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CASE7-2Japan-TaxesonAlcoholicBeverages

WorldTradeOrganization,DisputeSettlementPanel,1998

Canada,theEU,andtheUnitedStatescomplainedthatJapanimposedlowertaxesonshochu,alocallyproducedalcoholicbeverage,thanitdidonimportedalcoholicbeverages,includingvodka,inviolationofArticlell,paragraph2,ofGATT1994.PanelReportsWT/DS8/R,WT/DS10/R,WT/DS11/R82

ReportofthePanel

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ThePanelnotedthatthecomplainantsareessentiallyclaimingthattheJapaneseLiquorTaxLawisinconsistentwithGATTArticleIl12(hereinafter"ArticleIl12").ArticleI12zreads

Theproductsoftheterritoryofanycontractingpartyimportedintotheterritonofanyothercontractingpartyshallnotbesubject,directlyorindirectly,tointernataxesorotherinternalchargesofanykindinexcessofthoseapplied,directlyorndirectly,tolikedomesticproducts.Moreover,nocontractingpartyshallotherwiseapplyinternaltaxesorotherinternalchargestoimportedordomesticproductsinamannercontrarytotheprinciplessetforthinparagraph1

GATTArticleI:1(hereinafter"ArticleIl11),whichisreferredtoinArticleIl2z,reas:Thecontractingpartiesrecognizethatinternaltaxesandotherinternalcharges,andlaws,regulations,andrequirementsaffectingtheinternalsale,offeringfosale,purchase,transportation,distribution,oruseofproducts,andinternalquantitativeregulationsrequiringthemixture,processing,oruseofproductsinspecifiedamountsorproportions,shouldnotbeappliedtoimportedordomesticproductssoastoaffordprotectiontodomesticproduction

ArticleIl:2,FirstSentence

a)Definitionof"LikeProducts"

ThePanelnotedthattheterm"likeproduct"appearsinvariousGATTprovisions.ThePanelfurthernotedthatitdidnotnecessarilyfollowthatthetermhadtobeinterpretedinauniformway.Inthisrespect,thePanelnotedthediscrepancybetweenArticleI1:2,ontheonehand,andArticleI:4ontheother:whiletheformerreferredtoArticleIl:1andtolike,aswellastodirectlycompetitiveorsubstitutableproducts(seealsoArticleXIXofGATT),thelatterreferredonlytolikeproducts.Thisispreciselywhy,inthePanel'sview,itsconclusionsreachedinthisdisputearerelevantonlyfortheinterpretationoftheterm"likeproduct"asitappearsinArticleIl2

ThePanelnotedthatpreviouspanelshadagreedthattheterm"likeproduct"shouldbeinterpretedonacase-by-casebasis,buthadnotestablishedanyparticulartesttobefollowedindefininglikeness.Previouspanelshaduseddifferentcriteriainordertoestablishlikeness,suchastheproduct'sproperties,natureandquality,anditsend-uses;consumers'tastesandhabits,whichchangefromcountrytocountry;andtheproduct'sclassificationin

InthePanel'sview,"likeproducts"neednotbeidenticalinallrespects.However,inthePanel'sview,theterm"likeproduct"shouldbeconstruednarrowlyinthecaseofArticleIl2,firstsentence.Thisapproachisdictated,inthePanel'sview,bytwoindependentreasons:(i)becauseArticleI1:2distinguishesbetweenlikeanddirectlycompetitiveorsubstitutableproducts,thelatterobviouslybeingamuchlargercategoryofproductsthantheformer;and(i)becauseofthePanel'sconclusionsreachedtariffnomenclatures.vithrespecttotherelationshipbetweenArticlesIlland1.

As to the first point, the distinction between "like" and "directly competitive or substitutable products" has already been discussed. As to the second point, as previous panels had noted, one of the main objectives of Article I:2 is to ensure that WTO Members do not frustrate the effect of tariff concessions granted under Article Il through internal taxes and other internal charges, it follows that there should be a similar interpretation of the definition of products for purposes of Article Il tariff concessions and the term "like product" as it appears in Article Il:2.This is so in the Panel's view, because with respect to two products subject to the same tariff binding and therefore to the same maximum border tax, there is no justification, outside of those mentioned in GATT rules, to tax them in a differentiated way through internal taxation.

..IntheviewofthePanel,theterm"likeproducts"suggeststhatfortwoproductstofallunderthiscategorytheymustshareessentiallythesamephysicalcharacteristics.Flexibilityisrequiredinordertoconcludewhethertwoproductsaredirectlycompetitiveorsubstitutable.InthePanel'sview,thesuggestedapproachcanguaranteetheflexibilityrequired,sinceitpermitsonetotakeintoaccountspecificcharacteristicsinanysinglemarket;consequently,twoproductscouldbeconsideredtobedirectlycompetitiveorsubstitutableinmarketA,butthesametwoproductswouldnotnecessarilybeconsideredtobedirectlycompetitiveorsubstitutableinmarketB.ThePanelnextturnedtoanexaminationofwhethertheproductsatissueinthiscasewere"likeproducts,"startingfirstwithvodkaandshochu.ThePanelnotedthatvodkaandshochusharedmostphysicalcharacteristics.InthePanel'sview,exceptforfiltration,thereisvirtualidentityinthedefinitionofthetwoproducts.ThePanelnotedthatadifferenceinthephysicalcharacteristicofalcoholicstrengthoftwoproductsdidnotprecludeafindingoflikenessespeciallysincealcoholicbeveragesareoftendrunkindilutedform.ThePanelthennotedthatessentiallythesameconclusionhadbeenreachedinthe1987PanelReport,which

agreedwiththeargumentssubmittedtoitbytheEuropeanCommunities,Finland,andtheUnitedStatesthatJapaneseshochu(GroupA)andvodkacouldbeonsideredas"like"productsintermsofArticleI:2becausetheywerebothwhite/cleanspirits,madeofsimilarrawmaterials,andtheend-useswerevirtuallyidentical.

Followingitsindependentconsiderationofthefactorsmentionedinthe1987PanelReport,thePanelagreedwiththisstatement.ThePanelthenrecalleditsconclusionsconcerningtherelationshipbetweenArticlesIlandIl.Inthiscontext,itnotedthat()vodkaandshochuwerecurrentlyclassifiedinthesameheadingintheJapanesetariffs...and(i)vodkaandshochuwerecoveredbythesameJapanesetariffbindingatthetimeofitsnegotiation.Oftheproductsatissueinthiscase,onlyshochuandvodkahavethesametariffappliedtothemintheJapaneseriffschedule.

Consequently,inlightoftheconclusionofthe1987PanelReportandofitsindependentconsiderationoftheissue,thePanelconcludedthatvodkaandshochuarelikeproducts.InthePanel'sview,onlyvodkacouldbeconsideredas[a]likeproducttoshochusince,apartfromcommonalityofend-uses,itsharedwithshochumostphysicalcharacteristics.Definitionally,theonlydifferenceisinthemediausedforfiltration.Substantialnoticeabledifferencesinphysicalcharacteristicsexistbetweentherestofthealcoholicbeveragesatdisputeandshochuthatwoulodisqualifythemfrombeingregardedaslikeproducts.Morespecifically,theuseofadditiveswoulodisqualifyliqueurs,ginandgenever;theuseofingredientswoulddisqualifyrum;lastly,appearance(arisingfrommanufacturingprocesses)woulddisqualifywhiskyandbrandy.

b)TaxationinExcessofThatImposedonLikeDomesticProducts

The Panel then proceeded to examine whether vodka is taxed in excess of the tax imposed on shochu under the Japanese Liquor Tax Law. The Panel noted that what was contested in the Japanese legislation was a system of specific taxes imposed on various alcoholic drinks. In this respect, it noted that vodka was taxed at 377230 Yen per kiloliter-for an alcoholic strength below 38that is 9927 Yen per degree of alcohol, whereas shochu A was taxed at 155700 Yen per kiloliter-for an alcoholic strength between 25 and 26that is 6228 Yen per degree of alcohol (see Figure 7.8). The Japanese taxes on vodka and shochu are calculated on the basis of and vary according to the alcoholic content of the products and, on this basis, it is obvious that the taxes imposed on vodka are higher than those imposed on shochu. Accordingly, the Panel concluded that the tax imposed on vodka is in excess of the tax imposed on shochu.

ThePanelthenaddressedtheargumentputforwardbyJapanthatitslegislation,bykeepingthetax/priceratio"roughlyconstant,"istradeneutralandconsequentlynoprotectiveaimandeffectofthelegislationcanbedetected.Inthisconnection,thePanelrecalledJapan'sargumentthatitsaimwastoachieveneutralityandhorizontaltaxequity.TotheextentthatJapan'sargumentisthatitsLiquorTaxLawdoesnotimposeonforeignproducts(i.e,vodka)ataxinexcessofthetaximposedondomesticlikeproductsfi.e.,shochu),thePanelrejectedtheargumentforthefollowingreasons:

1.ThebenchmarkinArticleIl:2,firstsentence,isthatinternaltaxesonforeignproductsshallnotbeimposedinexcessofthoseimposedonlikedomesticproducts.Consequently,inthecontextofArticleIll2,firstsentence,itisirrelevantwhether"roughly"thesametreatmentthrough,forexample,a"roughlyconstant"tax/priceratioisaffordedtodomesticandforeignlikeproductsorwhetherneutralityandhorizontaltaxequityisachieved.

2.Japanhadarguedthatthecomparisonoftax/priceratiosshouldbedoneonacategory-bycategorybasis,butitsstatisticsonwhichthetax/priceratioswerebasedexcludeddomesticallyproducedspiritsfromthecalculationoftax/priceratiosforspiritsandwhisky/brandySincethepricesofthedomesticspiritsandwhisky/brandyaremuchlowerthanthepricesoftheimportedgoods,thisexclusionhastheimpactofreducingconsiderablythetax/priceratioscitedbyJapanforthoseproducts.Inthisconnection,thePanelnotedthatoneconsequenceoftheJapanesetaxsystemwastomakeitmoredifficultforcheaperimporteobrandsofspiritsandwhisky/brandytoentertheJapanesemarket.Moreover,thePanelfurthernotedthattheJapanesestatisticswerebasedonsuggestedretailpricesandtherewasevidenceintherecordthattheseproductswereoftensoldatadiscount,atleastinTokyo.Totheextentthatthepriceswereunreliable,theresultanttax/priceratioswouldbeunreliableaswell.

3.Nowhereinthecontestedlegislationwasitmentionedthatitspurposewastomaintaina"roughlyconstant"tax/priceratio.Thiswasratheranexpostfacto3rationalizationbyJapanandatanyrate,therearenoguaranteesinthelegislationthatthetax/priceratiowillalwaysbemaintained"roughlyconstant."Priceschangeovertimeandunlessanadjustmentprocessisincorporatedinthelegislation,thetax/priceratiowillbeaffected.Japanadmittedthatnoadjustmentprocessexistsinthelegislationandthatonlyexpostfactoadjustmentscanoccur.ThePanellastlynotedthatsincethemodificationin1989oflapan'sLiquorTaxLawtherehasbeenonlyoneinstanceofadjustment.

Consequently,thePanelconcludedthat,bytaxingvodkainexcessofshochu,JapanisinviolationofitsobligationunderArticleI:2,firstsentence.

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[ThePanelalsofoundthat"shochu,whisky,brandy,rum,gin,genever,andliqueursare'directlycompetitiveorsubstitutableproducts'andJapan,bynottaxingthemsimilarly,isinviolationofitsobligationunderArticleIl12,secondsentence,oftheGeneralAgreementonTariffsandTrade1994."]

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ThePanelrecommendsthattheDisputeSettlementBodyrequestJapantobringtheLiquorTaxLawintoconformitywithitsobligationsundertheGeneralAgreementonTariffsandTrade1994.

Casepoint

TheWTOpanelconsideredwhetherJapan'spolicyoftaxingimportedvodka(andwhiskey,brandy,andotherimportedalcoholicbeverages)atahigherratethanJapaneseshochuwasaviolationofGATTArticeIll.ThissectionofGATTrequiresthatimportedgoodsbeaccorded"nationaltreatment"-thatis,notsubjectedtohigheinternaltaxesthansimilardomesticproducts.Aftercomparingvodkaandshochu,thepaneldecidedthattheywereindeed"like"products.Sinceimportedvodkawastaxedatahigherrate,thispracticeconstitutedaviolationofJlapan'sobligationsunderGATT-WTOrules.