#3: Tracing the Service: GATS and Rules of Origin
‘Rules of origin’ are the set criteria which helps governments determine the source of the imports. Broadly, the source of imports is important to (a) implement commercial measures, (b) enforce various trade commitments, and (c) collect trade statistics. The General Agreement on Tariffs and Trade (“GATT”) is silent on the issue of origin in its legal text. However, the Agreement on Rules of Origin has a comprehensive set of rules for determining the origin of imports of goods of various kinds.
The General Agreement on Trade of Services (“GATS”) has incorporated basic rules of origin in its text. When it comes to services, the issue of the origin of the imported service becomes extremely crucial. Due to the intangible nature of services, it is important to know the source of the service, to know if it is being imported at all or is being rendered by a local service supplier itself! Apart from that, a serious issue which arises is that GATS provisions such as Denial of Benefits cannot be exercised fully without having a proper mechanism to identify the source of services. The Denial of Benefits clause limits the WTO Members’ obligation only to the Member Countries. The Members can choose to deny the benefits of GATS to Non-Members. However, without a proper origin determination methodology in place, Non-Members will be able to claim benefits under GATS as well.
Existing GATS Framework
While the Definitions provision lays out a basic skeleton of how to understand the nationality of services, the lack of a comprehensive framework leaves various gaps in law. Article XXVII of the GATS explains the origin of the service on the basis of the kind of service in question. There are four modes of services:
It is clear that Mode 1 and Mode 2 rely on the territorial origin of the service. They are concerned with the service being provided from the exporting country itself. Mode 3 and Mode 4, on the other hand, require persons (natural or juridical) to move from the exporting country and be present in the importing country to provide services. The issues arising from both these kinds of supply of services overlap in some manner but shall be discussed separately for the sake of clarity.
Issues concerning Mode 3 and Mode 4
Mode 3 and Mode 4 clearly require the nationality of the service supplier to be determined, since the service supplier is present in the importing country itself. To understand if there has been an ‘export of services’ at all, the nationality of the service supplier becomes important. ‘Service supplier’ has been defined as ‘any person that supplies a service’, and a ‘person’ is ‘either a natural person or a juridical person’.
The nationality of a service provider who is a ‘natural person’ is relatively easier to determine. The service provided by a natural person is said to originate from Country Y, if:
The natural personal is a national of Country Y;
The natural person is a permanent resident of Country Y (assuming Country Y accords citizen-like treatment to permanent residents).
The issue arises when a natural person is a citizen of countries such as Australia, Canada, United States of America, European countries, etc. Several countries allow persons to hold dual citizenship. Therefore, if a service provider holds the passport for Australia and Canada both, the determination of the origin of the service being provided becomes tricky.
Similarly, problems may also arise for ‘stateless’ persons, who do not hold the citizenship for a given country. A situation of ‘statelessness’ can arise out of various reasons- administrative issues, transition of citizenship status, change in law, renunciation, etc. In such a situation, it is unclear how the origin of services shall be determined.
A juridical person is an incorporated company or firm. Under Mode 3, a company is said to originate from Country Y in the following situations:
If nationals of Country Y hold more than 50% of the equity interest in the company (own the company);
If nationals of Country Y have the power to name a majority of its directors (have ‘control’ over the company);
If nationals of Country Y can legally direct the actions of the company (have ‘control’ over the company).
Interestingly, an issue arose in the case of Canada-Autos, where DaimlerChrysler Canada Inc. was said to be originating in the United States, since it was controlled by a juridical person in United States, i.e. incorporated in United States. However, the Panel did not deem it necessary to analyze the final beneficiary of the equity held in the company. With such an understanding, provisions such as the Denial of Benefits, as explained previously, will move towards redundancy, if the final beneficiary happens to be a Non-WTO member. The limited two-pronged approach taken by the legal text of GATS with regard to ‘control’ is insufficient for a proper understanding and interpretation. A more nuanced understanding of corporate structures is required from the text to be able to trace the origin of companies, in case of commercial presence.
Another gap in understanding is in a situation where a service is jointly being provided by companies of different nationalities. As sectors such as digital publishing, architectural design, web hosting, and defense, transnational collaboration is extremely common. The GATS text does not entail a situation where one can mark the amount of value addition to a service made by a said company, in order to determine the origin.
Issues concerning Mode 1 and Mode 2
Arguably, determining the origin for Mode 1 and Mode 2 is easier, since they rely on the territorial origin of services. There is a clear distinction between the importing country and exporting country. However, there are still issues which are unclear.
Firstly, it is uncertain if the nationality of the person exporting the services is relevant. For example, through Mode 3, Company XYZ owned by a national of Country A is established in Country Y, and is providing certain services. These services are then exported by Country X. Would Country A have no role in this transaction?
Nothing in the GATS legal text suggests that the nationality of the service supplier must be determined. The legal text only requires a ‘territorial’ transfer of services. This can be problematic considering there could be various instances of circumvention/’trade agreement shopping’ which can take place due to such a vast gap in law.
It is pertinent to note that in a “Mode of Supply Snapshot” published by Canada, residency and citizenship requirements have been considered of relevance under Cross Border Supply and Consumption Abroad. In that situation, the problems relating to Mode 3 and Mode 4 are cornered back into Mode 1 and Mode 2 as well.
Another issue to be taken into account is that most of the supplies are provided over the internet under Mode 1. While the geographical location of internet devices can be traced through IP geolocation, there is enough literature to suggest that the method is not 100% accurate.
It is clear that the gaps in the rules of origin under GATS give rise to several problems. The feasibility of having Rules of Origin for services has been in question for the longest time. In 1991, during the Uruguay Round, it was discussed that rules of origin based on value addition for trade in services would not feasible for the following reasons:
Substantial transformation test and change in tariff heading will not be workable;
Insufficient information is available regarding the structure of production of most services; and
Non-storability of services makes every import of service a ‘substantial transformation’;
Hinderance to achieving the final goal of a policy introduced by a country.
However, with the transformation of how services are supplied over the past three decades, there are other aspects of origination to consider. The intangibility of services allow it to originate from multiple sources, and therefore make specific obligations under FTAs and general obligations under GATS (to WTO Members) redundant.
A document on rules of origin for services would be extremely different from the existing Agreement on Rules of Origin. As suggested in the paper, ‘WTO Origin Rules for Services and the Defects: Substantial Input Test as One Way Out?”, a combination of the substantial input test, value added test, and the existing laws is needed to be able to address the issue. Dimensions other than mere ‘inputs’ can be considered to understand the origin of the service, such as the context in which the origin is required, the nature of service, and the national laws regarding the said service. An understanding of corporate structures and how they affect trade in services must be built in trade law in order to have flourishing free trade in services as well. Great emphasis must also be laid on strong technology and privacy laws in this context, to be able to trace internet-related services in a more effective manner.