Case analysis

This topic presents all final rulings that state courts and the Federal District appeal courts issued in the past five years (a-h). State courts that have not been listed did not rule in any GATT-related case in the relevant period. Following the case law, the topic offers an overall analysis of fragmentation (i) and outcomes in cases concerning Article III at state level (j).

It is important to note, for the purpose of fragmentation analyses, that none of the courts used treaty interpretation methods or WTO case law and interpretation. Thus, these items will not be referred to in each case to avoid repetition. They will be considered only in the state appeal level’s final analysis (k).

a)State of Alagoas

The Court of Appeals of the State of Alagoas has only tried one case on GATT-related matters. Below, this thesis presents the case (i), followed by a fragmentation analysis (ii) and an outcome analysis (iii).

i) The case: ICMS on imported cumin from India³⁸⁵

The State of Alagoas filed an appeal against a first-instance decision, based on GATT provisions, to grant ICMS exemption to an importer of cumin from India.

The importer had originally filed the lawsuit contesting the State of Alagoas’ demand that it should pay ICMS on cumin imports from India.

The complainant contended that, since domestic cumin sales were exempt from ICMS, the same exemption should be applied to imported cumin from India under GATT Article III—to which both Brazil and India were parties. Indeed, according to the State of Alagoas’ Decree 36.489/95, intrastate and interstate sales of cumin were exempt from ICMS. Applying the GATT to the case, the court of first instance decided in favour of the complainant, granting ICMS exemption to the import at stake.

The State of Alagoas appealed to the State Court of Appeals, arguing that state law did not grant ICMS exemption to imported goods, but only to internal sales. Moreover, it contended that, as Article 111 of the Brazilian Tax Code dictates, tax exemptions must be interpreted in a restrictive manner.

Noting that both Brazil and India are parties to the WTO, the State Court of Appeals upheld the first-instance court’s decision. Based on GATT Article III:4, it concluded that cumin originating from India should receive the same tax treatment granted to cumin originating from other Brazilian states. In this case, the treaty thus required an exemption from ICMS.

385 ALAGOAS. Tribunal de Justiça. Apelação 0719870-68.2014.8.02.0001. Appellant: Estado de Alagoas. Appellee: Heleno Vieira da Paixão - ME. Rapporteur: Desembargador Fábio José Bittencourt Araújo. Maceio 13 April 2016 <http://www2.tjal.jus.br> accessed 06 August 2019

Moreover, the State Court of Appeals affirmed, Article III:4 of the GATT provided for ‘isonomic’³⁸⁶ treatment of national and imported goods originating from WTO Members with respect to laws, regulations and requirements related to their sale, offering for sale, purchase, transportation, distribution or use in the internal market. The court mentioned Súmula 20 of the Superior Court of Justice, edited in 1990, which stated that imported goods originating from GATT countries were exempt from ICM³⁸⁷when a similar national good was exempt.³⁸⁸

‘Isonomic’ means equal before the law. The Brazilian Constitution provides for a principle of isonomy in taxation. This principle does not prevent the adoption of different tax treatments to persons or situations;

however, this must be justified with regard to taxable capacity and regulatory reasons. According to the Brazilian Supreme Court, isonomic tax treatment does not necessarily mean ‘equal’, because there might be reasons to treat taxpayers differently.³⁸⁹

Finally, responding to the appellant’s argument that the exemption granted by State Decree 36.489/95 should be interpreted in a restrictive manner, the Court first observed that, since international treaties incorporated into the Brazilian legal system have the status of federal (ordinary) laws, they should prevail over decrees. In addition, the Court recalled the Brazilian Tax Code’s Article 98, which supported the argument that GATT should prevail over the state decree.

ii) Fragmentation analysis

Below, this topic analyses fragmentation related to coherence (α) or consistency (β).

α)Coherence

The case does not present any matter related to coherence.

β) Consistency

This topic analyses several patterns to establish fragmentation of meaning:

identification of treaty provisions applicable to the facts (β.i); textualist approach to interpretation (β.ii); interpretation analysis (β.iii).

β.i)Identification of treaty provisions in light of WTO interpretation

In these rulings, the Court of Appeals used GATT Article III:4 to adjudicate the case.

β.ii)Textualist approach to interpretation

The Court did not use a textual approach to interpretation.

386 Isonomic corresponds to isonomy, which means equality before the law.

387 When the precedent was issued, the tax was called ICM. Later, the name changed to ICMS.

388 BRAZIL. Superior Court of Justice. Súmula n. 20 - “ A mercadoria importada de país signatário do GATT é isenta do ICM, quando contemplado com esse favor o similar nacional” <

http://www.stj.jus.br/docs_internet/SumulasSTJ.pdf > accessed 06 August 2019.

389 See, for example: BRAZIL. Supremo Tribunal Federal (Supreme Court). RE 578846/SP. Appellant:

Santos Corretora de Câmbio e Valores S/A. Appellee: União Federal (Federal Union). Rapporteur:

Justice Dias Toffoli. Brasilia, 06 June 2018.<

http://www.stf.jus.br/portal/jurisprudenciaRepercussao/verAndamentoProcesso.asp?incidente=259 7075&numeroProcesso=578846&classeProcesso=RE&numeroTema=665> accessed 06 August 2019; BRAZIL. Supremo Tribunal Federal (Supreme Court). RE 969735 AgR/PR. Appellant: Marca Laser Presentes Ltda. Appellee: União Federal (Federal Union). Rapporteur: Justice Dias Toffoli.

Brasilia, 24 February 2017.

<http://stf.jus.br/portal/jurisprudencia/listarJurisprudencia.asp?s1=%28969735%29&base=baseAc ordaos&url=http://tinyurl.com/ybb6q2ct> accessed 06 August 2019.

β.iii)Interpretation analysis

The Court did not refer to WTO case law, nor standard treaty interpretation methods, such as those provided in the Vienna Convention on the Law of Treaties. Furthermore, it did not adopt a textualist approach to interpretation, as is normally the case with WTO adjudicating bodies.

Moreover, it considered exclusively the Brazilian Portuguese translation of the text, with no comparison to the original versions. In spite of these, the Court’s reasoning is consistent with WTO adjudicating bodies’

interpretation of Article III of the GATT.

Truly, the Court based its reasoning on Article III:4, which is a broader provision in comparison with Article III:2 that applies specifically to taxes.

However, this has not had the effect, in this case, of changing the provision’s meaning.

In Brazil-Taxation, the Panel explained that

‘ any type of governmental action ( including both tax measures and domestic regulations) which favours domestic products over like imported products is contrary to Article III of the GATT.’³⁹⁰

The Panel then explained that

‘while Article III:2 prohibits tax discrimination between imported and domestic like products, Article III:4 and III:5 deal with discrimination introduced through regulations. This is because multiple features of a single measure may operate simultaneously. In such a situation, different aspects of the same measure could be considered to be covered by the disciplines of either or both Article III:2 and III:4’.³⁹¹

According to WTO case law, it is possible that the same measure be considered under both Article III:2 and Article III:4, when different aspects of it can be covered by either or both. Nevertheless, in the specific case ruled by the Court of Alagoas, the measure at issue amounted to a difference in tax treatment, only. There were no ICMS charges on internal and interstate sales of cumin, but only on importation. It cannot be said, however, that considering a tax measure under Article III:4 of the GATT would be inconsistent with WTO case law.

Furthermore, the Court stated that Article III:4 of the GATT provides for ‘isonomic’ treatment for domestic and imported goods, whereas the GATT text refers to ‘no less favourable’ treatment. The Court does not define ‘isonomic’, which, as seen above, does not mean ‘equal’, but related to equality before the law. This seems to be consistent with WTO case law.

In Korea- Various Measures on Beef, the Appellate Body affirmed that Article III:4 does not require identical treatment of imported and like domestic products, but rather equality of competitive conditions between them.³⁹² Also, according to the Appellate Body in EC-Asbestos,

a Member may draw distinctions between products which have been found to be ‘like’, without, for this reason alone, according to the group of ‘like’ imported products ‘less favourable treatment’ than that accorded to the group of ‘like’ domestic products.³⁹³

The findings mentioned above demonstrate that the Court used WTO language in this case, even if it did not follow the same approach to interpretation and treaty interpretation methods that WTO adjudicating bodies follow.

390 WTO, Report of the Panel, Brazil-Taxation , WT/DS472/R, adopted on 11 January 2019, para. 7.33.

391 WTO, Report of the Panel, Brazil-Taxation, WT/DS472/R, adopted on 11 January 2019, para. 7.33.

392 WTO, Report of the Appellate Body, Korea — Measures Affecting Imports of Fresh, Chilled and Frozen Beef (2000) WT/DS161/AB/R, adopted on 10 January 2001, paras. 135-137.

393 WTO, Report of the Appellate Body, European Communities: Measures Affecting Asbestos and Products Containing Asbestos (2001) WT/DS135/AB/R, adopted on 5 April 2001, para. 100.

iii) Outcome analysis

The case’s outcome is compatible with WTO case law. According to WTO case law, Article III:2 of the GATT is applicable to matters of internal taxation of goods, meaning that imported like products must not be taxed in excess of domestic ones (Article III:2, first sentence).³⁹⁴ The ruling—that, because domestic cumin is exempt from ICMS, imported cumin must be similarly exempt—is therefore compatible with WTO case law.

It is interesting to note that, even using Article III:4 of the GATT instead of Article III:2, the Court arrived at a conclusion compatible with Article III:2’s interpretation on WTO level.

b) Bahia

The Court of Appeals of Bahia adjudicated two final cases involving GATT-related matters. All of them concerned the application of GATT to ICMS issues. The following items present the cases according to their subject matter (i-ii), followed by an overall analysis of fragmentation (iv) and outcomes (v).

i) ICMS: Tax rate reduction on wheat flour

A Brazilian importer filed a lawsuit related to wheat flour imported from Argentina. According to the complainant, imported wheat flour was being taxed in excess of wheat flour originating in some specific Brazilian states.

Below, this item discusses the case (α) and presents fragmentation (β) and outcome (γ) analyses.

α) Case ³⁹⁵

The case involves the application of ICMS Protocol 46/00 - and subsequent modifications - and Normative Instruction 63/02 of the State of Bahia.

ICMS Protocol 46/00 was a tax agreement signed by some Brazilian states, including the state of Bahia, which established a harmonized system of ICMS collection in the territory of the parties to it. In Normative Instruction 63/2002, the state of Bahia implemented several operational measures to put the harmonized system into practice.

ICMS Protocol 46/00 established a harmonized system of ICMS collection among states from the North and Northeast of Brazil, which applied to all circulation of wheat grain, wheat flour and mixture of wheat flour, from the moment of importation or internal sale into a state party to it - in this case, the state of Bahia-, until the final sale of derivative goods manufactured within industrial establishments: bread, pasta, biscuits and other wheat products. Following this system, parties to the Protocol shared collection functions and the proceeds of collected taxes: 40% of them was kept by the collecting state and 60% was passed on to the state to which the tax was effectively due.³⁹⁶

Against this backdrop, the parties to the Protocol established a common final tax burden of 30% for wheat flour originating from abroad or other states. In order to obtain this final tax burden, the Protocol

394 See, for example, WTO, Report of the Appellate Body, Japan- Taxes on Alcoholic Beverages WT/DS8/AB/R, adopted on 1 November 1996, 18-19.

395 BAHIA. Tribunal de Justiça. Apelação 0003124-37.2004.8.05.0001. Appellant: State of Bahia.

Appellee: Cepol Comércio de Cereais e Importação Ltda. Rapporteur: Des. Lícia de Castro L.

Carvalho. Salvador, 22 July 2014. < www.tj.ba.jus.br> accessed 06 August 2019.

396 Protocol ICMS 46/00 with the text given by Protocol ICMS 16/02, third clause, in force at the

importation time.

<http://www.lex.com.br/doc_358185_PROTOCOLO_ICMS_N_46_DE_15_DE_DEZEMBRO_DE_2000 .aspx> accessed 06 August 2019.

provided for adjustments in the tax base that should be made whenever the tax rate at each state was different from 12%.³⁹⁷

In relation to wheat flour originating from states that were not parties to the Protocol, the amount of ICMS previously collected – ‘input’ ICMS - should be rebated from the tax base. There was no rebate on ICMS collected on sales of goods originating from states that were parties to ICMS Protocol 46/00. As to wheat flour originating from abroad, the whole ICMS was collected at once, not in several phases.

Among the measures contained in Normative Instruction 63/2002, the state of Bahia established differentiated minimum tax bases and rates for anticipated payments at the moment of entry of goods into its territory - either imported or originating from other Brazilian states. For this purpose, it established a tax rate of 12% for wheat flour originating from other Brazilian states that were also parties to that protocol, ³⁹⁸and a tax rate of 17% for wheat flour originating from Brazilian states which were not parties to that protocol and imported wheat flour. The Protocol, however, as mentioned above, stipulated a common final tax burden of 30% for wheat flour originating from abroad or other states, which should be obtained by adjustments in the tax base.

In this case, the importer did not pay ICMS at a tax rate of 17% on imported wheat flour, but only at 12%, causing the tax authorities to seize the goods at the point of importation. The importer then sued the state of Bahia arguing that, due to GATT provisions, the correct tax rate was of 12%.

The complainant contended that GATT commanded imported goods to be taxed at the same rate as goods originating from Brazilian states that were parties to ICMS Protocol 46/00 - that is, 12% - and, in this case, receive a more favourable tax treatment than goods originating from other Brazilian states, non-parties to that Protocol - 17%.

The Court of Bahia upheld the first instance decision passed in favour of the complainant, determining that, due to a rule of ‘tax isonomy’ in GATT and MERCOSUR, imported wheat flour should be taxed at a rate of 12%. According to the Court, granting to imported goods a tax treatment that was less favourable than that accorded to goods originating from Brazilian states that were parties to Protocol 46/00 was not compatible with GATT and MERCOSUR provisions.

β) Fragmentation analysis

Below, this topic analyses fragmentation related to coherence (β.i) or consistency (β.ii).

β.i) Coherence

The case does not present any matter related to coherence.

β.ii)Consistency

This topic analyses several patterns to establish fragmentation of meaning:

identification of the treaty provisions applicable to the facts (β.ii.i);

textualist approach to interpretation (β.ii.ii); interpretation analysis (β.ii.iii).

397 Protocol ICMS 46/00 with the text given by Protocol ICMS 16/02, second clause, paragraph 3, in

force at the importation time.

<http://www.lex.com.br/doc_358185_PROTOCOLO_ICMS_N_46_DE_15_DE_DEZEMBRO_DE_2000 .aspx> accessed 06 August 2019.

398 Protocol ICMS 46/00

<http://www.lex.com.br/doc_358185_PROTOCOLO_ICMS_N_46_DE_15_DE_DEZEMBRO_DE_2000 .aspx> accessed 06 August 2019.

β.ii.i)Identification of treaty provisions

There was no identification of the specific GATT provisions involved, but only generic references to a rule of ‘tax isonomy’ between imported goods and domestic similar goods.

β.ii.ii) Textualist approach to interpretation

Since the Court did not identify any specific treaty provision applicable to the facts, it did not adopt a textual approach to interpretation.

β.ii.iii) Interpretation analysis

In these rulings, the Court did not follow the steps adopted in WTO case law to solve the case. The Court neither identified specific treaty provisions applicable to the facts, nor adopted a textual approach to interpretation or used treaty interpretation methods. It did not refer to WTO case law either.

The Court generically referred to a rule of ‘tax isonomy’ between imported goods and domestic similar goods. This is not per se inconsistent with WTO language.

However, GATT contains rules that define that internal taxes must be applied ‘so as not to afford protection to domestic production’. This expression is relevant in determining Article III’s meaning and qualifies the scope of its protection.

Along these lines, in Brazil-Taxation, the Panel reiterated that differences in nominal tax rates are not enough to establish a violation of Article III:2, first sentence:

…in order to determine whether imported products have been taxed ‘in excess of’ like domestic products, it is not enough to look at the nominal tax rates applied but rather at the actual tax burden that both categories of products bear.³⁹⁹

In Argentina-Hides and Leather, the Panel affirmed:

It may thus be stated, in more general terms, that a determination of whether an infringement of Article III:2, first sentence, exists must be made on the basis of an overall assessment of the actual tax burdens imposed on imported products, on the one hand, and like domestic products, on the other hand.⁴⁰⁰

The Court, in this case, did not analyse the actual tax burden, but only focused on the differences in tax rates. However, the cause for such differences was not a measure to afford protection to domestic industry, but rather the consequence of a system of shared collection among some states, which did not impact on the actual tax burden.

The states party to Protocol 46/00 shared collection responsibilities and the amounts of the collected taxes. At principle, therefore, it could make sense that a differentiated system of tax collection, which involved differentiated tax rates at certain operations, be put into place.

Although the system of tax collection was different in the diverse phases of collection due to the harmonized collection system, the final tax burden, according to Protocol 46/00, should be exactly the same for imported wheat flour and wheat flour originating from all Brazilian states.

Thus, the actual tax burden was the same for goods originating from all states, those who were party to the Protocol or not, and also for imported goods. The common tax burden, in this case, was obtained through adjustments at the tax base.⁴⁰¹ Indeed, the Brazilian Constitution prohibits

399 WTO, Report of the Panel, Brazil-Taxation , WT/DS472/R, adopted on 11 January 2019, para.7.148.

400 WTO, Report of the Panel, Argentina — Measures Affecting the Export of Bovine Hides and the Import of Finished Leather ,WT/DS55/R, adopted on 16 February 2001, para. 11184.

401 Protocol ICMS 46/00 with the text given by Protocol ICMS 16/02, second clause, paragraph 3, in

force at the importation time.

states to discriminate between goods and services based on their origin or destination.⁴⁰²

A more sophisticated examination would be necessary to determine whether the different collection systems led to discrimination towards wheat flour originating from other Brazilian states and from abroad.

However, it is important to note that the parties to the case discussed only the tax rate, but neither the adjustment in the tax bases nor the system as a

However, it is important to note that the parties to the case discussed only the tax rate, but neither the adjustment in the tax bases nor the system as a

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