Everyone familiar with the Kevin Brady/Paul Ryan "Blueprint" cash flow tax seems to agree that the first line of defense of the United States before a WTO Panel would be to argue that this tax is akin to VAT (Value Added Tax). Let us recall that VAT is explicitly recognized by footnote 58 of the SCM as being an indirect tax. This kind of tax is eligible for border tax adjustment and does not constitute an export subsidy (footnote 1 of the SCM).
Many observers have noted however that this kind of non-formalistic legal argument is unlikely to be accepted by a WTO Panel or the Appellate Body. The aim of this post is to suggest that this conclusion is premature.
In Boeing, the Appellate Body had to determine whether NASA and USDOD payments to Boeing for undertaking research, constituted a direct transfer of funds within the meaning of Article 1.1(a)(1)(i) of the SCM. Confronting an absence of definition of the expression “direct transfer of funds”, the Appellate Body resorted to a kind of reasoning that may be highly relevant for the cash flow tax:
We recall that, under subparagraph (i), there is a financial contribution where “a government practice involves a direct transfer of funds”. Several examples of direct transfers of funds are provided. These examples are not exhaustive. Where, as here, there are measures that have sufficient characteristics in common with one of the examples in subparagraph (i) [namely, debt-to-equity swaps] , this commonality indicates to us that the measures fall within the concept of ““direct transfers of funds” in Article 1.1(a)(1)(i).
This situation is similar to what would happen in a cash flow tax case before a WTO panel. Footnote 58 of the SCM does not offer a substantive definition of an indirect tax.It offers only examples of indirect taxes and a tautological residual category based on being other than an direct tax which is itself poorly defined in the same footnote:
The term "indirect taxes" shall mean sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and import charges;
The Boeing precedent indicates that if the United States could present a prima facie case that the cash flow tax has "sufficient characteristics in common with” a TVA tax, it could prevail. In other words, when confronted with an absence (or poor) definition of a category, the Boeing precedent shows that the Appellate Body is not allergic to non-formalistic arguments based of commonality criteria with an example provided in a list. For the Appellate Body, this method has the great advantage of avoiding to give risky abstract definitions of poorly defined categories, while nonetheless resolving the dispute at issue.
