## Facts

- The European Communities, Japan, and the United States challenged Indonesian measures providing tax and tariff advantages in the automobile sector.
- Indonesia maintained two sets of measures: a 1993 incentive scheme and a 1996 “National Car Programme.”
- The 1993 measures provided sales-tax (luxury tax/PPnBM) and customs-duty reductions or exemptions conditioned on meeting specified local content levels.
- The 1996 programme granted customs-duty and luxury-tax advantages to “national cars,” tied in practice to minimum local content thresholds and participation by a designated national-car producer and model line.
- The complainants alleged the measures discriminated against imported like vehicles and parts and functioned as local-content requirements and subsidies affecting competition in Indonesia’s automobile market.
- A single WTO panel heard the consolidated disputes; the panel report was circulated on July 2, 1998 and later adopted by the WTO dispute settlement body on July 23, 1998.

## Issues

1. Whether local-content-contingent tax and duty advantages constituted investment measures inconsistent with TRIMs Agreement Article 2.
2. Whether the programmes’ internal tax advantages for qualifying vehicles resulted in discriminatory taxation contrary to GATT 1994 Article III:2.
3. Whether the National Car Programme accorded advantages inconsistently with MFN obligations under GATT 1994 Article I:1.
4. Whether the National Car Programme’s tax and duty concessions were subsidies under the SCM Agreement and, if so, whether they caused “serious prejudice” to the European Communities under SCM Agreement Article 5(c) (as informed by Article 6).
5. What recommendations and compliance steps were required under DSU Article 19.1.

## Decision

- The panel found that the 1993 Programme’s local content requirements linked to sales-tax and customs-duty benefits were inconsistent with TRIMs Agreement Article 2.
- The panel found that the 1993 Programme’s discriminatory internal taxation in favor of high-local-content vehicles breached GATT 1994 Article III:2.
- The panel found that the 1996 National Car Programme was inconsistent with TRIMs Agreement Article 2 and breached GATT 1994 Articles I:1 and III:2.
- The panel found that the European Communities established serious prejudice to its interests within the meaning of SCM Agreement Article 5(c) arising from the National Car Programme subsidies.
- The panel recommended that Indonesia bring the challenged measures into conformity with its WTO obligations.

## Legal Principles

- Conditioning governmental advantages (including tax exemptions or duty reductions) on meeting local content thresholds constitutes a prohibited TRIM when it is inconsistent with GATT national-treatment and MFN obligations, as incorporated through TRIMs Agreement Article 2 and its Illustrative List.
- Under GATT 1994 Article III:2, imported and domestic “like” products may not be subject to internal taxes or charges that result in higher effective taxation of imports; de facto tax differentiation based on eligibility conditions can violate Article III:2.
- Under GATT 1994 Article I:1, advantages affecting importation must be accorded immediately and unconditionally to like products from all WTO Members; selective eligibility criteria that effectively privilege certain origins or arrangements can breach MFN.
- Tax and duty exemptions can constitute a governmental “financial contribution” (foregone revenue) conferring a “benefit” under SCM Agreement Article 1 when they reduce charges otherwise payable and are limited to specific enterprises or products.
- “Serious prejudice” under SCM Agreement Article 5(c), evaluated using Article 6 indicators, may be shown through displacement or impediment of exports, significant price undercutting, and lost sales or diminished competitive opportunities in the subsidized market.

## Conclusion

The panel concluded that Indonesia’s local-content-linked automobile incentives violated TRIMs and GATT non-discrimination rules and that subsidies under the National Car Programme caused serious prejudice to European Communities’ interests, requiring Indonesia to withdraw or modify the measures to comply with WTO obligations.


Indonesia—Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R (WTO Panel July 2, 1998)