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April 05, 2011 The Tax Lawyer

Taxing Innovation?—The Evolving Coverage of the Information Technology Agreement

Vol. 64, No. 1 - Fall 2010

Shin-yi Peng


    The World Trade Organization (WTO) Ministerial Declaration on Trade in Information Technology Products (the Information Technology Agreement, or ITA) was concluded at the Singapore Ministerial Conference in December 1996. The ITA was “a crowning achievement of the post-Uruguay Round WTO system,” and was widely recognized for eliminating duties on a vast range of information technology (IT) products. It was also considered to promote the spread of innovative technologies throughout the developed and developing world. Under the ITA scheme, WTO Members representing over 90% of the world’s trade in IT products committed themselves to eliminating customs duties and other duties and charges (such as tariffs) on a wide variety of IT products through equal rate reductions that began in 1997 and concluded in 2000. The immediate tariff benefit of this agreement laid the groundwork for economic development worldwide. In the ten years since the conclusion of the ITA, the export of IT products has amounted to more than $1.4 trillion USD (exceeding the global trade in agriculture), and there has been an unprecedented expansion in IT products.

    At the same time, the products and services of the information and communication (ICT) sector have gone through a dramatic technological convergence. Information technology is eliminating the historical differences between devices and network platforms, and blurring the lines between physical networks and the service providers that use those networks. In this context, there is a need to establish a trading and regulatory regime that recognizes the impact of this digital convergence. Unprecedented market changes have demonstrated that what worked in the past may not be the right approach today.

    The main objective of this Article is to critically review the litigation brought by the United States, Japan, and Taiwan (complainants) against the European Commission (EC) tariff regime on IT products [hereinafter the EC–IT Products Dispute]. To begin, the EC has classified flat panel computer monitors with digital video interface (DVI) under tariff codes that are not covered by the ITA, and has subjected them to a 14% duty. Thus, a question before the WTO Dispute Panel is whether or not the EC is entitled to exclude the “flat panel display devices” from the scope of the ITA concessions merely because flat panel display devices are capable of receiving and reproducing signals from both “automatic data processing machines” and other sources. In addition, under the EC tariff regime, only a product with a telephone-based or cable-based modem qualifies for duty-free treatment; any product that communicates using a wireless, integrated services digital network (ISDN) or Ethernet modem is removed from the duty-free classification and is subject to a 14% duty. Moreover, the EC issued a new regulation classifying multifunction printers with scanning, laser printing, and laser copying capabilities, under the Harmonized System Commodity Description and Coding Systems (1996) subheading 9009.12, as photocopying apparatuses subject to a 6% duty.

    The complainants claim that the products at issue are covered by the ITA and not subject to taxation by the EC. The ITA signed in 1996 prohibits tariffs on most of the high-technology (hi-tech) products. The complainants claim that the tariff commitments at issue are contained in the European Communities Schedule of Concessions to the GATT 1994 (EC Schedule)—which was modified after the ITA was concluded to incorporate ITA tariff concessions—and that they bind all products covered by the ITA at zero duty. As such, the complainants further claim that the EC’s actions to impose duties on these products are inconsistent with Article II:1(a) and (b) of the General Agreement on Tariffs and Trade 1994 (GATT).

    Apparently, there is an interesting relationship between innovation, competition, and the hi-tech imports. Part II of this Article discusses the context of the ITA and the background of the EC–IT Products Dispute. Part III reviews the written submissions and oral arguments of the parties involved and discusses whether or not the products at issue should be covered by the ITA, and if yes, why. Finally, Part IV discusses the question of how the ongoing litigation regarding the ITA “provides an opportunity to revisit the issue of tariff classification, and offers a creative [format] for treaty interpretation” based on the trend of digital convergence.

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