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Japan - Taxes on Alcoholic Beverages AB-1996-2 Report of the Appellate Body (Continued) 6.34 The Panel then addressed the argument put forward by Japan that the Japanese legislation is trade-neutral, and thus guarantees equality of competitive conditions, since it maintains a "roughly constant" tax/price ratio and no protective aim or effect of the legislation can be detected. In this connection, the Panel recalled the argument by Japan that its aim was to achieve horizontal tax equity. 122 The Panel further recalled in this context that it had already dismissed the aim-and-effect test put forward by Japan. The Panel noted that to the extent that Japan's argument could be considered as an argument that Japan's Liquor Tax Law taxed directly competitive or substitutable products similarly, in the Panel's view, the argument should be rejected for the following reasons: (i) The benchmark in Article III:2, second sentence, is whether internal taxes operate "so as to afford protection to domestic production", a term which has been further interpreted in the Interpretative Note ad Article III:2, paragraph 2, to mean dissimilar taxation of domestic and foreign directly competitive or substitutable products. However, in the Panel's view, it is not at all clear that maintaining a "roughly constant" tax/price ratio avoids violating this requirement. (ii) The statistics on the tax/price ratio show that significant differences exist between shochu and the other directly competitive or substitutable products 123 and that there are significantly different tax/price ratios within the same product categories. Therefore, the tax/price ratios could not be regarded as being "roughly constant", and horizontal equity could not be demonstrated. Moreover, as noted in paragraph 6.33 above, there were significant problems with the methodology for calculating tax/price ratios submitted by Japan, such that arguments based on that methodology could only be viewed as inconclusive. More particularly, although Japan had argued that the comparison of tax/price ratios should be done on a category-by-category basis, its statistics on which the tax/price ratios were based excluded domestically produced spirits and whisky/brandy from the calculation of tax/price ratios for spirits and whisky/brandy. Since the prices of the domestic spirits and whisky/brandy are much lower than the prices of the imported ones, this exclusion has the impact of reducing considerably the tax/price ratios cited by Japan for those products. In this connection, the Panel noted that one consequence of the Japanese tax system was to make it more difficult for cheaper imported brands of spirits and whisky/brandy to enter the market. Moreover, the Panel noted that the Japanese statistics were based on suggested retail prices and there was evidence in the record that these products were often sold at a discount, at least in Tokyo. To the extent that the prices were unreliable, the resultant tax/price ratios would be unreliable as well. (iii) Finally, the Panel noted that nowhere in the contested legislation was it mentioned that its purpose was to maintain a constant tax/price ratio. This is rather an ex post facto rationalization by Japan and, at any rate, there are no guarantees in the legislation that the tax/price ratio will always be maintained at a constant (or "roughly constant") level. Prices change over time and unless an adjustment process is incorporated in the legislation, the tax/price ratio will be affected. Japan admitted that no adjustment process exists in the legislation and that only ex post facto adjustments can occur. The Panel lastly noted that since the modification of Japan's Liquor Tax Law there has been only one instance of adjustment. Consequently, in the Panel's view, the argument by Japan that its legislation by keeping the tax/price ratio "roughly constant" is trade neutral and does not operate "so as to afford protection to domestic production" should be rejected. 6.35 The Panel took note, in this context, of the statement by Japan that the 1987 Panel Report erred when it concluded that shochu is essentially a Japanese product. The Panel accepted the evidence submitted by Japan according to which a shochu-like product is produced in various countries outside Japan, including the Republic of Korea, the People's Republic of China and Singapore. The Panel noted, however, that Japanese import duties on shochu are set at 17.9 per cent. At any rate what is at stake, in the Panel's view, is the market share of the domestic shochu market in Japan that was occupied by Japanese-made shochu. The high import duties on foreign-produced shochu resulted in a significant share of the Japanese shochu market held by Japanese shochu producers. Consequently, in the Panel's view, the combination of customs duties and internal taxation in Japan has the following impact: on the one hand, it makes it difficult for foreign-produced shochu to penetrate the Japanese market and, on the other, it does not guarantee equality of competitive conditions between shochu and the rest of "white" and "brown" spirits. Thus, through a combination of high import duties and differentiated internal taxes, Japan manages to "isolate" domestically produced shochu from foreign competition, be it foreign produced shochu or any other of the mentioned white and brown spirits. In the Panel's view, the table in Annex I illustrates this point. VII. CONCLUSIONS 7. 1 In light of the findings above, the Panel reached the following conclusions: (i) Shochu and vodka are like products and Japan, by taxing the latter in excess of the former, is in violation of its obligation under Article III:2, first sentence, of the General Agreement on Tariffs and Trade 1994. (ii) Shochu, whisky, brandy, rum, gin, genever, and liqueurs are "directly competitive or substitutable products" and Japan, by not taxing them similarly, is in violation of its obligation under Article III:2, second sentence, of the General Agreement on Tariffs and Trade 1994. 7.2 The Panel recommends that the Dispute Settlement Body request Japan to bring the Liquor Tax Law into conformity with its obligations under the General Agreement on Tariffs and Trade 1994. Annex I
* Annual percentage reduction: approximately 2.4% P: 124-129 Graphics not stored 122 See para. 4.132ff. of the Descriptive Part. 123 See paras. 4.100, 4.159, 4.160, 4.161 and 4.165 of the Descriptive Part. |
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