14.104 The European Communities submit a series of categories of goods which, it argues should be considered "like products" for the purposes of applying Article III:2, first sentence, in the present case. ⁶⁹² The European Communities argue that the tax exemptions provided by the various car programmes under examination are not based on any factor which in itself affects the properties, nature or quality of the products concerned or their end uses. Rather the exemptions are based on the country of manufacture of the products; or on their level of local content; or on whether a motor vehicle is a National Car and has complied with certain local content requirements or has incorporated a certain percentage of "counter-purchased" parts and components exported from Indonesia; or on the characteristics of the car manufacturers.

14.105 Japan claims that the tax benefits of the 1996 car programmes violate Article III:2, first sentence but limits its claim of like products to National Cars and like imported automobiles. The United States claims that National Cars and other Indonesian cars with more than 60 per cent local content are like imported motor vehicles. Both Japan and the United States argue that such imported products are taxed in excess of domestic like products.

14.106 Indonesia does not specifically argue that the complainants have not demonstrated the elements necessary to establish a violation of Article III:2 (i.e. like products and differential taxation) ⁶⁹³,but rather argues that Article III:2 of GATT is inapplicable because it prohibits what the SCM Agreement permits. We have already rejected this argument from Indonesia.

14.107 To establish a violation of Article III:2, first sentence, complainants must prove that imported products are taxed "in excess" of domestic like products. In examining the claims of the complainants, we note that Indonesia does not dispute that pursuant to the 1993 and 1996 car programmes imported motor vehicles are taxed in excess of the domestic products at issue. For instance, more specifically, under the 1996 car programmes, National Cars are completely exempted from sales tax, and under the 1993 car programme (as modified by Regulation No. 36/1996) domestic passenger cars below 1600cc with greater than 60% local content are exempted from sales tax while imported sedans or domestic sedans with 60% or less local content are subject to a sales tax of 35%.

14.108 Turning to the "like product" issue, in applying this test, we note that the term "like product" is not defined in GATT. Past panels have recognized that the term has different meanings in different GATT provisions, depending on the context and the object and purpose of those provisions. ⁶⁹⁴ In this connection, it is useful to recall the Appellate Body's discussion of Article III in Alcoholic Beverages(1996) ⁶⁹⁵:

14.109 In Alcoholic Beverages(1996) ⁶⁹⁸ and Periodicals⁶⁹⁹, the Appellate Body endorsed the basic approach set out in the 1970 Report of the Working Party on Border Tax Adjustment:

14.110 Applying these criteria to the case at hand, we note that Japan specifically claims that, for purposes of Article III:2, four models of Japanese cars that have been sold in the Indonesian market are like the National Car (i.e. the Timor, which is based on the Kia Sephia⁷⁰¹). Those cars are the Toyota Corolla, the Mitsubishi Lancer, the Honda Civic and the Suzuki Baleno. In support thereof, it notes the similar engine sizes: 1500cc for the Timor, 1600cc for the others. We note that the evidence before us demonstrates that these cars are categorized similarly in market segmentation studies, with the Baleno in Segment B (Supermini Segment), the Corolla and Civic in Segment C1 (lower end of the Lower Medium Segment) and the Lancer in Segment C2 (upper end of the Lower Medium Segment). ⁷⁰² In particular, at least as to the imported models in Segment C1, it appears to us that these models of cars have the same end uses and the same basic properties, nature and quality. Given that these models are in the same market segments, there would not appear to be any relevant differences in respect of consumers' tastes and habits sufficient to render these products unlike. We note, however, that both the Corolla and the Civic are imported into Indonesia in CKD (completely knocked down) form. In our analysis of determining the likeness of products pursuant to complainants� claims under the SCM Agreement, we have examined whether a CKD kit can be "like" a finished car. We consider that, in the present case, the same analysis is appropriate to the determination of like products under Article III:2, first sentence. From the evidence submitted, it is not clear whether the Civics sold in Indonesia can be considered to be imports of like products from Japan, as data provided by Indonesia in the Annex V (SCM) context indicate that the Honda models sold in Indonesia received benefits under the 1993 car programme, implying that these models have more than 20% local content. However, we need not decide whether the Civic is or is not an imported like product, since we find that there is at least one model in market Segment C1, the Corolla, that does appear not to have received any such benefit, indicating that its percentage of Indonesian local content, if any, is minimal. In our view, this evidence is sufficient to establish a presumption ⁷⁰³ of likeness between the Timor and Corolla for purposes of Article III:2. Since Indonesia has submitted no evidence or argument to rebut the presumption of likeness for the purposes of Article III:2, we find that imported products like the National Car exist for purposes of Article III:2.

14.111 While the European Communities and the United States did not identify specific car models that they alleged to be like products to the National Car or other Indonesian cars for Article III:2 purposes, we note that they did so for purposes of their claims under the SCM Agreement. In connection therewith⁷⁰⁴, we found after a detailed examination that several models in Segment C1 (Ford Escort, Peugeot 306 and Opel Optima) were like the Timor. We believe that in the present case the same facts which support a finding of likeness for the purpose of the SCM Agreement also support a finding of likeness for the purpose of the first sentence of Article III:2 of GATT.

14.112 More importantly, we note that because of the structure of the tax regime under examination, any imported like products would necessarily be taxed in excess of domestic like products. In considering the broader arguments put forward by the complainants that the tax measures in dispute violate Article III:2 because they discriminate not on the basis of factors affecting the properties, nature, qualities or end use of the products, but on origin-related criteria, we recall that the Appellate Body decisions in Alcoholic Beverages(1996) and Periodicals suggest that the term "like products" as used in Article III:2 should be interpreted narrowly. ⁷⁰⁵ We note, however, that in this case the "like products" issue is not the same as the "like products" issue in the Alcoholic Beverages(1996) case. There, the internal tax imposed on domestic shochu was the same as that imposed on imported shochu; the higher tax imposed on imported vodka was also imposed on domestic vodka. Identical products (not considering brand differences) were taxed identically. The issue was whether the differences between the two products shochu and vodka, as defined for tax purposes, were so minor that shochu and vodka should be considered to be like products and therefore subject to the requirement of Article III:2, first sentence, that one should not be taxed in excess of the other. Here, the situation is quite different. The distinction between the products, which results in different levels of taxation, is not based on the products per se, but rather on such factors as the nationality of the producer or the origin of the parts and components contained in the product. As such, an imported product identical in all respects to a domestic product, except for its origin or the origin of its parts and components or other factors not related to the product itself, would be subject to a different level of taxation.

14.113 In Periodicals, the Appellate Body recognized the possibility of using hypothetical imports to determine whether a measure violates Article III:2, although in that case the Appellate Body rejected the hypothetical example used by the Panel. ⁷⁰⁶ But this case is different. Under the Indonesian car programmes the distinction between the products for tax purposes is based on such factors as the nationality of the producer or the origin of the parts and components contained in the product. Appropriate hypotheticals are therefore easily constructed. An imported motor vehicle alike in all aspects relevant to a likeness determination would be taxed at higher rate simply because of its origin or lack of sufficient local content. ⁷⁰⁷ Such vehicles certainly can exist (and, as demonstrated above, do in fact exist). In our view, such an origin-based distinction in respect of internal taxes suffices in itself to violate Article III:2, without the need to demonstrate the existence of actually traded like products. ⁷⁰⁸ This is directly in accord with the broad purposes of Article III:2, as outlined by the Appellate Body in paragraph 14.108, infra.

14.114 Thus, by providing for the imposition of taxes on imported products in excess of taxes imposed on domestic like products, the tax provisions of the Indonesian car programmes violate the provisions of the first sentence of Article III:2 of GATT.

14.118 Although it does not do so explicitly, Indonesia could be viewed as claiming that should Article III:2 be applicable, those of its measures which are subsidies should be exempted from Article III through the application of Article III:8(b). ⁷⁰⁹

14.119 In our view, with regard to subsidies to producers, Article III:8(b) should be interpreted to mean that:

14.120 In this sense, we agree with the statement of the Appellate Body in the recent Periodicals case where it approved the reasoning of the Malt Beverages case on Article III:8(b).

"We [the Appellate Body] agree with the panel in United States - Malt Beverages that:

We also agree with the following passage of Malt Beverages:

14.121 We find therefore that subsidies that result from product-tax discrimination are subject to the prohibitions of Article III:2 of GATT. This is to say that the Indonesian measures involving tax exemptions and reductions, here on finished motor vehicles including National Cars, are fully subject to the prohibition against product-tax discrimination of Article III:2.

14.122 Thus, Article III:8(b) of GATT does not provide Indonesia with a defense to the claims that its car programmes violate the provisions of Article III:2 of GATT.

14.126 The European Communities also argue that the sales tax exemption provided to National Cars assembled in Indonesia under the February 1996 car programme violates Article I:1 of GATT because it provides an "indirect advantage" to parts and components assembled in National Cars; therefore this indirect advantage (covered by Article I of GATT) benefits mainly, if not exclusively, imports of parts and components originating in Korea since the only National Car assembled in Indonesia is a replica of the Kia model Sephia from Korea, and this is to the detriment of imports of "like" parts and components from other Members. ⁷¹¹

14.127 Indonesia argues that its measures are subsidies governed exclusively by the SCM Agreement and therefore are not subject to Article I of GATT for the same reasons as it argued that Article III of GATT is not applicable to this dispute.

14.128 Indonesia also notes that in all past cases where panels found de facto discrimination violations, a particular result was mandated by government action. In none of them was the choice of supplier made by the private-party recipient of the subsidy found to constitute government-mandated de facto discrimination. For Indonesia, the essential fact remains that a private-sector choice, not government direction, was the reason why there were imports from Korea. Such a private choice is not within the scope of Article I.

14.129 Indonesia also adds that the June 1996 car programme has expired and will not be renewed. For Indonesia all claims related to this June 1996 car programme are therefore moot. The complainants respond that the government of Indonesia does not forego its sales tax until a car is sold and that since there are still some 20,000 cars not yet sold and/or imported, the Panel should examine the measure. In response to additional questions from the Panel after the second meeting, Indonesia argued that PT TPN, the only company entitled to benefits under the June 1996 car programme, failed the "SUCOFINDO audit" ⁷¹² and, thus, none of the remaining cars will receive the customs duty or tax exemption.

14.130 Indonesia also argues that the National Car and components and parts imported for it, are not "like" any passenger vehicles, components or parts imported from the territories of complainants as the parts and component are tailor-made for the Indonesian National Cars.

(a) Is the SCM Agreement the only agreement applicable to this dispute at the exclusion of Article I of GATT?

14.136 Under the circumstances, taking into account the terms of reference of this Panel, we consider that it is appropriate for us to address the measures under the June 1996 car programme. We shall proceed therefore to examine the claims of the complainants and the defense of Indonesia.

To continue with Criteria for an Article I of GATT violation

⁶⁹² See paragraph 5.16 of the Descriptive Part.

⁶⁹³ We recall, on the issue of burden of proof, that the complainant parties bear the burden of proof in that they must establish a prima facie case of inconsistency with a provision before the burden of showing consistency with that provision is taken on by the defendant party. But, as noted by the Appellate Body in the Hormones report: "It is also well to remember that a prima facie case is one which, in the absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the complaining party presenting the prima facie case". Appellate Body Report on Hormones, op.cit., para. 104.

⁶⁹⁴ Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, adopted on 10 November 1987, BISD 34S/83, para. 5.6, hereafter called Alcoholic Beverages (1987).

⁶⁹⁵ Alcoholic Beverages(1996), op. cit., Appellate Body Report, p.16.

⁶⁹⁶ Panel Report on Section 337, op. cit., para. 5.10.

⁶⁹⁷ Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, BISD 34S/136, para. 5.1.9, hereafter called Superfund.

⁶⁹⁸ Appellate Body Report on Alcoholic Beverages(1996), op. cit., p.20.

⁶⁹⁹ Appellate Body Report on Periodicals, op. cit., p.21.

⁷⁰⁰ Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para 18. In Alcoholic Beverages(1996), the Appellate Body noted that "We believe that, in Article III:2, first sentence of the GATT 1994, the accordion of �likeness� is meant to be narrowly squeezed". Appellate Body Report on Alcoholic Beverages (1996), op.cit., p.21.

⁷⁰¹ The DRI�s Global Automotive Group, a company whose clients appear to include all major auto manufacturers, including KIA, PT TPN�s National Car partner, identifies models sold in the Indonesian market by the more common model names used in other markets. However, it is clear from the data provided by DRI that the "Sephias" referred to in the Asian Forecast are in fact Timors imported from Korea or assembled in Indonesia. Thus under the DRI�s classification the Timor falls within Segment C1 (lower end of the Lower Medium Segment).

⁷⁰² This market segmentation is based on the analysis made by the DRI�s Global Automotive Group. As further developed in paragraphs 14.177 et seq. hereafter we have relied on this DRI study as an important element of our analysis for the purpose of determining the likeness of products pursuant to the claims under the SCM Agreement. We find that in this case the criteria used by DRI in arriving at its market segmentation are appropriate to the determination of like products under Article III:2, first sentence.

⁷⁰³ Shirts and Blouses, op. cit., Appellate Body Report, p.14.

⁷⁰⁴ See paragraphs 14.193 infra.

⁷⁰⁵ Alcoholic Beverages(1996), op. cit., Appellate Body Report, pp.19-20; Periodicals, op. cit., Appellate Body Report, p.22.

⁷⁰⁶ Periodicals, op. cit., Appellate Body Report, pp. 20-21.

⁷⁰⁷ Thus, although there is no evidence in the record of such actual imports, it can be found that any imported motorcycles of 250 cc or less, which are like Indonesian made motorcycles of 250 cc or less, would be taxed in excess of the latter; any imported combines, minibuses, vans and pick-ups, which are like Indonesian made combines, minibuses, vans and pick ups, including those with a local content of 60 % or more, would be taxed in excess of the latter; any imported buses, which are like Indonesian made buses, would be taxed in excess of the latter; any imported sedans and stations wagons of less than 1,600 cc, which are like Indonesian made sedans and station wagons of less than 1,600 cc, including those with a local content of 60 % or more, would be taxed in excess of the latter.

⁷⁰⁸ This finding is in accord with a number of previous panel reports concluding that differences in producers� characteristics, which do not affect the products� characteristics, cannot justify a different tax treatment of the products involved. See, e.g., Malt Beverages, at para 5.19 ("beer produced by large breweries is not unlike beer produced by small breweries"); Gasoline, at para. 6.11 ("Article III:4 of the General Agreement deals with the treatment to be accorded to like products; its wording does not allow less favourable treatment dependent on the characteristics of the producer."); Panel Report on United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, adopted 4 October 1994, DS44/R, para. 97 ("The Panel thus considered that the system for calculation of the BDA on imported tobacco itself, not just the manner in which it was currently applied, was inconsistent with Article III:2 because it carried with it the risk of discriminatory treatment of imports in respect of internal taxes.")

⁷⁰⁹ We have already discussed the scope and purpose of Article III:8(b) in Section C of this report. We consider that one of the purposes of Article III:8(b) is to confirm the respective scopes of Article III and Article XVI (and now the SCM Agreement).

⁷¹⁰ Periodicals, op. cit., Appellate Body Report, p. 34.

⁷¹¹ However the European Communities does not appear to have made such a claim (for what they label measure (d)) in their request for a panel. We note also that in their request for establishment of a panel the European Communities claimed that the import duty relief (what they label measure (a)) of the 1993 car programme violate the provisions of Article I:1 of GATT. However the European Communities did not further argue such latter claims in their submissions and oral presentations to the Panel.

⁷¹² See paragraphs 10.1 to 10.12 of the Descriptive Part.

⁷¹³ Panel Report on Shirts and Blouses, op. cit., para 6.2, affirmed by the Appellate Body.