In this article, Ayushi Singh, a BA.LLB from Symbiosis law school and working with EY as an Associate Consultant, writes on the modes of supply under GATS (General Agreement on Trade in Services).
WTO was created following the Uruguay Round of multilateral trade negotiations to provides a common framework for the conduct of trade relations among its members with the main functions of facilitating the implementation, administration, and operation of the multilateral trade agreements; providing a forum for further negotiations; reviewing national trade policies; and securing solutions to trade disputes.
General Agreement on Trade in Services (GATS) is one of the three main principle of WTO agreements. The term ‘Supply of a Service’ under GATS includes the production, distribution, marketing, sale, and delivery of that service. GATS has identified 4 main modes of supply depending on the territorial presence of the supplier and the consumer at the time of the transaction and the degree and type of territorial presence which they have at the moment the service is delivered.
What are the Criterias:
1. Cross-border– Services supplied from the territory of one WTO Member into the territory of any other Member.
A user in country A receives services from abroad through its telecommunications or postal infrastructure.
Recently BEPS action Plan 1 has provided working paper guidance on taxation of the digital economy. This paper addresses specifically issues of above cross-border supply in addition to other issues.
The equalization levy in India is an example of withholding obligation on cross-border supply of services levied on online advertisements.
Influenced Sectors: Professional Services, Computer Related Services. Telecommunication Services, Courier Services
Types of Requirement: Commercial presence, Residency, Citizenship, Authorization and/or Licensing.
Necessary Statistics: Record the sale of such a service, net of the value of transport service and net of the value of the good in which the service is embodied.
2. Consumption abroad– services supplied in the territory of one WTO Member to the service consumer of any other Member, Nationals of country A have moved abroad as tourists, students, or patients to consume the respective services.
The Explanatory Note states that activities such as ship repair abroad, where only the property of the consumer moves, or is situated abroad, are also covered.
Influenced Sectors: Tourism
Types of Requirement/Restriction Affecting Mode: Commercial Presence, Residency, Citizenship, Authorization and/or Licensing, Discriminatory taxation, Limitations and/or restrictions on insurance.
Necessary Statistics: Include, not only items such as the repairs of vessels undertaken abroad, but also the purchase by tourists of specific services, ranging from hotels and restaurants to photographic services.
3. Commercial presence– Services supplied by a service supplier of one WTO Member, through commercial presence, in the territory of any other Member.
The service is provided within country A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (bank, hotel group, Construction Company, etc.).
Commercial presence covers not only the presence of juridical persons but also that of legal entities which share some of the same characteristics.
This criteria’s are broader than the balance of payments (BOP) concept of services trade, which is concerned only with transactions between residents of a given country and non-residents encompassing modes 1, 2, and 4. However, this mode typically involves only residents of the country concerned.
Influenced Sectors: Financial Services, Oil, Gas and Mining Services, Telecommunication Services, Environmental Services.
Restrictions on: the type of legal entity, on the number of suppliers, the participation of foreign capital, discriminatory taxation, remittances, capital transfers, and currency conversion.
Necessary Statistics: (i) information on flows and stocks of foreign investment which make commercial presence possible, and are currently recorded in FDI statistics; (ii) information on market size in service sectors, which may be approximated using production statistics, such as gross output or value added; and (iii) information on the activity of foreign companies in domestic markets (such as turnover), which is to be recorded under the new statistical domain of foreign affiliates trade (FAT) statistics.
4. Presence of natural persons– Services supplied by a service supplier of one WTO Member, through the presence of natural persons of a Member in the territory of any other Member which includes employees of service suppliers and suppliers present for less than a year in foreign markets. A foreign national provides a service within country A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).
The Annex on the Movement of Natural Persons supplying Services under the Agreement specifies that the agreement does not apply “to measures affecting natural persons seeking access to the employment market” nor does it apply “to measures regarding citizenship, residence or employment on a permanent basis.” This mode includes self-employed persons and employees on temporary assignment (intra-corporate transferees).
The terminology “natural persons” is used to differentiate between individuals and the generic use of “persons,” which covers individuals, branches, partnerships, associated groups, associations, estates, trusts, government agencies, and others.
If the presence is through a natural person, the mode of supply can assume two forms under GATS. The first relates to the commercial presence and includes the foreign employees of service suppliers, such as intra-corporate transferees (e.g., a foreign employee temporarily transferred to a foreign branch from a parent company which is commonly reflected in high-level staff/specialists or cheap labour). The second form relates to the presence of foreign natural persons independently of foreign commercial presence. This could involve persons who are themselves service suppliers, and present on a temporary basis in foreign markets for the supply of their services, such as foreign consultants, or the employees of foreign services suppliers sent abroad to fulfill a service contract.
Influenced Sectors: Information Technology, Professional Services, Other services where the movement of service supplying personnel is crucial (i.e. after sales services)
Types of Requirement/Restriction Affecting Mode: Visa and work permit processing delays, Licensing/certification requirement, Spousal employment restrictions, More restricted entry for certain types of professions, Economic Needs Tests and Labour Market Tests, Quotas, Technology transfer requirements, Residency and nationality requirements, Training/education/qualification requirements.
Statistics of movement per se of natural persons and the capital flow that makes such presence possible, and, the details of their activities.
These would cover transactions of independent service suppliers, such as foreign doctors, and information on natural persons who are employed by service suppliers, such as the foreign employees of foreign-owned banks. In the latter case, the service transaction would be attributed to the commercial presence mode, but the data required would presumably include the number of foreign employees and their income.