Heathrow Airport Ltd & Ors v Her Majesty's Treasury (Rev 1) [2021] EWCA Civ 783

“The supplier of goods which are liable to VAT and which are supplied to intending passengers at duty-free and tax-free shops approved by the Commissioners may, for those goods which are exported directly to a place outside the VAT territory of the member states, be regarded as the exporter and zero rate the supply.”

“A.22 Abolition of the VAT Retail Export Scheme (RES): this scheme allows individuals from parts of the world other than the EU to claim back VAT on goods purchased in Great Britain. Abolishing it brings the treatment of tourists from outside the EU into line with those from the EU from the end of the transition period (as opposed to extending the scheme to EU tourists). Alignment is a requirement of WTO rules. Most VAT RES beneficiaries do their shopping in luxury stores, particularly those in London and the South East, with 90 per cent of refunds from London and Oxford (Bicester Village). Ending the scheme results in a direct Exchequer saving – around £0.5 billion was refunded through the scheme in 2019 – but there will also be costs as the UK becomes less attractive for affected tourists relative to alternative EU destinations such as Paris or Milan. Estimates of the sensitivity of tourism to price changes generally refer to tourism in general rather than those focused on luxury shopping. The costing takes one UK-specific estimate relating to tourism in general and scales it up by 50 per cent (to an elasticity of 1.9) in recognition of the likely greater responsiveness of those affected by the measure. This reduces the yield slightly, but the estimate is highly uncertain. Several studies have considered the negative consequences of this measure for affected industries. Our forecasts consider such indirect effects at an aggregate level, looking at overall changes in tax and spending (worth tens of billions of pounds at this forecast) rather than measure-by-measure. A.23 Abolition of Tax-Free airside shopping: this measure also aligns the UK with WTO rules. Tax-free airside shopping is currently available for those travelling to destinations outside the EU, but this will be abolished at the end of the transition period. The main impact will be on the sales of beauty products (perfumes and cosmetics) that generate around half of total sales in duty free shops. The yield from this is again subject to uncertainty around the behavioural response. It is not clear how much of the tax rise will be passed through to the prices faced by consumers or the degree that any price rises will reduce sales.”

“(1) The appropriate Minister may by regulations made by statutory instrument make such provision relating to— (a) value added tax, (b) any duty of customs, or (c) any excise duty, as the appropriate Minister considers appropriate in consequence of, or otherwise in connection with, the withdrawal of the United Kingdom from the EU.”

“Tax free shopping (extra statutory concession 9.1) The tax-free shopping extra statutory concession (ESC 9.1) is published in Vat Notice 48. It allows retailers of goods sold in ports and airports to zero-rate sales to passengers departing for non-EU destinations. ESC 9.1 allows the retailer to be regarded as exporters of those goods and consequently zero rate the supply for VAT purposes. This concession will be withdrawn with effect from 1 January 2021 throughout the UK. VAT Retail Export Scheme (VAT RES) VAT RES allows non-EU visitors to the EU to recover the VAT on purchases they make on the high street which they take home with them in their luggage. This scheme will be withdrawn in Great Britain. Retailers in Northern Ireland, including those at ports or airports, will continue to be able to offer VAT RES to non-EU visitors to Northern Ireland, under the terms of the Northern Ireland Protocol.”

“1.6 The government has a number of objectives relating to passengers after the transition period, and any changes would need to take these into account: • minimising disruption at exit and entry points. • minimising delivery challenges and expensive and timeconsuming infrastructure changes. • minimising revenue loss, particularly via tax evasion or avoidance.”

“2.1 The framework for the VAT and excise treatment of crossborder movements of goods in the EU is currently set out in EU law. The international norm, consistent with OECD Guidelines and World Trade Organisation (WTO) rules, is that VAT and excise on goods should be paid in the country of consumption. The consequence is that the UK relieves excise duty and VAT on goods which are exported and consumed outside of the EU. 2.2 For passengers travelling within the EU, duty-free and taxfree sales were abolished on 30 June 1999, which meant that passengers travelling intra-EU were no longer entitled to purchase duty-free and tax-free goods. However, they could, instead, carry unlimited amounts of tax paid non-excise goods and duty-paid alcohol and tobacco across borders within the EU, subject to indicative limits. No customs duty, additional excise duty (providing the goods are for personal use and are transported by the individual) or additional VAT was due at their destination, VAT and excise duty having been paid in the EU country of purchase. These passengers may currently enter the UK by using the blue channel at airports and ports and this will remain the case during the transition period, as the UK continues to be a member of the customs union and goods may flow freely between the UK and EU. 2.3 In the case of excise goods, passengers entering the UK from a non-EU country can bring in limited amounts of alcohol and tobacco in their personal luggage without making a declaration. If they remain within the personal allowances, then they can use the green channel to declare that they are within these allowances. If the goods carried by the passenger exceed the personal allowances (or the goods are held for a commercial purpose) then the passenger must use the red channel, where they must declare goods and pay relevant taxes and duties. Duty-free shops are found at international airports and ports; duty-free sales are also made on-board some aircraft and ships. 2.4 Currently duty-free sales are only available to passengers travelling to or from non-EU countries by air or sea. Those travelling between the UK and the EU or by other means of transport, such as by car and train (the Dublin-Belfast train or on Eurostar or Eurotunnel) cannot purchase duty-free products. Existing EU law does not allow duty-free shops at land borders, including train stations. Currently there are no duty-free shops at UK ports. 2.5 At the end of the transition period EU member states will be able to offer duty-free and tax-free sales on the cross-border movement of goods to those travelling to the UK from airports, ports or on-board aircraft or ships. The decision on the application of duty-free and tax-free limits to those goods when entering the UK will lie with the UK government. It would similarly be the UK’s choice whether to offer duty-free and taxfree sales to those travelling from the UK to the EU after the transition period, subject to the UK’s international obligations.”

“Q11. The government would welcome any evidence or views on the impacts of abolishing the VAT RES. Q13. The government would welcome any evidence or views on the impacts of abolishing airside tax-free sales.”

“4.16 The government is aware that a number of claims have been made about the scale of the benefits of the VAT RES to international tourism, the high street and other businesses. Before the government considers retaining the VAT RES or extending this service to EU residents it would welcome evidence as to the scale of those benefits, and whether the current scheme is achieving its aims. While the VAT RES adheres to international tax principles, it is unclear what the impact on the high street is (particularly outside of London and other tourist destinations), whether the scheme offers value for money for the Exchequer, and whether passengers are being treated fairly (for example, some customers only receive a small proportion of their VAT refund).”

“If airside tax-free sales were abolished, all UK airports would lose significant income. In Heathrow’s case, this would mean that commercial income would significantly reduce and under CAA regulation Heathrow would not be able to support current passenger charges to airlines. This could lead to an increase in air fares by the main airlines who operate from Heathrow and therefore impact on UK consumers negatively. As mentioned above, airports and airlines are likely to experience a relatively slow recovery, and so non-aeronautical income will become even more important for UK aviation in the years ahead. If the implications of this question indicated that only duty-free sales would remain this would leave a small proportion of the total airside offer currently. Many retailers in airside locations in UK airports may consider closing as the value proposition would be totally undermined. Outside of the current COVID-19 impact, nearly 10.000 colleagues are employed across over 350 restaurant and retail units in Heathrow alone.”

“3.12 … The main arguments against abolition were that the scheme is felt to incentivise overseas visitors to spend more during their visit and there was a feeling that sales may be displaced to other countries. One stakeholder told the government about the potential impact on jobs. 3.13 Instead, these respondents want to see the VAT RES extended to the EU in digital form. One stakeholder suggested that, as passenger numbers have dropped due to the pandemic, there is little risk of disruption from an extension of the scheme in current form. Three others had a similar view but did not reference the pandemic.”

“3.15 The international norm, consistent with OECD guidelines and WTO rules, is that VAT (and excise) on goods should be paid in the country of consumption. The VAT RES is only one mechanism which aims to achieve this for eligible goods which are exported in the luggage of non-EU residents and consumed outside of the UK. However, the scheme is an imperfect way to ensure that VAT is paid in the place of consumption, not least due to the risk of fraud and non-compliance. 3.16 Many stakeholders have highlighted what they see as the benefits of the VAT RES and submitted evidence about the scale of those benefits for international tourism, the high street and other businesses. The direct impact of the scheme on the high street remains unclear, particularly outside of London. For example, evidence provided during the consultation and gathered by HMRC shows that the majority of purchases are made in London and following this, Bicester Village. Other regions, and particularly smaller high streets, do not appear to benefit as much, if at all.”

“…goods that do not leave the country which are instead consumed in GB, passenger adherence to eligibility rules (GB or EU residents using non-EU passports to benefit from the scheme) and passengers not declaring goods that are liable for import tax and duty in the 13 destination country. There is a risk that these issues would significantly increase with any extension to the EU.”

“This differential treatment between non-EU and EU residents will not be possible on 1 January 2021 as it is not tenable as a long-term solution, nor would it be compliant with WTO rules which broadly require the government to treat goods carried by passengers bound for different destinations equally.”

“1.1 Introduction This report evaluates the costs and benefits of the proposed ending of Duty-Free Shopping for Non-EU visitors to the UK as an indirect result of the Brexit negotiations. It compares looks at the two possible systems. First, the proposed situation where the VAT Retail Export Scheme is scrapped and secondly, the extension of the current scheme to tourists from the EU as well as from outside the EU. The main research in Sections 2-5 use the elasticities approach where conventional elasticities from tourism and tax research by official bodies are applied. We estimate the deadweight revenue losses, the gains from tourism and spending and the net benefits in GVA and jobs and total tax revenue gains after netting off the deadweight losses. Our calculations are based on an earlier report commissioned by Global Blue which Cebr prepared in 2017. Because of the urgency of the current report it assumes the same elasticities for the main research as were used in the earlier report. Our normal approach would be to use data from the latest complete calendar year. For this report what would have been a standard practice has become a necessity since Covid-19 has so affected the data for 2020 as to make it atypical. Figures in this report are therefore for 2019 unless stated otherwise. Section 2 provides background; Section 3 describes the methodology; Section 4 analyses the impact of scrapping the current scheme and Section 5 the impact of extending the current scheme to tourists from the EU. Section 6 shows a different analysis based on Global Blue customer research. A significant proportion of the expenditure affected by the VAT Retail Export Scheme is concentrated on a small number of heavy hitters and so the behaviour of these heavy hitters is relevant. Global Blue has conducted some very up to date fieldwork on the possible behaviour of these people and the potential impact if the preferences which they state turn out to accurate in reality. Section 7 shows the conclusions and how the options of extension and scrapping compare with each other. 1.2 Summary Effects of abolishing the current scheme for non-EU visitors We show in Section 4 the potential impact of ending the current VAT Retail Export Scheme for non-EU visitors estimated using the traditional elasticities for tourism and spending calculated by official bodies. Even on these cautious assumptions the impacts are clearly negative: • The number of non-EU visitors to the UK will be reduced by 7.3% or 1,168,000. • The total decrease in spending by tourists resulting from the ending of the VAT Retail Export Scheme is estimated to be between £1.1 billion and £1.8 billion • After taking account of knock on effects GVA is reduced by £1.8 -£2.8 billion. • We estimate that between 27,000 and 41,000 jobs will be lost. • And that far from gaining the theoretical £521 million, the loss of economic activity would mean that tax revenues were net reduced by £270 – 680 million. But if the stated preferences emerging from the customer research carried out by Global Blue are correct, these estimates are far too low and the actual real-life impact will be very much higher. • Abolition of tax free would reduce the number of visitors by 31% or 4.96 million. • Their spending would be reduced by over £6 billion. • GVA is £9.3 billion lower causing a reduction in employment of 138,423 • And after taking the gains from the abolition of the tax relief into account, tax revenues are £3,492 million lower. If the survey data is anywhere near accurate, abolishing the scheme would be a massive negative for the economy at a time when this is least needed, hitting sectors that are especially vulnerable like tourism and retail. Extension of the scheme to EU visitors We have only used the elasticities approach to estimate the impact of extending the scheme to EU visitors and the detailed calculations are in Section 5. Again, even on the cautious assumption that this implies, the net impact is that extending the scheme raises more tax revenue than it loses. • We estimate that extending the scheme to visitors from the EU would increase the number of EU visitors by 3.8%. This would imply an additional 948,000 visitors who themselves would spend an additional £590-£890 million. • We estimate that the increase in GVA of extending tax free retail to visitors from the EU will be between £900 and £1,360 million. The increase in jobs from the extension would be 13,500 and 20,200 jobs. • The theoretical loss of revenue from extending Tax Free is £312 million of VAT estimated earlier. But this is offset by the income taxes, national insurance, indirect taxes, corporate taxes and rates that will be collected as a result of the additional tourist spending. • So, extending the scheme, far from costing money, generates between £79 and £276 million in net additional taxes.”

“The choice was between extending the VAT RES to EU residents or removing it completely as World Trade Organization (WTO) rules specify that goods bound for different destinations must be treated the same.”

“The tax base is uncertain. There is also uncertainty around any behaviour responses once the policy is implemented, especially around how much shops will react and adjust prices and, consequently, how much travellers reduce spending”

“We have estimated a small impact on the APD forecast. This could also negatively affect other sectors such as hospitality and transport”

“particularly confident in any specific number.”

“Mr Andy King … This is obviously related to flows of tourism which during the pandemic have been hit extraordinarily hard. So in some ways we’ve linked this to the judgements we’ve made about how long it will take the air passenger duty forecast to recover. And that’s all before you get to the behavioural response. Now, the way we looked at this, there was rather more outside evidence brought to bear on this than many costings of similar size. We assumed a relatively high price elasticity response from those affected, but for the reasons you’ve set out, whether that’s going to be high enough or not is something that I don’t think we can be very confident in. I don’t think we’re going to be able to pick this apart with the benefit of hindsight either, because it’s being introduced mid-pandemic. I think the wider question about VAT on hotels, that kind of thing, that is not reflected in the £300 million a year that you mentioned. That number just looks at the degree to which shopping on the type of goods that are covered by the scheme at the moment will be affected. When we look at how the wider economy is affected by new policy measures, we do it in the round, with all the measures that are announced in a Budget or a Spending Review. So in this instance, with the best part of £100 billion being added to public spending, a £0.5 billion at most tax takeaway is kind of swamped by that. That’s not to say that these are not important - if you were looking at this on its own, if it was the only thing that happened in this Budget, then we would have been looking at that in a slightly different way. So, that’s not to say the analysis that people have done is not relevant, but it’s not factored into that specific line of numbers. Felicity Buchan MP: Yeah, and I understand completely in terms of materiality, but just if you were to look at this measure on its own, do you think there’s a risk that it could actually be negative to the Exchequer, if you were to take in the losses on VAT? Mr Andy King: I’m afraid I haven't looked at that specifically, sorry. I don’t have an answer for you.”

“3.25 Currently, tax-free sales to passengers travelling to nonEU countries are permitted under an HMRC extra statutory concession (ESC). The legal scope for such an ESC is very limited and the ESC for tax-free sales, as it stands, could not apply after the end of the transition period, nor could it be amended. HMRC will therefore remove the ESC for tax-free sales across the UK with effect from 1 January 2021.”

“Following a 2005 Judgement from the House of Lords, which limited HMRC's discretion to provide tax reliefs through an ESC, the legal scope for any ESC has been very limited. As such, the ESC for tax-free airside sales, as it stands, could not be amended. The ESC, as drafted, should only apply to non-EU bound passengers and cannot be amended to apply to EU bound passengers.”

“Extra statutory concession … are the most public and formal way in which the Commissioners have exercised their C&M powers. ESCs are designed to smooth the operation of the tax system and may result in relief for certain customers in specific circumstances. They have been a feature of the UK’s tax system for decades and will continue to be made and withdrawn as necessary. As ESC is a published statement that HMRC will, in certain defined circumstances, depart from the strict position under statute and treat taxpayers as if they were entitled to some concession, such as a reduction in liability to the particular tax or duty. ESCs must be justified as an exercise of the Commissioners’ managerial discretion. Many but not all ESCs are published in the “Extra Statutory Concessions: ex-inland Revenue” booklet and in “VAT Notice 48: Extra Statutory Concessions”

“…HMRC’s view has been that ESC 9.1 is, and remains, ultra vires but that the risk of challenge was minimal, and it was therefore not a high priority for review and replacement.”

“Article 146 1. Member States shall exempt the following transactions: (a) the supply of goods dispatched or transported to a destination outside the Community by or on behalf of the vendor; (b) the supply of goods dispatched or transported to a destination outside the Community by or on behalf of a customer not established within their respective territory, with the exception of goods transported by the customer himself for the equipping, fuelling and provisioning of pleasure boats and private aircraft or any other means of transport for private use… (emphasis added)” private aircraft or any other means of transport for private use… (emphasis added)”

“Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.”

“The exemptions provided for in Chapters 2 to 9 [of Title IX of the VAT Directive] shall apply without prejudice to other Community provisions and in accordance with conditions which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse.”

“24. It should be noted that, under Article 146(1)(b) of the VAT Directive, the Member States are to exempt the supply of goods dispatched or transported to a destination outside the European Union by or on behalf of a customer. That provision must be read in conjunction with Article 14(1) of that directive, according to which ‘supply of goods’ means the transfer of the right to dispose of tangible property as owner. 25. It follows from those provisions and, in particular, from the term ‘dispatched’ in Article 146(1)(b) that the export of goods is effected and the exemption of the supply of goods for export becomes applicable when the right to dispose of the goods as owner has been transferred to the purchaser and the supplier establishes that those goods have been dispatched or transported outside the European Union and that, as a result of that dispatch or that transport, they have physically left the territory of the European Union (judgment of 19 December 2013, BDV Hungary Trading, C-563/12, EU:C:2013:854, paragraph 24 and the case-law cited).”

“22 It must be recalled, in the first place, that in accordance with Article 146(1)(a) of the VAT Directive the Member States are to exempt the supply of goods dispatched or transported to a destination outside the European Union by or on behalf of the vendor. That provision should be read in conjunction with Article 14(1) of the directive, in accordance with which ‘supply of goods’ is to mean the transfer of the right to dispose of tangible property as owner (see, to that effect, judgment of 28 February 2018, Pieńkowski, C-307/16, EU:C:2018:124, paragraph 24). 23 That exemption is intended to ensure that the supplies of goods concerned are taxed at the place of destination of those goods, namely the place where the exported products will be consumed (see, to that effect, judgment of 8 November 2018, Cartrans Spedition, C-495/17, EU:C:2018:887, paragraph 34). 24 It follows from the provisions mentioned in paragraph 22 above, and particularly from the word ‘dispatched’ in Article 146(1)(a) of the VAT Directive, that the export of goods is effected and the exemption of the supply of goods for export becomes applicable when the right to dispose of the goods as owner has been transferred to the purchaser, the supplier establishes that those goods have been dispatched or transported outside the European Union, and, as a result of that dispatch or that transport, the goods have physically left the territory of the European Union (see, to that effect, judgment of 28 February 2018, Pieńkowski, C-307/16, EU:C:2018:124, paragraph 25).”

“even so, it was the customers and not the Appellant who exported them”

“A supply of goods is zero-rated by virtue of this subsection if the Commissioners are satisfied that the person supplying the goods - (a) has exported them [to a place outside the member States An amendment to section 30(6) by paragraph 29(4) of Schedule 8 of the Taxation (Cross-border Trade) Act 2018 removed the words "to a place outside the member States" from the current section 30(6)(a) VATA. ]; or (b) has shipped them for use as stores on a voyage or flight to an eventual destination outside the United Kingdom, or as merchandise for sale by retail to persons carried on such a voyage or flight in a ship or aircraft, and in either case if such other conditions, if any, as may be specified in regulations or the Commissioners may impose are fulfilled.”

“… the ESC would not be needed at all and its abolition would be of no concern to the Claimants.”

“Extending airside tax-free shopping to EU bound passengers travelling by air, sea and rail would require legislation to formalise the system and further requirements setting out how tax-free shops should operate could be included in this legislation.”

“With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”

“Article III 2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1. … 4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.”

“4. Further, as from 1 January 1958 or the earliest practicable date thereafter, Members shall cease to grant either directly or indirectly any form of subsidy on the export of any product other than a primary product which subsidy results in the sale of such product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market...”

“The exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.”

“3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: (a) … (b) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I; subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. 3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1.”

“Article XXIV: Territorial Application — Frontier Traffic — Customs Unions and Free-trade Areas” 1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting parties and to any other customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application. Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement, be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be construed to create any rights or obligations as between two or more customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application by a single contracting party. 2. … 3. The provisions of this Agreement shall not be construed to prevent: (a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic. (b) Advantages accorded to the trade with the Free Territory of Trieste by countries contiguous to that territory, provided that such advantages are not in conflict with the Treaties of Peace arising out of the Second World War. 4. The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories. 5. Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area; Provided that: (a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be; (b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free–trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and (c) any interim agreement referred to in subparagraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.”

“43. We note that, in its findings, the Panel referred to the chapeau of paragraph 5 of Article XXIV only in a passing and perfunctory way. The chapeau of paragraph 5 is not central to the Panel's analysis, which focuses instead primarily on paragraph 5(a) and paragraph 8(a). However, we believe that the chapeau of paragraph 5 of Article XXIV is the key provision for resolving the issue before us in this appeal. In relevant part, it reads: ‘Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union …; Provided that’: … (emphasis added). 44. To determine the meaning and significance of the chapeau of paragraph 5, we must look at the text of the chapeau, and its context, which, for our purposes here, we consider to be paragraph 4 of Article XXIV. 45. First, in examining the text of the chapeau to establish its ordinary meaning, we note that the chapeau states that the provisions of the GATT 1994 "shall not prevent" the formation of a customs union. We read this to mean that the provisions of the GATT 1994 shall not make impossible the formation of a customs union. Thus, the chapeau makes it clear that Article XXIV may, under certain conditions, justify the adoption of a measure which is inconsistent with certain other GATT provisions, and may be invoked as a possible "defence" to a finding of inconsistency. 46. Second, in examining the text of the chapeau, we observe also that it states that the provisions of the GATT 1994 shall not prevent "the formation of a customs union". This wording indicates that Article XXIV can justify the adoption of a measure which is inconsistent with certain other GATT provisions only if the measure is introduced upon the formation of a customs union, and only to the extent that the formation of the customs union would be prevented if the introduction of the measure were not allowed.”

“The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.”

“A principal difficulty, in the view of the Appellate Body, with the Panel Report's application of Article XX(g) to the baseline establishment rules is that the Panel there overlooked a fundamental rule of treaty interpretation. This rule has received its most authoritative and succinct expression in the Vienna Convention on the Law of Treaties (the "Vienna Convention") which provides in relevant part: Article 31 General rule of interpretation ‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. The "general rule of interpretation" set out above has been relied upon by all of the participants and third participants, although not always in relation to the same issue. That general rule of interpretation has attained the status of a rule of customary or general international law. As such, it forms part of the "customary rules of interpretation of public international law" which the Appellate Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions of the General Agreement and the other "covered agreements" of the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement"). That direction reflects a measure of recognition that the General Agreement is not to be read in clinical isolation from public international law.”

“… the United States, of course, carries responsibility for actions of both the executive and legislative departments of government”

“The United States, like all other Members of the WTO and of the general community of states, bears responsibility for acts of all its departments of government, including its judiciary.”

“1.1. The UK has left the European Union (EU) and entered a transition period. The question for the rest of 2020 is whether the UK and the EU can agree a deeper trading relationship on the lines of the free trade agreement (FTA) the EU has with Canada, or whether the relationship will be based simply on the Withdrawal Agreement deal agreed in October 2019, including the Protocol on Ireland / Northern Ireland. In either event the UK will be leaving the single market and the customs union at the end of this year and stakeholders should prepare for that reality. 1.2 The government will not agree to tax measures which go beyond those typically included in a comprehensive FTA. The government believes therefore that both parties should recognise their respective commitments to maintaining high standards in this area; confirm that they will uphold their international obligations; and agree to avoid using measures in this area to distort trade.”

“At the end of the transition period EU member states will be able to offer duty-free and tax-free sales on the cross-border movement of goods to those travelling to the UK from airports, ports or on-board aircraft or ships. The decision on the application of duty-free and tax-free limits to those goods when entering the UK will lie with the UK government. It would similarly be the UK’s choice whether to offer duty-free and taxfree sales to those travelling from the UK to the EU after the transition period, subject to the UK’s international obligations.”

“This differential treatment between non-EU and EU Residents will not be possible on 1 January 2021 as it is not tenable as a long term solution, nor would it be compliant with WTO rules which broadly require the government to treat goods carried by passengers bound for different destinations equally.”

“In order to remain compliant with WTO rules following the transition period, the UK’s VAT and excise rules will no longer be able to treat individuals carrying goods for personal use (passengers) to/from the EU, differently to those travelling to/from Rest of World countries.”

“The Government did not have the choice of maintaining the VAT RES as it is today. The choice was between extending the VAT RES to EU residents or removing it completely as the World Trade Organisation (WTO) rules specify that goods bound for different destination must be treated the same.”

“The UK Government have taken the decision to treat all passengers the same regardless of inbound origin or outbound destination following the MFN principle”

“these considerations…have only to be stated to compel the conclusion that these are not issues upon which a municipal court can pass judgment. … [T]here are … no judicial or manageable standards by which to judge these issues, or to adopt another phrase .., the court would be in a judicial no-man's land: the court would be asked to review transactions in which four sovereign states were involved, which they had brought to a precarious settlement, after diplomacy and the use of force, and to say that at least part of these were "unlawful" under international law.”

“…as a matter of the constitutional law of the United Kingdom, the Royal Prerogative, whilst it embraces the making of treaties, does not extend to altering the law or conferring rights upon individuals or depriving individuals of rights which they enjoy in domestic law without the intervention of Parliament…”

“The transactions of independent states between each other are governed by other laws than those which municipal courts administer: such courts have neither the means of deciding what is right, nor the power of enforcing any decision which they may make.”

“55. Subject to any restrictions imposed by primary legislation, the general rule is that the power to make or unmake treaties is exercisable without legislative authority and that the exercise of that power is not reviewable by the courts - see Civil Service Unions case cited above, at pp 397-398. Lord Coleridge CJ said that the Queen acts “throughout the making of the treaty and in relation to each and every of its stipulations in her sovereign character, and by her own inherent authority” - Rustomjee v The Queen (1876) 2 QBD 69, 74. This principle rests on the so-called dualist theory, which is based on the proposition that international law and domestic law operate in independent spheres. The prerogative power to make treaties depends on two related propositions. The first is that treaties between sovereign states have effect in international law and are not governed by the domestic law of any state. As Lord Kingsdown expressed it in Secretary of State in Council of India v Kamachee Boye Sahaba (1859) 13 Moo PCC 22, 75, treaties are “governed by other laws than those which municipal courts administer”

“Speaking generally, in my opinion, the presumption when considering any such policy issue is that [customary international law], once established, can and should shape the common law, whenever it can do so consistently with domestic constitutional principles, statutory law and common law rules which the courts can themselves sensibly adapt without it being, for example, necessary to invite Parliamentary intervention or consideration.”

“…the Secretary of State himself … took account of the respondent's representations that his extradition to Hong Kong would be a breach of the Convention in reaching his decision that he should be extradited.”

“That is so; but the whole context of the dialogue between the Secretary of State and the respondent in this case was the risk of an interference with the respondent's human rights. That in itself is a ground for subjecting the decisions to the most anxious scrutiny, in accordance with the principles laid down by this House in Regina v. Secretary of State for the Home Department, ex parte Bugdaycay [1987] A.C. 151, as Sir Thomas Bingham M.R. also recognised in Smith at p. 554H.”

“Nevertheless, the Attorney-General and Mr Pannick strenuously argued before the House that the judgment of the Divisional Court is in conflict with the principle of parliamentary sovereignty in the context of unambiguous primary legislation, viz section 16A. They submitted that the effect of the judgment was to invite the DPP to disapply primary legislation. In my view this argument is mistaken and fails to do justice to the reasoning of the Divisional Court. The Lord Chief Justice pointed out that in the present case the Director wished to know where he stood on the issue of compatibility of the legislation. The DPP sought and relied on legal advice on that issue. The Lord Chief Justice said that if the advice was wrong, the DPP should have the opportunity to reconsider the confirmation of his advice on a sound legal basis. As the Lord Chief Justice observed this approach is consistent with the judgment of Lord Hope of Craighead in Reg. v. Secretary of State for the Home Department, Ex parte Launder[1997] 1 WLR 839, at 867. In Launder Lord Hope observed: "If the applicant is to have an effective remedy against a decision [on extradition] which is flawed because the decision-maker has misdirected himself on the Convention which he himself says he took into account, it must surely be right to examine the substance of the argument." I respectfully agree. There was no infringement of the principle of Parliamentary sovereignty. I would reject this argument of the DPP.”

“So far as individuals are concerned, it is res inter alios acta from which they cannot derive rights and by which they cannot be deprived of rights or subjected to obligations; and it is outside the purview of the court not only because it is made in the conduct of foreign relations, which are a prerogative of the Crown, but also because, as a source of rights and obligations, it is irrelevant.”

“Investigation and prosecution of the bribery of a foreign public official shall be subject to the applicable rules and principles of each Party. They shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

“43. It is common ground that had the Director ignored article 5 of the OECD Convention, an unincorporated treaty provision not sounding in domestic law, his decision could not have been impugned on the ground of inconsistency with it. But the Director publicly claimed to be acting in accordance with article 5. The claimants accordingly contend (1) that it is open to the domestic courts of this country to review the correctness in law of the Director's self-direction; (2) that our courts should themselves interpret article 5; (3) that the Director's interpretation should be held to be incorrect; and (4) that the Director's decision should be quashed. Each of these steps in the argument is, in the judgment of the House, problematical. 44. In support of step (1) in this argument reliance was placed in particular on R v Secretary of State for the Home Department, Ex p Launder[1997] 1 WLR 839, 866-867 and R v Director of Public Prosecutions, Ex p Kebilene[2000] 2 AC 326, 341-342, 367, 375-376. Both cases concerned decision-makers claiming to act consistently with the European Convention at a time when it had not been given effect in domestic law. The courts accepted the propriety of reviewing the compatibility with the Convention of the decisions in question. But there was in the first case no issue between the parties about the interpretation of the relevant articles of the Convention, and in the second there was a body of Convention jurisprudence on which the courts could draw in seeking to resolve the issue before it. Whether, in the event that there had been a live dispute on the meaning of an unincorporated provision on which there was no judicial authority, the courts would or should have undertaken the task of interpretation from scratch must be at least questionable. It would moreover be unfortunate if decision-makers were to be deterred from seeking to give effect to what they understand to be the international obligations of the UK by fear that their decisions might be held to be vitiated by an incorrect understanding.” decisions might be held to be vitiated by an incorrect understanding.”

“The Parties shall co-operate in carrying out a programme of systematic follow-up to monitor and promote the full implementation of this Convention. Unless otherwise decided by consensus of the Parties, this shall be done in the framework of the OECD Working Group on Bribery in International Business Transactions and according to its terms of reference, or within the framework and terms of reference of any successor to its functions, and Parties shall bear the costs of the programme in accordance with the rules applicable to that body.”

“65. Although, as I have acknowledged, there are occasions when the court will decide questions as to the state's obligations under unincorporated international law, this, for obvious reasons, is generally undesirable. Particularly this is so where, as here, the contracting parties to the Convention have chosen not to provide for the resolution of disputed questions of construction by an international court but rather (by article 12) to create a Working Group through whose continuing processes it is hoped a consensus view will emerge. Really this is no more than an echo of para 44 of Lord Bingham's opinion. For a national court itself to assume the role of determining such a question (with whatever damaging consequences that may have for the state in its own attempts to influence the emerging consensus) would be a remarkable thing, not to be countenanced save for compelling reasons. 66. Are there such compelling reasons here? In my judgment there are not. There seem to me to be very real differences between this case and both Launder and Kebilene. In the first place, as Lord Bingham points out at para 43, there is a marked distinction between seeking to apply established Convention jurisprudence to the particular case before the court (as there) and determining, in the absence of any jurisprudence whatever on the point, a deep and difficult question of construction of profound importance to the whole working of the Convention (as here). Secondly, it seems to me tolerably plain that the decisionmakers in both Launder and Kebilene, deciding respectively on extradition and prosecution, would have taken different decisions had their understanding of the law been different. In each case the decision-maker clearly intended to act consistently with the UK’s international obligations whatever decision that would have involved him in taking. That, however, was not the position here. Although both the Director (and the Attorney General) clearly believed—and may very well be right in believing—that the decision was consistent with article 5, it is surely plain that the primary intention behind the decision was to save this country from the dire threat to its national and international security and that the same decision would have been taken even had the Director had doubts about the true meaning of article 5 or even had he thought it bore the contrary meaning. All that he and the Attorney General were really saying was that they believed the decision to be consistent with article 5. This clearly they were entitled to say: it was true and at the very least obviously a reasonable and tenable belief. Both the Director’s and Attorney General’s understanding of article 5 was clearly apparent from their public statements: it was implicit in these that they understood article 5 not to preclude regard being had to fundamental considerations of national and international security merely because these would be imperilled by worsening relations with a foreign state.”

“92. There are, undoubtedly, circumstances in which the courts of England and Wales will decide questions as to the extent of the obligations of the United Kingdom or, indeed, other States under treaties which have not been implemented into domestic law. (See, for example, J H Rayner (Mincing Lane) Limited v Department of Trade and Industry [1990] 2 AC 418 per Lord Oliver at pp. 500-501; Occidental Exploration and Production Company v. The Republic of Ecuador [2005] EWCA Civ 1116.) Thus, as Lord Pannick points out, in R v. Secretary of State for the Home Department, ex parte Launder [1997] 1 WLR 839 and R v. Director of Public Prosecutions, ex parte Kebilene [2000] AC 326 domestic courts decided the extent of the United Kingdom's obligations under the European Convention on Human Rights before it was given effect in domestic law by the Human Rights Act 1998. In R (Barclay) v. Lord Chancellor [2009] UKSC 9; [2009] 3 WLR 1270 Launder and Kebilene were accepted, on the basis of a concession, to be good law. However, Launder and Kebilene were treated in Corner House as exceptions to the general rule (Lord Brown at paragraph 65) and justified as cases in which there was no live dispute over the provisions of international law in issue or where there was a body of Convention jurisprudence on which the national court could draw in deciding the issue before it (Lord Bingham at paragraph 44 and Lord Brown at paragraph 66).”

“To my mind, the present case provides a compelling example of the difficulties and the undesirability of a domestic court expressing a concluded view on a disputed point as to the meaning and effect of non-implemented instruments governing a regime established by an international organisation. It will be apparent from the documents referred to above that widely different views are held as to the consequences which should follow under the ITU regime in circumstances where, as in the present case, a number of years after its registration, an assignment has not been brought into regular operation in accordance with its notified specification. That is a live dispute as to the rights and duties of the 191 national administrations which participate in the ITU regime. Moreover, there is provision within the ITU regime for dispute resolution, although the question whether that would be applicable in the circumstances of the present case is itself apparently in dispute. A further difficulty in the present case is that the statements emanating from various officers of the ITU referred to above would, given their quality and characteristics, hardly be an appropriate basis for the task of resolving the issue. However, that apart, it would not be appropriate for this court to embark on such an undertaking for the policy reasons given by Lord Bingham and Lord Brown in Corner House. This court is not in an appropriate position to determine the issue for all those subject to the ITU scheme. Given the dispute between the parties as to the effect of the ITU regime, it would not be appropriate for this court to go beyond the "tenable view" approach in examining the point of international law in question.”

“…clear that art. 23 of the treaty of August 1858, which accorded to Great Britain “most favoured nation” treatment, conferred upon this country and its subjects all the privileges and immunities secured to the United States and Austro-Hungary and their respective subjects, by the treaties to which reference has been made. There cannot, therefore, be any doubt that a British subject has a right to require that when a Japanese has a complaint or grievance against him, it shall be decided, not by the Local Courts of Japan, but by the British authorities exercising in that country extraterritorial jurisdiction.”

“Reversion to the status quo ante would place the United Kingdom in breach of its WTO obligations following expiry of the transition period.”

“If a domestic decision maker does decide to take an international obligation into account, he must also identify such obligations correctly, or his/her decision may be open to successful review.”

“Adoption of a ‘tenable view’ approach would be a way—under circumstances where the proper interpretation of international law is uncertain, the domestic courts have no authority under international law to resolve the issue and the executive has responsibility within the domestic legal order for management of the United Kingdom’s international affairs (including the adoption of positions to promote particular outcomes on doubtful points of international law)—to allow space to the executive to seek to press for legal interpretations on the international place to favour the United Kingdom’s national interest, while also providing a degree of judicial control to ensure that the positions adopted are not beyond what is reasonable.”

“7.1021. The scope of application of Article I:1 of the GATT 1994 is explicitly provided in the text thereof and includes "all matters referred to in paragraphs 2 and 4 of Article III". Article III:2 and III:4 cover, respectively, "internal taxes or other 204. internal charges of any kind … applied, directly or indirectly, to … products" and "laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use" of imported products". 7.1022. The Panel notes the European Union's argument that Brazil fails to explain why a measure not falling under Article III would also escape the application of Article I. Despite Brazil's limited explanation of its argument, the Panel understands Brazil to be arguing that if a measure does not concern a "matter referred to in Article III:2 or III:4" then it is outside the scope of Article I:1. Such an understanding would accord with the plain text of Article I:1. The Panel therefore proceeds in its analysis by examining whether the tax reductions at issue under Article I:1 constitute "matters referred to in paragraphs 2 and 4 of Article III". In other words, whether the measures at issue constitute either internal taxes or other internal charges of any kind applied directly or indirectly to products; or laws, regulations, or requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products. 7.1023. The Panel recalls from its discussion in section 7.2.1 above that the fact that a measure may be imposed on firms, or may relate to production and process methods, does not imply that its effects on trade in products are not covered by the disciplines of GATT Article III prohibiting discrimination between imported and domestic like products. The Panel believes that this is also true with respect to the disciplines of GATT Article I prohibiting discrimination between like imported products. 7.1024. More specifically, the tax reductions challenged under Article I:1 and discussed here are explicitly imposed on products. Article 21 of Decree 7,819/2012 states that "vehicles … may benefit from a reduction in IPI tax rates", and Article 22(I) of the same decree states that "[t]he reduction in IPI tax rates referred to in Article 21 … shall also apply to the products”. 7.1025. Since the tax reductions are on their face applied directly to products, the Panel considers that such tax reductions relate to "internal taxes … applied, directly or indirectly, to … products", and also comprise "laws, regulations and requirements affecting the [] internal sale, offering for sale, purchase, transportation, distribution or use" of imported products. 7. 1026. The Panel therefore concludes that such tax reductions are indeed "matters referred to in paragraphs 2 and 4 of Article III" and therefore are within the scope of Article I:1 of the GATT 1994.”

“Article 4 of the TRIPS Agreement. Like the national treatment obligation, the obligation to provide most-favoured-nation treatment has long been one of the cornerstones of the world trading system. For more than fifty years, the obligation to provide most-favoured-nation treatment in Article I of the GATT 1994 has been both central and essential to assuring the success of a global rules-based system for trade in goods. Unlike the national treatment principle, there is no provision in the Paris Convention (1967) that establishes a mostfavoured-nation obligation with respect to rights in trademarks or other industrial property. However, the framers of the TRIPS Agreement decided to extend the most favoured-nation obligation to the protection of intellectual property rights covered by that Agreement. As a cornerstone of the world trading system, the most-favoured-nation obligation must be accorded the same significance with respect to intellectual property rights under the TRIPS Agreement that it has long been accorded with respect to trade in goods under the GATT. It is, in a word, fundamental.”

“4. The "Separate Regimes" Argument 189. It has been argued by the European Communities that there are two separate EC import regimes for bananas, the preferential regime for traditional ACP bananas and the erga omnes regime for all other imports of bananas. Submissions made by the European Communities raise the question whether this is of any relevance for the application of the non-discrimination provisions of the GATT 1994 and the other Annex 1A agreements. The European Communities argues, in particular, that the non discrimination obligations of Articles I:1, X:3(a) and XIII of the GATT 1994 and Article 1.3 of the Licensing Agreement, apply only within each of these separate regimes. The Panel found that the European Communities has only one import regime for purposes of applying the non-discrimination provisions of the GATT 1994 and Article 1.3 of the Licensing Agreement. 190. The issue here is not whether the European Communities is correct in stating that two separate import regimes exist for bananas, but whether the existence of two, or more, separate EC import regimes is of any relevance for the application of the nondiscrimination provisions of the GATT 1994 and the other Annex 1A agreements. The essence of the non-discrimination obligations is that like products should be treated equally, irrespective of their origin. As no participant disputes that all bananas are like products, the non-discrimination provisions apply to all imports of bananas, irrespective of whether and how a Member categorizes or subdivides these imports for administrative or other reasons. If, by choosing a different legal basis for imposing import restrictions, or by applying different tariff rates, a Member could avoid the application of the nondiscrimination provisions to the imports of like products from different Members, the object and purpose of the nondiscrimination provisions would be defeated. It would be very easy for a Member to circumvent the non-discrimination provisions of the GATT 1994 and the other Annex 1A agreements, if these provisions apply only within regulatory regimes established by that Member. 191. Non-discrimination obligations apply to all imports of like products, except when these obligations are specifically waived or are otherwise not applicable as a result of the operation of specific provisions of the GATT 1994, such as Article XXIV. In the present case, the non-discrimination obligations of the GATT 1994, specifically Articles I:1 and XIII, apply fully to all imported bananas irrespective of their origin, except to the extent that these obligations are waived by the Lomé Waiver. We, therefore, uphold the findings of the Panel that the nondiscrimination provisions of the GATT 1994, specifically, Articles I:1 and XIII, apply to the relevant EC regulations, irrespective if there is one or more "separate regimes" for the importation of bananas.”

“Differential indirect taxation rates, and schemes to implement those differential rates according to destination, would not seem to affect the competitive opportunities of “like” products from different origins.”

“… could be circumvented simply by presenting a discriminatory tax on group X as though it were simply a tax relief for group Y.”

“The Ground stands or falls on whether the Claimants can establish an error of law in the Defendants’ interpretation of Article I:1 of the GATT 1994 in the Decision.”

“The result of [the TCA] … and its express establishment of a free trade area under Article XXIV of GATT 1994 Article OTH.3 TOCA does provide that the TCA is an agreement under Article XXIV GATT is that the alleged WTO impermissibility of maintaining from 1 January 2021 the VAT RES and ESC scheme as currently provided has disappeared.”

“Article COMPROV.16: Private rights 1. Without prejudice to Article MOBI.SSC.67 [Protection of individual rights] and with the exception, with regard to the Union, of Part Three [Law enforcement and judicial cooperation], nothing in this Agreement or any supplementing agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement or any supplementing agreement to be directly invoked in the domestic legal systems of the Parties. 2. A Party shall not provide for a right of action under its law against the other Party on the ground that the other Party has acted in breach of this Agreement or any supplementing agreement.”

“29 General implementation of agreements 1. Existing domestic law has effect on and after the relevant day with such modifications as are required for the purposes of implementing in that law the Trade and Cooperation Agreement or the Security of Classified Information Agreement so far as the agreement concerned is not otherwise so implemented and so far as such implementation is necessary for the purposes of complying with the international obligations of the United Kingdom under the agreement. 2. Subsection (1) - (a) is subject to any equivalent or other provision— (i) which (whether before, on or after the relevant day) is made by or under this Act or any other enactment or otherwise forms part of domestic law, and (i) which (whether before, on or after the relevant day) is made by or under this Act or any other enactment or otherwise forms part of domestic law, and (ii). which is for the purposes of (or has the effect of) implementing to any extent the Trade and Cooperation Agreement, the Security of Classified Information Agreement or any other future relationship agreement, and (b). does not limit the scope of any power which is capable of being exercised to make any such provision. 3. The references in subsection (1) to the Trade and Cooperation Agreement or the Security of Classified Information Agreement are references to the agreement concerned as it has effect on the relevant day. 4. In this section— “domestic law” means the law of England and Wales, Scotland or Northern Ireland; “existing domestic law” means— (a). an existing enactment, or (b). any other domestic law as it has effect on the relevant day; “existing enactment” means an enactment passed or made before the relevant day; “modifications” does not include any modifications of the kind which would result in a public bill in Parliament containing them being treated as a hybrid bill; “relevant day”, in relation to the Trade and Cooperation Agreement or the Security of Classified Information Agreement or any aspect of either agreement, means— (a). so far as the agreement or aspect concerned is provisionally applied before it comes into force, the time and day from which the provisional application applies, and (b). so far as the agreement or aspect concerned is not provisionally applied before it comes into force, the time and day when it comes into force; and references to the purposes of (or having the effect of) implementing an agreement include references to the purposes of (or having the effect of) making provision consequential on any such implementation.”

“30 Interpretation of agreements A court or tribunal must have regard to Article COMPROV.13 of the Trade and Cooperation Agreement (public international law) when interpreting that agreement or any supplementing agreement.” law) when interpreting that agreement or any supplementing agreement.”

“Reaffirmingthat the purpose of such agreements should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other Members with such territories; and that in their formation or enlargement the parties to them should to the greatest possible extent avoid creating adverse effects on the trade of other Members”

“22. KAI did not ultimately conduct the analysis as originally posed in the scoping paper. This was because, in my teams discussions with them, it became clear that the assumptions on which such an analysis would depend were too uncertain in this case to arrive at a ‘precise’ number for these impacts. I understand from my teams’ conversation with KAI that a significant difficulty was that any precise empirical estimates that are broader than the Fiscal Cost, including the effect on the high street, of the VAT RES or tax-free airside sales would be heavily dependent on key behavioural assumptions which were uncertain (e.g. on how it would affect purchasing decision and someone’s decision to visit the UK in the first place). Making these precise behavioural judgments, alongside the difficulty in obtaining, for example, granular sales date from retailer, was a key issue with conducting this kind of ‘precise’ estimate.”

“…A decision that is unsupported by evidence of probative value will be unlawful. In R (Laws)v Police Medical Appeal Board [2010] EWCA Civ 109, Laws LJ at [20] confirmed that judicial review was available in circumstances where there was “no legally sufficient evidence to justify the conclusion.”

“no reasonable authority could have been satisfied on the basis of the enquiries made that it possessed the information necessary for its decision” (Balajigari [70]).”

“…[T]he judge speaks of a ‘decision-maker who fails to take account of all and only those considerations material to his task’. It is important to bear in mind, however, … that there are in fact three categories of consideration. First, those clearly (whether expressly or impliedly) identified by the statute as considerations to which regard must be had. Second, those clearly identified by the statute as considerations to which regard must not be had. Third, those to which the decision-maker may have regard if in his judgment and discretion he thinks it right to do so. There is, in short, a margin of appreciation within which the decisionmaker may decide just what considerations should play a part in his reasoning process.”

“…the subsequent decision to implement withdrawal of the schemes was taken following and informed by the OBR analysis.”

“The reports presented the Wider Economic Impact of the schemes and relied on behavioural judgements and assumptions, which officials considered to be at the very upper end of the range for this type of analysis, and not what the OBR would likely deem as ‘reasonable and central’. While stakeholders might refer to these reports as evidence of the benefits of extending the scheme, they are very clearly estimates and predictions and open to challenge. These reports also contained little discussion about the uncertainties in predicting behaviour or the impact of passenger/visitor numbers, as KAI’s initial analysis of the Fiscal Cost had done. My team also had conversations with KAI about the general findings in these reports, with the view taken that these types of analysis were significantly uncertain and the claimed outcomes very difficult to predict. … [M]y team and KAI also held a meeting with the authors of the March 2020 York Aviation report to understand better the data used in their analysis of the Exchequer Impact of extending tax- and duty-free sales which formed part of their assessment of Wider Economic Impact. However, in short, we formed a different view to these reports on the behavioural assumptions and uncertainties that fed through into the claimed Wider Economic Impact of the schemes.”

“21. One issue was the extent to which KAI could assess the potential behavioural factors needed to build on the Fiscal Cost to produce wider analysis of the VAT RES as it currently operated and what it might be if it was extended to EU residents. Page 7 of the scoping paper posed a question about commissioning KAI to look at the tradeoff between the loss of revenue from VAT RES claims and the potential gain in high street sales from the scheme. 22. KAI did not ultimately conduct the analysis as originally posed in the scoping paper. This was because, in my team’s discussions with them, it became clear that the assumptions on which such an analysis would depend were too uncertain in this case to arrive at a ‘precise’ number for these impacts. I understand from my team’s conversations with KAI that a significant difficulty was that any precise empirical estimates that are broader than the Fiscal Cost, including the effect on the high street, of the VAT RES or tax-free airside sales would be heavily dependent on key behavioural assumptions which were uncertain (e.g. on how it would affect purchasing decisions and someone’s decision to visit the UK in the first place). Making these precise behavioural judgements, alongside the difficulty in obtaining, for example, granular sales data from retailers, was a key issue with conducting this kind of ‘precise’ estimate. However, my team had ongoing discussions with KAI from December 2019 onwards about potential ways to approach this issue and other analytical questions posed in the scoping paper. 23. In the event, KAI used a variety of data sources to initially assess the Fiscal Cost of the schemes, before the OBR forecast which would incorporate behavioural assumptions to assess the Exchequer Impact (which as explained … was not until November 2020). KAI’s analysis of the Fiscal Cost included analysis and discussion of the current cost and the impact of extending the schemes … and … – for example, KAI estimated the Fiscal Cost of the VAT RES using the total amount of VAT which refunded through the scheme, and the amount of VAT not charged to passengers travelling to non-EU countries for tax-free airside sales. This analysis also included analysis and discussion about the potential option of extending the schemes to EU residents, with uncertainties around passenger numbers and behaviours – as would be expected in any type of analysis such as this. MC5, which contained a section on the Fiscal Cost of extending the VAT RES to the EU, also included a discussion of the key behavioural factors that industry considered important (§44) and which would influence any estimate of the Exchequer Impact, subject to the limitations I have just explained. The Fiscal Cost of extending the schemes were presented to the Chancellor across the series of advices…”

“3.2 A policy costing is an estimate of the impact on the public finances of a new policy compared with a counterfactual scenario in which the policy is not introduced (i.e. the current policy continues). This means that the first step in any approach to costing a policy change is to establish the baseline ‘no policy’ counterfactual. For example, in considering the effects of reducing the rate of beer duty it would first be necessary to forecast the quantity of beer that was expected to be purchased absent any change in policy. 3.3 The objective of costing an individual policy measure is to reflect as accurately as possible the full effects the policy change will have on the public finances. Meeting that objective would ensure that forecasts of the public finances are as accurate and unbiased as possible and allow policymakers to make informed trade-offs between different policy options. In addition, when producing a forecast of the public finances, which informs the Chancellor’s decisions about the overall fiscal policy setting, a key objective is to understand the net impact of the policy package as a whole. 3.4 A policy change can potentially affect the public finances through a variety of channels, some of which are more straightforward to quantify than others. This is because policy changes will often influence the behaviour of those affected, which can lead to a complex chain of interlinked effects on the economy and public finances. A key question when producing policy costings is to what extent these micro-level behavioural effects and macrolevel indirect effects can be robustly estimated in policy costings. 3.5 There are different ways the chain of effects of a policy measure can be broken down. For the purposes of this briefing paper, we have used the following five steps, as the effects of the policy change filter through the economy: • The static effect of changing policy parameters such as tax rates or thresholds, before considering any behavioural response from firms or individuals; • The immediate direct behavioural effects of firms or individuals to the policy change; • Micro-level behavioural effects in closely-related areas that are small in relation to the whole economy; • Macro-level behavioural effects of policy changes that are material in relation to the whole economy; and • The overall net impact of the policy package as a whole. 3.6 The first step to costing a policy change is to consider its static effects. These are the immediate fiscal effects of a policy change, ignoring any impact on the behaviour of those affected by the change or any knock-on effects to the wider economy. In the beer duty example, that would mean applying the new beer duty rate to the baseline forecast of the quantity of beer clearances and calculating the difference in beer duty raised on the new and old basis. This calculation would be relatively simple, but the behavioural and wider effects ignored could be material. As the examples in Chapter 4 illustrate, in some cases even the static effects can be difficult to calculate where there is considerable uncertainty about the baseline forecast. 3.7 Policy changes can affect people’s incentives and decisions on a range of economic behaviours, such as how much they work, the quantities and types of goods and services that they consume, and the amount they save. Indeed policymakers often change policy settings precisely in order to induce certain behavioural and economic changes. These effects may have a material impact on the public finances. 3.8 The first-round of such behavioural effects concerns the particular area of taxation or spending directly affected by the policy change. In the beer duty example, the reduction in beer duty leads to lower beer prices, which, given the price elasticity of beer consumption, would increase beer clearances relative to the baseline. This would tend to push up total beer duty receipts which would to some extent – dependent on the price elasticity – offset the simple static effect, whereby a lower rate of beer duty on each unit sold would reduce receipts. 3.9 Behavioural changes may also affect closely related areas of taxation or expenditure. For example, the cost of beer and therefore the rate of beer duty could be a factor in the consumption of cider and other types of alcohol. Therefore a reduction in the beer duty rate could lead to a reduction in the consumption of cider, assuming there was no corresponding change in cider duty. HMRC has developed a variety of cross price elasticities to model such outcomes. 3.10 This chain reaction of behavioural responses to one set of policy changes affecting other decisions theoretically continues until all prices and quantities in the economy have adjusted to the new policy landscape. In the example of reducing beer duty, these wider indirect effects include a near-term effect on inflation, since the post-tax price of alcohol makes up part of the inflation measure, with possible knock-on effects for household consumption. Changes to the forecast size or composition of the economy would have second round of effects on the public finances – for example, temporarily lower inflation would affect the amount of interest paid on index-linked gilts and could affect the uprating of tax and benefit thresholds; changes in household consumption could affect VAT receipts; and so on. 3.11 Finally, while understanding the full effects of individual policy measures is important, it is also necessary to consider the net effect of the overall policy package. In recent Budgets and Autumn Statements, a typical policy package has included around 50 to 60 policy measures. As well as the chains of effects from individual measures, there will be interactions between the measures that need to be taken into account. Approaches to costing policy measures and packages 3.12 In simple terms, costing policy measures can be approached bottom-up (from the individual measures), top-down (from the net impact of the overall package), or through some combination of the two. In choosing the best approach(es), analytical tractability and transparency of presentation are both important considerations. 3.13 As we noted earlier, the Treasury publishes a scorecard of policy measures alongside each Budget and Autumn Statement, in which it quantifies the impact of each policy measure on public sector net borrowing (the ‘costing’) over the five years of the forecast horizon. In doing so, it incorporates for each measure the first three of the five steps listed above – the static impact, the direct behavioural impact and any micro-level behavioural impact in closely related areas. Under the terms of the Charter, the Treasury is free to decide which policy measures to include in – and exclude from – the scorecard and what costs to attribute to them. 3.14 Our ultimate objective is to assess the aggregate impact of the whole policy package and thus to produce the best forecast we can of the outlook for the public finances, taking into account all the latest decisions. In doing so, we state publicly whether we believe that the individual costings in the Treasury’s scorecard are central and reasonable, taking the scope of the assessment as given. We then incorporate these costings (or our preferred alternatives) into our forecast, also taking into account the impact of other policy measures that the Treasury may have omitted from the scorecard and, where material, reflecting the fourth and fifth steps identified above – namely the macro-level behavioural impact of the individual measures and the impact of the package as a whole on the aggregate balance of demand and supply in the economy, and thus the setting of monetary policy. Since the dividing line between what should be considered part of the bottom-up direct costing and what should be treated as a wider indirect effect is not clear-cut, it is important to ensure there is no double-counting of effects and to avoid any material effects being missed. 3.15 Splitting the five steps in this way – and dealing with the fourth and fifth in a top-down fashion – makes sense given the time and resources available to us during the pre-statement policy scrutiny process. In principle, we could analyse all the numerous knock-on behavioural effects of each policy measure and attribute the overall impact on the public finances to that measure, a process known as ‘dynamic scoring’. Quantifying the ‘general equilibrium’ fiscal effects of policy changes in this way is far from straightforward. As the Institute for Fiscal Studies has noted: “The difficulty [with dynamic scoring] is that coming up with this perfect measure would require answering virtually every question, theoretical and empirical, that has ever been asked in economics.”

“… a common statistical tool used to investigate relationships between variables. The investigator will seek to ascertain the causal effect of one variable upon another. A classic illustration is the impact of a price increase upon demand. In order to conduct this inquiry the compiler assembles data on the relevant underlying variables and then employs regression to estimate the quantitative effect of the causal variables upon the variable that they influence. The inquiry will also normally assess the "statistical significance" of the estimated relationships i.e. the degree of confidence that the true relationship is close to the estimated relationship. In the present case the counterfactual being assessed is the use and prevalence of tobacco in a market where standardised packaging as mandated by the Regulations is operative. Many factors operate upon use and prevalence: tax and excise duty; prior regulatory restrictions; the pricing policies of individual tobacco companies; etc. Regression analysis seeks to disentangle these divergent and variable forces in order to measure how only one such force or impetus is working.”

“12. Occasionally costing notes will assess the impact of a policy on other taxes and duties if there is a very clear and direct link. … 13. Costing notes do not assess the broader impact of tax policy changes on economic variables such as Gross Value Added or Consumer Price Index. The impact of a measure on broader economic variables, and the impact of those variables on other tax revenues (such as corporation tax receipts) is included in the indirect effects process if deemed appropriate by the OBR.”

“26. On reflection if we did treat the elasticity as a measure of the sensitivity of VAT RES users to changes in prices, then we could have adjusted the value of VAT RES purchases as a proportion of total spending by only VAT RES users. For illustration, we have replaced the 21% with 59% (which is the proportion of VAT RES spending as a proportion of total travel spending for VAT RES users, as found in the HMRC survey referenced in MC26, Annex B paragraph 2). This would mean the 2.8% would become 7.9%. The visitor impact would change from 28,824 in Table 8 to 81,473.”

“This would change the costing impact described at the end of Table 8 from £10 million to £30 million, compared to a total static cost of £525 million.”