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JAPAN - TAXES ON ALCOHOLIC BEVERAGES
Report of the Panel
TABLE OF CONTENTS
II. FACTUAL ASPECTS
2. Tax Rates
IV. ARGUMENTS OF THE PARTIES
B. The Legal Value of the 1987 Panel Report
C. General Presentation of the Arguments of the Parties on Article III:2
D. Article III:2, First Sentence
b) The Test Suggested by Canada
c) The Test Suggested by the United States
d) The Test Suggested by Japan
b) The Second Step of the Test: Discriminatory Taxes
b) The Test Suggested by Canada
c) The Test Suggested by the United States
d) The Test Suggested by Japan
ii) Cross-price elasticity
c) Application of the Second, Third and Fourth Criteria of the Legal Test Suggested by Canada for Article III:2, Second Sentence
2. The Effect of the Legislation
2. The Aim of the Legislation
3. The Effect of the Legislation
b) Cross-Price Elasticity
c) Production of Shochu Outside Japan
d) Import Statistics
B. Preliminary Finding
C. Main Findings
2. Article III
3. Article III:2, First Sentence
b) Like Products
c) Taxation in Excess of that Imposed on Like Domestic Products
b) " ... So as to Afford Protection"
1.1 On 21 June 1995, the European Communities ("the Community") requested consultations with Japan under Article XXII of the General Agreement on Tariffs and Trade 1994 ("GATT") concerning the internal taxes levied by Japan on certain alcoholic beverages pursuant to the Japan's Liquor Tax Law (WT/DS8/1). On 7 July 1995, pursuant to Article 4.11 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"), the United States (WT/DS8/2) and Canada (WT/DS8/3) requested to be joined in these consultations. Japan accepted these requests on 19 July 1995 (WT/DS8/4).
1.2 On 7 July 1995, Canada requested consultations with Japan under Article XXII of GATT 1994 concerning certain Japanese liquor taxation laws (WT/DS10/1). On 17 July 1995, pursuant to Article 4.11 of the DSU, the United States (WT/DS10/2) and the Community (WT/DS10/3) requested to be joined in these consultations. Japan accepted these requests on 19 July 1995 (WT/DS10/4).
1.3 On 7 July 1995, the United States requested consultations with Japan under Article XXIII of GATT 1994 regarding internal taxes imposed by Japan on certain alcoholic beverages pursuant to the Liquor Tax Law (WT/DS11/1).
1.4 On 20 July 1995, the Community, Canada and the United States jointly held consultations with Japan with a view to reaching a mutually satisfactory resolution of the matter, but they were unable to reach such a resolution. On 21 July 1995, the United States and Japan consulted under Article XXIII:1, but they did not reach a mutually acceptable resolution of the matter.
1.5 On 14 September 1995, pursuant to Article XXIII:2 of GATT 1994 and Article 6 of the DSU, the Community requested the Dispute Settlement Body ("DSB") to establish a panel with standard terms of reference (WT/DS8/5). The Community claimed that:
"a) Japan had acted inconsistently with Article III:2, first sentence, of GATT 1994 by applying a higher tax rate on the category of ‘spirits’ than on each of the two sub-categories of shochu, thereby nullifying or impairing the benefits accrued to the European Communities under GATT 1994; and that
b) Japan has acted inconsistently with Article III:2, second sentence, of GATT 1994 by applying a higher tax rate on the category of ‘whisky/brandy’ 1 and on the category of ‘liqueurs’ than on each of the two sub-categories of shochu, thereby nullifying or impairing the benefits accrued to the European Communities under GATT 1994.
In the event that the liquors falling within the category of ‘spirits’ were found by the Panel not to be ‘like products’ to shochu within the meaning of the first sentence of Article III:2, the [Community] further claimed that:
c) Japan has acted inconsistently with Article III:2, second sentence, of GATT 1994 by applying a higher tax rate on the category of ‘spirits’ than on each of the two sub-categories of shochu, thereby nullifying or impairing the benefits accrued to the European Communities under GATT 1994".
1.6 On 14 September 1995, pursuant to Article XXIII of GATT 1994 and Articles 4 and 6 of the DSU, Canada requested the DSB to establish a panel with standard terms of reference (WT/DS10/5). Canada claimed that:
" ... the higher rates of taxation on imported alcoholic beverages including whiskies, brandies, other distilled alcoholic beverages and liqueurs than on Japanese shochu imposed pursuant to the Japanese Liquor Tax Law are:
a) inconsistent with Article III:1 and III:2 of GATT 1994;
b) nullifying and impairing the benefits accruing to Canada pursuant to the WTO".
1.7 On 14 September 1995, pursuant to Article XXIII:2 of GATT 1994 and Articles 4 and 6 of the DSU, the United States requested the DSB to establish a panel with standard terms of reference (WT/DS11/2). The United States claimed that:
" ... the internal taxes imposed by Japan [pursuant to the Liquor Tax Law] on these beverages, and in particular the preferential tax treatment accorded to shochu, are inconsistent with Article III of GATT 1994, and otherwise nullify and impair benefits accruing to the United States under the GATT 1994".
1.8 At its meeting of 27 September 1995, pursuant to the first request of the three complaining parties and with Japan's acceptance, the DSB established a single panel with the mandate to examine the requests of the Community, Canada and the United States, all of which related to the same matter, in accordance with Article 9 of the DSU (WT/DSB/M/7).
1.9 During the 27 September 1995 meeting of the DSB, Norway reserved its right as a third party to the present dispute. However, on 7 November 1995, Norway informed the Panel of the withdrawal of its request to participate as a third party in the dispute (WT/DS8/7, DS10/7 and DS11/4).
1.10 At the same meeting of the DSB on 27 September 1995, the parties agreed that the Panel should have standard terms of reference as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited by the EC, Canada and US in documents WT/DS8/5, WT/DS10/5, WT/DS11/2, the matters referred to the DSB by the EC, Canada and the United States in those documents and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".
1.11 On 30 October 1995, the Panel was constituted with the following composition:
II. FACTUAL ASPECTS
A. The Japanese Liquor Tax Law
2. 1 This dispute concerns the Japanese Liquor Tax Law (Shuzeiho), Law No.6 of 1953 as amended ("Liquor Tax Law"), which lays down a system of internal taxes applicable to all liquors, which are defined as domestically produced or imported beverages having an alcohol content of not less than one degree and which are intended for consumption in Japan.
2.2 The Liquor Tax Law currently classifies the various types of alcoholic beverages into ten categories and additional sub-categories: sake, sake compound, shochu (group A, group B), mirin, beer, wine (wine, sweet wine), whisky/brandy, spirits, liqueurs, miscellaneous (various sub-categories).
1. Terminology and Definitions
The Liquor Tax Law defines liquors involved in the present disputes - shochu, whisky/brandy, spirits and liqueurs - as follows: 2
2. Tax Rates
2.3 Pursuant to the Liquor Tax Law, liquors are taxed at the wholesale level. In the case of liquors made in Japan, the tax liability accrues at the time of shipment from the factory, and in the case of imported liquors, at the withdrawal from a customs-bonded area. As explained above, the Liquor Tax Law divides all liquors into ten categories, some of which are divided into sub-categories. Different tax rates are applied to each of the various tax categories and sub-categories defined by the Liquor Tax Law. The rates are expressed as a specific amount in Japanese Yen ("¥") per litre of beverage. For each category or sub-category, the Liquor Tax Law lays down a reference alcohol content per litre of beverage and the corresponding reference tax rate. For whisky, the reference rate uses an alcohol strength of 40 per cent; for spirits the alcohol strength is 37 per cent; for liqueurs the alcohol strength is 12 per cent; for both shochu sub-categories, an alcohol strength of 25 per cent is used. As a result, the liquors covered by the present dispute are subject to the following tax rates:
2.4 A special formula is applied to determine the rate applicable to beverages having an alcohol content below 13 per cent or, in the case of "liqueurs", below 12 per cent (as a general rule, pre-mixes combining a liquor with water or with other non-alcoholic beverages). This formula yields the result that the tax rate per litre of pure alcohol levied on these beverages is the same as the tax per litre of pure alcohol that would be borne by a liquor of the same category at the legal standard strength.
B. The 1987 Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages ("1987 Panel Report")
2.5 In 1986, the Community requested consultations with Japan in respect of Japan's Liquor Tax Law, as it then existed. The consultations failed to resolve the matter and in 1987 a panel was established to consider, among others, the Community's claim that the Liquor Tax Law violated Article III:2.
2.6 As of 1987, the Liquor Tax Law divided the whisky/brandy category into whisky and brandy, and subdivided whisky into three grades, i.e., Special Grade, First Grade and Second Grade. The category shochu was sub-divided into Groups A and B. Specific tax rates were provided for each category and sub-category of alcoholic beverages. In addition, an ad valorem tax was applicable to inter alia, Special, First and Second Grade whiskies where the price exceeded a certain threshold. This tax was not applicable to either shochu group.
2.7 The 1987 Panel Report concluded that some aspects of the Liquor Tax Law were inconsistent with Article III:2, first and second sentences, and suggested that the CONTRACTING PARTIES recommend that Japan bring its taxes on whiskies, brandies, other distilled spirits (such as gin and vodka), liqueurs, still wines and sparkling wines into conformity with its obligations under the General Agreement. In particular, the Panel reached the following conclusions:
"5.5 ... The Panel concluded that the ordinary meaning of Article III:2 in its context and in the light of its object and purpose supported the past GATT practice of examining the conformity of internal taxes with Article III:2 by determining, firstly, whether the taxed imported and domestic products are ‘like’ or ‘directly competitive or substitutable’ and, secondly whether the taxation is discriminatory (first sentence) or protective (second sentence of Article III:2). The Panel decided to proceed accordingly also in this case.
5.6 ... The Panel found that the following alcoholic beverages should be considered as "like products" in terms of Article III:2 in view of their similar properties, end-uses and usually uniform classification in tariff nomenclatures: imported and Japanese-made gin; imported and Japanese-made vodka; imported and Japanese-made whisky (including all grades classified as ‘whisky’ in the Japanese Liquor Tax Law) and ‘spirits similar to whisky in colour, flavour and other properties’ as described in the Japanese Liquor Tax Law; imported and Japanese-made grape brandy (including all grades classified as ‘brandy’ in the Japanese Liquor Tax Law); imported and Japanese-made fruit brandy (including all grades classified as ‘brandy’ in the Japanese Liquor Tax Law); imported and Japanese-made ‘classic’ liqueurs (not including, for instance, medicinal liqueurs); imported and Japanese-made unsweetened still wine; imported and Japanese-made sparkling wines.
5.7 The Panel did not exclude that also other alcoholic beverages could be considered as ‘like’ products. Thus, even though the Panel was of the view that the ‘likeness’ of products must be examined taking into account not only objective criteria (such as composition and manufacturing processes of products) but also the more subjective consumers' viewpoint (such as consumption and use by consumers), the Panel agreed with the arguments submitted to it by the European Communities, Finland and the United States that Japanese shochu (Group A) and vodka could be considered as ‘like’ products in terms of Article III:2 because they were both white/clean spirits, made of similar raw materials, and their end-uses were virtually identical (either as straight ‘schnaps’ type of drinks or in various mixtures). Since consumer habits are variable in time and space and the aim of Article III:2 of ensuring neutrality of internal taxation as regards competition between imported and domestic like products could not be achieved if differential taxes could be used to crystallize consumer preferences for traditional domestic products, the Panel found that the traditional Japanese consumer habits with regard to shochu provided no reason for not considering vodka to be a "like" product. The Panel decided not to examine the ‘likeness’ of alcoholic beverages beyond the requests specified in the complaint by the European Communities (see ... ). The Panel felt justified in doing so also for the following reasons: Alcoholic drinks might be drunk straight, with water, or as mixes. Even if imported alcoholic beverages (e.g. vodka) were not considered to be ‘like’ to Japanese alcoholic beverages (e.g. shochu Group A), the flexibility in the use of alcoholic drinks and their common characteristics often offered an alternative choice for consumers leading to a competitive relationship. In the view of the Panel there existed - even if not necessarily in respect of all the economic uses to which the product may be put - direct competition or substitutability among the various distilled liquors, among various liqueurs, among unsweetened and sweetened wines, and among sparkling wines. The increasing imports of ‘Western-style’ alcoholic beverages into Japan bore witness to this lasting competitive relationship and to the potential products substitution through trade among various alcoholic beverages. Since consumer habits vis-à-vis these products varied in response to their respective prices, their availability through trade and their other competitive inter-relationships, the Panel concluded that the following alcoholic beverages could be considered to be ‘directly competitive or substitutable products’ in terms of Article III:2, second sentence:
- imported and Japanese-made distilled liquors, including all grades of whiskies/brandies, vodka and shochu Groups A and B, among each other;
- imported and Japanese-made liqueurs among each other;
- imported and Japanese-made unsweetened and sweetened wines among each other; and
- imported and Japanese-made sparkling wines among each other.
5.9 a) ... The Panel concluded ... that (special and first grade) whiskies/brandies imported from the EEC were subject to internal Japanese taxes ‘in excess of those applied ... to like domestic products’ (i.e. first and second grade whiskies/brandies) in the sense of Article III:2, first sentence.
b) ... The Panel concluded ... that ... the imposition of ad valorem taxes on wines, spirits and liqueurs imported from the EEC, which are considerably higher than the specific taxes on ‘like’ domestic wines, spirits and liqueurs, was inconsistent with Article III:2, first sentence.
d) ... The Panel concluded that this imposition of higher taxes on ‘classic’ liqueurs and sparkling wines with higher raw material content was inconsistent with Article III:2, first sentence.
5.11 The Panel recalled its findings that distilled liquors, including all grades of shochu types A and B, were ‘directly competitive or substitutable products’ in terms of the interpretative note to Article III:2 (see above paragraph 5.7). The Panel noted that shochu was not subject to ad valorem taxes and that the specific tax rates on shochu were many times lower than the specific tax rates on whiskies, brandies and other spirits. The Panel noted that, whereas under the first sentence of Article III:2 the tax on the imported product and the tax on the like domestic product had to be equal in effect, Article III:1 and 2, second sentence, prohibited only the application of internal taxes to imported or domestic products in a manner ‘so as to afford protection to domestic production’. The Panel was of the view that also small tax differences could influence the competitive relationship between directly competing distilled liquors, but the existence of protective taxation could be established only in the light of the particular circumstances of each case and there could be a de minimis level below which a tax difference ceased to have the protective effect prohibited by Article III:2, second sentence. The Panel found that the following factors were sufficient evidence of fiscal distortions of the competitive relationship between imported distilled liquors and domestic shochu affording protection to the domestic production of shochu:
- the considerably lower specific tax rates on shochu than on imported whiskies, brandies and other spirits ... ;
- the imposition of high ad valorem taxes on imported whiskies, brandies and other spirits and the absence of ad valorem taxes on shochu;
- the fact that shochu was almost exclusively produced in Japan and that the lower taxation of shochu did ‘afford protection to domestic production’ (Article III:1) rather than to the production of a product produced in many countries (say, butter) in relation to another product (say, oleomargarine, as in the example referred to by Japan in paragraph 3.11 above);
- the mutual substitutability of these distilled liquors, as illustrated by the increasing imports into Japan of ‘Western-style’ distilled liquors and by the consumer use of shochu blended in various proportions with whisky, brandy or other drinks.
Since it has been recognized in GATT practice that Article III:2 protects expectations on the competitive relationship between imported and domestic products rather than expectations on trade volumes (see L/6175, paragraph 5.1.9), the Panel did not consider it necessary to examine the quantitative trade effects of this considerably different taxation for its conclusion that the application of considerably lower internal taxes by Japan on shochu than on other directly competitive or substitutable distilled liquors had trade-distorting effects affording protection to domestic production of shochu contrary to Article III:1 and 2, second sentence.
5.13 ... The Panel noted the Japanese submission that, for instance, the grading system for whisky was ‘based on the circumstances of production and consumption of whiskies in Japan’, and that generally ‘taxes on liquors are levied according to the tax-bearing ability on the part of consumers of each category of liquor’. The Panel was of the view that the use of product and tax differentiations with the view of maintaining or promoting certain production and consumption patterns could easily distort price-competition among like or directly competitive products by creating price differences and price-related consumer preferences which would not exist in case of non-discriminatory internal taxation consistent with Article III:2. The Panel noted that the General Agreement did not make provision for such a far-reaching exception to Article III:2, and that the concept of "taxation according to tax-bearing ability of prospective consumers" of a product did not offer an objective criterion because it relied on necessarily subjective assumptions about future competition and inevitably uncertain consumer responses. The Panel was of the view that a national policy of ‘taxation according to tax-bearing ability’ did not necessitate discriminatory or protective taxation of imported products and could be pursued by each contracting party in many ways in compliance with Article III:2. A national policy of promoting the domestic production of certain goods could likewise be pursued in conformity with the General Agreement (e.g., by means of production subsidies) without discriminatory or protective taxation of imported goods. The Panel concluded therefore from the text, system and objectives of the General Agreement that, even though each contracting party retained broad freedom as to its internal tax policy also in respect of its internal taxation of goods, the General Agreement did not provide for the possibility of justifying discriminatory or protective taxes inconsistent with Article III:2 on the ground that they had been introduced for the purpose of ‘taxation according to the tax-bearing ability’ of domestic consumers of imported and directly competitive domestic liquors." 3
TO CONTINUE WITH JAPAN - TAXES ON ALCOHOLIC BEVERAGES
1 In the present Panel report the use of the term "whisky" includes also the term "whiskey" as used in the case of Irish whiskey and Tennessee whiskey.
2 These definitions (translations from the Liquor Tax Law) were submitted by Japan.
3 Panel Report on "Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages", adopted on 10 November 19877, BISD 34S/83.