Taxes on Automobiles

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Taxes on Automobiles 11 October 1994 UNITED STATES - TAXES ON AUTOMOBILES Report of the Panel DS31/R DS31/R Page 2 TABLE OF CONTENTS I. INTRODUCTION . 4 Terms of reference . 4 Composition . 4 II. FACTUAL ASPECTS . 4 A. Luxury Tax . 5 B. The Gas Guzzler Tax . 5 C. Corporate Average Fuel Economy (CAFE) . 7 III. MAIN ARGUMENTS . 10 A. Luxury Tax . 10 (i) Article III:2 . 10 (a) Charges or taxes in excess of those applied to domestic products . 10 (b) Like product . 22 (c) Threshold and coverage . 30 (d) Nullification and impairment under Article XXIII:2 . 35 B. Gas Guzzler Tax . 36 (i) Article III:2 . 36 (a) Charges or taxes in excess of those applied to domestic products . 36 (b) Methodology for calculating the fuel economy . 42 (c) Light trucks . 48 (d) Like product . 52 (d)(i) Objectivity of criteria . 54 (ii) Article XX(g) . 57 (a) Relating to the conservation of an exhaustible natural resource . 58 (b) Made effective in conjunction with restrictions on domestic production or consumption . 59 (c) Arbitrary or unjustifiable discrimination between countries where the same conditions prevail . 62 (d) Disguised restriction on trade . 63 C. Corporate Average Fuel Economy Regulation . 63 (i) Article III:2 . 63 (ii) Article III:4 . 65 (a) Treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements ... 65 (a)(i) Fleet averaging . 75 (b) Separate foreign fleet accounting . 81 (iii) Article III:5 . 84 Separate foreign fleet accounting . 84 (iv) Article XX(g) . 87 (a) relating to the conservation of an exhaustible natural resource . 87 (b) Made effective in conjunction with restrictions on domestic production and consumption . 89 (c) Arbitrary or unjustifiable discrimination between countries where the same conditions prevail . 91 DS31/R Page 3 (d) Disguised restriction on trade . 92 (e) Article XX(g) and the two-fleet and 75 per cent parts rules . 93 (v) Article XX(d) . 94 D. Cumulative Effect of the Three Automobile Taxes . 94 IV. THIRD PARTY SUBMISSIONS . 95 V. FINDINGS . 98 A. Luxury Tax . 98 (i) Article III:2, first sentence . 99 (a) Treatment of like products under Article III . 99 (b) The luxury tax threshold . 102 (ii) Article III:2, second sentence . 103 B. Gas Guzzler Tax . 103 (i) Article III:2, first sentence . 104 (a) Domestic automobiles above the threshold . 105 (b) Domestic automobiles with a higher computed fuel economy . 106 (c) Domestic vehicles not covered by the measure . 107 (ii) Article III:2, second sentence . 108 (iii) Article XX(g) . 108 C. Corporate Average Fuel Economy (CAFE) Regulation . 108 (i) Article III . 110 (ii) Article III:4 . 110 (a) Separate foreign fleet accounting . 111 (b) Fleet averaging . 112 (iii) Article XX(g) . 114 (a) Separate foreign fleet accounting . 116 (b) Fleet averaging . 116 (iv) Article XX(d) . 117 (v) Article III:5 . 118 D. Cumulative effect of the three regulations . 118 VI. CONCLUSIONS . 118 ANNEX I . 120 ANNEX II . 125 DS31/R Page 4 I. INTRODUCTION 1.1 On 20 May 1992, the European Community requested the United States to hold consultations pursuant to Article XXIII:1 on three measures maintained by the United States, namely, the Corporate Average Fuel Economy (CAFE) regulations, the gas guzzler tax, and the luxury tax, as it applies to cars (DS31/1). These consultations were held on 15 July and 20 September 1992. As they did not result in a satisfactory solution, the European Community, in a communication dated 12 March 1993, requested the CONTRACTING PARTIES to establish a Panel to examine the matter under Article XXIII:2 (DS31/2). 1.2 The Council, at its meeting on 12 May 1993, agreed to establish a Panel on the matter and authorized the Chairman of the Council to designate the Chairman and members of the Panel in consultation with the parties concerned (C/M/263). 1.3 In document DS31/3, dated 2 August 1993, the Chairman of the Council reported that the Panel would have the following terms of reference and composition: Terms of reference "To examine, in the light of the relevant GATT provisions, the matter referred to the CONTRACTING PARTIES by the European Economic Community in document DS31/2 and to make such findings as will assist the CONTRACTING PARTIES in making the recommendations or in giving the rulings provided for in Article XXIII:2." Composition Chairman: Mr. Thomas Cottier Members: Mr. Carlos M. Cozendey Mr. Adrian Macey 1.4 At the meeting of the Council on 12 May 1993, the delegations of Australia, Japan, and Sweden reserved the right to intervene in the Panel proceedings (C/M/263). 1.5 The Panel met with the parties to the dispute on 4-5 November and 16-17 December 1993. The delegation of Sweden orally presented a written submission to the Panel at the meeting held on 4-5 November 1993. The Panel submitted its report to the parties on 30 September 1994. II. FACTUAL ASPECTS 2.1 This Panel concerns three United States (US) measures: the luxury tax on automobiles contained in the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990")1 (hereinafter called the luxury tax), the gas guzzler tax on automobiles contained in the Energy Tax Act of 1978, as amended, and its Regulations2, (hereinafter called the gas guzzler tax), and the Corporate Average Fuel Economy law contained in the Energy Policy and Conservation Act (EPCA 1975), and its Regulations3, as amended (hereinafter called CAFE). 127 U.S.C. 4001 et seq. 226 U.S.C. 4064 et seq. Regulations contained in 40 C.F.R. Part 600. 315 U.S.C. 2001 et seq. Other legislative materials in H. Rep. No. 340, 94th Congress, 1st Session 3 (1975); and S. Rep. No. 179, 94th Congress, 1st Session 6 (1975). Regulations in 49 C.F.R. Part 500. DS31/R Page 5 A. Luxury Tax 2.2 The OBRA 1990 imposed the luxury tax on the first retail sale of vehicles over $30,000, and on several other products. The tax was equal to 10 per cent of the amount by which the article's retail price exceeded $30,000 in the case of passenger vehicles, $100,000 in the case of boats, $250,000 in the case of aircraft, and $10,000 in the case of jewelry and furs. The automobile luxury tax is paid by the customer to the dealer who then submits receipts periodically to the US Internal Revenue Service. The automobile luxury applied to domestic and imported vehicles alike. 2.3 The law defines a passenger vehicle as any 4-wheeled vehicle that is manufactured primarily for use on public streets, roads, and highways and that is rated at 6,000 pounds unloaded gross vehicle weight or less. Limousines are subject to the tax regardless of their weight. Trucks and vans are subject to the tax on a gross vehicle weight basis. Vehicles sold for use in a trade or business of transporting persons or property for compensation or hire are not subject to the tax. Exemptions are also provided for exports and for vehicles sold to the Federal Government or a State or local government for use exclusively in law enforcement or public safety activities or to any person for use exclusively in providing emergency medical services. 2.4 In 1993, the US Congress enacted the Omnibus Budget Reconciliation Act of 1993. This Act repealed the luxury excise tax imposed on boats, aircraft, jewelry, and furs. It also modified the tax on passenger vehicles by indexing the $30,000 threshold for inflation occurring after 1990,which raised the threshold to $32,000 as of 1 January 1994. B. The Gas Guzzler Tax 2.5 The gas guzzler tax is an excise tax enacted in 1978 on the sale of automobiles within "model types" whose fuel economy fails to meet certain fuel economy requirements. The tax is imposed on manufacturers. The levels of fuel economy below which passenger automobiles are subject to tax, and below which the maximum tax is imposed, are as follows: Model year Subject to tax if below: Maximum tax if below 1980 15 mpg4 13 mpg 1981 17 mpg 13 mpg 1982 18.5 mpg 12.5 mpg 1983 19 mpg 13 mpg 1984 19.5 mpg 12.5 mpg 1985 21 mpg 13 mpg 1986 or later 22.5 mpg 12.5 mpg 2.6 Under the Energy Tax Act of 1978, the range of tax rates applicable in each model year was as follows: Model year Lowest rate Highest rate 1980 $200 $550 1981 $200 $650 1982 $200 $1,200 1983 $350 $1,550 1984 $450 $2,150 1985 $500 $2,650 4Hereafter, "mpg" means "miles per gallon". DS31/R Page 6 1986 or later $500 $3,850 2.7 In 1990, OBRA 1990 doubled the gas guzzler tax rates in effect since 1986; the current rates range from $1,000 to $7,700. The levels of fuel economy below which passenger automobiles are subject to tax, and below which the maximum tax is imposed remain at 22.5 mpg and 12.5 mpg, respectively. Thus, the tax rates are now imposed as follows : If the fuel economy of the model type in which the auto falls is: The tax is: At least 22.5 $ 0 At least 21.5 but less than 22.5 1,000 At least 20.5 but less than 21.5 1,300 At least 19.5 but less than 20.5 1,700 At least 18.5 but less than 19.5 2,100 At least 17.5 but less than 18.5 2,600 At least 16.5 but less than 17.5 3,000 At least 15.5 but less than 16.5 3,700 At least 14.5 but less than 15.5 4,500 At least 13.5 but less than 14.5 5,400 At least 12.5 but less than 13.5 6,400 Less than 12.5 7,7005 2.8 The law defines an automobile as any 4-wheeled vehicle propelled by fuel that is manufactured primarily for use on public streets,.
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