughout this study that
not all differences in tax treatment constitute discrimination.”3 In fact the very foundation upon
which bilateral tax treaties are based is the bilateral negotiation of better tax treatment by foreign
governments. It will also become apparent in the trade agreements that some differences in
treatment are acknowledged as entirely acceptable, for example those negotiated through bilateral
tax treaties those to protect revenue collection such as the imposition of withholding taxes on nonresident taxpayers. Nonetheless not all differences in tax treatment can be justified and to the
extent that they cannot they are viewed as discriminatory.
The principle of non-discrimination is one of the basic tenets of most international trade
agreements, in particular the principles of most favoured nation (MFN) and national treatment
(NT). Under the MFN rule a host country is required to extend to service providers from one
foreign country treatment no less favourable than it accords to service providers from any other
country. According to the NT principle, the host country is required to treat a foreign service
provider in the same or comparable way as a domestic service provider. The protection provided
by the MFN and NT provisions in any trade agreement depend on the extent of the exceptions
attached to them.
Tax treaties generally contain a non-discrimination clause that is derived from Article 24 of the
Model developed by the Organisation for Economic Cooperation and Development (OECD
Model). From its historic origins, this is generally understood to be a NT clause and not an MFN
clause.4 Its first objective is to prevent a treaty partner from granting to foreign nationals treatment
that is “other or more burdensome” than that granted to its own nationals, provided that the former
are in the same or substantially similar circumstances as the latter. Its second objective is to ensure
that companies are not treated differently based on whether the capital is held by its own nationals
rather than those of the other contracting party. There is no implied obligation to provide MFN
Discrimination has been defined as “treating persons unfavourably for reasons that are unreasonable, arbitrary or
irrelevant which can create a potential trade barrier .See B.J. Arnold, Tax Discrimination Against Aliens, Non-Residents, and
3
Foreign Activities: Canada, Australia, New Zealand, the United Kingdom, and the United States (Toronto: Canadian Tax
Foundation, 1991) at 5.
4
Clauses of the kind found in the OECD Model were used in international agreements such as treaties of friendship or
commerce to provide protection for nationals long before their appearance in tax treaties. See Commentary to Article
24 of the OECD Model para. 2.
8
treatment in the OECD Model, although various tax treaties, including those in the NAFTA bloc,
do contain specific MFN clauses.5
What is the connection between direct taxation and international trade in services? How do trade
agreements such as the GATS and NAFTA interact with bilateral tax treaties? Consider the
following examples.
Example 1
The Canadian government does not impose income tax if the remuneration earned by a Mexican
truck driver in Canada does not exceed $16,000 of employment income earned in Canada and paid
by a Canadian employer. The driver is in Canada for approximately six weeks each summer. No
tax would be imposed on $10,000 of employment income earned by a driver from the U.S. in
similar circumstances. Can the U.S. government complain that tax discrimination has occurred?
The answer is no. Both the NAFTA and the GATS provide for the primacy of tax treaties.
Example 2
No tax treaty protection against tax discrimination is available to Canadian service providers in
Greece and vice versa due to the absence of a tax treaty between Canada and Greece. Is it possible
for such service providers to seek remedy at the WTO by invoking the GATS provisions in order
to challenge differential tax treatment? The answer is yes.
Example 3
Assume a hypothetical situation in which new Goods and Services Tax (GST) surcharge of 2% is
introduced by the Government of Canada that will apply to any income earned by a non-resident
from the provision of services in Canada if their income from such services earned in Canada
exceeded $50,000 in the prior year. Susan, a U.S. resident carrying on business and providing
consulting services in Canada, is informed that she is obligated to collect and remit this additional
tax. Can one argue discrimination under the NAFTA or the GATS in this case? The answer is –
not likely under both the GATS and NAFTA.
Example 4
Assume a hypothetical situation in which the Province of Ontario (Canada) will not permit a
deduction in calculating taxable income for Ontario tax purposes for amounts paid to non-residents
(but not residents) of Canada that exceed $100,000 per annum. An Ontario client denies a U.S.
engineer, earning income in excess of $100,000 in Ontario, further work. The U.S. government
seeks to challenge the discriminatory Ontario tax under the NAFTA. Is the NAFTA the
appropriate forum despite the tax treaty? The answer is yes.
See for example the Canada – US Treaty Article XXV(2). A significant issue underlying the discussion in the case of
Canada, will be the scope of the non-discrimination clause in the relevant tax treaty, and in particular to what extent
the non-discrimination clause will restrict the right to challenge the NT or MFN obligation other than under a tax
treaty.
5
9
Different outcomes in the above examples demonstrate that cross-border service suppliers may be
subject both to differing standards in the determination of whether tax discrimination has occurred
and to differing dispute resolution options. In order to understand why the differences in treatment
and remedies occur it is necessary to examine the provisions of both the GATS and NAFTA.
10
PART I: THE GENERAL AGREEMENT ON TRADE IN SERVICES
1.
General Overview of the GATS
This section examines the scope of application of the GATS, the main obligations under the
GATS, the interaction of the GATS and tax treaties, and the effect of this interaction on crossborder service providers. In general there are many ways to render cross-border services. This
Manual uses a generic definition of cross-border provision of services that encompasses both
situations when natural persons cross the border and when the actual movement of individuals is
accompanied or substituted with movement of capital, know-how, or commercial presence in
another jurisdiction.
1.1
What Is the GATS?

The General Agreement on Trade in Services (GATS) is the first and only multilateral
trade agreement that regulates international trade in services.
The Agreement came into force on January 1, 1995.
The GATS consists of the framework agreement, several annexes and understandings as
well as schedules of specific commitments and exemptions.


1.2
Who Are the Players?
1.
2.
1.3
The GATS applies to all Members of the World Trade Organisation, i.e. only
governments that have signed the World Trade Organisation Agreement,6 which
includes the GATS.
Private individuals or enterprises cannot directly invoke provisions of any of the
WTO Agreements.
What Is a “Service”?
Before the rules under the GATS can be examined, it is necessary to define such terms as
“services” and “trade in services”.
6
WTO, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 15 April 1994, 33 I.L.M. 1141
(entered into force 1 January 1995) [WTO Agreement].
11
The GATS contains no legal definition of “services”. It only provides that
For the purposes of this Agreement:
“Services” includes any service in any sector except services supplied in the exercise of
governmental authority.
Article I:3(b)
1.4
What Is “Trade in Services”?
The definition of services trade under the GATS is four-pronged, depending on the territorial
presence of the supplier and the consumer at the time of the transaction. The GATS distinguishes
between the following four modes of supply of a service:
Mode 1 – cross-border trade: from the territory of one Member into the territory of any other
Member;
Mode 2 – consumption abroad: in the territory of one Member to the service consumer of
any other Member;
Mode 3 – commercial presence: by a service supplier of one Member, through commercial
presence, in the territory of any other Member; and
Mode 4 – presence of natural persons: by a service supplier of one Member, through the
presence of natural persons of a Member in the territory of any other Member.
Article I:2
Here are some examples:
Mode 1: a user in country A receives services from abroad through its telecommunications or
postal infrastructure. For example, consultancy or market research reports, telemedical advice,
distance training or architectural drawings.
Mode 2: nationals of country A have moved to country B as tourists, students or patients to
consume the respective services.
12
Mode 3: commercial presence. The service is provided within country A by a locally-established
affiliate, subsidiary or representative office of a foreign-owned and controlled company (bank,
hotel group, construction company, etc.).
Mode 4: a foreign national provides a service in country A as an independent supplier (consultant,
health worker, etc.) or as an employee of a service supplier (consultancy firm, hospital,
construction company, etc.).
Generally, the following broad categories of services are distinguished in the literature:












Business services (including professional services and computer services)
Communication services
Construction and related engineering services
Distribution services
Educational services
Environmental services
Financial services (including insurance and banking)
Health-related and social services
Tourism and travel-related services
Recreational, cultural and sporting services
Transport services
Other services not included elsewhere
These sectors are further subdivided into subsectors. Source: WTO Document MTN.GNS/W/120.
1.5
When Does the GATS Apply?
Bearing in mind the broad definition of “services”, see Section 1.3 above, it is necessary to
ascertain when the GATS applies.
This Agreement applies to measures by Members affecting trade in services.
Article I:1
What constitutes a “measure by Member affecting trade in services” becomes an important
threshold issue.
13
1.6
What’s In?
For the purposes of this Agreement:
“Measures by Members” means any measure by a Member, whether in the form of a law,
regulation, rule, procedure, decision, administrative action, or any other form.
Article XXVIII(a)
“Measures by Members” means measures taken by


central, regional or local governments and authorities; and
non-governmental bodies in the exercise of powers delegated by central,
regional or local governments or authorities.
In fulfilling its obligations and commitments under the Agreement, each Member shall take such
reasonable measures as may be available to it to ensure their observance by regional and local
governments and authorities and non-governmental bodies within its territory.
Article I:3
“Measures by Members affecting trade in services” include measures in respect of



the purchase, payment or use of a service;
the access to and use of, in connection with the supply of a service, services
which are required by those Members to be offered to the public generally;
the presence, including commercial presence, of persons of a Member for the
supply of a service in the territory of another Member.
Article XXVIII(c)
1.7
What’s Out?
One comprehensive exemption has already been mentioned in Section 1.3 above and pertains to
services supplied in the exercise of governmental authority.
For the purposes of this Agreement:
“A service supplied in the exercise of governmental authority” means any service which is
14
supplied neither on a commercial basis, nor in competition with one or more service suppliers.
Article I:3(c)
Some examples of such services which are beyond the reach of the GATS include police, fire
protection, activities of a central bank, health care, social security, public retirement plans, tax and
customs administration.
Several sectoral exemptions also exist. One of them is found in the Annex on Air Transport
Services.
(i)
The Agreement, including its dispute settlement procedures, shall not apply to measures
affecting:


traffic rights, however granted; or
services directly related to the exercise of traffic rights,
except as provided in paragraph 3 of this Annex.
(ii)
The Agreement shall apply to measures affecting:



aircraft repair and maintenance services;
the selling and marketing of air transport services;
computer reservation system (CRS) services.

Definitions:
-
“Aircraft repair and maintenance services” mean such activities when undertaken on an
aircraft or a part thereof while it is withdrawn from service and do not include so-called
line maintenance.
-
“Selling and marketing of air transport services” mean opportunities for the air carrier
concerned to sell and market freely its air transport services including all aspects of
marketing such as market research, advertising and distribution. These activities do not
include the pricing of air transport services
-
“Computer reservation system (CRS) services” mean services provided by computerised
systems that contain information about air carriers’ schedules, availability, fares and fare
rules, through which reservations can be made or tickets may be issued.
-
“Traffic rights” mean the right for scheduled and non-scheduled services to operate
and/or to carry passengers, cargo and mail for remuneration or hire from, to, within, or
15
over the territory of a Member, including points to be served, routes to be operated,
types of traffic to be carried, capacity to be provided, tariffs to be charged and their
conditions, and criteria for designation of airlines, including such criteria as number,
ownership, and control.
Annex on Air Transport Services
Another sectoral exemption is found in the Annex on Financial Services.

Domestic Regulation

Notwithstanding any other provisions of the Agreement, a Member shall not be prevented
from taking measures for prudential reasons, including for the protection of investors,
depositors, policy holders or persons to whom a fiduciary duty is owed by a financial
service supplier, or to ensure the integrity and stability of the financial system. Where such
measures do not conform with the provisions of the Agreement, they shall not be used as a
means of avoiding the Member’s commitments or obligations under the Agreement.
Annex on Financial Services
This exemption applies, for instance, to banking and insurance services.
1.8
The GATS and Direct Taxation
Three articles of the GATS affect direct taxation – Articles II, XVII and XXII. Each is discussed in
more detail below. As a result of these provisions it is generally conceded that direct taxation has
been largely carved out from the GATS with respect to federal taxation, particularly if there is a
double taxation agreement between the Member States. There are, however, instances when
differential direct tax treatment can fall within the purview of the WTO.
Differential tax treatment is most noticeable under Mode 4 of the GATS, i.e. when services are
supplied by nationals of one WTO Member in the territory of another. Mode 4 includes both
independent consultants supplying services in another country (such as lawyers, doctors, engineers,
etc.) and employees of a company providing services abroad (for example, a foreign employee of a
bank working for one of the bank’s branches abroad).
The first question to be asked is “What is a measure”?
16
As mentioned above, for the purpose of the GATS:
“Measure” means any measure by a Member, whether in the form of a law, regulation, rule,
procedure decision, administrative action, or any other form.
Article XXVIII(a)
“Direct taxes” comprise all taxes on total income, on total capital or on elements of income or of
capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and
gifts, and taxes on the total amount of wages or salaries paid by enterprises, as well as taxes on
capital appreciation.
Article XXVIII(o)
1.9
How Does the GATS Apply to Direct Tax Measures?
In order to understand how the GATS applies in the context of direct taxes and whether a matter
involving differential tax treatment can be brought to the WTO, the key provisions of the
Agreement must be considered. The key provisions are: the Most-Favoured-Nation and national
treatment obligations and exceptions to each of these obligations.
1.9.1
The Most-Favoured-Nation Obligation – Article II
Article II:1 provides that each Member is required to “accord immediately and unconditionally to
services and service suppliers of any other member treatment no less favourable than that it
accords to like services and service suppliers of any other country.” The GATS, however,
envisages several exceptions allowing WTO Members to modify the scope of the MFN obligation.
1.9.2
Exceptions to the Most-Favoured-Nation Obligation
The GATS envisages a number of exceptions to the MFN obligation.

Members can modify the scope of their MFN obligation by inscribing exemptions in their
schedules of specific commitments. Article II. The MFN exemptions can apply across all
service sectors and all modes of supply of a service. Annex on Article II (MFN) Exemptions
provides that such exemptions are subject to review and in principle should not exceed a period
of 10 years from the date of entry of the WTO Agreement into force, but there is no obligation
to eliminate the exemptions. Article XXIX:6.
17
The following WTO documents contain the List of MFN Exemptions for Canada:




GATS/EL/16 (1994)
GATS/EL/16/Suppl.1 (1995)
GATS/EL/16/Suppl.1/Rev.1 (1995) and
GATS/EL/16/Suppl.2 (1998).

WTO Members may adopt and enforce measures for the protection of public morals or to
maintain public order; protection of human, animal or plant life or health; and measures
necessary to secure compliance with other laws which are themselves consistent with the
GATS. Article XIV.

The most important exemption to the MFN obligation for the purposes of direct taxation is
contained in Article XIV(e) which provides that “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 like conditions prevail, or a disguised restriction on
trade in services,” violations of the MFN obligation are exempted altogether as long as the
difference in treatment results from “an agreement on the avoidance of double taxation [i.e. a
tax treaty] or provisions on the avoidance of double taxation in any other international
agreement or arrangement by which the Member is bound.”

Security exceptions allow a WTO Member to withhold information or to take any action
necessary for the protection of its essential security interests. Article XIVbis.

An exception to the MFN obligation is envisaged when Members confer or accord advantages
to adjacent countries in order to facilitate exchanges limited to contiguous frontier zones of
services that are both locally produced and consumed. Article II:3.

Members may enter into economic integration agreements liberalising trade in services subject
to certain conditions. Article V.

Members may enter into labour markets integration agreements. Article Vbis.

WTO Members may also recognise regulatory standards and certificates granted by another
Member(s) subject to certain conditions, which implies departure from the MFN obligation.
Article VII.

The MFN obligation does not apply to laws, regulations or requirements governing the
procurement by governmental agencies of services purchased for governmental, rather than
commercial, purposes. Article XIII.
18
1.9.3
The National Treatment Obligation - Article XVII
The national treatment obligation applies only to the extent that actual commitments are made by a
WTO Member and subject to the specified conditions and qualifications. Article XVII:1.
The national treatment obligation requires that in the sectors listed in a Member’s schedule of
commitments foreign service providers are to be treated no less favourably than domestic ones.
Article XVII:1. “Formally identical or formally different treatment shall be considered to be less
favourable if it modifies the conditions of competition in favour of services or service suppliers of
the Member compared to like services or service suppliers of any other Member.” Article XVII:3.
The Schedule of Specific Commitments for Canada is found in the following WTO documents:
1.
2.
3.
4.
5.
6.
7.
8.
GATS/SC/16 (1994)
GATS/SC/16/Suppl.1 (1995)
GATS/SC/16/Suppl.2 (1995)
GATS/SC/16/Suppl.1/Rev.1 (1995)
GATS/SC/16/Suppl.2/Rev.1 (1995)
GATS/SC/16/Suppl.3 (1997)
GATS/SC/16/Suppl.4 (1998) and
GATS/SC/16/Suppl.4/Rev.1 (2000).
Within a Schedule attached to GATS, Canada has claimed national treatment qualifications for a
number of taxation measures.7 These exemptions from national treatment include:







7
tax measures that result in differential treatment with respect to expenditures made on
scientific research and experimental development services;
federal and subnational tax measures that result in a difference of the treatment for
expenditures incurred with services performed in Canada related to mining related to the
exploration and development;
federal and subnational tax measures that may result in different treatment of Canadiancontrolled private corporations;
GST measures that permit certain supplies between members of a closely-related group of
corporations, including financial institutions, to be treated as exempt supplies while
imported supplies do not qualify for this treatment;
federal income tax measures that result in different tax treatment with respect to an
investment in a venture capital corporation;
Ontario land transfer tax on the purchase by a non-resident of recreational property; and
indirect tax measures that result in differences in treatment with respect to delivery by mail
of goods in Canada.
See, for example, WTO Doc. GATS/SC/16, Schedule of Specific Commitments – Canada (15 April 1994).
19
1.9.4
Exceptions to the National Treatment Obligation
Departure from the national treatment obligation is permitted under the GATS in the following
cases.
1. WTO Members may adopt and enforce measures for the protection of public morals or to
maintain public order; protection of human, animal or plant life or health; and measures
necessary to secure compliance with other laws which are themselves consistent with the
GATS. Article XIV.
2. Security exceptions allow a WTO Member to withhold information or to take any action
necessary for the protection of its essential security interests. Article XIVbis.
3. The national treatment obligation does not apply to laws, regulations or requirements
governing the procurement by governmental agencies of services purchased for
governmental, rather than commercial, purposes. Article XIII.
4. Differential treatment of service providers is permitted as long as a measure does not
constitute “arbitrary or unjustifiable discrimination between countries where like conditions
prevail, or a disguised restriction on trade in services … [and] provided that the difference
in treatment is aimed at ensuring the equitable or effective imposition or collection of direct
taxes in respect of services or service suppliers in other Member countries.” Article
XIV(d).
A footnote to Article XIV(d) clarifies that “equitable or effective imposition of taxes”
includes measures taken by a Member under its taxation system which:
(a) apply to non-resident service suppliers in recognition of the fact that tax obligation
of non-residents is determined with respect to taxable items sourced or located in
the Member’s territory (for example, withholding taxes);
(b) apply to non-residents in order to ensure the imposition or collection of taxes in the
Member’s territory; or
(c) apply to non-residents or residents in order to prevent the avoidance or evasion of
taxes, including compliance measures; or
(d) apply to consumers of services supplied in or from the territory of another Member
in order to ensure the imposition or collection of taxes on such consumers derived
from sources in the Member’s territory; or
(e) distinguish service suppliers subject to tax on worldwide taxable items from other
service suppliers, in recognition of the difference in the nature of the tax base
between them; or
(f) determine, allocate or apportion income, profit, gain, loss, deduction or credit of
resident persons or branches or between related persons or branches of the same
person, in order to safeguard the member’s tax base.
20
The footnote also specifies that tax terms or concepts in Article XIV(d) and in the footnote are
determined according to tax definitions and concepts, or their equivalent, under the domestic law
of the Member taking the measure.
Even when a national treatment commitment under the GATS had been made and the measure in
question does not fall within any of the exceptions to the national treatment obligation outlined
above, it may still be difficult to challenge a discriminatory direct tax measure because of an
additional constraint imposed by Article XXII:3.
1.9.5
Consultation and Dispute Settlement - Article XXII
A Member may not invoke the national treatment obligation if a measure of another Member “falls
within the scope of a tax treaty.” Article XXII:3. The GATS delegates regulation of matters
related to direct taxation to tax treaties. If a tax treaty between countries does not exist,
presumably one may seek remedy at the WTO. If there is a tax treaty, however, whether one may
argue violation of the national treatment obligation under the GATS will depend on whether the
measure falls within the scope of a tax treaty or not.
1.10
Direct Taxation in Trade in Goods and in Trade in Services
The General Agreement on Tariffs and Trade (GATT) regulates cross-border trade in goods,
whereas the GATS regulates cross-border trade in services. Sometimes the distinction between a
good and a service is difficult to make. The distinction is, however, important because the GATT
and GATS operate differently and the level of protection against a discriminatory tax measure is
not the same under these agreements. It is also possible for both agreements to apply
simultaneously.
Article III:1 of the GATT strives to promote the principle of national treatment in the taxation of
goods by providing that “internal taxes and other internal charges … should not be applied to
imported or domestic products so as to afford protection to domestic production.” Moreover,
Article III:2 of the GATT indicates that the “products … imported … shall not be subject, directly
or indirectly, to internal taxes or other internal charges of any kind in excess of those applied,
directly or indirectly, to like domestic products.” These provisions strive to prevent protectionism
by disallowing tax measures that could undermine tariff reductions promoted by the GATT.
Because of the reference to “products” within Article III, the provision is normally thought to
apply only to consumption taxes (like VATs and the GST) rather than to income taxes. However,
a WTO panel has held that Article III can apply to income tax measures in certain contexts.
Article III was used to strike down a discriminatory practice whereby Argentina charged and
21
collected an income tax in advance on imported goods at a higher rate than the one applied on
domestic products.8
Article III has also been used to successfully challenge a Canadian practice of using taxes to
protect the domestic magazine industry. As part of its cultural protectionism strategy, Canada had
enacted laws that prohibit the import of foreign “split-run” magazines, which are Canadian editions
of foreign magazines that publish little if any Canadian editorial content but offer extremely
competitive rates for advertising aimed at a Canadian audience. In 1995, Canada imposed an 80%
excise tax on split-run magazines after Sports Illustrated started to transmit its Canadian edition to
a Canadian printer via satellite from New York to avoid the import ban.
The United States challenged the Canadian measures before a WTO appeals panel, arguing that the
excise tax violated article III of GATT. The U.S. also argued that the postal subsidy given to
Canadian magazines was discriminatory. Because the tax rate for imported products was 80%
while the tax rate for similar local products was zero, the panel held that the excise tax was
impermissible under article III as it afforded protection to a domestic industry.9 After the WTO
decision, Canada and the United States negotiated an agreement on U.S. access to Canada’s
domestic advertising industry. Although the matter was not before the WTO, Canada also agreed
to amend its Income Tax Act with respect to tax deductions for advertisements in foreign-owned
publications, which had previously provided that tax deductions were only permissible if these
publications had a minimum of 75% Canadian ownership and contained at least 80% original
content.
Income tax measures have also been successfully challenged under Article III:4 of the GATT,
which maintains that any requirements affecting the internal sale of goods must provide foreignoriginating goods with treatment that is no less favourable than that provided to domestic goods.
Article III:4 was used to challenge a U.S. income tax code provision that allowed a tax exemption
for exports generated by a “foreign sales corporation” or FSC, which is a subsidiary of a U.S.
corporation that is established offshore to handle foreign sales.
In 1997, the European Union challenged this provision as an illegal export subsidy that gives U.S.
exporters an unfair competitive advantage. A WTO panel held that the FSC is a prohibited export
subsidy because: (a) revenue is foregone; (b) exports are taxed more favourably than production
abroad. In 2000, a WTO appeals panel affirmed the Panel Report in all essential respects.10 The
United States subsequently amended its foreign sales corporation provisions, but this amendment
was again found to constitute an impermissible export subsidy by a WTO panel. The European
Union was authorised by the WTO to apply countermeasures and, since March 2004, the EU has
applied a customs duty of 5% on certain imports from the United States. The countermeasures can
continue until the United States amends its income tax laws to comply with the WTO rulings.
See Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather (Complaint by
the European Communities) (2000), WTO Doc. WT/DS155/R (Panel Report).
9
See Canada – Certain Measures Concerning Periodicals (Complaint by the United States) (1997), WTO Doc.
WT/DS31/AB/R (Appellate Body Report).
10
See United States – Tax Treatment for Foreign Sales Corporations (Complaint by the European Communities)
(2000), WTO Doc. WT/DS108/AB/R (Appellate Body Report).
8
22
1.11
Investment and Tax Measures
The Agreement on Trade-Related Investment Measures is of limited use to cross-border service
providers because, as seen below, the provisions are restricted to trade in goods.
This Agreement applies to investment measures related to trade in goods only.
Article 1
1.12
The Method of Analysis
To reach a conclusion about whether a tax is discriminatory, and if so, how it is to be disciplined, a
series of questions could be posed. These might include:
1.
What is the tax issue being complained about?
2.
Does a tax treaty apply, i.e. does a discriminatory tax measure fall within any of the articles
in the tax treaty?
3.
(a)
If the answer is yes, the tax treaty prevails  cannot rely on the dispute settlement
mechanism under the GATS; must use the mutual agreement procedure under the
tax treaty.
(b)
If the answer is may be  with respect to the national treatment obligation under
the GATS the competent authority will decide if the tax treaty applies to the matter;
and with respect to other issues consider the role of the relevant mutual agreement
procedure.
(c)
If the answer is no, see step 3.
Should the GATS be invoked? If it can be invoked, which is the forum from the
complainant’s perspective for dispute settlement?
(a)
If the GATS is chosen and the other party agrees that a discriminatory measure does
not fall within the scope of a tax treaty  can invoke violation of the MFN
obligation (Article II) and/or national treatment obligation (Article XVII); and
dispute settlement in the WTO (Article XXIII) is available.
23
(b)
1.13
If the GATS is chosen and parties disagree as to whether a discriminatory tax
measure falls within the scope of a tax treaty:

if a tax treaty was concluded in or after 1995  either party may unilaterally bring
the matter to the Council for Trade in Services for binding arbitration if a tax treaty
was concluded in or after 1995;

if a tax treaty existed before 1995  both parties must consent in order to bring the
matter to the Council for Trade in Services for binding arbitration and the Council
for Trade in Service establishes whether a measure falls within the tax treaty scope
or not  see steps 1 and 2.
Where to Find What Obligations And Commitments Have Been Undertaken by
Canada Or Any Other WTO Member?
1.13.1
Undertaken Commitments
1.
One way to find this information is to access the WTO on-line at www.wto.org and choose
as follows:
2.
From the menu in the upper right corner on the screen select:
Documents  Official Documents  Schedules of Concessions  and then
3.
Choose the country and select “exemptions” to check when departures from the MFN
obligation apply; or
4.
Choose the country and select “commitments” to see in what sectors and to what services
the national treatment obligation applies.
1.13.2
Case Law
Some of the cases analysing the issue of direct taxation in the context of the WTO Agreements
include the following:
1.
Canada – Certain Measures Concerning Periodicals (Complaint by the United States)
(1997), WTO Doc. WT/DS31/AB/R (Appellate Body Report).
The case concerned the relationship between the General Agreement on Tariffs and
Trade (GATT) and the GATS as well as the applicability of the GATT in the
absence of specific commitments under the GATS.
24
2.
European Communities – Regime for Importation, Sale and Distribution of Bananas
(Complaints by the United States, et. al.) (1997), WTO Doc. WT/DS27/AB/R (Appellate
Body Report).
The case interprets the meaning of the national treatment provision in the GATS.
3.
Canada – Certain Measures Affecting the Automotive Industry (Complaint by the European
Communities and Japan) (2000), WTO Doc. WT/DS139/1 and WT/DS142/1 (Appellate
Body Report).
The case analyses the meaning of the MFN obligation in the GATS and the
applicability of the GATS.
4.
United States – Tax Treatment for Foreign Sales Corporations (Complaint by the European
Communities) (2000), WTO Doc. WT/DS108/AB/R (Appellate Body Report).
The case analyses the meaning of several terms under the Agreement on Subsidies
and Countervailing Measures: (1) definition of a subsidy, (2) revenue which is
“otherwise due”, (3) export subsidy, and (4) measures taken to avoid double
taxation. The case also considers the obligation to withdraw subsidies and how
Article III of the GATT applies to requirement of domestic content.
5.
Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished
Leather (Complaint by the European Communities) (2000), WTO Doc. WT/DS155/R
(Panel Report).
The case examined the effect of tax down payments on imported goods which
increased the tax burden in the form of interest payments for imports compared to
competing domestic products.
6.
United States - Measures Affecting the Cross-Border Supply of Gambling and Betting
Services, Panel Report WT/DS285/R (10 November 2004), Appellate Body Report
WT/DS285/AB/R (7 April 2005).
The case interprets the following GATS provisions: schedules of commitments, the
market access, and the public morals exception.
25
PART II: THE NORTH AMERICAN FREE TRADE AGREEMENT
2.
General Overview of the NAFTA
The NAFTA exceeds the GATS both in scope and coverage and requires Canada, the United States
and Mexico (Parties) to state explicitly – in various annexes – if each party does not intend to
conform to the general rules governing trade in services under the NAFTA. The following five
chapters in the NAFTA regulate the cross-border provision of services:
Chapter 11 – Investment
Chapter 12 – Cross-Border Trade in Services
Chapter 13 – Telecommunications
Chapter 14 – Financial Services
Chapter 16 – Temporary Entry of Business Persons
The following annexes complement the chapters:
Annex 1212 – Land Transportation
Annex 1210.5 – Professional Services
Annex 2106 – Specific Reservations and Exceptions
2.1
What Is the NAFTA?



2.2
It is a trilateral agreement which established a free trade area between the United States of
America, Canada, and Mexico.
The Agreement came into effect on January 1, 1994.
The NAFTA consists of the framework agreement, several annexes and supplemental
agreements as well as schedules of specific commitments and reservations.
Who Are the Players?


The governments of the United States of America, Canada, and Mexico.
Investors can directly invoke provisions of the NAFTA whether on their own or on
behalf of an enterprise.
Articles 1116-1117
26
2.3
What Is a “Service”?
Before the rules under the NAFTA can be examined, it is necessary to define such terms as a
“service” and “trade in services”.
The NAFTA contains no legal definition of “services.” It only provides a definition of “Crossborder provision of a service or cross-border trade in services.”
2.4
What Is “Cross-Border Trade in Services”?
2.4.1
Chapter 12 – Cross-Border Trade in Services
The definition of services trade under the NAFTA is three-pronged, depending on the territorial
presence of the supplier and the consumer at the time of the transaction. The NAFTA
distinguishes between the following three modes of supply of a service:
Mode 1 – cross-border trade: from the territory of a Party into the territory of another Party;
Mode 2 – consumption abroad: in the territory of a Party by a person of that Party to a
person of another Party; or
Mode 3 – commercial presence: by a national of a Party in the territory of another Party, but
does not include the provision of a service in the territory of a Party by an investment, as
defined in Article 1139 in that territory.
Article 1213
2.4.2
Chapter 11 – Investment, Services and Related Matters
Chapter 11 contains several important obligations.
Chapter 11 applies to measures adopted or maintained by a Party relating to:
a. investors of another Party;
27
b. investments of investors of another Party; and
c. with respect to Articles 1106 and 1114, all investments in the territory of the Party.
Article 1101(1)
2.4.3
Chapter 16 – Temporary Entry for Business Persons
Chapter 16 regulates the temporary entry and stay of business persons on a reciprocal basis.
Each Party shall grant temporary entry to business persons who are otherwise qualified for entry
under applicable measures relating to public health and safety and national security, in accordance
with this Chapter, including the provisions of Annex 1603.
Article 1603(1)
For purposes of Chapter 16:
“Business person” means a citizen of a Party who is engaged in trade in goods, the provision of
services or the conduct of investment activities.
“Temporary entry” means entry into the territory of a Party by a business person of another Party
without the intent to establish permanent residence.
Article 1608
The NAFTA distinguishes between the following categories of business persons:
(a)
(b)
(c)
(d)
Business Visitors
Traders and Investors
Intra-Company Transferees
Professionals
Annex 1603
28
2.5
When Does the NAFTA Apply?
More specifically, when does Chapter 12, which regulates cross-border trade in services, apply?
This Chapter applies to measures adopted or maintained by a Party relating to cross-border trade
in services by service providers of another Party, including measures respecting:
(a) the production, distribution, marketing, sale and delivery of a service;
(b) the purchase or use of, of payment for, a service;
(c) the access to and use of distribution and transportation systems in connection with
the provision of a service;
(d) the presences in its territory of a service provider of another Party; and
(e) the provision of a bond or other form of financial security as a condition for the
provision of a service.
Article 1201(1)
“Service provider of a Party” means a person of a Party that seeks to provide or provides a
service.
Article 1213
What constitutes a “measure adopted or maintained by a Party relating to cross-border trade in
services” becomes an important threshold issue.
2.6
What’s In?
The Parties shall ensure that all necessary measures are taken in order to give effect to the
provisions of this Agreement, including their observance, except as otherwise provided by this
Agreements, by state and provincial governments.
Article 105
29
“Measure” includes any law, regulation, procedure, requirement or practice.
Article 201
The definition of a “measure” in Article 201 is not limited to the enumerated categories. By
analogy it seems logical to assume that a “taxation measure” is also a fairly broad category which
encompasses any tax law, regulation, procedure, requirement or practice. A practice includes a
pattern of applying or failing to apply ( or enforcing or failing to enforce) another measure. There
are, however, some exceptions.
2.7
What’s Out?
For the purposes of Chapter 21
“Taxes and taxation measures” does not include: (a) a “customs duty” as defined in Article 318
(Market Access – Definitions); or (b), (c), (d), and (e) of that definition.11
Article 2107
2.7.1
Chapter 12 – Cross-Border Trade in Services
Chapter 12, Cross-Border Trade in Services, does not apply to:
(i)
financial services, as defined in Chapter 14 (Financial Services)
(ii)
air services, including domestic and international air transportation services,
whether scheduled or non-scheduled, and related services in support of air
services, other than
Article 318 provides that “customs duty” in the context of the importation of a good does not include any (b)
antidumping or countervailing duty, (c) fee or other charge in connection with importation commensurate with the cost
of services rendered, (d) premium offered or collected on an imported good arising out of any tendering system in
respect of he administration of quantitative import restrictions, tariff rate quotas or tariff preference levels, and (e) fee
applied pursuant to section 22 of the U.S. Agricultural Adjustment Act.
11
30
(iii)
(iv)
aircraft repair and maintenance services during which an aircraft is withdrawn
from service, and
specialty air services;
(v)
procurement by a Party or a state enterprise; or
(vi)
subsidies or grants provided by a Party or a state enterprise, including governmentsupported loans, guarantees and insurance.
Article 1201(2)
2.7.2
Chapter 14 – Financial Services
Financial services are specifically addressed in Chapter 14.
2.7.3
Chapter 13 – Telecommunication Services
Telecommunication services are specifically addressed in Chapter 13.
2.7.4
Chapter 11 – Investment, Services and Related Matters
Chapter 11, Investment, Services and Related Matters, establishes the following additional
exemptions:
A Party has the right to perform exclusively the economic activities set out in Annex III and to
refuse to permit the establishment of investment in such activities.
Article 1101(3)
Nothing in Chapter 11 shall be construed to prevent a Party from providing a service or
performing a function such as law enforcement, correctional services, income security or
insurance, social security or insurance, social welfare, public education, public training, health,
and child care, in a manner that is not inconsistent with this Chapter.
Article 1101(4)
31
2.8
Taxation in Trade in Services Under the NAFTA
In order to understand how the NAFTA applies in the context of direct taxes and whether a matter
involving differential tax treatment can be resolved under the NAFTA, the key provisions of the
Agreement must be considered. The key provisions are: the Most-Favoured-Nation and national
treatment obligations and exceptions to these obligations.
The NAFTA has certain national treatment and MFN obligations with respect to cross-border
services. These obligations ensure that, in many circumstances, each NAFTA country accord
service providers of another NAFTA country similar treatment that is provided to domestic service
providers (see Article 1201). As discussed next, these obligations extend to taxation measures
under certain circumstances.
2.8.1
Standard of Treatment
The NAFTA requires that Parties accord to service providers of other Parties the better of national
treatment and MFN Treatment.
Each Party shall accord to service providers of any other Party the better of the treatment required
by Articles 1202 and 1203.
Article 1204
2.8.2
The Most-Favoured-Nation Obligation – Article 1203
Each Party shall accord to service providers of another Party treatment no less favourable than that
it accords, in like circumstances, to service providers of any other Party or of a non-Party.
Article 1203
32
2.8.3
The National Treatment Obligation – Article 1202
1. Each Party shall accord to service providers of another Party treatment no less favourable than
that it accords, in like circumstances, to its own service providers.
2. The treatment accorded by a Party under paragraph 1 means, with respect to a state or province,
treatment no less favourable than the most favourable treatment accorded, in like circumstances,
by that state or province to service providers of the Party of which it forms a part.
Article 1202
2.8.4
Exceptions to the Most-Favoured-Nation and National Treatment Obligations
The protection against discriminatory tax measures relating to cross-border services is subject to
several important qualifications.
Exception #1:
NAFTA exempts from this protection all existing tax provisions of the NAFTA countries at the
time of signing as well as any renewals or non-aggravating amendments.
Article 2103(4)(c)
As a result, any applicable tax treaty overrides the national treatment obligation under the NAFTA.
Further, obligations assumed under the MFN provisions in the NAFTA do not prevent a NAFTA
government from providing an exclusive bilateral advantage under a tax treaty to a specific treaty
partner.
Exception #2:
The NAFTA provisions do not apply to any taxation measures in existence at the time that
NAFTA came into effect (1 January 1994).
33
Article 2103(4)(d)
The NAFTA provisions do not apply to the renewal or any amendment of a tax measure that does
not decrease its conformity.
Exception #3:
The NAFTA, like the GATS, also envisages an exception for “any new taxation measure aimed at
ensuring the equitable and effective imposition or collection of taxes and that does not arbitrarily
discriminate between persons, goods or services of the Parties or arbitrarily nullify or impair
benefits accorded under those Articles.”
Article 2103(4)(g)
2.9
How Does the NAFTA Apply to Direct Tax Measures?
The principal provisions that relate to taxation are contained in Article 2103. NAFTA generally
provides that each NAFTA country shall give to service providers of another party no less
favourable treatment than is accorded to its own service providers.
Taxes on trade in cross-border services and financial services are protected to a limited extent by
the NAFTA’s national treatment provisions.
2.9.1
Income and Capital Tax Measures Affecting the Purchase and Consumption of
Cross-Border and Financial Services
Subject to any applicable tax treaty, the national treatment clause “shall apply to all taxation
measures on income, capital gains or on the capital of corporations, and to … [the asset tax under
the Asset Tax Law of Mexico, to the extent that those taxes] relate to the purchase or consumption
of particular services.”
Article 2103(4)(a)
34
It should be noted that the national treatment obligations do not cover the taxation of service
providers themselves but relate to the purchase or consumption of services. For example, the
NAFTA countries are prohibited from denying a tax benefit such as a deduction for medical
expenses to a purchaser or a consumer of a service provided by another NAFTA country if that
benefit was available with respect to the purchase or consumption of services from a domestic
service provider.
2.9.2
Other Taxes Affecting Services and Investments
The national treatment and MFN obligations contained in the investment, cross-border and
financial services chapters apply to all taxation measures other than those on income, capital,
estates, gifts, inheritances and generation-skipping transfers.
Article 2103(4)(b)
The result is that both an MFN and national treatment obligations extend to taxes such as excise
tax, provincial and state sales tax and, in Canada’s case, the Goods & Services Tax (GST), and, in
Mexico’s case, the Value-Added Tax (VAT).
2.9.3
Tax Measures Linked to Performance Requirements
The NAFTA contains a special reference to prohibitions on performance requirements made in
connection with the conferral of benefits by a government. Such benefits would include subsidies,
financing assistance and tax concessions.
No Party may condition the receipt or continued receipt of an advantage, in connection with an
investment in its territory of an investor of a Party or of a non-Party, on compliance with any of
the following requirements:
(a)
(b)
(c)
(d)
to achieve a given level or percentage of domestic content;
to purchase, use or accord a preference to goods produced in its territory, or to
purchase goods from producers in its territory;
to relate in any way the volume or value of imports to the volume or value of
exports, or goods and services while Article 1106(3) only applies to goods;
to restrict sales of goods or services in its territory by relating such sales to the
volume or value of its exports or foreign exchange earnings.
Article 1106(1)
35
Article 2103(5) has incorporated these performance prohibitions into the NAFTA tax provisions
meaning that subject to an applicable tax treaty, the prohibitions shall also apply to tax measures.
As a result, a government is prohibited from tying a tax advantage, such as a tax holiday, to the
purchase of locally produced goods or the manufacture of goods with a certain level of domestic
content.
Notwithstanding, Article 1106(4) provides that a Party is not prohibited from “conditioning an
advantage, in connection with an investment in its territory of an investor, or compliance with a
requirement to locate production, provide a service, train or employ workers, construct or expand
particular facilities or carry out research and development in its territory.” Thus, a Party may
condition the receipt of a tax advantage on the performance of services in its territory. It follows
that a NAFTA government may also condition the receipt or continued receipt of a tax benefit with
the purchase of services on the requirement that the service be provided in its territory.
2.10
The NAFTA and Tax Treaties
2.10.1 The General Rule
Nothing in this Agreement shall affect the rights and obligations of any Party under any tax
convention. In the event of any inconsistency between this Agreement and any such convention,
that convention shall prevail to the extent of inconsistency.
Article 2103(2)
This provision allows tax treaties to take precedence over the provisions in NAFTA, including tax
treaties negotiated between a NAFTA country and a non-NAFTA country. Because of this
treatment, NAFTA countries can agree through their tax treaties to impose discriminatory taxes on
each other, despite the fact that such behaviour is prohibited by NAFTA.
2.10.2 Exceptions to the Primacy of Tax Treaties
Article 2103(3) of the NAFTA contains two exceptions to the primacy of tax treaties in tax
matters. These exceptions may be of little practical effect as they relate to matters that are not
normally addressed in a tax treaty.
36
Exception #1 – Trade in Goods
Article 301 (Market Access – National Treatment) and such other provisions of this Agreement as
are necessary to give effect to that Article shall apply to taxation measures to the same extent as
does Article III of the GATT;
Article 2103(3)(a)
The national treatment obligation as it relates to the trade in goods, as proscribed in Article III of
the GATT, will have primacy over lesser obligations assumed under a tax treaty. Article
2103(3)(a) allows access to the NAFTA dispute settlement procedures in alleging discrimination
with respect to imported goods.
Exception #2 – Export Taxes
Article 314 (Market Access – Export Taxes) and Article 604 (Energy – Export Taxes) shall apply
to taxation measures.
Article 2103(3)(b)
2.11
Investment and Tax Measures
NAFTA imposes additional rules with respect to cross-border investments that may affect taxation
measures. A NAFTA country is not permitted to offer an investment advantage, including
advantages through its tax regime, tied to specific performance requirements (see Articles 2103(5)
and 1106). A NAFTA country cannot therefore create conditional tax benefits where a firm must
meet requirements such as purchasing locally produced goods, achieving specified levels of
domestic content or meeting certain export levels. Certain requirements are exempted from this
prohibition including requirements to locate production facilities in designated areas or the
necessity to undertake research and development. Moreover, tax measures are subject to NAFTA
expropriation and compensation obligations whereby the NAFTA countries have agreed not to
permit the expropriation of businesses without due process of law and payment of compensation
(see Article 1110).
37
There have been two NAFTA arbitration tribunal findings surrounding taxation measures in the
context of the provisions that protect cross-border investments. In NAFTA Chapter Eleven
Arbitration Between Pope & Talbot, Inc. and Canada, a NAFTA Tribunal found that an agreement
between Canada and the United States concerning the imposition by Canada of an export tax on
softwood lumber did not violate performance requirements or expropriation and compensation
provisions of NAFTA.12 The Tribunal noted, among other things, that while Canada’s regime,
including the export tax, deterred increased exports to the United States, this deterrence did not
constitute a prohibited “requirement” because the regime permitted unlimited exports at a higher
fee rate. The Tribunal also concluded that the regime did not qualify as an expropriation for failure
to meet the test of being an interference “sufficiently restrictive” to support a conclusion that the
property had been “taken” from its owner.
In Feldman v. Mexico, a NAFTA Tribunal found that the denial of VAT refunds to a U.S. citizen
for exports of cigarettes from Mexico did not constitute, among other things, a violation of the
expropriation and compensation requirements. A majority of the Tribunal did, however, find that
Mexico’s tax policy discriminated against the U.S. citizen’s company vis-à-vis its domestic
competitors in contravention with national treatment obligations in Article 1102. As a remedy for
the discrimination, the tribunal awarded the taxpayer approximately US$1.6 million in damages for
the lost tax rebates.13 Because Ottawa was the seat of arbitration, Mexico brought an application to
set aside the NAFTA award before the Ontario Superior Court of Justice. In upholding the award,
the Court expressed to the need for a high level of deference to the expert Tribunal’s findings.14
2.12
Taxation in Trade in Goods
Article (3)(a) of NAFTA indicates that the national treatment obligations respecting goods set out
in Article 301 of NAFTA apply to taxation measures to the same extent as Article III of the GATT.
As discussed below, the GATT provision states that imported goods shall not be subject, directly
or indirectly, to internal taxes in excess of those applied to similar domestic products. This GATT
provision has commonly been interpreted to cover only indirect taxes such as sales taxes and not to
apply to direct taxes such as corporate income taxes (see the discussion below). The NAFTA
provisions will hence generally affect taxes that are applied to goods such as sales taxes, excise
taxes and value-added taxes (for example, the GST in Canada and the Value-Added Tax in
Mexico).
Importantly, Article 301(2) extends non-discrimination requirements to states and provincial
governments. Under Article 2103(4)(d), the NAFTA national treatment requirements do not
extend to any non-conforming tax measures that are currently in force or to measures that continue
or amend the initial measure in such a way as not to decrease the conformity.
See International Trade Canada, Dispute Settlement NAFTA – Chapter 11 – Investment, “NAFTA Chapter Eleven
Arbitration between Pope & Talbot Inc. and Canada” (26 June 2000).
13
See Feldman v. Mexico (2002), ARB(AF)/99/1.
14
See Mexico v. Karpa [2003] O.J. No. 5070 (S.C.J.). The decision was subsequently upheld by the Ontario Court of
Appeal (see Mexico v. Karpa [2005] O.J. No. 16 (C.A.).
12
38
Under Article 2103(3)(b), the NAFTA countries are prohibited from imposing export taxes on the
export of goods to another NAFTA country in most circumstances. A NAFTA country is not
permitted to impose a tax on the export of goods to another NAFTA country unless the same tax is
imposed on the good when destined for domestic consumption and when exported to all NAFTA
countries. Although export taxes are not prohibited outright, the requirement that a corresponding
tax be imposed on goods destined for domestic consumption defeats their purpose (see Article 214
of NAFTA). An exception to the general rule regarding export taxes permits Mexico to adopt
export charges for up to one year on food items in conjunction with government stabilization plans
designed to keep domestic prices below world prices. The exception allows Mexico to relieve
critical food shortages by ensuring that the food products stay within Mexico.
39
PART III: THE GATS OR THE NAFTA?
To reach a conclusion about whether a tax is discriminatory, and if so, whether it is more
advantageous to challenge a discriminatory tax measure under the GATS or NAFTA, a series of
questions could be posed. These might include:
1. What is the tax issue being complained about?
2. Does a tax treaty apply?

If the answer is yes, the tax treaty prevails:
o cannot rely on the dispute settlement mechanism under the GATS  use the
mutual agreement procedure under the tax treaty;
o cannot rely on the dispute settlement mechanism under the NAFTA (but see
caveat in Section 3 (c) below)  use the mutual agreement procedure under the
tax treaty.

If the answer is may be:
o with respect to the national treatment obligation under the GATS and/or
NAFTA the competent authority will decide if the tax treaty applies to the
matter.
o with respect to other issues consider the role of the relevant mutual agreement
procedure.

If the answer is no, see step 3.
3. Should the GATS or NAFTA be invoked? If either can be invoked, which is the forum
from the complainant’s perspective for dispute settlement?

If the GATS is chosen:
(a) can argue violation of the national treatment obligation (Article XVII) not covered
in a tax treaty and dispute settlement in the WTO (Article XXIII) is available.

If the NAFTA is chosen:
40
(b) can argue violation of the national treatment obligation in the context of matters not
covered in a tax treaty, subject to the proviso that nothing in the NAFTA shall affect the
rights and obligations of any party under a tax treaty, and dispute resolution under the
NAFTA is available.
(c) despite the existence of a tax treaty between Canada and another NAFTA party, an
income tax imposed by the provincial, state, or local government in violation of the
national treatment obligation would, to the extent that such obligation are binding on
sub-federal level, be subject to the NAFTA, assuming that tax was neither permitted
under Article 2103(4)(c) or 2103(4)(g).
41
PART IV: EXAMPLES OF DIFFERENCES IN TAX TREATMENT IN
CANADA AND THE UNITED STATES THAT MAY NEGATIEVLY IMPACT A
SERVICE PROVIDER
Some of the examples of discriminatory tax provisions or treatment in Canada and the United
States are presented below.
Example 1
The Canadian government does not impose an income tax on $14,000 of employment income
earned in Canada by a truck driver from Mexico and paid by a Canadian employer. The driver is
in Canada for approximately 6 weeks each summer. The tax is imposed on $11,000 of
employment income earned by a driver from the U.S. in similar circumstances. Can the U.S.
government complain that tax discrimination has occurred? The answer is no. Both the NAFTA
and the GATS provide for the primacy of tax treaties.
Pursuant to Article 14(2) of the Mexico-Canada Treaty, a resident of Mexico can earn income from
employment exercised in Canada without paying Canadian tax, as long as the employee is present
in Canada in the aggregate for less than 183 days in any twelve month period commencing or
ending in the calendar year concerned and either the salary or wages are paid by or on behalf of a
Mexican resident (i.e. the trucking company) that doesn't carry on business in Canada through a
permanent establishment, or the remuneration earned in Canada totals less than CDN $16,000 in
the calendar year concerned.
In this case the employment income earned in Canada by a Mexican truck driver does not exceed
the $16,000 threshold, and the driver is, therefore, exempt under the tax treaty.
In the case of remuneration earned by the U.S. trucking employee in Canada, the exemption from
Canadian taxation is $10,000.
In the above example, assume the U.S. driver is employed by a U.S. resident corporation and
makes frequent trips across the Canada-U.S. border, resulting in a total stay in Canada that exceeds
the 183 day exemption allowed under the Canada-U.S. Treaty. His exemption from Canadian tax
remains straightforward. Pursuant to Article 15(3) of the Canada-U.S. Treaty, remuneration
derived by a resident of the U.S. in respect to an employment regularly exercised in more than one
State (i.e. country) on a ship, aircraft, motor vehicle or train operated by a resident of the U.S. is
taxable only in the U.S. Thus the employment income would not be taxable in Canada. The same
is not true of a Mexican driver in similar circumstances. Under the Canada-Mexico Treaty,
remuneration in respect of employment exercised in the other Contracting State is exempt only if
exercised aboard a ship or aircraft in international traffic. There is no exemption for employment
exercised aboard a motor vehicle or train to parallel the exemption found in the Canada-U.S.
Treaty.
42
Example 2
Francecorps Conventions Inc. (Francecorp) organizes conventions, meetings and other such events
at its facility in Paris. Francecorp’s bid to host the next annual meeting of U.S. Corp., a large U.S.
corporation has been met with stiff resistance by U.S. Corp., who states a clear preference for
holding it’s meeting in Banff, Alberta. According to U.S. Corp. the costs of the meeting, if held in
Banff, are fully deductible, but will not be deductible if the meeting is held in France.
Can it be argued that the U.S. has violated its MFN obligation under the WTO by refusing to
permit the deduction of meeting expenses if the convention is held in France? The answer is no.
The matter is covered by the terms of a tax treaty. Specifically, Article 24(9) of the Canada-U.S.
Treaty provides for the deduction of convention expenses to the same extent that such expenses
would be deductible if the convention were held in the U.S. Because the WTO expressly permits
the violation of the MFN obligation if the matter is addressed in a tax treaty, there is no basis for
complaint by France. Francecorp will have to adjust its pricing if it wants to win the contract.
What if there was not a specific exemption in the Canada-U.S. tax treaty with respect to the
deductibility of convention expenses? Can France now argue that the U.S. has violated its MFN
obligation under the WTO? It would appear that the MFN obligation in the GATS has been
violated if the difference in treatment is not the result of a tax treaty or other tax agreement.
Example 3
Catherine, a Canadian, and Ursula, an American, are both on the Board of Directors of Mexicorp.
Each receives the equivalent of $50,000 U.S. per annum for their services. Director’s meetings,
which are held quarterly, are generally held by video conferencing, with Catherine and Ursula
remaining at home. Director’s meetings are also occasionally held in Florida. Catherine discovers
that she is being taxed on her director’s fees in Mexico. Ursula is not. Assuming a specific
exemption was not claimed under the GATS, has Mexico violated its MFN obligation?
Again the answer is no. Article 15 of the U.S.-Mexico treaty permits Mexico to tax Director’s fees
only if the services are performed outside the U.S. As the services are performed from within the
U.S. no tax is exigible. In contrast, Article 16 of the Mexico-Canada Treaty allows the taxation of
payments derived by a resident of a Contracting State in that resident’s capacity as a member of a
Board of Directors of a corporation that is a resident of the other Contracting State. Thus Mexico
is entitled to rely on the tax treaty to avoid its MFN obligation.
The above three examples provide factual and obvious illustrations of how tax discrimination is
permitted in the NAFTA block under a tax treaty despite MFN obligations assumed under a trade
agreement. Sometimes the answers to the questions “Has tax discrimination occurred?” and if so,
“Does the tax treaty apply?” are not as obvious. Consider the following example, which is purely
hypothetical.
43
Example 4
Assume a new Goods and Services Tax (GST) surcharge of 2% is proposed by the Government of
Canada that will apply to any income earned by a non-resident from the provision of services in
Canada if their income from such services earned in Canada exceeded $50,000 in the prior year.
Susan, a U.S. resident carrying on business and providing consulting services in Canada, is
informed that she is obligated to collect and remit this additional tax. Has the national treatment
obligation under the NAFTA been violated? The answer is - not likely.
Subject to a tax treaty, the national treatment obligation under the NAFTA,15 (and the GATS if
applicable),16 prohibits governments from using taxes such as sales taxes, excise taxes and VAT
taxes to discriminate against cross-border service providers or, in the case of the NAFTA, their
investments. Ordinarily this would include a tax like the GST. However, the Canada-U.S. Treaty
appears to selectively over-ride in the case of a GST dispute involving the national treatment
obligation. Specifically, the non-discrimination article in that tax treaty applies to all taxes
imposed by a Contracting Party. The issue is, “Does the non-discrimination article in the tax treaty
apply to the GST surcharge imposed on Susan, and if so, what is the result?”
The non-discrimination obligation under the Canada-U.S. Treaty clearly applies if Susan is an U.S.
citizen who is resident in Canada.17 The tax treaty does not, however, impose a national treatment
obligation with respect to an U.S. citizen who is not resident in Canada or to a corporation
controlled by U.S. citizens that is resident in Canada. Both of these groups are provided with a
form of MFN18 but not national treatment under the tax treaty. Thus, one argument is that the tax
treaty does not apply to Susan and therefore there is no restriction to prevent a dispute about the
discriminatory imposition of GST on an U.S. service provider who is not a resident of Canada from
being brought under the NAFTA. An alternate argument is found both in the wording of Article
25(2) of the tax treaty, which addresses the treatment of non-resident citizens, and in the wording
of Article 2103(2) of the NAFTA. The latter provides that nothing in the NAFTA “shall affect the
rights and obligations of any Party under any tax convention. In the event of any inconsistency…
the convention shall prevail”. Since Susan’s rights as a non-resident Citizen and the Government
of Canada’s obligations to her appear to be well-established under the tax treaty, this provision
may end Susan’s legal complaint about tax discrimination under the NAFTA. The reasoning
would be that since protection was not provided under the tax treaty for a non-resident citizen of
the other Contracting State, such a right should not arise under a trade agreement. Put differently,
inferring a right under a trade agreement in these circumstances would affect the rights and
obligations of the parties under a tax treaty contrary to Article 2103(2) of the NAFTA.
The same argument that a tax treaty restricts a possible NAFTA claim cannot be made under the
Mexico-Canada Treaty. The non-discrimination article in that treaty provides national treatment to
nationals of the other State in the same circumstances. This would presumably apply to a Mexican
national who is a tax resident of Canada. Unlike the Canada-U.S. treaty, however, this treaty is
15
The NAFTA Article 2102.
The GATS Article XVII. Assuming a commitment has been by the country in that sector in their Schedule of
commitments.
17
Canada-U.S. Treaty Article 25(1).
18
Canada-U.S. Treaty Article 25(2) and (5). The scope of the MFN is very limited. For example, a citizen of the U.S.
living in the UK gets the same treaty relief as a citizen of the UK living in the UK in the same circumstances.
16
44
silent about the required treatment of a Mexican Service provider who is a non-resident of Canada.
Again the question arises – if the tax treaty is silent about whether national treatment is required, is
a remedy under the NAFTA available, or must one conclude that there is no obligation to provide
either MFN or national treatment to non-resident nationals of the other State in respect of direct tax
matters who are not in the same circumstances?
Is there a remedy for Susan’s plight under the GATS? Again, the answer is likely not. At issue
will be the meaning of the words in the Third protocol to the Canada-U.S. Treaty, which provide
that for the purposes of the GATS, Canada and the U.S. agree that a measure will fall under the tax
treaty if the measure relates to a tax to which Article 25 applies (non-discrimination). This dispute
about the discriminatory imposition of the GST matter relates to Article 25.19 The obligation to
provide national treatment and thus the protection against discrimination is simply not provided.
The argument against a successful claim under the GATS is further reinforced by the wording of
Article XXII:3. It provides that a Member may not invoke the national treatment article with
respect to “a measure of another Member that falls within the “scope” of an international
agreement between them relating to the avoidance of double taxation.” As the issue of national
treatment is addressed in Article 25 of the tax treaty, the wording of Article XXII:3 may preclude a
complaint. At issue will be how Article XXII:3 is interpreted, and in particular, what is considered
to fall within the scope of a tax treaty.
In summary, notwithstanding that Article 2 of the Canada-U.S. Treaty restricts the application of
the treaty provisions to taxes covered under the Income Tax Act in the case of Canada, and the
Internal Revenue Code of 1986 in the case of the U.S., (and certain other identified taxes), the
scope of the non-discrimination article in the tax treaty is crafted to be considerably broader. If
interpreted broadly, and in conjunction with Article XXII (3) of GATS, an argument can be made
that all taxes affecting trade in services that are imposed by the U.S. or Canada must be resolved
under the tax treaty as the issue of non-discrimination with respect to all taxes is addressed under
the tax treaty.
In contrast, assume the complainant is a service provider from Mexico. Under the Mexico-Canada
Treaty, income taxes, but not the GST, are subject to the treaty.20 In consequence, in similar
circumstances, a dispute about the discriminatory imposition of the GST would be resolved under
the national treatment provisions in the NAFTA (or the GATS) and not under the Mexico-Canada
Treaty.
As can be seen from this example, while one NAFTA partner may have no remedy or may be
confined to the mutual agreement procedure mechanism in the tax treaty, another similarly situated
NAFTA service provider may have recourse to the NAFTA dispute resolution mechanisms and
may have recourse to the WTO dispute resolution procedures.21 A careful examination of each of
19
Canada-U.S. Treaty Article 25(10).
Mexico-Canada Treaty Article 2(3), which states that the treaty applies only to taxes imposed under the Income Tax
Act in the case of Canada. The GST is imposed under the Excise Tax Act (R.S. 1985) c. E-15.
21
For example, the non-discrimination article in the U.S.-Mexico Treaty applies to all taxes including those imposed
by political subdivisions and local authorities. To the extent that the tax treaty prevails under an international trade
agreement, the treaty dispute resolution provisions apply. In contrast, in the tax treaties between the U.S. and Canada
and Canada and Mexico the non-discrimination provisions bind only the federal governments. Disputes about taxes
20
45
the NAFTA tax treaties is therefore required to determine precisely what obligations are assumed
under the tax treaty and how these relate to the obligations assumed by the particular country under
the NAFTA and the GATS. The answer to both questions is preliminary to a determination of
whether discrimination has occurred and, if so, what potential remedy is available. Consider the
following two examples.
Example 5
Assume the Province of Ontario (Canada) proposes not to permit a deduction in calculating taxable
income for Ontario tax purposes for amounts paid to non-residents (but not residents) of Canada
that exceed $100,000 per annum. An Ontario client denies a U.S. engineer, earning income of
excess of $100,000 in Ontario, further work The U.S. government seeks to challenge the Ontario
tax as a violation of the national treatment obligation under the NAFTA. Is this the appropriate
dispute resolution forum or will the Canada-US Treaty restrict any available remedy to the
competent authority procedure under the tax treaty? The answer is yes; NAFTA is the appropriate
forum despite the tax treaty.
The non-discrimination article in the Canada-U.S. Treaty applies only to tax levied by the
Government of Canada. Provincial taxes are not covered by the tax treaty, except for the limited
purpose of defining the scope of the obligation of the other Contracting State to provide relief from
double taxation.22 Thus, there is no restriction, based on the argument that the matter is covered by
a tax treaty, to prevent a dispute about a discriminatory provincial income tax from being brought
under the NAFTA. Further, the NAFTA imposes a national treatment obligation as the tax relates
to the purchase or consumption of cross border services.23 Thus there is a clear argument that the
national treatment obligation has been violated.
Can the U.S. Government argue there has been a national treatment violation under the GATS,
assuming a commitment by Canada in this sector? The answer appears to be no. Article 26(7) of
the Canada-U.S. Treaty addresses the issue of the deductibility of expenses and provides that in
determining the taxable profits of a resident, disbursements paid to a resident of the other
contracting state shall be deductible under the same conditions as if they had been paid to a
resident of the first mentioned State. Thus the matter must be addressed under the tax treaty.
Assuming the engineer is from Mexico, can the Mexican Government argue there has been a
national treatment violation under the GATS? The answer is maybe. Whether or not a claim can
be made under the WTO dispute resolution procedures will depend on the specific commitments
and exemptions claimed by Canada in its schedule to the GATS.24 Assuming a commitment by
Canada to provide national treatment, the issue will again be based on the interaction between
imposed by political subdivisions or local authorities are therefore not part of the exclusive jurisdiction granted to tax
agreements in resolving disputes.
22
Article 24(7) Canada-U.S. Treaty.
23
The same is true if the engineer were from Mexico. The Mexico-Canada Treaty applies only to taxes imposed by the
Government of Canada under the Income Tax Act and not to income taxes imposed by the provinces. Thus the
Mexican government can also challenge the tax as being in violation of Canada’s national treatment obligation under
the NAFTA.
24
See discussion supra note 14.
46
Article XXII(3) of the GATS and the Canada-Mexico Treaty. Specifically, the issue is whether the
matter falls with the ‘scope’ of a tax treaty, given the non-discrimination article and interpretive
rules in the Canada-Mexico Treaty.25
The tax treaty specifically addresses the right of a national who is a resident, in the context of tax
requirements “that are other or more burdensome”. Thus it is arguable that all aspects of the
national treatment obligation fall within the scope of the Canada-Mexico Treaty. The other view is
that the national treatment obligation in respect of a national who is a non-resident does not fall
within the scope of a tax treaty and thus access to the WTO dispute resolution procedures is
available.
Example 6
In contrast, in the above example if the deduction was not permitted by the State of California with
respect to the services provided by an engineer from Mexico in California, the non-discrimination
Article of the U.S.-Mexico treaty would clearly apply.26 Thus access to the NAFTA and the WTO
dispute resolution mechanisms would be denied. This conclusion follows from the specific
wording of the U.S.-Mexico Treaty, which states that it applies to all taxes imposed, including
those imposed by political subdivisions. As a result, it would appear that any dispute about a
California tax measure that impacts the deductibility of non-resident fees earned in California must
be resolved through the competent authority procedure under the U.S.-Mexico Treaty.
25
The OECD commentary to Article 25 of the tax treaty at para 44.5 includes the following discussion of the scope of
a tax treaty. …”the phrase” falls within the scope” is inherently ambiguous, as indicated by the inclusion in paragraph
3 of Article XXII of the GATS both an arbitration procedure and a clause exempting pre-existing conventions from its
application in order to deal with disagreements related to its meaning. While it seems clear that a country could not
argue in good faith that a measure relating to a tax to which no provision of a tax convention applied fell within the
scope of that convention, it is unclear whether the phrase covers all measure that relate to taxes that are covered by all
or only some provisions of the tax convention.”
26
See Article 25 paras. (4) and (6).
47
PART V: OUTSTANDING ISSUES UNDER THE GATS
Several issues remain outstanding under the GATS. For the purposes of this Manual the following
issues require attention: subsidisation in trade in services, the relationship between the GATS and
the scope of the non-discrimination clause in tax treaties, and export taxes.
1.
Subsidies in Trade in Services
Presently the GATS does not discipline subsidies in trade in services. The GATS provides as
follows:
Members recognize that, in certain circumstances, subsidies may have distortive effects on trade in
services. Members shall enter into negotiations with a view to developing the necessary
disciplines to avoid such trade distortive effects … For the purpose of such negotiations, Members
shall exchange information concerning all subsidies related to trade in services that they provide to
their domestic service suppliers.
Article XV:1
A footnote to Article XV:1 clarifies that a future work programme shall determine how, and in
what time frame, negotiations on such multilateral disciplines will be conducted.
Any Member which considers that it is adversely affected by a subsidy of another Member may
request consultation with that Member on such matters. Such requests shall be accorded
sympathetic consideration.
Article XV:2
Some of the sources of information about subsidies in trade in services include the following:
(a)
The Council for Trade in Services maintains a list of voluntary notifications of some of the
subsidies in trade in services by certain WTO Members.
(b)
The Trade Policy Review Body (TPRB) conducts regular evaluation of trade policies of the
WTO Members in order to promote greater transparency of trade policies and practices.
TPRB’s reports often contain information on subsidies in trade in services.
48
2.
Non-Discrimination Articles in Tax Treaties
Non-discrimination articles in tax treaties are limited in scope. Certain issues remain beyond the
reach of both the GATS and the non-discrimination article. To the extent that such discrimination
is not addressed in a tax treaty, it will be subject to the national treatment obligation in the GATS.
At issue will be whether the absence of a national treatment obligation under the tax treaty
provides the complete answer to the question of whether national treatment is required.
In the context of federal states, tax treaties are binding at the federal level, thus not binding
provincial, state or municipal authorities. Despite the existence of a tax treaty between two federal
states, an income tax imposed at the provincial or state level in violation of the national treatment
obligation would, to the extent that such obligations are binding on states or provinces,27 be subject
to the GATS, assuming the tax does not fall within any of the exceptions outlined in Part I of the
Manual.
3.
Export Taxes
Unlike the GATT, which seeks to discipline export restrictions in Article XI, the GATS provides
no discipline over export direct taxes. Thus, nationals of the country who wish to provide crossborder services can be treated less favourably than their domestic counterparts rendering similar
services. More burdensome direct tax treatment of cross-border service providers becomes
particularly noticeable in federal states because export taxes can be introduced not only at the
federal but at the sub-federal level as well.
Article I of the GATS provides that “measures by Members” means measures taken by:
(i)
central, regional or local governments and authorities;
(ii)
non-governmental bodies in the exercise of powers delegated by central, regional or local governments or
authorities;
In fulfilling its obligations and commitments under the Agreement, each Member shall take such reasonable measures
as may be available to it to ensure their observance by regional and local governments and authorities and nongovernmental bodies within its territory.
27
49
PART VI: OUTSTANDING ISSUES UNDER THE NAFTA IN TRADE IN SERVICES
Certain issues remain outstanding under the NAFTA as well. The issue of the non-discrimination
articles in the NAFTA tax treaties and export taxes are two of such matters.
1.
Non-Discrimination Articles in Tax Treaties
The non-discrimination article in a tax treaty may not address certain aspects of discrimination
against foreign service providers resulting from a Party’s grant of a tax relief or a reduction in
income tax to consumers of that service. To the extent that such discrimination is not addressed in
a tax treaty, it will be subject to the national treatment obligation in the NAFTA. At issue will be
whether the absence of a national treatment obligation under the tax treaty provides the complete
answer to the question of whether national treatment is required. See example 4 in Part IV of the
Manual.
None of the tax treaties between Canada and the other NAFTA parties binds states, provinces, or
local authorities with respect to the taxes they choose to impose. Despite the existence of a tax
treaty between Canada and another NAFTA party, an income tax imposed by a province of Canada
(or a state of the U.S. or of Mexico) in violation of the national treatment obligation would, to the
extent that such obligations are binding on states or provinces,28 be subject to the NAFTA,
assuming the tax was neither permitted under a grandfather clause, Article 2103(4)(c), nor allowed
pursuant to Article 2103(4)(g) as an “equitable and effective imposition or collection of taxes.”
2.
Export Taxes
Unlike the GATT, which seeks to discipline export restrictions in Article XI, the NAFTA provides
no discipline over export direct taxes. Thus, nationals of the country who wish to provide crossborder services can be treated less favourably than their domestic counterparts rendering similar
services. More burdensome direct tax treatment of cross-border service providers becomes
particularly noticeable in federal states because export taxes can be introduced not only at the
federal but at the sub-federal level as well.
Article 105 of the NAFTA provides that “The Parties shall ensure that all necessary measures are taken in order to
give effect to the provisions of the Agreement … by state and provincial governments.”
28
50
PART VII: TRADE WITH THE EUROPEAN UNION
The European Union (EU) is a very important trade partner for Canada, and even more important
as a source and destination of direct investment.29 Canada’s primary direct taxation relationship
with the EU arises under the multilateral WTO Agreement. With respect to the EU Member
States, direct taxation is governed both by the WTO agreement and by the bilateral tax treaties
between Canada and each Member State. Canada and the EU have launched negotiations for a
new Trade and Investment Enhancement Agreement (TIEA) that will advance trade in services,
investment and other aspects of the EU-Canada relationship. In May 2006 these negotiations were
put on hold pending the conclusion of the World Trade Organization Doha Round and are still
suspended as of September 2006.
Articles 56-58 of the EC Treaty30 guarantee the free movement of capital. The interpretation and
application of Articles 56-58 are a matter determined by EU law and, to a lesser extent, the
national laws of the EU Member States, so that Canadian law has little to say about it. To date
Canadian undertakings and investors have not initiated legal proceedings pursuant to EC Treaty
Art. 56, and there is no known published Canadian scholarly or official discussion of the
implications of this provision for direct taxation between Canada and EU Member States.
Since most intra-EU challenges to direct tax laws of the Member States have been initiated by
private taxpayers in national courts, the fact that Article 56 has direct effect31 gives Canadian
companies and individuals (and EU investors in Canada) access to EU legal rights of potentially
great significance. However, an anticipated difference in the way third country direct taxation
jurisprudence will evolve is that the European Commission is not likely to lend its support to such
challenges to the same degree it has on behalf of EU taxpayers, or to take independent action to
eliminate restrictions on free movement of capital between the EU and third countries. On the
other hand, the Commission’s active enforcement of Article 56 in intra-EU direct taxation
matters32 will undoubtedly bring attention to restrictions on capital movements to and from third
countries as well.
Canadian investors in the EU and EU investors in Canada will be able to take as extensive
advantage of Article 56 as investors from any other third country, (with the exception of the EEA
members, Iceland, Norway and Liechtenstein), as the case law so far seems to treat the provision as
equally applicable to all third countries. Even where a special relationship exists between the EU
29
Direct investment by Canadians in the EU has increased more than fourfold in recent years, from $24 billion in 1993
to $101 billion in 200329 and this figure is undoubtedly higher since the accession of the ten new Member States,
particularly as Hungary is among the five EU Member States in which Canadian investment is concentrated (the others
are the U.K., Ireland France and the Netherlands). According to the Canadian Department of Foreign Affairs and
International Trade, investment by EU undertakings in Canada increased from $35 billion in 1992 to $102 billion in
2002, and two way direct investment to $214 billion in 2005. See Lemaire/Cai, Lost over the Atlantic? The CanadaEU Trade and Investment Relationship, Conference Board of Canada (2006), p. i .
30
Treaty establishing the European Community (consolidated version), [2002] O.J. 325/33.
31
ECJ 14 December 1995, Sanz de Lera C-163/94, C-165/94, C-250/94 [1995] ECR I-04821.
32
Such as in case ECJ 4 March 2004, C-334/02 Commission v. France [2004] ECR I-7063.
51
and the third country under, for example, a free trade or association agreement, the third country
litigant usually relies solely on Article 56.33
It seems unlikely, notwithstanding the clear words of Article 56, that the ECJ will interpret and
apply the prohibition on restrictions on capital movements between the EU and third countries as
sweepingly as it has, until recently, within the EU. The fact that the extension of the prohibition on
restrictions on capital movements to and from third countries is unilateral and applies equally to all
third countries, regardless of the existence (or lack of) other bilateral or multilateral commitments
between them and EU Member States, suggests that a different context and purpose will inform the
interpretation of this provision by the ECJ.
From a Canadian perspective, the dominant instrument in regulating Canadian and EU Member
State relations in direct tax matters is the bilateral tax treaty. These offer widely differing
withholding tax rates and protections against non-discrimination. Any standardization of these
obligations to EU Member States must come in bilateral negotiations, as the EU has no
competence in this area, and it is unlikely that unanimity could be achieved to give it competence
to negotiate a tax treaty on behalf of all 25 Member States. It will certainly not be found under the
WTO agreement. Canadians can hope that discrimination in free movement of capital between EU
Member States and Canada will be improved through the unilateral obligations imposed on EU
Member States under Article 56 as interpreted by the ECJ. Some comfort may also be taken from
the ongoing negotiations under the TIEA.
33
In Sanz de Lera, supra note 6, one of the joined cases, ECJ 14 December 1995, C-250/94 [1995], involved a Turkish
national transporting currency to Turkey, but the Association Agreement between the EC and Turkey was not
mentioned. In Fidium Finanz the Swiss company does not invoke any of the bilateral free movement agreements
between the Swiss Confederation and the EU, although Advocate General Stix-Hackl makes the observation at para.
42 of her Opinion that the Agreement between the EC and the Swiss Confederation on the free movement of persons
would not affect the outcome of the case. Opinion 16 March 2006, C-452/04 Fidium Finanz [2006].
52
PART VIII: CANADIAN TAX TREATY PRACTICE
With little regulation under the WTO, the dominant instrument in regulating direct tax matters
from a Canadian perspective is tax treaties. These bind the Government of Canada only and not
the Canadian provinces or territories. As discussed above, to the extent that direct tax matters have
not been relegated to a tax treaty, the WTO provisions respecting NT and MFN apply to tax
legislation and measures taken by these sub-national governments.
The same can also be said for capital taxes imposed by the Government of Canada, which imposes
both income and capital taxes under the Income Tax Act. By way of an example, only six of the
24 tax treaties concluded with the European Union Member States appear to apply to these capital
taxes. The remainder apply only to income taxes imposed by the Government of Canada. Nondiscrimination issues relating to capital taxes therefore, also remain subject to WTO provisions
under the other 18 treaties.34
Such differences in treatment among treaty partners are not unusual from a Canadian perspective.
Each of the tax treaties is distinct and each varies widely in matters of withholding tax, definitions
and other critical features.
34
The treaties in which capital taxes are included are with Latvia, Lithuania, Luxembourg, Norway, the Slovak
Republic and Slovenia.
53
PART IX: NATIONAL AND LOCAL GOVERNMENT OBLIGATIONS
In federal states, like Canada, federal governments usually cannot force subnational governments
to adopt, amend, and implement measures in any particular area. Nevertheless, the GATS provides
that the federal government shall take such reasonable measures to ensure observance of the GATS
by regional and local government and authorities and non-governmental bodies within its
territory.35 Similarly, the NAFTA requires the parties to ensure that all necessary measures are
taken in order to give effect to the NAFTA’s provisions.36 In the event of a breach of an obligation
under the GATS or NAFTA by a province or territory it is the federal government that will be held
responsible. Some of the areas where tension between obligations undertaken by the federal
government and measures adopted by subnational and local governments, which can create barriers
to free movement, include taxation, subsidisation, and measures taken by governmental bodies,
including such issues as government procurement, state enterprises, monopolies and exclusive
service suppliers.
35
36
Article I:3(a).
Article 105.
54
Appendix A: GATS
Part I of Appendix A reproduces key provisions of the GATS for the purposes of direct taxation.
Part II of Appendix A refers to additional sources of information about the GATS.
Part I – Key Provisions of the General Agreement on Trade in Services
Article II
Most-Favoured-Nation Treatment
1.
With respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any other Member treatment
no less favourable than that it accords to like services and service suppliers of any other country.
2.
A Member may maintain a measure inconsistent with paragraph 1 provided that
such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions.
3.
The provisions of this Agreement shall not be so construed as to prevent any
Member from conferring or according advantages to adjacent countries in order to facilitate
exchanges limited to contiguous frontier zones of services that are both locally produced and
consumed.
Article XVII
National Treatment
1.
In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service suppliers of any
other Member, in respect of all measures affecting the supply of services, treatment no less
favourable than that it accords to its own like services and service suppliers.37
2.
A Member may meet the requirement of paragraph 1 by according to services and
service suppliers of any other Member, either formally identical treatment or formally different
treatment to that it accords to its own like services and service suppliers.
3.
Formally identical or formally different treatment shall be considered to be less
favourable if it modifies the conditions of competition in favour of services or service suppliers of
the Member compared to like services or service suppliers of any other Member.
37
Specific commitments assumed under this Article shall not be construed to require any Member to compensate for
any inherent competitive disadvantages which result from the foreign character of the relevant services or service
suppliers.
55
Article XIV
General Exceptions
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 like conditions prevail,
or a disguised restriction on trade in services, nothing in this Agreement shall be construed to
prevent the adoption or enforcement by any Member of measures:
(a)
necessary to protect public morals or to maintain public order;38
(b)
necessary to protect human, animal or plant life or health;
(c)
necessary to secure compliance with laws or regulations which are not inconsistent
with the provisions of this Agreement including those relating to:
(i)
the prevention of deceptive and fraudulent practices or to deal with the
effects of a default on services contracts;
(ii)
the protection of the privacy of individuals in relation to the processing and
dissemination of personal data and the protection of confidentiality of
individual records and accounts;
(iii)
safety;
(d)
inconsistent with Article XVII, provided that the difference in treatment is aimed at
ensuring the equitable or effective39 imposition or collection of direct taxes in
respect of services or service suppliers of other Members;
(e)
inconsistent with Article II, provided that the difference in treatment is the result of
an agreement on the avoidance of double taxation or provisions on the avoidance of
38
The public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of
the fundamental interests of society.
39
Measures that are aimed at ensuring the equitable or effective imposition or collection of direct taxes include
measures taken by a Member under its taxation system which:
(i)
apply to non-resident service suppliers in recognition of the fact that the tax obligation of non-residents is
determined with respect to taxable items sourced or located in the Member's territory; or
(ii)
apply to non-residents in order to ensure the imposition or collection of taxes in the Member's territory; or
(iii)
apply to non-residents or residents in order to prevent the avoidance or evasion of taxes, including compliance
measures; or
(iv)
apply to consumers of services supplied in or from the territory of another Member in order to ensure the
imposition or collection of taxes on such consumers derived from sources in the Member's territory; or
(v)
distinguish service suppliers subject to tax on worldwide taxable items from other service suppliers, in
recognition of the difference in the nature of the tax base between them; or
(vi)
determine, allocate or apportion income, profit, gain, loss, deduction or credit of resident persons or branches,
or between related persons or branches of the same person, in order to safeguard the Member's tax base.
Tax terms or concepts in paragraph (d) of Article XIV and in this footnote are determined according to tax definitions
and concepts, or equivalent or similar definitions and concepts, under the domestic law of the Member taking the
measure.
56
double taxation in any other international agreement or arrangement by which the
Member is bound.
Article XIVbis
Security Exceptions
1.
Nothing in this Agreement shall be construed:
(a)
to require any Member to furnish any information, the disclosure of which it
considers contrary to its essential security interests; or
(b)
to prevent any Member from taking any action which it considers necessary for the
protection of its essential security interests:
(c)
(i)
relating to the supply of services as carried out directly or indirectly for the
purpose of provisioning a military establishment;
(ii)
relating to fissionable and fissionable materials or the materials from which
they are derived;
(iii)
taken in time of war or other emergency in international relations; or
to prevent any Member from taking any action in pursuance of its obligations under
the United Nations Charter for the maintenance of international peace and security.
2.
The Council for Trade in Services shall be informed to the fullest extent possible of
measures taken under paragraphs 1(b) and (c) and of their termination.
Article XXIII
Dispute Settlement and Enforcement
1.
If any Member should consider that any other Member fails to carry out its
obligations or specific commitments under this Agreement, it may with a view to reaching a
mutually satisfactory resolution of the matter have recourse to the DSU.
2.
If the DSB considers that the circumstances are serious enough to justify such
action, it may authorize a Member or Members to suspend the application to any other Member or
Members of obligations and specific commitments in accordance with Article 22 of the DSU.
3.
If any Member considers that any benefit it could reasonably have expected to
accrue to it under a specific commitment of another Member under Part III of this Agreement is
being nullified or impaired as a result of the application of any measure which does not conflict
with the provisions of this Agreement, it may have recourse to the DSU. If the measure is
57
determined by the DSB to have nullified or impaired such a benefit, the Member affected shall be
entitled to a mutually satisfactory adjustment on the basis of paragraph 2 of Article XXI, which
may include the modification or withdrawal of the measure. In the event an agreement cannot be
reached between the Members concerned, Article 22 of the DSU shall apply.
Part II - Additional Sources of Information About the GATS
Other articles of the GATS as well as schedules of national treatment commitments along with the
list of MFN exemptions are available on-line.
1. One way to access the GATS is to go to www.wto.org and take the following steps:
(a) On the home page of the WTO site from the menu in the upper right corner on the
screen select:

Documents  Legal texts  scroll down to Annex 1B or
(b) On the home page of the WTO site from the menu in the upper right corner on the
screen select:

Trade topics  Services  browse and download the GATS
2. The WTO Services Database contains the schedules of commitments and lists of Article II
(MFN) exemptions of WTO Members. The database is maintained, in English only, by the
Trade in Services Division of the WTO. Note, however, that only the commitments of
countries which were members of WTO prior to 31 December 2004 are included in the
database. Go to: http://tsdb.wto.org/wto/WTOHomepublic.htm.
3. Other useful sources of information about the GATS:
(a) Services Gateway available on-line at:
http://www.wto.org/english/tratop_e/serv_e/serv_e.htm.
(b) GATS Training Module available on-line at:
http://www.wto.org/english/tratop_e/serv_e/cbt_course_e/signin_e.htm.
(c) WTO Analytical Index, which interprets the provisions of the GATS, is available online at:
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gats_e.htm.
58
Appendix B: NAFTA
Part I of Appendix B reproduces key provisions of the NAFTA for the purposes of direct taxation.
Part II of Appendix B refers to additional sources of information about the NAFTA.
Part I - Key Provisions of the North American Free Trade Agreement
Article 1202
National Treatment
1.
Each Party shall accord to service providers of another Party treatment no less favourable
than that it accords, in like circumstances, to its own service providers.
2.
The treatment accorded by a Party under paragraph 1 means, with respect to a state or
province, treatment no less favorable than the most favorable treatment accorded, in like
circumstances, by that state or province to service providers of the Party of which it forms a part.
Article 1203
Most-Favored-Nation Treatment
Each Party shall accord to service providers of another Party treatment no less favorable than that it
accords, in like circumstances, to service providers of any other Party or of a non-Party.
Article 1204
Standard of Treatment
Each Party shall accord to service providers of any other Party the better of the treatment required
by Articles 1202 and 1203.
Article 2101
General Exceptions
1.
For the purposes of: (a) Part Two (Trade in Goods), except to the extent that a provision of
that Part applies to services or investment, and (b) Part Three (Technical Barriers to Trade), except
to the extent that a provision of that Part applies to services, GATT Article XX and its
interpretative notes, or any equivalent provision of a successor agreement to which all Parties are
party, are incorporated into and made part of this Agreement. The Parties understand that the
59
measures referred to in GATT Article XX(b) include environmental measures necessary to protect
human, animal or plant life or health, and that GATT Article XX(g) applies to measures relating to
the conservation of living and non-living exhaustible natural resources.
2.
Provided that such measures are not applied in a manner that would constitute a means of
arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a
disguised restriction on trade between Parties, nothing in: (a) Part Two (Trade in Goods), to the
extent that a provision of that Part applies to services, (b) Part Three (Technical Barriers to Trade),
to the extent that a provision of that Part applies to services, (c) Chapter Twelve (Cross-Border
Trade in Services), and (d) Chapter Thirteen (Telecommunications), shall be construed to prevent
the adoption or enforcement by any Party of measures necessary to secure compliance with laws or
regulations that are not inconsistent with the provisions of the Agreement, including those relating
to health and safety and consumer protection.
Article 2102
National Security
1.
Subject to Articles 607 (Energy – National Security Measures) and 1018 (Government
Procurement – Exceptions), nothing in this Agreement shall be construed: (a) to require any Party
to furnish or allow access to any information the disclosure of which it determines to be contrary to
its essential security interests; (b) to prevent any Party from taking any actions that it considers
necessary for the protection of its essential security interests (i) relating to the traffic in arms,
ammunition and implements of war and to such traffic and transactions in other goods, materials,
services and technology undertaken directly or indirectly for the purpose of supplying a military or
other security establishment, (ii) taken in time of war or other emergency in international relations,
or (iii) relating to the implementation of national policies or international agreements respecting
the non-proliferation of nuclear weapons or other nuclear explosive devices; or (c) to prevent any
Party from taking action in pursuance of its obligations under the United Nations Charter for the
maintenance of international peace and security.
Article 2103
Taxation
1.
Except as set out in this Article, nothing in this Agreement shall apply to taxation measures.
2.
Nothing in this Agreement shall affect the rights and obligations of any Party under any tax
convention. In the event of any inconsistency between this Agreement and any such convention,
that convention shall prevail to the extent of the inconsistency.
3.
Notwithstanding paragraph 2: (a) Article 301 (Market Access – National Treatment) and
such other provisions of this Agreement as are necessary to give effect to that Article shall apply to
taxation measures to the same extent as does Article III of the GATT; and (b) Article 314 (Market
Access – Export Taxes) and Article 604 (Energy – Export Taxes) shall apply to taxation measures.
60
4.
Subject to paragraph 2: (a) Article 1202 (Cross-Border Trade in Services – National
Treatment) and Article 1405 (Financial Services – National Treatment) shall apply to taxation
measures on income, capital gains or the taxable capital of corporations, and to those taxes listed in
paragraph 1 of Annex 2103.4, that relate to the purchase or consumption of particular services, and
(b) Article 1102 and 1103 (Investment – National Treatment and Most-Favored-Nation Treatment),
Articles 1202 and 1203 (Cross-Border Trade in Services – National Treatment and Most-FavoredNation Treatment) and Article 1405 and 1406 (Financial Services – National Treatment and MostFavored-Nation Treatment) shall apply to all taxation measures other than those on income, capital
gains or on the taxable capital of corporations, taxes on estates, inheritances, gifts and generationskipping transfers and those taxes listed in paragraph 1 of Annex 2103.4, except that nothing in
those Articles shall apply (c) any most-favored-nation obligation with respect to an advantage
accorded by a Party pursuant to a tax convention, (d) to a non-conforming provision of any
existing taxation measure, (e) to the continuation or prompt renewal of a non-conforming provision
of any existing taxation measure, (f) to an amendment to a non-conforming provision of any
existing taxation measure to the extent that the amendment does not decrease its conformity, at the
time of the amendment, with any of those Articles, (g) to any new taxation measure aimed at
ensuring the equitable and effective imposition or collection of taxes and that does not arbitrarily
discriminate between persons, goods or services of the Parties or arbitrarily nullify or impair
benefit accorded under those Articles, in the sense of Annex 2004, or (h) to the measures listed in
paragraph 2 of Annex 2103.4.
5.
Subject to paragraph 2 and without prejudice to the rights and obligations of the Parties
under paragraph 3, Article 1106(3), (4) and (5) (Performance Requirements) shall apply to taxation
measures.
6.
Article 1110 (Expropriation and Compensation) shall apply to taxation measures except
that no investor may invoke that Article as the basis for a claim under Article 1116 (Claim by an
Investor of a Party on its Own Behalf) or 1117 (Claim by an Investor of a Party on Behalf of an
Enterprise), where it has been determined pursuant to this paragraph that the measure is not an
expropriation. The investor shall refer the issue of whether the measure is not an expropriation for
a determination to the appropriate competent authorities set out in Annex 2103.6 at the time that it
gives notice under Article 1119 (Notice of Intent to Submit a Claim to Arbitration). If the
competent authorities do not agree to consider the issue or, having agreed to consider it, fail to
agree that the measure is not an expropriation within a period of six months of such referral, the
investor may submit its claim to arbitration under Article 1120 (Submission of a Claim to
Arbitration).
Annex 2103.4
Specific Taxation Measures
1.
For purposes of Article 2103(4)(a) and (b), the listed tax is the asset tax under the Asset
Tax Law (“Ley del Impuesto al Activo”) of Mexico.
61
2.
For purposes of Article 2103(4)(h), the listed tax is any excise tax on insurance premiums
adopted by Mexico to the extent that such tax would, if levied by Canada or the United States, be
covered by Article 2103(4)(d), (e) or (f).
Annex 2103.6
Competent Authorities
For purposes of this Chapter:
competent authority means (a) in the case of Canada, the Assistant Deputy Minister for Tax
Policy, Department of Finance; (b) in the case of Mexico, the Deputy Minister of Revenue of the
Ministry of Finance and Public Credit (“Secretaria de Hacienda y Credito Publico”); and (c) in the
case of the United States, the Assistant Secretary of the Treasury (Tax Policy), Department of
Treasury.
Article 2107
Definitions
For purposes of this Chapter:
…
tax convention means a convention for the avoidance of double taxation or other international
taxation agreement or arrangement;
taxes and taxation measures do not include: (a) a “customs duty” as defined in Article 318
(Market Access – Definitions); or (b) the measures listed in exceptions (b), (c), (d) and (e) of that
definition.
Part II – Additional Sources of Information About the NAFTA
Other provisions of the NAFTA
alena.org/DefaultSite/index.html.
are
available
on-line
at
http://www.nafta-sec-
62
Appendix C: GATT
Appendix C contains some of the key provisions of the General Agreement on Tariffs and Trade
which may have a bearing on tax treatment under the GATS or NAFTA.
Article III
National Treatment on Internal Taxation and Regulation
1.
The contracting parties recognize that internal taxes and other internal charges, and laws,
regulations and requirements affecting the internal sale, offering for sale, purchase, transportation,
distribution or use of products, and internal quantitative regulations requiring the mixture,
processing or use of products in specified amounts or proportions, should not be applied to
imported or domestic products so as to afford protection to domestic production.*
2.
The products of the territory of any contracting party imported into the territory of any
other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal
charges of any kind in excess of those applied, directly or indirectly, to like domestic products.
Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to
imported or domestic products in a manner contrary to the principles set forth in paragraph 1.*
3.
With respect to any existing internal tax which is inconsistent with the provisions of
paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10,
1947, in which the import duty on the taxed product is bound against increase, the contracting
party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to
such tax until such time as it can obtain release from the obligations of such trade agreement in
order to permit the increase of such duty to the extent necessary to compensate for the elimination
of the protective element of the tax.
4.
The products of the territory of any contracting party imported into the territory of any
other contracting party shall be accorded treatment no less favourable than that accorded to like
products of national origin in respect of all laws, regulations and requirements affecting their
internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this
paragraph shall not prevent the application of differential internal transportation charges which are
based exclusively on the economic operation of the means of transport and not on the nationality of
the product.
5.
No contracting party shall establish or maintain any internal quantitative regulation relating
to the mixture, processing or use of products in specified amounts or proportions which requires,
directly or indirectly, that any specified amount or proportion of any product which is the subject
of the regulation must be supplied from domestic sources. Moreover, no contracting party shall
otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in
paragraph 1.*
63
6.
The provisions of paragraph 5 shall not apply to any internal quantitative regulation in force
in the territory of any contracting party on July 1, 1939, April 10, 1947, or March 24, 1948, at the
option of that contracting party; Provided that any such regulation which is contrary to the
provisions of paragraph 5 shall not be modified to the detriment of imports and shall be treated as a
customs duty for the purpose of negotiation.
7.
No internal quantitative regulation relating to the mixture, processing or use of products in
specified amounts or proportions shall be applied in such a manner as to allocate any such amount
or proportion among external sources of supply.
8.
(a)
The provisions of this Article shall not apply to laws, regulations or requirements
governing the procurement by governmental agencies of products purchased for governmental
purposes and not with a view to commercial resale or with a view to use in the production of goods
for commercial sale.
(b)
The provisions of this Article shall not prevent the payment of subsidies exclusively
to domestic producers, including payments to domestic producers derived from the proceeds of
internal taxes or charges applied consistently with the provisions of this Article and subsidies
effected through governmental purchases of domestic products.
9.
The contracting parties recognize that internal maximum price control measures, even
though conforming to the other provisions of this Article, can have effects prejudicial to the
interests of contracting parties supplying imported products. Accordingly, contracting parties
applying such measures shall take account of the interests of exporting contracting parties with a
view to avoiding to the fullest practicable extent such prejudicial effects.
10.
The provisions of this Article shall not prevent any contracting party from establishing or
maintaining internal quantitative regulations relating to exposed cinematograph films and meeting
the requirements of Article IV.
Ad Article III
Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred
to in paragraph 1 which applies to an imported product and to the like domestic product and is
collected or enforced in the case of the imported product at the time or point of importation, is
nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or
requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of
Article III.
Paragraph 1
The application of paragraph 1 to internal taxes imposed by local governments and authorities with
the territory of a contracting party is subject to the provisions of the final paragraph of Article
XXIV. The term "reasonable measures" in the last-mentioned paragraph would not require, for
example, the repeal of existing national legislation authorizing local governments to impose
internal taxes which, although technically inconsistent with the letter of Article III, are not in fact
64
inconsistent with its spirit, if such repeal would result in a serious financial hardship for the local
governments or authorities concerned. With regard to taxation by local governments or authorities
which is inconsistent with both the letter and spirit of Article III, the term "reasonable measures"
would permit a contracting party to eliminate the inconsistent taxation gradually over a transition
period, if abrupt action would create serious administrative and financial difficulties.
Paragraph 2
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to
be inconsistent with the provisions of the second sentence only in cases where competition was
involved between, on the one hand, the taxed product and, on the other hand, a directly competitive
or substitutable product which was not similarly taxed.
Article XI
General Elimination of Quantitative Restrictions
1.
No prohibitions or restrictions other than duties, taxes or other charges, whether made
effective through quotas, import or export licences or other measures, shall be instituted or
maintained by any contracting party on the importation of any product of the territory of any other
contracting party or on the exportation or sale for export of any product destined for the territory of
any other contracting party.
2.
The provisions of paragraph 1 of this Article shall not extend to the following:
(a)
Export prohibitions or restrictions temporarily applied to prevent or relieve critical
shortages of foodstuffs or other products essential to the exporting contracting
party;
(b)
Import and export prohibitions or restrictions necessary to the application of
standards or regulations for the classification, grading or marketing of commodities
in international trade;
(c)
Import restrictions on any agricultural or fisheries product, imported in any form,*
necessary to the enforcement of governmental measures which operate:
(i)
to restrict the quantities of the like domestic product permitted to be
marketed or produced, or, if there is no substantial domestic production of
the like product, of a domestic product for which the imported product can
be directly substituted; or
(ii)
to remove a temporary surplus of the like domestic product, or, if there is no
substantial domestic production of the like product, of a domestic product
for which the imported product can be directly substituted, by making the
surplus available to certain groups of domestic consumers free of charge or
at prices below the current market level; or
65
(iii)
to restrict the quantities permitted to be produced of any animal product the
production of which is directly dependent, wholly or mainly, on the
imported commodity, if the domestic production of that commodity is
relatively negligible.
Any contracting party applying restrictions on the importation of any product pursuant to
subparagraph (c) of this paragraph shall give public notice of the total quantity or value of the
product permitted to be imported during a specified future period and of any change in such
quantity or value. Moreover, any restrictions applied under (i) above shall not be such as will
reduce the total of imports relative to the total of domestic production, as compared with the
proportion which might reasonably be expected to rule between the two in the absence of
restrictions. In determining this proportion, the contracting party shall pay due regard to the
proportion prevailing during a previous representative period and to any special factors* which
may have affected or may be affecting the trade in the product concerned.
Ad Articles XI, XII, XIII, XIV and XVIII
Throughout Articles XI, XII, XIII, XIV and XVIII, the terms "import restrictions" or "export
restrictions" include restrictions made effective through state-trading operations.
Ad Article XI
Paragraph 2 (c)
The term "in any form" in this paragraph covers the same products when in an early stage of
processing and still perishable, which compete directly with the fresh product and if freely
imported would tend to make the restriction on the fresh product ineffective.
Paragraph 2, last subparagraph
The term "special factors" includes changes in relative productive efficiency as between domestic
and foreign producers, or as between different foreign producers, but not changes artificially
brought about by means not permitted under the Agreement.
Article XX
General Exceptions
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 shall be
construed to prevent the adoption or enforcement by any contracting party of measures:
66
(a)
necessary to protect public morals;
(b)
necessary to protect human, animal or plant life or health;
(c)
relating to the importations or exportations of gold or silver;
(d)
necessary to secure compliance with laws or regulations which are not inconsistent
with the provisions of this Agreement, including those relating to customs
enforcement, the enforcement of monopolies operated under paragraph 4 of Article
II and Article XVII, the protection of patents, trade marks and copyrights, and the
prevention of deceptive practices;
(e)
relating to the products of prison labour;
(f)
imposed for the protection of national treasures of artistic, historic or archaeological
value;
(g)
relating to the conservation of exhaustible natural resources if such measures are
made effective in conjunction with restrictions on domestic production or
consumption;
(h)
undertaken in pursuance of obligations under any intergovernmental commodity
agreement which conforms to criteria submitted to the CONTRACTING PARTIES
and not disapproved by them or which is itself so submitted and not so
disapproved;*
(i)
involving restrictions on exports of domestic materials necessary to ensure essential
quantities of such materials to a domestic processing industry during periods when
the domestic price of such materials is held below the world price as part of a
governmental stabilization plan; Provided that such restrictions shall not operate to
increase the exports of or the protection afforded to such domestic industry, and
shall not depart from the provisions of this Agreement relating to nondiscrimination;
(j)
essential to the acquisition or distribution of products in general or local short
supply; Provided that any such measures shall be consistent with the principle that
all contracting parties are entitled to an equitable share of the international supply of
such products, and that any such measures, which are inconsistent with the other
provisions of the Agreement shall be discontinued as soon as the conditions giving
rise to them have ceased to exist. The CONTRACTING PARTIES shall review the
need for this sub-paragraph not later than 30 June 1960.
67
Article XXI
Security Exceptions
Nothing in this Agreement shall be construed
(a)
to require any contracting party to furnish any information the disclosure of which it
considers contrary to its essential security interests; or
(b)
to prevent any contracting party from taking any action which it considers necessary
for the protection of its essential security interests
(c)
(i)
relating to fissionable materials or the materials from which they are
derived;
(ii)
relating to the traffic in arms, ammunition and implements of war and to
such traffic in other goods and materials as is carried on directly or
indirectly for the purpose of supplying a military establishment;
(iii)
taken in time of war or other emergency in international relations; or
to prevent any contracting party from taking any action in pursuance of its
obligations under the United Nations Charter for the maintenance of international
peace and security.
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Appendix D: Canada – U.S. Tax Treaty
Tax Treaties and Trade in Services: Some of the relevant provisions of the Canada – United States
Tax Treaty signed on September 26, 1980, as amended by the Protocols signed on June 14, 1983,
March 28, 1984, March 17, 1995 and July 29, 1997, are presented below.
Article XIV – Independent Personal Services
Income derived by an individual who is a resident of a Contracting State in respect of independent
personal services may be taxed in that State. Such income may also be taxed in the other
Contracting State if the individual has or had a fixed base regularly available to him in that other
State but only to the extent that the income is attributable to the fixed base.
Article XV – Dependent Personal Services
1.
Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX
(Government Service), salaries, wages and other similar remuneration derived by a resident of a
Contracting State in respect of an employment shall be taxable only in that State unless the
employment is exercised in the other Contracting State. If the employment is so exercised, such
remuneration as is derived therefrom may be taxed in that other State.
2.
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in a calendar year in the other Contracting
State shall be taxable only in the first-mentioned State if:
(a)
such remuneration does not exceed ten thousand dollars ($10,000) in the currency
of that other State; or
(b)
the recipient is present in the other Contracting State for a period or periods not
exceeding in the aggregate 183 days in that year and the remuneration is not borne
by an employer who is a resident of that other State or by a permanent
establishment or a fixed base which the employer has in that other State.
3.
Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived by a resident
of a Contracting State in respect of an employment regularly exercised in more than one State on a
ship, aircraft, motor vehicle or train operated by a resident of that Contracting State shall be taxable
only in that State.
Article XXV – Non-Discrimination
1.
Citizens of a Contracting State, who are residents of the other Contracting State, shall not
be subjected in that other State to any taxation or any requirement connected therewith which is
other or more burdensome than the taxation and connected requirements to which citizens of that
other State in the same circumstances are or may be subjected.
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2.
Citizens of a Contracting State, who are not residents of the other Contracting State, shall
not be subjected in that other State to any taxation or any requirement connected therewith which is
other or more burdensome than the taxation and connected requirements to which citizens of any
third State in the same circumstances (including State of residence) are or may be subjected.
3.
In determining the taxable income or tax payable of an individual who is a resident of a
Contracting State, there shall be allowed as a deduction in respect of any other person who is a
resident of the other Contracting State and who is dependent on the individual for support the
amount that would be so allowed if that other person were a resident of the first-mentioned State.
4.
Where a married individual who is a resident of Canada and not a citizen of the United
States has income that is taxable in the United States pursuant to Article XV (Dependent Personal
Services), the United States tax with respect to such income shall not exceed such proportion of the
total United States tax that would be payable for the taxable year if both the individual and his
spouse were United States citizens as the individual's taxable income determined without regard to
this paragraph bears to the amount that would be the total taxable income of the individual and his
spouse. For the purposes of this paragraph,
(a)
the "total United States tax" shall be determined as if all the income of the
individual and his spouse arose in the United States; and
(b)
a deficit of the spouse shall not be taken into account in determining taxable
income.
5.
Any company which is a resident of a Contracting State, the capital of which is wholly or
partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting
State, shall not be subjected in the first-mentioned State to any taxation or any requirement
connected therewith which is other or more burdensome than the taxation and connected
requirements to which other similar companies of the first-mentioned State, the capital of which is
wholly or partly owned or controlled, directly or indirectly, by one or more residents of a third
State, are or may be subjected.
6.
Notwithstanding the provisions of Article XXIV (Elimination of Double Taxation), the
taxation on a permanent establishment which a resident of a Contracting State has in the other
Contracting State shall not be less favourably levied in the other State than the taxation levied on
residents of the other State carrying on the same activities. This paragraph shall not be construed as
obliging a Contracting State:
(a)
to grant to a resident of the other Contracting State any personal allowances, reliefs
and reductions for taxation purposes on account of civil status or family
responsibilities which it grants to its own residents; or
(b)
to grant to a company which is a resident of the other Contracting State the same tax
relief that it provides to a company which is a resident of the first-mentioned State
with respect to dividends received by it from a company.
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7.
Except where the provisions of paragraph 1 of Article IX (Related Persons), paragraph 7 of
Article XI (Interest) or paragraph 7 of Article XII (Royalties) apply, interest, royalties and other
disbursements paid by a resident of a Contracting State to a resident of the other Contracting State
shall, for the purposes of determining the taxable profits of the first-mentioned resident, be
deductible under the same conditions as if they had been paid to a resident of the first-mentioned
State. Similarly, any debts of a resident of a Contracting State to a resident of the other Contracting
State shall, for the purposes of determining the taxable capital of the first-mentioned resident, be
deductible under the same conditions as if they had been contracted to a resident of the firstmentioned State.
8.
The provisions of paragraph 7 shall not affect the operation of any provision of the taxation
laws of a Contracting State:
(a)
relating to the deductibility of interest and which is in force on the date of signature
of this Convention (including any subsequent modification of such provisions that
does not change the general nature thereof); or
(b)
adopted after such date by a Contracting State and which is designed to ensure that
a person who is not a resident of that State does not enjoy, under the laws of that
State, a tax treatment that is more favorable than that enjoyed by residents of that
State.
9.
Expenses incurred by a citizen or resident of a Contracting State with respect to any
convention (including any seminar, meeting, congress or other function of a similar nature) held in
the other Contracting State shall, for the purposes of taxation in the first-mentioned State, be
deductible to the same extent that such expenses would be deductible if the convention were held
in the first-mentioned State.
10.
Notwithstanding the provisions of Article II (Taxes Covered), this Article shall apply to all
taxes imposed by a Contracting State.
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Appendix E: Canada – Mexico Tax Treaty
Some of the relevant provisions of the Canada – Mexico Tax Treaty signed on September 12, 2006
are presented below.
Article 14 – Income from Employment
1.
Subject to the provisions of Articles 15 and 18, salaries, wages and other similar
remuneration derived by a resident of a Contracting State in respect of an employment shall be
taxable only in that State unless the employment is exercised in the other Contracting State. If the
employment is so exercised, such remuneration as is derived there from may be taxed in that other
State.
2.
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State:
a)
if the remuneration earned in the other Contracting State in the calendar year
concerned does not exceed sixteen thousand Canadian dollars ($16,000) or its
equivalent in Mexican pesos or such other amount as may be specified and agreed
in letters exchanged between the competent authorities of the Contracting States; or
b)
if
(i)
the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any twelve month period
commencing or ending in the calendar year concerned, and
(ii)
the remuneration is paid by, or on behalf of, an employer who is not a
resident of the other State, and such remuneration is not borne by a
permanent establishment which the employer has in the other State.
3.
Notwithstanding the preceding provisions of this Article, remuneration in respect of an
employment exercised aboard a ship or aircraft operated in international traffic by a resident of a
Contracting State, shall be taxable only in that State. However, if the remuneration is derived by a
resident of the other Contracting State it shall be taxable only in that other State.
Article 22 – Non-Discrimination
1.
Nationals of a Contracting State shall not be subjected in the other Contracting State to any
taxation or any requirement connected therewith which is other or more burdensome than the
taxation and connected requirements to which nationals of that other State in the same
circumstances, in particular with respect to residence, are or may be subjected.
72
2.
The taxation on a permanent establishment which a resident of a Contracting State has in
the other Contracting State shall not be less favourably levied in that other State than the taxation
levied on residents of that other State carrying on the same activities.
3.
Nothing in this Article shall be construed as obliging a Contracting State to grant to
residents of the other Contracting State any personal allowances, reliefs and reductions for taxation
purposes on account of civil status or family responsibilities which it grants to its own residents.
4.
Except where the provisions of paragraph 1 of Article 9, paragraph 7 of Article 11, or
paragraph 9 of Article 12 apply, interest, royalties and other disbursements paid by an enterprise of
a Contracting State to a resident of the other Contracting State shall, for the purposes of
determining the taxable profits of such enterprise, be deductible under the same conditions as if
they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise
of a Contracting State to a resident of the other Contracting State shall, for the purposes of
determining the taxable profits of such enterprise, be deductible under the same conditions as if
they had been paid to a resident of the first-mentioned State.
5.
Any provisions of paragraph 4 shall not affect the operation of any provision of the taxation
laws of a Contracting State:
a)
relating to the deductibility or recharacterization of interest and which is in force on
the date of signature of this Convention (including any subsequent modification of
such provisions that does not change the general nature thereof); or
b)
adopted after such date by a Contracting State and which is designed to ensure that
a person who is not a resident of that State does not enjoy, under the laws of that
State, a tax treatment that is more favourable than that enjoyed by residents of that
State.
6.
Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not
be subjected in the first-mentioned State to any taxation or any requirement connected therewith
which is other or more burdensome than the taxation and connected requirements to which other
similar enterprises of the first-mentioned State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of a third State, are or may be subjected.
7.
Notwithstanding the provisions of Article 2, this Article shall apply to all taxes imposed by
a Contracting State.
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Appendix F: U.S. – Mexico Tax Treaty
Some of the key provisions of the United States – Mexico Tax Treaty singed on September 18,
1992 are presented below.
Article 14 – Independent Personal Services
1.
Income derived by an individual who is a resident of a Contracting State from the
performance of personal services or other activities of a similar nature in an independent capacity
shall be taxable only in that State, unless:
a)
such resident has a fixed base in the other Contracting State which he regularly
makes use of in the course of performing his activities; in such case, the other State
may tax the income from services performed in that other State which is attributable
to that fixed base; or
b)
the resident is present in the other Contracting State for a period or periods
equalling or exceeding a total of 183 days within a 12-month period; in such case,
the other State may tax the income attributable to activities performed in that other
State.
2.
The term "personal services" includes especially independent scientific, literary or artistic
activities, educational or teaching activities, as well as independent activities of physicians,
lawyers, engineers, architects, dentists and accountants.
Article 15 – Dependent Personal Services
1.
Subject to the provisions of Articles 16 (Directors’ Fees), 19 (Pensions, Annuities,
Alimony, and Child Support) and 20 (Government Service), salaries, wages, and other similar
remuneration derived by a resident of a Contracting State in respect of an employment shall be
taxable only in that State unless the employment is exercised in the other Contracting State. If the
employment is so exercised, such remuneration as is derived therefrom may be taxed in that other
State.
2.
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State if:
a)
the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days in a 12-month period;
b)
the remuneration is paid by, or on behalf of, an employer who is not a resident of
the other State; and
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c)
the remuneration is not borne by a permanent establishment or a fixed base which
the employer has in the other State.
Article 25 – Non-Discrimination
1.
Nationals of a Contracting State shall not be subjected in the other Contracting State to any
taxation or any requirement connected therewith which is other or more burdensome than the
taxation and connected requirements to which nationals of that other State in the same
circumstances are or may be subjected. However, a national of a Contracting State who is subject
to tax in that State on worldwide income and a national of the other Contracting State who is not
taxed in the first-mentioned State on worldwide income are not in the same circumstances.
2.
The taxation on a permanent establishment which an enterprise of a Contracting State has
in the other Contracting State shall not be less favorably levied in that other State than the taxation
levied on enterprises of that other State carrying on the same activities. This provision shall not be
construed as obliging a Contracting State to grant to residents of the other Contracting State any
personal allowances, reliefs, and reductions for taxation purposes on account of civil status or
family responsibilities which it grants to its own residents.
3.
Nothing in this Article shall be construed as preventing either of the Contracting States
from imposing the tax described in Article 11A (Branch Tax) or, in the case of Mexico, from
denying a deduction for presumed expenses (without regard to where such expenses are incurred)
to an individual resident of the United States who elects to be subject to tax in Mexico on a net
basis with respect to income from real property.
4.
Except where the provisions of paragraph 1 of Article 9 (Associated Enterprises),
paragraph 8 of Article 11 (Interest), or paragraph 5 of Article 12 (Royalties) apply, interest,
royalties, and other disbursements paid by a resident of a Contracting State to a resident of the
other Contracting State shall, for the purposes of determining the taxable profits of the firstmentioned resident, be deductible under the same conditions as if they had been paid to a resident
of the first-mentioned State.
5.
Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not
be subjected in the first-mentioned State to any taxation or any requirement connected therewith
which is other or more burdensome than the taxation and connected requirements to which other
similar enterprises of the first-mentioned State are or may be subjected.
6.
The provisions of this Article shall, notwithstanding the provisions of Article 2 (Taxes
Covered), apply to all taxes imposed by a Contracting State or a political subdivision or local
authority thereof.
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Appendix G: Summary
Summary of Provisions Included in the Non-Discrimination Articles
in the NAFTA Tax Treaties
Canada – US
Mexico – Canada
US – Mexico
Citizens who are residents of
the other Contracting State
shall not be subjected in that
other State to any taxation
requirement that is other or
more burdensome than the
taxation
and
connected
requirements to which citizens
in the same circumstances are
or may be subjected.
“nationals shall not be
subjected
in
the
other
Contracting State to any
taxation or any requirement
connected therewith which is
other or more burdensome
than
the
taxation
and
connected requirements to
which nationals of that other
State
in
the
same
circumstances are or may be
subjected, EXCEPT with
respect to any personal
allowances,
reliefs
and
reductions
for
taxation
purposes on account of civil
status
or
family
responsibilities which it grants
to its own residents.
“nationals
shall
not
be
subjected
in
the
other
Contracting State to any
taxation or any requirement
connected therewith which is
other or more burdensome than
the taxation and connected
requirements to which nationals
of that other State in the same
circumstances are or may be
subjected,
EXCEPT
with
respect to any personal
allowances,
relief
and
reductions for taxation purposes
on account of civil status or
family responsibilities which it
grants to its own residents.
Permanent
establishment
(PE) and fixed
bases (FB’s)
The taxation on a PE which a
resident has in the other
Contracting State shall not be
less favourably levied in the
other State than the taxation
levied on residents of the
other
Contracting
State
carrying on the same activity.
NT – taxation … shall not be
less favourably levied in that
other State than the taxation
levied on residents of that
other State carrying on the
same activities.
NT- taxation … shall not be
less favourably levied in that
other State than the taxation
levied on residents of that other
State carrying on the same
activities.
Companies
MFN
MFN
NT
Individuals
Citizens who are NOT
residents
shall
not
be
subjected to any taxation
requirement that is other or
more burdensome than the
taxation
requirements
to
which citizens of any third
state
in
the
same
circumstances (including state
of residence) are or may be
subjected.
76
Deductibility
of Expenses
Taxes
Covered
NonDiscrimination
Relief from
Double
Taxation
Canada – US
Mexico – Canada
US – Mexico
Interest, royalties and other
disbursements paid by a
resident of a Contracting State
to a resident of the other
Contracting State shall, for the
purposes of determining the
taxable profit of the firstmentioned
resident,
be
deductible under the same
conditions as if they had been
paid to a resident of the firstmentioned State.
Interest, royalties and other
disbursements paid by an
enterprise of a Contracting
State to a resident of the other
Contracting State shall, for the
purposes of determining the
taxable profits of such
enterprise, be deductible under
the same conditions as if they
had been paid to a resident of
the first-mentioned State.
Similarly, any debts of an
enterprise of a Contracting
State to a resident of the other
Contracting State shall, for the
purposes of determining the
taxable profits of such
enterprise, be deductible under
the same conditions as if they
had been paid to a resident of
the first-mentioned State.
Interest, royalties and other
disbursements paid by a
resident of a Contracting State
to a resident of the other
Contracting State shall, for the
purposes of determining the
taxable profit of the firstmentioned
resident,
be
deductible under the same
conditions as if they had been
paid to a resident of the firstmentioned State.
- taxes on income and capital
gains;
- government of Canada taxes
per the Income Tax Act;
- U.S. federal income taxes
under Internal Revenue Code
(1986).
- taxes on income;
- government of Canada taxes
per the Income Tax Act;
- Mexican income tax under
Income Tax Law.
- Mexican income tax under
Income Tax law;
- U.S. federal income taxes
under Internal Revenue Code
(1986).
Covers ALL taxes imposed by
a Contracting State. Although
GST is covered by tax treaty,
NAFTA 2103 (3) overrides
(2) and NAFTA applies to
goods.
Applies to ALL taxes imposed
by a Contracting State.
Applies to ALL taxes imposed
by a Contracting State, political
subdivision or local authority.
Third Protocol, Nov. 2002
applies to ALL taxes and
interpretation issues to be
decided under the competent
authority procedure in the tax
treaty.
Applies to ALL taxes imposed
by a Contracting State
including
political
subdivisions.
In Canada – taxes payable on
profits, income or gains.
U.S. citizens receive credit for
income and profits tax.
In Mexico, income tax paid in
Canada.
Mexico – residents receive
credit for income/profits tax.
77