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WORLD TRADE
ORGANIZATION

WT/DS302/R
26 November 2004

(04-5120)

  Original: English

DOMINICAN REPUBLIC – MEASURES AFFECTING
THE IMPORTATION AND INTERNAL
SALE OF CIGARETTES


Report of the Panel


I. INTRODUCTION 

II. FACTUAL ASPECTS 

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS 

IV. ARGUMENTS OF THE PARTIES 

A. FIRST WRITTEN SUBMISSION OF HONDURAS

1. The measures at issue 

(a) The surcharge imposed on imports
(b) The foreign exchange fee imposed on imports 
(c) The requirement to affix a stamp on cigarettes in the territory of the Dominican Republic
(d) The application of the Selective Consumption Tax for certain imported cigarettes 
(e) The administration of the law for determining the tax base for cigarettes 
(f) The lack of publication of the survey on which the Selective Consumption Tax is to be based 
(g) The bond requirement for importers of cigarettes

2. Legal arguments: 

(a) The surcharge is inconsistent with Article II:1(b) of the GATT 
(b) The foreign exchange fee is inconsistent with Article II:1(b) of the GATT (c) The requirement to affix a stamp in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT 
(d) The application of the Selective Consumption Tax for certain imported cigarettes is inconsistent with Article III:2 of the GATT
(e) The failure to establish and/or apply transparent and generally applicable criteria for determining the value of imported cigarettes is inconsistent with Article X:3(a) of the GATT 
(f) The failure to publish the surveys that are used to determine the Selective Consumption Tax is inconsistent with Article X:1 of the GATT
(g) The requirement to post a bond is inconsistent with Article XI:1 of the GATT, or, in the alternative, if the bond requirement is determined to be an internal measure, is inconsistent with Article III:4 of the GATT 

B. FIRST WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC 

1. Introduction 

2. Legal arguments 

(a) Dead measures 
(b) Measures applied to guarantee compliance with internal tax laws
(c) Temporary measures imposed on imports 

3. Conclusion 

C. ORAL STATEMENT OF HONDURAS AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL 

D. ORAL STATEMENT OF THE DOMINICAN REPUBLIC AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL 

E. SECOND WRITTEN SUBMISSION OF HONDURAS

1. Introduction 

2. Legal arguments

(a) The requirement to affix a stamp in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT 
(b) The requirement to affix a stamp in the territory of the Dominican Republic is not justified under Article XX(d) of the GATT 
(c) The requirement to post a bond is inconsistent with Article XI:1 of the GATT 
(d) In the alternative, the bond requirement is inconsistent with Article III:4 of the GATT 
(e) The bond requirement is not justified under Article XX(d) of the GATT 
(f) The Selective Consumption Tax and its application are inconsistent with Articles III:2, Article III.4, X:1, X:3(a) of the GATT
(g) The transitional surcharge for economic stabilization is inconsistent with Article II:1(a) and Article II:1 (b) of the GATT
(h) The Foreign Exchange Fee

F. SECOND WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC

1. Introduction 
2. Rebuttal of Honduras's claims 

(a) Dead measures 
(b) Measures applied to guarantee compliance with internal tax laws 
(c) Temporary measures imposed on imports

3. Conclusion

G. ORAL STATEMENT OF THE DOMINICAN REPUBLIC AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL

1. Introduction
2. Stamp requirement for domestic and imported cigarettes
3. Bond requirement for domestic and imported cigarettes
4. Interpretation of Article III:4 of the GATT
5. Dead measures
6. Transitional surcharge and foreign exchange fee

H. ORAL STATEMENT OF HONDURAS AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL 

V. ARGUMENTS OF THE THIRD PARTIES 

A. CHILE 

1. Introduction
2. The repealed measures
3. GATT 1994 Article XX(d) exception
4. Requirement to affix stamps in the territory of the Dominican Republic
5. Bond requirement
6. Inconsistent legislation
7. Other duties or charges
8. Conclusion

B. CHINA

1. Introduction
2. Selective Consumption Tax and Survey of Average Retail Prices
3. The timing of the amendment, revocation, or termination of the measures challenged
4. The extent to which the measure challenged has been changed
5. The relevance of any revocation of the challenged measure to the implementation stage of the dispute settlement process
6. The Foreign Exchange Fee
7. Relationship between Article XV:9 and Article XV:2, and the obligation to consult with IMF pursuant to Article XV:2
8. The legal effect of the IMF-endorsed criterion to the WTO
9. Relationship between Article XV:9 and Article XV:4
10. The stamp requirement 

(a) The parameters related to the "less favourable treatment" criterion
(b) Justification under Article XX (d)
(c) Burden of proof
(d) Analytical approach for Article XX justification

11. Conclusion

C. EL SALVADOR AND NICARAGUA

1. Introduction
2. Legal aspects

(a) 2 per cent transitional surcharge on imports
(b) Coverage of the measure as applied

3. Foreign exchange fee of 10 per cent imposed on imports

(a) The validity of the "foreign exchange fee of 10 per cent" in relation to the Dominican Republic's Schedule XXIII – "other duties or charges"
(b) Coverage of the measure as applied

4. Stamp requirements for cigarettes
5. Conclusions

D. EUROPEAN COMMUNITIES

1. Introduction
2. The transitional surcharge on imports
3. The foreign exchange fee
4. The requirement to affix tax stamps in the territory of the Dominican Republic

(a) Article III:4 of the GATT
(b) Article XX:(d) of the GATT

5. The Selective Consumption Tax
6. The requirement to post a bond
7. Conclusions

E. GUATEMALA

1. Introduction 
2. The stamp requirement for imported and domestic cigarettes
3. The transitional surcharge on imports

F. UNITED STATES

1. Introduction 
2. Legal aspects 

VI. INTERIM REVIEW

VII. FINDINGS 

A. CLAIMS OF THE PARTIES

1. The claims of Honduras
2. The defence of the Dominican Republic

B. ORDER OF ANALYSIS

C. THE IMPOSITION OF TRANSITIONAL SURCHARGE FOR ECONOMIC STABILIZATION

1. The measure at issue
2. Introduction
3. Which legal instrument constitutes the measure to be examined by the Panel

(a) Arguments of the parties
(b) Analysis by the Panel

4. Whether the transitional surcharge is an "other duty or charge" under Article II:1(b) of the GATT 1994

(a) Arguments of the parties
(b) Analysis by the Panel

5. Whether the surcharge has been properly recorded in the Schedule of Concessions of the Dominican Republic and the nature of the recorded measure

(a) Arguments of the parties
(b) Analysis by the Panel

6. Whether the right to challenge the existence of the measure and the nature of the measure in the recording expired three years after the incorporation of the Uruguay Round Schedule

(a) Introduction
(b) Arguments of the parties
(c) Analysis by the Panel

7. Whether the surcharge is inconsistent with Article II:1(b) of the GATT 1994 

(a) Arguments of the parties
(b) Analysis by the Panel

8. Whether the measure is limited to cigarette products

(a) Arguments of the parties
(b) Analysis by the Panel

9. Whether the surcharge is inconsistent with Article II:1(a) of the GATT 1994 

D. THE LEVYING OF THE FOREIGN EXCHANGE FEE

1. The measure at issue
2. Introduction
3. Whether the foreign exchange fee is an ODC as recorded in the Schedule of the Dominican Republic

(a) Arguments of the parties
(b) Analysis by the Panel

4. Whether the exchange fee is an "exchange restriction" under Article XV:9 (a) of the GATT 1994

(a) Arguments of the parties
(b) Analysis by the Panel

5. Whether the fee is imposed "in accordance with" Articles of Agreement of the IMF

(a) Arguments of the parties
(b) Analysis by the Panel

6. Whether the measure is justified under Article XV:9(a) of the GATT 1994

E. OBLIGATION THAT STAMPS BE AFFIXED TO CIGARETTE PACKETS IN THE TERRITORY OF THE DOMINICAN REPUBLIC (THE TAX STAMP REQUIREMENT)

1. The measure at issue
2. Whether the tax stamp requirement accords less favourable treatment to imported products in a manner inconsistent with Article III:4 of the GATT 1994

(a) Arguments of the parties
(b) Analysis by the Panel
(c) Like product determination
(d) Law, regulation, or requirement affecting the internal sale, offering for sale, purchase, transportation, distribution, or use
(e) Less favourable treatment

3. Whether the tax stamp requirement is justified under Article XX(d) of the GATT 1994

(a) Arguments of the parties
(b) Article XX(d) of the GATT 1994
(c) Laws and regulations which are not inconsistent with the provisions of the GATT 1994
(d) "Necessary" to secure compliance with tax laws and regulations
(e) The presence of tax authority inspectors and the forgery of tax stamps
(f) Alternative instruments

4. Conclusion 

F. BOND REQUIREMENT FOR IMPORTERS OF CIGARETTES

1. The measure at issue
2. Main claims and defences
3. Whether the bond requirement is an import restriction inconsistent with Article XI:1 of the GATT 1994

(a) Introduction
(b) Arguments of the parties
(c) Analysis by the Panel
(d) The bond requirement as a restriction on importation

4. Whether the bond requirement accords less favourable treatment to imported products in a manner inconsistent with Article III:4 of the GATT 1994

(a) Arguments of the parties
(b) Analysis by the Panel
(c) Like product determination
(d) Law, regulation, or requirement affecting the internal sale, offering for sale, purchase, transportation, distribution, or use
(e) Less favourable treatment

5. Whether the bond requirement is justified under Article XX(d) of the GATT 1994

(a) Arguments of the parties
(b) Article XX(d) of the GATT 1994

6. Conclusion

G. DETERMINATION OF THE TAX BASE FOR THE PURPOSE OF THE APPLICATION OF THE SELECTIVE CONSUMPTION TAX TO CERTAIN IMPORTED CIGARETTES

1. The measure at issue
2. Whether imported cigarettes were taxed in excess of the like domestic products in a manner inconsistent with Article III:2, first sentence, of the GATT 1994

(a) Arguments of the parties
(b) Analysis by the Panel
(c) Like product determination
(d) The application of the Selective Consumption Tax to imported cigarettes
(e) Amendments to the Dominican Republic Tax Code
(f) Determination of the tax base for cigarettes under Dominican Republic legislation
(g) Determination in practice of the tax base for cigarettes
(h) Recommendations regarding the measure found to be inconsistent

3. Conclusion

H. ADMINISTRATION OF PROVISIONS GOVERNING THE SELECTIVE CONSUMPTION TAX, IN PARTICULAR WITH RESPECT TO DETERMINATION OF THE "NEAREST SIMILAR PRODUCT ON THE DOMESTIC MARKET"

1. The conduct at issue
2. Whether the Dominican Republic administered the provisions governing the Selective Consumption Tax in an unreasonable manner

(a) Arguments of the parties
(b) Analysis by the Panel
(c) Laws, regulations, decisions and rulings described in Article X:1 of the GATT
(d) Reasonable administration
(e) Recommendations regarding the conduct

3. Conclusion

I. PUBLICATION OF SURVEYS USED TO DETERMINE THE VALUE OF CIGARETTES FOR THE PURPOSE OF APPLYING THE SELECTIVE CONSUMPTION TAX

1. The conduct at issue
2. Whether the Dominican Republic failed to publish, or make otherwise available to importers, the average-price surveys conducted by the Dominican Republic Central Bank
 

(a) Arguments of the parties
(b) Analysis of the Panel
(c) Laws, regulations, judicial decisions and administrative rulings of general application
(d) Prompt publication of the Central Bank average-price surveys
(e) Recommendations regarding the conduct at issue

3. Conclusion

VIII. CONCLUSIONS AND RECOMMENDATIONS

ANNEX A – REQUEST FOR THE ESTABLISHMENT OF A PANEL
– DOCUMENT WT/DS302/5

ANNEX B – WORKING PROCEDURES 

ANNEX C – LETTER FROM THE PANEL WITH QUESTIONS TO THE INTERNATIONAL MONETARY FUND (IMF) 

ANNEX D – LETTER FROM THE INTERNATIONAL MONETARY FUND (IMF) RESPONDING TO THE QUESTIONS FROM THE PANEL 


LIST OF ANNEXES

Annex A Request for the Establishment of a Panel – Document WT/DS302/5

Annex B

Working Procedures

Annex C

Letter from the Panel with questions to the International Monetary Fund (IMF)  

Annex D

Letter from the International Monetary Fund (IMF) responding to the questions from the Panel  

TABLE OF WTO CASES CITED IN THIS REPORT

Short Title

Full Case Title and Citation

Argentina – Footwear (EC)   Panel Report, Argentina – Safeguard Measures on Imports of Footwear, WT/DS121/R, adopted 12 January 2000, as modified by the Appellate Body Report, WT/DS121/AB/R, DSR 2000:II, 575
Argentina – Hides and Leather   Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and Import of Finished Leather, WT/DS155/R and Corr.1, adopted 16 February 2001, DSR 2001:V, 1779
Argentina – Textiles and Apparel   Appellate Body Report, Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/AB/R and Corr.1, adopted 22 April 1998, DSR 1998:III, 1003
Argentina – Textiles and Apparel   Panel Report, Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/R, adopted 22 April 1998, as modified by the Appellate Body Report, WT/DS56/AB/R, DSR 1998:III, 1033
Australia – Salmon   Appellate Body Report, Australia – Measures Affecting Importation of Salmon, WT/DS18/AB/R, adopted 6 November 1998, DSR 1998:VIII, 3327
Brazil – Aircraft   Appellate Body Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R, adopted 20 August 1999, DSR 1999:III, 1161
Brazil – Desiccated Coconut   Appellate Body Report, Brazil – Measures Affecting Desiccated Coconut, WT/DS22/AB/R, adopted 20 March 1997, DSR 1997:I, 167
Canada – Periodicals   Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July 1997, DSR 1997:I, 449
Canada – Periodicals   Panel Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/R and Corr.1, adopted 30 July 1997, as modified by the Appellate Body Report, WT/DS31/AB/R, DSR 1997:I, 481
Canada – Wheat Exports and Grain Imports Panel Report, Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain, WT/DS276/R, 6 April 2004.
Chile – Alcoholic Beverages   Appellate Body Report, Chile – Taxes on Alcoholic Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281
Chile – Price Band System   Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23 October 2002
Chile – Price Band System   Panel Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/R, 3 May 2002 adopted 23 October 2002, as modified by the Appellate Body Report, WT/DS207AB/R
EC – Asbestos   Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243
EC – Asbestos   Panel Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/R and Add.1, adopted 5 April 2001, as modified by the Appellate Body Report, WT/DS135/AB/R, DSR 2001:VIII, 3305
EC – Bananas III   Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC – Computer Equipment   Appellate Body Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, 1851
EC – Poultry   Appellate Body Report, European Communities – Measures Affecting the Importation of Certain Poultry Products, WT/DS69/AB/R, adopted 23 July 1998, DSR 1998:V, 2031
EC – Poultry   Panel Report, European Communities – Measures Affecting the Importation of Certain Poultry Products, WT/DS69/R, adopted 23 July 1998, as modified by the Appellate Body Report, WT/DS69/AB/R, DSR 1998:V, 2089
EC – Tariff Preferences Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004.
EC – Tariff Preferences Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R, adopted 20 April 2004, as modified by the Appellate Body Report, WT/DS/246/AB/R.
India – Autos   Panel Report, India – Measures Affecting the Automotive Sector, WT/DS146/R, WT/DS175/R and Corr.1, adopted 5 April 2002
India – Quantitative Restrictions   Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 1999:IV, 1763
India – Quantitative Restrictions   Panel Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/R, adopted 22 September 1999, as upheld by the Appellate Body Report, WT/DS90/AB/R, DSR 1999:V, 1799
Indonesia – Autos   Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3, and 4, adopted 23 July 1998, DSR 1998:VI, 2201
Japan – Agricultural Products II   Appellate Body Report, Japan – Measures Affecting Agricultural Products, WT/DS76/AB/R, adopted 19 March 1999, DSR 1999:I, 277
Japan – Alcoholic Beverages II   Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Japan – Film   Panel Report, Japan – Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R, adopted 22 April 1998, DSR 1998:IV, 1179
Korea – Various Measures on Beef   Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5
Korea – Various Measures on Beef   Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/R, WT/DS169/R, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS161/AB/R, WT/DS169/AB/R, DSR 2001:I, 59
Mexico – Corn Syrup
(Article 21.5 – US)
 
Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675
Thailand – H-Beams   Panel Report, Thailand – Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams from Poland, WT/DS122/R, adopted 5 April 2001, as modified by the Appellate Body Report, WT/DS122/AB/R, DSR 2001:VII, 2741
Turkey – Textiles   Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999, DSR 1999:VI, 2345
US – Certain EC Products   Appellate Body Report, United States – Import Measures on Certain Products from the European Communities, WT/DS165/AB/R, adopted 10 January 2001, DSR 2001:I, 373
US – Certain EC Products   Panel Report, United States – Import Measures on Certain Products from the European Communities, WT/DS165/R and Add.1, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS165/AB/R, DSR 2001:II, 413
US – FSC   Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
US – FSC   Panel Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/R, adopted 20 March 2000, as modified by the Appellate Body Report, WT/DS108/AB/R, DSR 2000:IV, 1675
US – FSC
(Article 21.5 – EC)
 
Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002
US – Gasoline   Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3
US – Gasoline   Panel Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/R, adopted 20 May 1996, as modified by the Appellate Body Report, WT/DS2/AB/R, DSR 1996:I, 29
US – Lead and Bismuth II   Appellate Body Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom, WT/DS138/AB/R, adopted 7 June 2000, DSR 2000:V, 2595
US – Section 301 Trade Act Panel Report, United States – Sections 301-310 of the Trade Act of 1974, WT/DS152/R, adopted 27 January 2000, DSR 2000:II, 815
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755
US – Steel Plate Panel Report, United States – Anti-Dumping and Countervailing Measures on Steel Plate from India, WT/DS206/R and Corr.1, adopted 29 July 2002
US – Wool Shirts and Blouses Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R and Corr.1, adopted 23 May 1997, DSR 1997:I, 323
US – Wool Shirts and Blouses Panel Report, United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/R, adopted 23 May 1997, as upheld by the Appellate Body Report, WT/DS33/AB/R, DSR 1997:I, 343

TABLE OF GATT CASES IN THIS REPORT

 

Short Title

Full Case Title and Citation

Canada – FIRA Panel Report, Canada – Administration of the Foreign Investment Review Act, adopted 7 February 1984, BISD 30S/140.
Canada – Provincial Liquor Boards (US) Panel Report, Canada – Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, adopted 18 February 1992, BISD 39S/27
EEC – Animal Feed Proteins Panel Report, EEC – Measures on Animal Feed Proteins, adopted 14 March 1978, BISD 25S/49
EEC – Import Restrictions Panel Report, EEC – Quantitative Restrictions Against Imports of Certain Products from Hong Kong, adopted 12 July 1983, BISD 30S/129
EEC – Oilseeds I   Panel Report, European Economic Community – Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins, adopted 25 January 1990, BISD 37S/86
Greece – Import Taxes Panel Report, Special Import Taxes Instituted by Greece, adopted 3 November 1952, BISD 1S/48
Japan – Leather II (US) Panel Report, Panel on Japanese Measures on Imports of Leather, adopted 15 May 1984, BISD 31S/94
Thailand – Cigarettes Panel Report, Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes, adopted 7 November 1990, BISD 37S/200
US – Section 337 Panel Report, United States Section 337 of the Tariff Act of 1930, adopted 7 November 1989, BISD 36S/345
US – Tobacco Panel Report, United States Measures Affecting the Importation, Internal Sale and Use of Tobacco, adopted 4 October 1994, BISD 41S/I/131

I. INTRODUCTION

1.1 On 8 October 2003, Honduras requested consultations with the Dominican Republic pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and Article XXII:1 of the General Agreement on Tariffs and Trade 1994 (the GATT 1994) concerning certain measures by the Dominican Republic affecting the importation and internal sale of cigarettes. The request was circulated to Members on 13 October 2003.1

1.2 Consultations were held on 4 November 2003, but did not lead to a mutually satisfactory resolution of this matter.

1.3 On 8 December 2003, Honduras requested the Dispute Settlement Body ("DSB") to establish a Panel pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of the GATT 1994.2 On 9 January 2004, the DSB established the Panel with the following terms of reference:

"To examine, in the light of the relevant provisions of the covered agreements cited by Honduras in document WT/DS302/5, the matter referred by Honduras to the DSB in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."3

1.4 On 17 February 2004, the parties agreed to the following composition of the Panel:

Chairman: Mr. Elbio ROSSELLI
   
Members: Mr. Tae-Yul CHO
Mr. Cristian ESPINOSA CAÑIZARES4

1.5 Chile, China, El Salvador, the European Communities, Guatemala, Nicaragua and the United States reserved their respective right to participate in the Panel proceedings as third parties.5

1.6 The Panel met with the two parties on 11 May and continued on 12 May 2004 after the third parties' meeting. The Panel met again with the parties on 29 and 30 June 2004.

1.7 Chile, China, El Salvador, the European Communities, Guatemala, and Nicaragua presented third party submissions before the first substantive meeting of the Panel. These countries, as well as the United States, made oral statements during the first substantive meeting of the Panel. El Salvador and Nicaragua made joint submissions and a joint oral statement at the first substantive meeting.

1.8 Pursuant to the terms of Paragraph 8 of the 1996 Agreement between the International Monetary Fund (IMF) and the World Trade Organization, the Panel, on 17 May 2004, requested the IMF to provide information on how the "Comisión Cambiaria a las Importaciones" (previously called "Comisión de Cambio" and originally introduced by the Monetary Board of the Dominican Republic's Central Bank on 24 January 1991) is being implemented by the Dominican Republic. The Panel also requested the IMF to provide its views on whether the "Comisión Cambiaria a las Importaciones", as applied by the Dominican Republic, is considered to be an "exchange control" or "exchange restriction" under the Articles of Agreement of the International Monetary Fund. On 25 June 2004 the IMF sent its response to the Panel.6 The letter from the IMF was circulated to Parties and the Panel invited Parties to make comments. Honduras made some comments and the Dominican Republic did not submit any comments.

1.9 The Panel gave the parties a draft version of the descriptive part of the Report for their comments on 9 August 2004. The Panel issued its interim report to the parties on 21 September 2004. The Panel issued its final report to the parties on 20 October 2004.

II. FACTUAL ASPECTS

2.1 The specific measures at issue in the present case are the following:

2.2 The imposition by the Dominican Republic of a transitional surcharge on all imports, described as a "transitional surcharge for economic stabilisation" (recargo transitorio de estabilización económica), in accordance with Decrees 646-03 and 693-03.7 The surcharge currently amounts to 2 per cent of the c.i.f. value of the imported goods.

2.3 The imposition by the Dominican Republic of a foreign exchange fee on all imports (comisión de cambio), in accordance with the Seventeenth Resolution of the Dominican Republic Central Bank's Monetary Board dated 24 January 1991 as amended, inter alia, by the First Resolution of 27 September 2001, the First Resolution of 20 August 2002, and the First Resolution of 22 October 2003. The current level of the fee is 10 per cent calculated on the value of the imports at the selling exchange rate for foreign currency. The surcharge applies to both bound and unbound tariff items.

2.4 The requirement by the Dominican Republic that tax stamps be affixed to cigarette packets in the territory of the Dominican Republic, pursuant to Article 37 of Decree 79-03 – Regulation on the Implementation of Section IV of the Tax Code (Reglamento para la Aplicación del Título IV del Código Tributario de la República Dominicana)8 and Articles 1 and 2 of Decree 130-02.9

2.5 The rules and the administrative practice used by the Dominican Republic in order to determine the tax base for the purpose of applying the Selective Consumption Tax (Impuesto Selectivo al Consumo) to cigarettes, in accordance with Article 367 of its Tax Code (Código Tributario de la República Dominicana)10, Article 3 of Decree 79-03 and Article I of General Rule 02-96.11 More specifically, Honduras identifies three types of situations in this regard: (i) the regulations used to establish the value of imported cigarettes, in order to determine the tax base for the Selective Consumption Tax (SCT); (ii) the determination of the tax base for imported cigarettes in specific cases; and, (iii) the lack of publication of the surveys conducted by the Dominican Republic Central Bank that are used to determine the value of cigarettes for the purpose of applying the SCT.

2.6 The requirement by the Dominican Republic that importers of cigarettes post a bond to ensure payment of taxes, pursuant to Article 376 of the Tax Code and Article 14 of Decree 79-03.

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

3.1 Honduras requested the Panel to find that:

  • the surcharge on imported goods is inconsistent with Article II:1(b), second sentence, and consequently, likewise with Article II:1(a) of the GATT;
     

  • the foreign exchange fee is inconsistent with Article II:1(b), second sentence and consequently, likewise with Article II:1(a) of the GATT;
     

  • the requirement to affix a stamp on imported cigarettes in the territory of the Dominican Republic and under the supervision of the local tax authorities, in a manner that accords to imported cigarettes treatment less favourable than that accorded to domestic cigarettes, is inconsistent with Article III:4 of the GATT;
     

  • the application of the Selective Consumption Tax to certain imported cigarettes is inconsistent with Article III:2 of the GATT;
     

  • the manner in which the Dominican Republic determines the value of imported cigarettes for the purpose of applying the Selective Consumption Tax is inconsistent with Article X:3(a) of the GATT;
     

  • the failure to publish the surveys conducted by the Central Bank, on which the Selective Consumption Tax on cigarettes is supposed to be based, is inconsistent with Article X:1 of the GATT; and,
     

  • the requirement that importers of cigarettes post a bond is inconsistent with Article X1:1 or, in the alternative, with Article III:4 of the GATT.

3.2 Honduras requests the Panel to recommend, in accordance with Article 19.1 of the DSU, that the DSB request the Dominican Republic to bring the measures at issue into conformity with the GATT.

3.3 The Dominican Republic rejected all the foregoing claims made by Honduras and requested the following from the Panel based on reasons given by the Dominican Republic during the whole Panel proceedings:

  • to dismiss the claim that the determination of the tax base of the Selective Consumption Tax levied on imported cigarettes is inconsistent with Article III:2 of the GATT.
     

  • to dismiss the claim that the manner in which the Dominican Republic administers its provisions governing the Selective Consumption Tax (SCT) is inconsistent with Article X:3(a) of the GATT.
     

  • to dismiss the claim that the surveys that identify the retail selling price to be used as the tax base for the SCT is inconsistent with Article X:1 of the GATT.
     

  • to dismiss the claim that the requirement to affix a tax stamp in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT. Nevertheless, should the Panel find that this requirement is inconsistent with Article III:4, the Dominican Republic requests that the Panel find that the requirement is justified by the general exception in Article XX(d) of the GATT.
     

  • to dismiss the claim that the requirement that importers of cigarettes post a bond is inconsistent with Article XI of the GATT or, in the alternative, with Article III:4 of the GATT. Nevertheless, should the Panel find that this requirement is inconsistent with either Article XI or Article III:4, the Dominican Republic requests that the Panel find that the requirement is justified by the general exception in Article XX(d) of the GATT.
     

  • to dismiss the claim that the transitional surcharge on imports is inconsistent with Article II:1 of the GATT.
     

  • to dismiss the claim that the transitional foreign exchange fee is inconsistent with Article II:1 of the GATT or find that it is an exchange measure justified by Article XV:9(a) of the GATT.

IV. ARGUMENTS OF THE PARTIES

A. FIRST WRITTEN SUBMISSION OF HONDURAS

1. The measures at issue

(a) The surcharge imposed on imports

4.1 The Dominican Republic imposes a surcharge on all goods that is described as the "transitional surcharge for economic stablisation" ("surcharge"). The surcharge amounts to 2 per cent of the c.i.f. value of all goods imported into the Dominican Republic. It is imposed on imports, upon their importation, concurrently with and in addition to, the ordinary customs duties. The surcharge applies to both bound and unbound items.

(b) The foreign exchange fee imposed on imports

4.2 The Dominican Republic imposes a foreign exchange fee on all imports at the same time as the surcharge and the ordinary customs duties are imposed, namely, upon importation. Given its name, the fee is ostensibly intended to address "foreign exchange" matters related to the payment of imports in a foreign currency. However, the single criterion which determines the amount of the "foreign exchange fee" is the "value of imports at the selling rate of foreign exchange". The foreign exchange fee, originally introduced in 1991, has been amended several times. The most recent modification which increased the foreign exchange fee to 10 per cent was made effective by the First Resolution of the Monetary Board of the Dominican Republic dated 22 October 2003. The foreign exchange fee applies to both bound and unbound items.

(c) The requirement to affix a stamp on cigarettes in the territory of the Dominican Republic

4.3 The Dominican Republic requires that a stamp be affixed on all cigarette packets in the territory of the Dominican Republic. This requirement applies both to domestic and imported cigarette packets. For domestic cigarettes, the stamp may be affixed during the production process before the cellophane wrap is applied. In other words, domestic producers may affix the stamp on the cigarette packets at their own premises. However, the effect of this requirement for imported cigarettes is that the stamp can only be placed on the cellophane of each cigarette packet after it is imported into the Dominican Republic, but prior to its sale. Foreign producers are not allowed to affix the stamp on their own premises abroad. Instead, the Dominican Republic requires that imported cigarette packets be placed in a bonded warehouse or a warehouse under the control of the Directorate General of Internal Taxes (Dirección General de Impuestos Internos, DGII) in the territory of the Dominican Republic. The stamp then has to be affixed on the imported cigarette packets in these warehouses in the presence of tax inspectors. This requirement and their administrative procedures are established by Article 37 of Decree 79-03 and Articles 1 and 2 of Decree 130-02.

(d) The application of the Selective Consumption Tax for certain imported cigarettes

4.4 The Dominican Republic establishes a Selective Consumption Tax on certain products, such as tobacco products. In order to apply the tax rate to certain imported cigarettes, the Dominican Republic determines the value of these products based on the retail selling price of the so-called "nearest similar product". According to Article 367 (b) of the Tax Code, the determination of the value of domestic cigarettes for the purpose of the tax must be based on the retail selling price of each brand, as provided in the survey. By contrast, the tax base for imported cigarettes is the value of the "nearest similar product on the domestic market". There are no regulations in the Tax Code which establish the criteria and procedures that should be used to determine the "nearest similar product on the domestic market".

4.5 Furthermore, Article 3 of Regulation 79-03 reaffirms that the tax base for both domestic and imported cigarettes is the retail selling price as determined by the average market price in accordance with the survey. However, not all imported cigarettes are included in the survey and therefore, for these products, the Dominican Republic uses the price of the "nearest similar product". The Dominican Republic has not published the criteria that it uses to determine the "nearest similar product".

4.6 On the other hand, the General Rule 02-96 specifies that the tax base for the Selective Consumption Tax for domestic goods shall be determined on the basis of the price to the retailer of the product. Pursuant to this provision, the tax base for tobacco products, including domestic cigarettes, is determined by increasing by 20 per cent the listed price of the cigarettes. The survey is not used to establish the tax base for these domestic products.

4.7 Honduras exports to the Dominican Republic cigarettes of the brands Viceroy and Belmont. For the purpose of applying the Selective Consumption Tax to Viceroy cigarettes, the Dominican Republic bases the value of the imported product on what it considers to be the nearest similar product in the domestic market. In this regard, the Dominican Republic disregards the retail selling price of Viceroy as the relevant factor in determining the tax base for applying the Selective Consumption Tax. The Dominican Republic does not consider Líder cigarettes as the nearest similar product to Viceroy cigarettes, even though they both sell for the same retail selling price. The result is that Viceroy cigarettes are deemed to be selling at a retail price higher than the actual selling price and therefore, are required to pay taxes based on this higher amount.

(e) The administration of the law for determining the tax base for cigarettes

4.8 Article 367(b) of the Tax Code, Article 3 of the Regulation 79-03 and Article I of the General Norm 02 96 are the relevant laws governing the application of the Selective Consumption Tax on cigarettes, particularly with respect to the determination of the "nearest similar product". The determination of what is the nearest similar product is required for the imposition of the Selective Consumption Tax on imported cigarettes. As noted above, the tax base for imported cigarettes is determined by the value of the nearest similar product. However, the relevant laws do not contain any criteria to determine what is the "nearest similar product" in the Dominican Republic's market. Therefore, the Dominican Republic has wide scope to determine what is the "nearest similar product" to certain brands of imported cigarettes, such as Viceroy.

(f) The lack of publication of the survey on which the Selective Consumption Tax is to be based

4.9 As noted above, Article 367(b) of the Tax Code and Article 3 of the Regulation 79-03 both require that the Central Bank of the Dominican Republic conducts a survey in order to determine the retail selling price to be used as the tax base for the application of the Selective Consumption Tax.

4.10 The survey, which is supposed to reflect average prices, should be the primary source for the determination of the retail selling price for cigarettes. Therefore, the information contained in the survey is of critical importance to traders for the following reasons:

4.11 The retail selling price as determined by the survey should be used as the tax base for domestic cigarettes. This amount should subsequently be used to determine the tax base of imported cigarettes which have not yet been included in the survey.

4.12 In addition, as imported goods may also be included in the survey, the prices listed in the survey would be the primary source for determining the tax base for the Selective Consumption Tax to be applied for these products.

4.13 However, the Dominican Republic has failed to publish, or otherwise make available to importers, any of these surveys. As a result, traders are not apprised of the basis upon which their products will be taxed.

(g) The bond requirement for importers of cigarettes

4.14 Article 376 of the Tax Code requires that domestic producers of alcohol and tobacco products post a bond. Even though Article 376 of the Tax Code requires that only domestic producers post a bond, Article 14 of Regulation 79-03 subsequently introduced a bond requirement for importers of cigarettes.

4.15 There is a bond requirement for both domestic producers and importers. The purpose of this bond requirement is ostensibly to ensure that the Selective Consumption Tax is paid. However, the timing of when the Selective Consumption Tax must be settled with the government differs between importers and domestic producers. An importer must liquidate and pay the Selective Consumption Tax together with the corresponding customs duties at the moment that the products enter into the Dominican Republic. However, domestic producers must settle the Selective Consumption Tax on the 20th day following the month in which the actual sale (or transfer) occurred.

4.16 It would appear that the bond is a security in the event that the tax obligation is not properly discharged by the domestic producer on the 20th day in the month following the month in which the actual sale (or transfer) occurred. However, as noted above, importers are required to pay the full amount of the Selective Consumption Tax upon the importation of the product. Therefore, with respect to the importers, there is no potential Selective Consumption Tax liability that the bond requirement would secure as the tax obligation has already been discharged.

4.17 In addition, the bond requirement is a fixed amount of RD$ 5 million that must be posted by each importer and each domestic producer. In contrast, the Selective Consumption Tax is dependent upon variable factors such as monthly volumes of sales and changes in the retail selling price according to market factors. Therefore, there is no direct relationship between the amount required to be guaranteed (i.e. the fixed amount of the bond) and the actual amount giving rise to the tax. These two amounts are not commensurate.

2. Legal arguments:

(a) The surcharge is inconsistent with Article II:1(b) of the GATT

(i) The surcharge is a duty or charge other than an ordinary customs duty

4.18 The surcharge applies to both bound and unbound items. In the Dominican Republic's Schedule of Concessions, cigarettes which fall under the 4-digit tariff heading 2402 have a bound rate of 40 per cent. As the surcharge applies to the bound item of cigarettes, the surcharge falls within the scope of Article II:1(b), second sentence, of the GATT.

4.19 Article 2 of Decree 646-03 refers to two different and distinct types of amounts that are payable: (i) the surcharge, and (ii) the customs duty payable. The term "customs duty payable" on its face comprises the obligation to pay all duties, including "ordinary customs duties". The obligation to pay the surcharge – while this term is not specifically defined – arises concurrently with the customs duty payable. It follows that the obligation to pay the surcharge is an obligation separate from that of the obligation to pay the "customs duty", including ordinary customs duties. In other words, it is an "other" duty or charge within the meaning of Article II:1(b), second sentence. The term "other" means "existing besides or distinct from that or those already specified or implied; further, additional". The placement of the term "transitional surcharge" beside the term "customs duty payable" indicates that it is a distinct type of charge or duty. The surcharge is a "duty or charge" other than an "ordinary customs duty" within the meaning of Article II:1(b), second sentence, of the GATT.

(ii) The surcharge is imposed on, or in connection with, importation

4.20 The surcharge is "…levied on the c.i.f value of [all] goods included in the Harmonized Commodity Description and Coding System and which fall under the regime of customs clearance for consumption" (emphasis added in the submission). It is only products that are imported that would fall under "the regime of customs clearance for consumption". Therefore, the surcharge is imposed on, or in connection with, the importation of all goods.

(iii) The Dominican Republic did not record the surcharge in its Schedule of Concessions and the surcharge is therefore inconsistent with Article II:1(b), second sentence, in the light of the Understanding on Article II:1(b)

4.21 According to the Understanding on the Interpretation of Article II:1(b) of the General Agreement on Tariffs and Trade 1994, as of 15 April 1994, all WTO Members had to record all charges and duties in their respective Schedules of Concessions. The Dominican Republic did not record this surcharge. Indeed, as the surcharge did not exist as of 15 April 1994, it was not possible for it to be recorded in the Dominican Republic's Schedule of Concessions.

(iv) The surcharge is in excess of the duties or charges imposed as of 15 April 1994

4.22 Article II:1(b), second sentence, read together with the Understanding, prohibits Members after 15 April 1994 from imposing "other duties or charges" in excess of the binding in the "other duties and charges" column of the Schedule. As the Dominican Republic did not record the surcharge as an "other duty or charge" in its Schedule of Concessions, any surcharge that it now introduces must be "in excess of" those set out and provided in its Schedule. It follows from the above that the 2 per cent surcharge is in excess of, and therefore is inconsistent with, the Dominican Republic's obligations under Article II:1(b), second sentence, of the GATT. Honduras submits that as the surcharge is inconsistent with the specific obligation set out in Article II:1(b), second sentence, it is consequently inconsistent with the general prohibition set out in Article II:1(a) of the GATT.

(b) The foreign exchange fee is inconsistent with Article II:1(b) of the GATT

(i) The foreign exchange fee is a duty or charge other than an ordinary customs duty

4.23 As noted above, the Dominican Republic imposes a foreign exchange fee on all imports at the same time as it imposes the ordinary customs duties, namely, upon importation. The "ordinary customs duties" are levied upon the entry of goods into a customs territory. The foreign exchange fee applies to both bound and unbound items. In the Dominican Republic's Schedule of Concessions, cigarettes which fall under the 4-digit tariff heading 2402 have a bound rate of 40 per cent. As the foreign exchange fee applies to the bound item of cigarettes, the foreign exchange fee falls within the scope of Article II:1(b), second sentence, of the GATT. As a result, the foreign exchange fee is a duty or charge "other" than an ordinary customs duty. Article II:1(b) applies to "other duties or charges" of any kind, whether they take the form of an "exchange action" or a "trade action". For the purpose of making a finding under Article II:1(b), therefore, the Panel need not decide whether the fee is an "exchange action" or a "trade action" within the meaning of Article XV:4 of the GATT.

(ii) The foreign exchange fee is imposed on, or in connection with, importation

4.24 The First Resolution of 22 October 2003 states clearly that the foreign exchange fee referred to in (amended) Paragraph 12 of the Seventeenth Resolution adopted by the Board on 24 January 1991 is a "foreign exchange fee on imports" (emphasis added). Furthermore, the foreign exchange fee is collected by Customs at the time of importation, and is "computed on the value of the imports". As it is applied on the value of imports and at the time of importation, the foreign exchange fee clearly is a duty or charge other than "ordinary customs duties" imposed on, or in connection with, importation, within the meaning of Article II:1(b), second sentence.

(iii) The Dominican Republic did not record the foreign exchange fee in its Schedule of Concessions and the fee is therefore inconsistent with Article II:1(b), second sentence, in the light of the Understanding on the Interpretation of Article II:1(b) of the GATT

4.25 The Understanding requires that all duties or charges, other than ordinary customs duties, must be recorded in a Member's Schedule of Concessions. Article II:1(b), second sentence, read together with the Understanding, prohibits Members after 15 April 1994 from imposing "duties or charges" other than those that were recorded in the "other duties or charges" column of that Member's Schedule. Honduras notes that the foreign exchange fee was never recorded as an "other duty or charge" in the Dominican Republic's Schedule of Concessions. Therefore, Honduras submits that the foreign exchange fee is inconsistent with Article II:1(b), second sentence, in the light of the Understanding on Article II:1(b).

(iv) The current foreign exchange fee is in excess of the duties or charges imposed as of 15 April 1994

4.26 If the Panel were to find that the imposition of the foreign exchange fee is WTO-consistent notwithstanding the Dominican Republic's failure to record it as an "other duty or charge" in its Schedule of Concessions, Honduras submits that it is nevertheless "in excess of" the rate applied as of 15 April 1994. The legislation establishing the foreign exchange fee was enacted in 1991; it provided that the fee would be levied at a rate of 2.5 per cent. Therefore, Honduras notes that the rate of 2.5 per cent that was applied before 15 April 1994 is lower than the rate of 10 per cent that is currently applied. The foreign exchange fee is inconsistent with Article II:1(b), second sentence, of the GATT because it is imposed in excess of the Dominican Republic's recorded bindings in the "other duties or charges" column in its Schedule of Concessions. Honduras submits that the foreign exchange fee is inconsistent with Article II:1(a) and, based on the principle underlying the relationship between Article II:1(a) and Article II:1(b), second sentence, it is consequently inconsistent with Article II:1(a).

(c) The requirement to affix a stamp in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT

4.27 The Appellate Body has stated that, in order to establish a violation of Article III:4, three elements must be satisfied: "…that the imported and domestic products at issue are 'like products'; that the measure at issue is a 'law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use'; and that the imported products are accorded 'less favourable' treatment than that accorded to like domestic products".12 These three elements are met.

(i) Imported and domestic cigarettes are "like products" within the meaning of Article III:4

4.28 Based on the four criteria stated in the GATT Working Party Report on Border Tax Adjustments13, as followed by the Appellate Body in EC –Asbestos14, Honduras submits that imported cigarettes and domestic cigarettes of all brands are like products. In general, both imported and domestic cigarettes have the same physical properties (i.e. tobacco) and similar presentation; they have the same end-use (i.e. they are smoked); they are interchangeable for consumers (e.g. many consumers do switch from one brand to another); and; they are classified under the same tariff heading.

(ii) The requirement of affixing a stamp on cigarette packets in the territory of the Dominican Republic is a requirement that affects the internal sale of imported cigarettes

4.29 The requirement to affix a stamp on both imported and domestic cigarettes is found in Article 37 of the Regulation and Articles 1 and 2 of Decree 130-02. The fulfilment of this requirement is a prerequisite for withdrawing the cigarettes from the warehouse in order that they may be distributed and sold in the Dominican Republic and, therefore, affects the internal sale of imported cigarettes.

(iii) The requirement of affixing a stamp in the territory of the Dominican Republic accords treatment less favourable to imported cigarettes than that accorded to domestic cigarettes

4.30 The requirement of affixing a stamp in the territory of the Dominican Republic applies to both domestic and imported cigarettes and is, as such, a formally identical requirement. Nevertheless, it has been recognised in GATT jurisprudence that "…there may be cases where application of formally identical legal provisions would in practice accord less favourable treatment to imported products and a contracting party might thus have to apply different legal provisions to imported products to ensure that the treatment accorded them is in fact no less favourable…"15 In the case at hand, the identical requirement of affixing the stamp in the Dominican Republic imposes the following additional steps and costs for importers of cigarettes. As the stamp must be affixed in the territory of the Dominican Republic, imported cigarettes must undergo additional steps in order to comply with this requirement. For domestic cigarettes, no additional steps are required to so comply; the stamp may be affixed during the production process prior to the final packaging of the product. In contrast, as shown below, in the case of imported cigarettes the affixing of the stamp requires a separate process after cigarettes have been produced and packed in the exporting country. This additional process requires the re-opening of boxes and cartons, the affixation of the stamps on the cigarette packets (over the cellophane), and the repackaging of cartons and boxes.

4.31 First, the importer must reopen the boxes and then reopen the cigarette cartons in order to remove the cigarette packets so that the stamp may be affixed on the cigarette packets. The sheets of stamps have to be individually cut and then individually glued onto the packets. Subsequently, the cigarette packets have to be replaced in the cartons and then replaced in the boxes. All these additional steps require the importer to hire additional labour to carry out these tasks in the Dominican Republic. Honduras submitted photographs which provide graphic evidence of the burdensome steps that the importer has to undertake to comply with this requirement. Domestic producers, on the other hand, do not have to carry out all these additional steps.

4.32 In addition, the fact that the stamp on imported cigarettes is placed over the cellophane aesthetically detracts from the overall presentation of the final product. Cigarettes manufactured in the Dominican Republic are allowed to have the stamp added to the packets before the cellophane wrap is applied and during the production process. As a result, imported cigarettes cannot be as attractively packaged as domestic cigarettes.

4.33 The costs to the importer of affixing the stamp in the territory of the Dominican Republic amount to US$0.9 per thousand cigarettes; that is 9.70 per cent of the c.i.f. average price. Honduras does not have access to the costs incurred by a domestic producer in the Dominican Republic to affix the stamp in the course of the production process. However, a report from Price Waterhouse Coopers demonstrates that the cost for a cigarette producer in Honduras for affixing the stamp during the overall production process is US$0.01 per thousand cigarettes; that is 0.1 per cent of the c.i.f. average cost. It is reasonable to assume that these costs in terms of percentage would be the same for a domestic producer in the Dominican Republic.

4.34 In the light of the foregoing analysis, Honduras submits that the requirement to affix the stamp in the Dominican Republic modifies the conditions of competition for imported cigarettes in the Dominican Republic to their detriment, and thus treats imported cigarettes less favourably. Therefore, Honduras submits that the measure at issue is inconsistent with Article III:4 of the GATT.

(d) The application of the Selective Consumption Tax for certain imported cigarettes is inconsistent with Article III:2 of the GATT

4.35 Based on the methodology set out by the Appellate Body regarding the analysis of a claim under Article III:2, first sentence, Honduras submits that the measure at issue is inconsistent with Article III:2 of the GATT for the reasons set out below.

(i) Domestic and imported cigarettes are "like products" within the meaning of Article III:2, first sentence

4.36 The Appellate Body has stated that it agrees "with the practice under the GATT 1947 of determining whether imported and domestic products are 'like' on a case-by-case basis".16 Honduras has established above that imported and domestic cigarettes are "like products". If the Panel were to find that domestic and imported cigarettes were not like products, Honduras submits that domestic and imported cigarettes are nevertheless directly competitive or substitutable and are not similarly taxed in accordance with Article III:2 and Note Ad Article III:2 of the GATT.

(ii) Certain imported cigarettes are subject to internal taxes in excess of those applied to like domestic products

4.37 The Dominican Republic treats like products which sell for the same retail selling price differently. In other words, the Dominican Republic establishes the tax base for certain imported cigarettes such as Viceroy on the basis of what it determines to be the retail selling price of the "nearest similar product", whereas it determines the tax base for its domestic cigarettes such as Líder and Marlboro on their actual retail selling prices. This difference in approach in determining the tax base has led to various complaints being filed with the courts in the Dominican Republic.

4.38 The difference in approach has resulted in lower-priced imported cigarettes being taxed at a rate higher than their actual selling price. In practical terms, this means that cigarettes like Viceroy which sell for RD$18 are taxed at a higher rate than the like domestic products, which sell for the same retail selling price.

4.39 Honduras provides the following table to illustrate the retail selling price of the relevant products:

Brand

Retail Selling Price

Selective Consumption Tax paid

per cent Actual Tax burden

Kent RD$ 22.00 RD$ 6.54 29.73 per cent
Marlboro RD$ 26.00 RD$ 7.73 29.73 per cent
Belmont RD$ 20.00 RD$ 6.13 30.65 per cent
Nacional RD$ 24.00 RD$ 7.36 30.65 per cent
Viceroy RD$ 18.00 RD$ 6.54 36.33 per cent
Líder RD$ 18.00 RD$ 5.34  29.66 per cent

(Information applicable during the period of 17 March – 1 August 2003.)

4.40 From this table, it can be noted that the retail selling prices for Viceroy and Líder are the same, but they are not taxed on the same basis.

4.41 Due to this difference in taxation, the Selective Consumption Tax applied to Honduras's Viceroy cigarettes is in excess of the Selective Consumption Tax applied to its like domestic product, Líder. Viceroy cigarettes have a higher tax burden of 36.33 per cent as compared to the tax burden of 29.66 per cent for Líder. The measure at issue is therefore inconsistent with Article III:2, first sentence, of the GATT.

(e) The failure to establish and/or apply transparent and generally applicable criteria for determining the value of imported cigarettes is inconsistent with Article X:3(a) of the GATT

4.42 The applicable provision is Article X:3(a) of the GATT. This provision applies to the measures falling under the scope of Article X:1 of the GATT.

(i) The law governing the Selective Consumption Tax falls under Article X:1 of the GATT

4.43 Article 367 (b) of the Tax Code, Article 3 of the Regulation and Article I of the General Rule 02-96 are "laws, regulations… of general application… pertaining to… taxes or other charges". Therefore, these measures fall under the scope of Article X:1 of the GATT.

(ii) The administration of the Selective Consumption Tax is not conducted in a reasonable manner

4.44 The Dominican Republic administers the provisions governing the Selective Consumption Tax in a manner that is not reasonable; in particular, with respect to determination of the "nearest similar product on the domestic market". Honduras submits that there is no adequate reason for the Dominican Republic to disregard the actual retail selling price of Líder when determining the tax base for Viceroy. As stated above, both Viceroy and Líder have the same retail selling price. The Dominican Republic, however, relies on the price of Kent or Marlboro to determine the "nearest similar" product to Viceroy in the Dominican Republic's market.

4.45 This unreasonable administration of the criteria to determine the "nearest similar product" to Viceroy is inconsistent with Article X:3(a) of the GATT.

4.46 The determination of "nearest similar product" as one with a higher retail selling price leads to the imposition of the Selective Consumption Tax on certain imported cigarettes in excess of like domestic cigarettes. Therefore, this unreasonable administration of the laws and regulations governing the Selective Consumption Tax, particularly the manner in which the "nearest similar product" is determined, has an impact on the competitiveness of imported cigarettes.

(f) The failure to publish the surveys that are used to determine the Selective Consumption Tax is inconsistent with Article X:1 of the GATT

(i) The surveys to be used to determine the rates for the Selective Consumption Tax fall under Article X:1

4.47 Article 3 of Regulation 79-03 confirms that the tax base for both domestic and imported cigarettes is the retail selling price as determined by the average market price in accordance with the survey. The surveys conducted by the Dominican Republic's Central Bank are part of the regulations or administrative rulings of general application pertaining to the determination of the Selective Consumption Tax. Therefore, the survey is a component of the legislation on the Selective Consumption Tax, covered by Article X:1 of the GATT.

(ii) The surveys to be used to determine the Selective Consumption Tax have not been published

4.48 However, the survey has not been made publicly available. According to Article X:1, the survey should have been published promptly in such a manner as to enable governments and traders to become acquainted with them. A WTO Panel has stated that: "[i]ndeed, Article X:1 requires the prompt publication of trade-related regulation 'so as to enable governments and traders to become acquainted with them.'"17

4.49 However, the Dominican Republic has not published the survey in order to enable governments and traders to become acquainted with their content. Therefore, the Dominican Republic has acted inconsistently with Article X:1.

(g) The requirement to post a bond is inconsistent with Article XI:1 of the GATT, or, in the alternative, if the bond requirement is determined to be an internal measure, is inconsistent with Article III:4 of the GATT

4.50 The applicable provision is Article XI:1 of the GATT. However, alternatively, if the bond requirement were considered to be an internal measure, then the provisions of Article III:4, which is cited above, would apply.

(i) The requirement to post a bond as stated in the applicable law is a restriction inconsistent with Article XI:1

4.51 In the light of Article 14 of the Regulation, importation would not be allowed unless the bond requirement is complied with. Therefore, the bond requirement constitutes a restriction imposed on the importation of cigarettes into the Dominican Republic. In GATT/WTO jurisprudence, Panels have interpreted Article XI:1 as a comprehensive ban of all types of limitations on the importation of products other than duties, taxes and charges. The requirement has the effect of restricting imports when the bond is not provided, in a manner inconsistent with Article XI:1.

(ii) If, in the alternative, the requirement to post the bond is an internal measure, it accords less favourable treatment to imported cigarettes than that accorded to like domestic cigarettes, and is therefore inconsistent with Article III:4

4.52 If the Panel were to consider that the requirement to post a bond is an internal measure, it should find that it is inconsistent with Article III:4 of the GATT because it accords less favourable treatment to imported cigarettes than that accorded to like domestic cigarettes. As stated above, domestic producers have the obligation to pay the amount of the tax on the 20th day of the month following the month in which the original sale (or transfer) was made. In this situation, it appears that the bond is a security in the event that the tax obligation is not properly discharged. However, importers have to pay the full amount of the Selective Consumption Tax upon the importation of the product. Therefore, with respect to the importers, there is no Selective Consumption Tax liability that the bond requirement would secure. In addition, the bond requirement is a fixed amount of RD$ 5 million that must be posted by each importer and domestic producer. In contrast, the Selective Consumption Tax is dependent upon variable factors such as monthly volumes of sales and variations in the retail selling price according to market factors. Therefore, there is no direct relationship between the amount required to be guaranteed (i.e. the fixed amount of the bond) and the actual amount giving rise to the tax. These two amounts are not commensurate. This discrepancy is illustrated by the fact that, as of December 2003, an importer that accounted for, say, 4 per cent of the market would have had to pay RD$4.1 million a month for the Selective Consumption Tax, whereas it would have had to post the bond for RD$5 million. By the same token, a domestic producer which accounted for, say, 88 per cent of the market would have had to pay RD$91.5 million a month for the Selective Consumption Tax, whereas it would have had to post the bond for RD$5 million.

4.53 In the alternative, Honduras submits that the measure at issue for these reasons is inconsistent with Article III:4 of the GATT.

B. FIRST WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC

1. Introduction

4.54 The claims raised by Honduras target six measures, which can be classified in one of the following categories: (1) dead measures18, (2) measures applied to enforce internal tax laws, and (3) transitional measures on imports.

4.55 The first category, i.e. dead measures, includes (a) the determination of the tax base of the ad valorem Selective Consumption Tax (SCT) for cigarettes, and (b) the publication of the surveys of average retail prices of cigarettes. Both measures were eliminated even before the Panel proceedings commenced (on the day the Panel was established). Honduras's claims are moot.

4.56 The second category of measures, i.e. measures applied to enforce internal tax laws, includes (a) the requirement to affix tax stamps on cigarettes in the territory of the Dominican Republic, and (b) the requirement to post a bond to guarantee compliance with the tax laws of the Dominican Republic. These measures apply equally to importers and to domestic producers. They do not discriminate against imported products, and are not applied so as to afford protection to domestic production.

4.57 The third category of measures, i.e. transitional measures on imports, includes (a) a transitional surcharge on imports, and (b) a transitional foreign exchange fee. Honduras's claims that the surcharge and the exchange fee are inconsistent with the obligations of the Dominican Republic are disproved by the recorded level of other duties or charges in the Schedule of Concessions XXIII – Dominican Republic.

2. Legal arguments

(a) Dead measures

4.58 Honduras's three claims concerning the Selective Consumption Tax for imported cigarettes target measures that the Dominican Republic eliminated on the same day this Panel was established. The claims are therefore moot and should be dismissed.

(i) Selective Consumption Tax

4.59 Honduras's claims under Articles III:2 and X:3(a) of the GATT concerning the SCT are based on the former – and now outdated – provisions of Article 367 of the Dominican Republic Tax Code. Law 3-04 of 9 January 2004 (published on 14 January 2004) amended Articles 367 and 375 of the Tax Code.19 Articles 367 and 375 of the Tax Code, as amended, establish a specific and identical tax base and tax rate for the SCT for imported and domestic cigarettes – i.e. RD$0.48 per cigarette.20 The Panel should dismiss Honduras's claims, as they are based on measures that no longer exist.

(ii) Survey of average retail prices

4.60 Honduras claims that the Dominican Republic acts inconsistently with Article X:1 of the GATT because it has not published the Central Bank surveys that identify the retail price to be used as the tax base for the SCT.21 However, the surveys were removed from Article 367 of the Tax Code by Law 3-04 of 9 January 2004. Honduras's claim concerning the surveys is therefore moot. Consequently, the Panel should dismiss this claim.

(b) Measures applied to guarantee compliance with internal tax laws

(i) The stamp requirement for imported and domestic cigarettes

4.61 There is nothing discriminatory about the stamp requirement specified in Article 37 of Decree 79-03 of 4 February 2003 and Article 2 of Decree 130-02 of 11 February 2002. The requirement to affix stamps to cigarette packets, whether imported or produced domestically, in the territory of the Dominican Republic and in the presence of officials from the DGII is a legitimate exercise of the Dominican Republic's sovereign right to enforce its internal tax laws. Honduras has not presented evidence to establish a prima facie case that the stamp requirement is inconsistent with Article III:4 of the GATT.

The stamp requirement is consistent with Article III:4 of the GATT

4.62 Contrary to Honduras's arguments, the requirement to affix stamps does not accord less favourable treatment to imported cigarettes nor is it applied so as to afford protection to the domestic producer.

4.63 The requirement in Article 37 of Decree 79-03 and Articles 1 and 2 of Decree 130-02 to affix tax stamps in the territory of the Dominican Republic is provided for and applied equally to importers and domestic producers. According to Article 37 of Decree 79-03, both the domestic producer and the importer of cigarettes are required to affix tax stamps in the presence and under the supervision of the DGII inspector, whose job is to ensure that each packet of cigarettes that enters the stream of commerce has paid its corresponding tax. The inspectors are neither more lenient nor more stringent on either the domestic producer or the importer. There is no evidence in this case of either de jure or de facto discriminatory treatment on the part of the Dominican Republic.

4.64 The conditions of competition that Honduras complains about have not been "modified" by the Dominican Republic. Rather, they are the result of inherent differences in the normal conditions under which imported products compete with domestic products. The inherent differences that exist between imported and domestic products mean that there can never be a perfect equality in the conditions of competition in the market place between importers and domestic producers. Article III:4 requires Members to refrain from modifying or upsetting those conditions of competition to the detriment of importers in a manner that affords protection to the domestic producers. It does not require that Members modify the conditions of competition so as to compensate for inherent differences between imported and domestic products and ensure perfect equality in the conditions of competition. The essence of Honduras's argument is that any cost associated with the performance of legitimate regulations must be borne by the State.

4.65 The examination of whether a measure involves "less favourable treatment" of imported products within the meaning of Article III:4 of the GATT 1994 "must be grounded in close scrutiny of the 'fundamental thrust and effect of the measure itself'".22 The thrust of the measure is to enforce the tax laws of the Dominican Republic and avoid the endemic problem of trade in smuggled cigarettes, which has been estimated to lead to US$25-30 billion in total lost tax revenue by governments around the world annually.23

4.66 The additional costs that Honduras points to in its first written submission are costs associated with compliance with non-discriminatory internal measures. Also, many of the "additional steps" that Honduras refers to are either avoidable or are steps that domestic producers also have to perform. In any event, the effect that the measure has on importers is negligible. Imports by the Honduran cigarette producer British American Tobacco (BAT) into the Dominican Republic increased by more than 80 per cent in value in 2003, compared with the previous year, from US$454,497 to US$818,307.24

4.67 The Appellate Body and Panels have held consistently that the general principle in Article III:1 informs the other paragraphs of Article III, including paragraph 4, and guides its interpretation.25 The Panel must determine, therefore, on the basis of the evidence submitted by the complainant, whether the measure has "protective application", i.e. is it applied so as to afford protection to domestic producers.26

4.68 In this case, an examination of the design, architecture, and revealing structure of the requirement to affix a stamp in the territory of the Dominican Republic reveals that the measure is not applied so as to afford protection.27 That conclusion is borne out by the following relevant facts and circumstances, which must be given full consideration:

(a) The tax stamp is a legitimate, internationally-recognized method to prevent and stymie trade in smuggled cigarettes and the resulting loss of tax revenue.

(b) The exact same requirement to affix the tax stamps in the territory of the Dominican Republic is imposed on both domestic producers and importers.28

(c) The effective enforcement of the tax stamp legislation requires the presence of inspectors from the DGII at the production facilities of domestic producers and the facilities of importers of cigarettes at the time the stamps are affixed.29

(d) The Dominican Republic has neither the right nor the resources to relocate DGII officials to foreign countries to enforce the laws of the Dominican Republic abroad and outside of its jurisdiction.

(e) The costs of complying with legitimate and non-discriminatory laws and regulations in the territory of the State enforcing such laws are inherent in the conduct of international trade. The cost to the importer of Honduran cigarettes BAT of complying with the Dominican Republic tax regulation is estimated at US$65,641.30

(f) There is concrete evidence in the Dominican Republic that allowing tax stamps to be shipped and affixed abroad results in forgery of such tax stamps and smuggling of the products in question.31

(g) The alleged associated cost of complying with the stamp requirement is a minimal expense that does not have a protective or discriminatory effect on the competitive conditions of importers of cigarettes in the Dominican Republic.

(h) The tax stamp has no protective effect in practice, as demonstrated by the significant increase in imports of cigarettes by BAT from Honduras and elsewhere into the Dominican Republic (more than 80 per cent in value in 2003, compared with the previous year, from US$454,497 to US$818,307).

(i) The Dominican Republic has the inherent and fundamental sovereign right to enforce its laws within its own territory.

(j) The Dominican Republic has the inherent and fundamental sovereign right to set the level of enforcement that it deems appropriate.32

4.69 Accepting Honduras's claim against the stamp requirement would leave the Dominican Republic with one of the following options: (a) send DGII inspectors to foreign countries to control the affixation of stamps in foreign producers' plants; or (b) lower its enforcement standard and allow foreign producers to affix stamps abroad without the supervision of the DGII.

4.70 The Dominican Republic cannot presume to have jurisdiction to prescribe nor enforce Decrees 79-03 and 130-02 outside of its territory. A state cannot take measures or exercise its power in any form on the territory of another state by way of enforcement of national laws, except by virtue of a permissive rule to the contrary.33

4.71 On the other hand, the Dominican Republic does not have the resources necessary to send DGII inspectors to Honduras (the annual cost to the Dominican Republic of flying one DGII inspector to Tegucigalpa every day to supervise that activity would be approximately US$151,680, or US$168,980 in the case of San Pedro Sula)34, or to any city of a WTO Member where production for export to the Dominican Republic takes place -in accordance with Article I of the GATT- to ensure that the stamps are affixed to the cigarette packets in accordance with Decrees 79-03 and 130-02.

4.72 The remaining regulatory "option" that would be theoretically available to the Dominican Republic would be to allow foreign producers to affix stamps abroad without the supervision of the DGII. As experience has shown, that would mean that the Dominican Republic would have to lower its desired level of enforcement. The Appellate Body has recognized, however, that "[i]t is not open to doubt that Members of the WTO have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations".35

(ii) The bond requirement for domestic and imported cigarettes

4.73 The bond requirement is a non-discriminatory internal measure. It is neither a restriction on importation subject to Article XI:1 nor discriminatory under Article III:4 of the GATT.

4.74 The Panel in US – Certain EC Products recognized the right of Members to require bonds as an "enforcement mechanism" that guarantees the performance of internal regulations.36

The bond requirement is outside the scope of Article XI:1 of the GATT

4.75 Contrary to Honduras's claim, the requirement to post a bond is not a restriction imposed on the importation of cigarettes into the territory of the Dominican Republic, and it is therefore outside the scope of Article XI:1. Rather, the bond requirement is an internal measure applied in accordance with Article III:4.

4.76 Article XI:1 applies to measures that impose a prohibition or restriction "on the importation" of a product. Article III covers measures that are applied to both imported and domestic products equally. Honduras acknowledges that the bond is applied identically to importers and to domestic producers of cigarettes. Article 14 of Decree 79-03 explicitly notes that under the Dominican Republic's regulations both domestic producers and importers of cigarettes must post a bond of RD$5 million.37 The fact that the bond is not enforced at the time or point of importation in the case of imported cigarettes is further evidence that the bond requirement is not a measure "on the importation" of a product. It is, therefore, an internal measure within the scope of Article III:4, not Article XI:1.

The bond requirement is consistent with Article III:4 of the GATT

4.77 There is no explanation of how, in the view of Honduras, the bond modifies the conditions of competition in the Dominican Republic to the detriment of imported cigarettes. There is also no indication of how the bond is applied to imported or to domestic cigarettes so as to afford protection to domestic production.

4.78 Contrary to Honduras's assertion, the bond does secure compliance by importers of their tax obligations, including the SCT. The fact that the importer is required to pay the SCT upon importation does not mean that no tax liability can arise after cigarettes have cleared customs.

4.79 It is often the case that the SCT originally assessed at the time of importation is insufficient to cover the tax liability of the importer. The Tax Authority of the Dominican Republic retains the right to conduct that reassessment and adjustment within a maximum of three years after the initial payment of the relevant tax.38 This right to reassess tax liquidation applies to importers and domestic producers equally.

4.80 Moreover, although Article 376 of the Tax Code appears to refer only to the SCT, in practice the Tax Authority of the Dominican Republic treats the bond as a guarantee of compliance with other internal tax obligations incumbent on the domestic producer and the importer of cigarettes.39

4.81 The assertion by Honduras that there is no tax liability for importers that the bond can secure is in any case legally irrelevant for purposes of an examination under Article III:4. Furthermore, even if the timing of the payment of the SCT was legally relevant, which it is not, the issue is outside the terms of reference of the Panel.

4.82 Honduras has also not explained how a specific amount that applies equally to importers and to domestic producers accords treatment less favourable to importers than to domestic producers. The absence of a so-called "direct relationship" between the amount of the bond and the underlying obligation it guarantees applies equally to domestic producers and to importers. Honduras appears to suggest that any bond for a specific amount that guarantees payment of a variable amount is inconsistent with Article III:4 of the GATT.

4.83 Finally, the bond requirement is not applied by the Dominican Republic "so as to afford protection" to domestic producers of cigarettes. The design, architecture, and revealing structure of the bond requirement in Article 14 of Decree 79-03 confirms that the measure is not protectionist in scope, application, or effect.

(iii) The requirement to affix stamps in the territory of the Dominican Republic and the requirement to post a bond are justified by Article XX(d) of the GATT

4.84 Should the Panel find the Dominican Republic's stamp and/or bond requirements are inconsistent with other provisions of the GATT, it should nevertheless find these measures are justified because they are necessary to secure compliance with laws or regulations that are not GATT inconsistent in accordance with Article XX(d) and they are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, in accordance with the chapeau of Article XX.40

The requirement to affix stamps in the territory of the Dominican Republic is justified by Article XX(d) of the GATT

4.85 The Dominican Republic's stamp requirement satisfies the requirements of Article XX(d) of the GATT.

4.86 First, the stamp requirement secures compliance with other Dominican Republic tax laws and regulations; particularly, the Dominican Republic Tax Code, including but not limited to the SCT for cigarettes. The stamp requirement is specifically under the supervision of the DGII, who is charged with securing compliance with the Dominican Republic Tax Code. The stamp requirement also helps prevent cigarette smuggling, which is a widespread problem intimately linked to tax compliance.

4.87 Second, the Dominican Republic Tax Code is consistent with the GATT; and Honduras has not challenged the GATT-consistency of the Tax Code. Moreover, the SCT on cigarettes, as amended by Law 3-04 of 9 January 2004, is consistent with the GATT41, and this measure is not at issue in this case.

4.88 Third, the stamp requirement is "necessary" to secure compliance with the Dominican Republic Tax Code and prevent cigarette smuggling. A measure need not be "indispensable" or "of absolute necessity" to be "necessary" within the meaning of Article XX(d).42 The contribution made by the measure to law enforcement, the importance of the common values at issue, and the impact on imports or exports must all be considered.43 The greater the contribution to these factors, the more likely a measure is to be "necessary".44

4.89 The stamp requirement contributes greatly to law enforcement because it allows Dominican Republic tax authorities to monitor the placement of stamps on cigarette cartons to ensure compliance with the Dominican Republic Tax Code and prevent cigarette smuggling. A WTO panel recognized that tax evasion could be addressed through prevention techniques, not solely through repressive enforcement strategies.45

4.90 There is also international agreement that tax stamps are necessary to prevent cigarette smuggling. The International Conference on Illicit Tobacco Trade (ICITT) has identified tax stamps as a method of labelling that is necessary to constrain distribution of contraband.46 The World Health Organization has also stressed the importance of marking cigarette packets.47

4.91 Without strict enforcement of its tax laws, the Dominican Republic would face more serious problems of smuggling and tax evasion. Evidence shows that where tax stamps for alcohol are permitted to be affixed abroad, there is a greater risk of smuggling and tax evasion, including through forgery of tax stamps.48

4.92 In addition, the slight impact that the measure has on imported cigarettes further supports the conclusion that the stamp requirement is "necessary" to secure compliance with the tax laws of the Dominican Republic. This slight impact is evidenced by the US$65,641 per year estimated cost to the importer of Honduran cigarettes BAT of affixing tax stamps to cigarettes imported from Honduras, and the 80 per cent increase of imports by BAT into the Dominican Republic in 2003, compared with the previous year.49 Moreover, any additional impact on imports arises from the inherent differences between imports and domestically manufactured goods.

4.93 The Dominican Republic has no reasonable alternatives to prevent tax evasion and cigarette smuggling that would meet the level of enforcement set by the Dominican Republic. The Dominican Republic has the right to determine the level of enforcement of its WTO consistent laws and regulations50, and it has done so in a manner that is identical for imported and domestically produced cigarettes. Moreover, it is impractical for the Dominican Republic to send its tax authorities abroad to monitor the affixation of stamps.

4.94 Thus, the stamp requirement is "necessary" within the meaning of Article XX(d) of the GATT.

The stamp requirement also satisfies the chapeau of Article XX

4.95 First, the stamp requirement is not applied in a manner that discriminates between countries where the same conditions prevail. Discrimination within the meaning of the chapeau does not refer to the same standard of discrimination under other provisions of the GATT, including Article III51, so the Panel must examine discrimination under the chapeau independently from its examination under Article III:4. There is no evidence that the stamp requirement is applied in a manner that discriminates between different countries supplying cigarettes to the Dominican Republic, or between importers and domestic producers of cigarettes, as all cigarette producers are required to affix stamps in the territory of the Dominican Republic.

4.96 Second, any alleged discrimination is neither arbitrary nor unjustifiable. For discrimination to be arbitrary, the measure must be applied inconsistently at the will or discretion of a legal authority52, or its application must result in a denial of basic fairness and due process.53 The stamp requirement does not meet this definition of arbitrary. The manner in which the measure is to be applied is clearly stipulated in the text, so it is transparent and does not deny basic fairness and due process.

4.97 For discrimination to be unjustifiable, it must be not reasonable, not defensible, not unavoidable, or coercive.54 The stamp requirement does not meet this definition of unjustifiable because any discrimination in its application between importers and domestic producers of cigarettes arises from the inherent differences between imports and domestically produced goods.

4.98 Third, the stamp requirement is not applied in a manner that constitutes a disguised restriction on international trade. A disguised restriction on international trade includes both concealed and unconcealed measures, as well as disguised discrimination. The analysis in determining whether the application of a measure constitutes arbitrary or unjustifiable discrimination also factors into whether such application is a disguised restriction on international trade.55 The intention of a measure to pursue trade-restrictive objectives is also relevant.56 The stamp requirement does not satisfy this definition. It is neither concealed nor unannounced. Moreover, it is not arbitrary or unjustifiable as it has not affected trade flows. Finally, the design, architecture, and revealing structure of the stamp requirement show no intent to pursue trade-restrictive objectives.

4.99 As the stamp requirement satisfies both Article XX(d) of the GATT and the chapeau of Article XX, it is justified by Article XX(d).

The requirement to post a bond is justified by Article XX(d) of the GATT

4.100 Should the Panel find that the Dominican Republic's requirement to post a bond is inconsistent with Article XI:1 or Article III:4 of the GATT, it should also find that the requirement is justified by the general exception provided for in Article XX(d) of the GATT, since that requirement (a) falls within the scope of paragraph (d) of Article XX of the GATT, and (b) satisfies the chapeau of Article XX.

4.101 The Dominican Republic's bond requirement is "necessary" within the meaning of that term as interpreted by WTO jurisprudence. First, it is undeniable that bonds are effective instruments to prevent tax evasion. Second, tax compliance and the prevention of tax evasion are extremely important global interests and sovereign rights for any state. Third, the bond requirement impacts importers and domestic producers equally, as it is fixed at RD$5 million for all importers and domestic producers of cigarettes. Therefore, this requirement remains "necessary" within the meaning of Article XX(d) of the GATT. Also, as is the case with the tax stamp requirement, the bond requirement has not had any discernable impact on the imports of cigarettes by BAT in the Dominican Republic, which have increased significantly in the last year.

4.102 The purpose of the bond requirement is to secure the payment of tax obligations arising from the Tax Code – i.e. it is a state measure intended to prevent tax evasion. The bond guarantees the full payment of the tax liability in cases where there has been an under-payment at the time of importation. Moreover, the Directorate General of Internal Taxes (DGII) relies on the bond under Article 376 to secure compliance with other internal taxes that are not paid before the products clear customs.57

4.103 Tax authorities cannot solely rely on repressive tax enforcement strategies, but must direct efforts toward preventing tax evasion in the first place.58 The Dominican Republic's bond requirement is precisely the type of measure that is indispensable for avoiding tax evasion. Furthermore, there is international consensus that bonds are necessary to prevent the smuggling of cigarettes.

4.104 The fiscal laws and regulations of the Dominican Republic, including those relating to the SCT, are consistent with the provisions of the GATT.

The requirement to post a bond also satisfies the chapeau of Article XX

4.105 The requirement to post a bond is not applied in a discriminatory manner within the meaning of the chapeau of Article XX. However, should the Panel find that the bond is applied in a discriminatory manner, it should also find that such discrimination is neither arbitrary nor unjustifiable. Also, the requirement is not applied in a manner that constitutes a disguised restriction on international trade.

4.106 First, there is no evidence that the bond requirement discriminates between different countries supplying cigarettes to the Dominican Republic, or between importers and domestic producers of cigarettes. Moreover, the application of this requirement has not resulted in discrimination against importers of cigarettes, as the volume of cigarette imports from Honduras has actually increased significantly.

4.107 Second, the Dominican Republic Tax Code has been published, and therefore the Dominican Republic's bond requirement is transparent. There is no denial of basic fairness or due process in the administration of this bond requirement. Moreover, there is no authority in the Tax Code for any government administrator to waive this bond requirement at his or her will or discretion, nor has this bond requirement been waived for any importer or domestic producer of cigarettes. Thus, there has been no arbitrary discrimination in the application of its bond requirement to imported cigarettes.

4.108 Third, there is no imposition of an additional tax burden on importers in this case. The amount of the bond, the commercial cost of posting the bond, and the main obligation that the bond guarantees, are all identical for both importers and domestic producers. In any event, to the extent there is any "discrimination" resulting from the fact that importers must post this bond at the border, such discrimination is foreseen and permitted by the GATT, as it is the result of the additional steps inherent in enforcing internal measures at the border.59 There is, therefore, no unjustifiable discrimination in the application of the Dominican Republic's bond requirement to imported cigarettes.

4.109 Finally, the application of the Dominican Republic's requirement that importers and domestic manufacturers of tobacco products post a bond is not a "disguised restriction on international trade". The bond requirement is not concealed or unannounced. It is published and available for all to see in Article 376 of the Tax Code and Article 14 of Regulation 79-03. It is not discriminatory, and therefore it is not a disguised restriction. Also, the design, architecture, and revealing structure of the Dominican Republic's bond requirement show no protective application or intent to pursue trade-restrictive objectives.

4.110 In conclusion, the Dominican Republic's requirement to post a bond is a measure that is necessary to secure compliance with the Dominican Republic Tax Code, which itself is consistent with the GATT. This requirement is not applied in a manner that constitutes either arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade. Consequently, even if the Panel finds that this requirement is inconsistent with Article XI:1 or Article III:4 of the GATT, it must nevertheless find that this requirement is justified by Article XX(d) of the GATT.

(c) Temporary measures imposed on imports

(i) The transitional surcharge is consistent with Article II:1 of the GATT

4.111 Decree 646-03 of 30 June 2003, is no longer in force. It has been replaced by Law 2-04 of 4 January 2004 – enacted before the Panel was established – which establishes a transitional surcharge of 2 per cent on imports.60 (The Dominican Republic will rebut Honduras's claim against the transitional surcharge as if it had addressed Law 2-04 of 4 January 2004 instead of Decree 646-03 of 30 June 2003. Nevertheless, the Dominican Republic does not waive its right to argue that Law 2-04 of 4 January 2004 is not within the terms of reference of the Panel.)

Honduras erroneously interprets Article II:1(a) of the GATT

4.112 Honduras misinterprets Article II:1(a) of the GATT. Article II:1(a) only prohibits less favourable treatment than provided for by each Member's Schedule, and as each Schedule records both ordinary customs duties and ODCs, the transitional surcharge cannot be inconsistent with Article II:1(a) solely by virtue of being a levy in addition to ordinary customs duties.

4.113 As Honduras's argument for inconsistency with Article II:1(a) derives from and is dependent on its claim that the transitional surcharge is inconsistent with Article II:1(b), second sentence, the Dominican Republic need not separately rebut Honduras's claim that this measure is inconsistent with Article II:1(a).

The Dominican Republic properly recorded ODCs in its Schedule of Concessions

4.114 Contrary to Honduras's contentions, the Dominican Republic did properly record ODCs applied to cigarettes as of 15 April 1994 in its Schedule. The Dominican Republic's Schedule XXIII lists an ODC level of 30 per cent for tariff heading 2402.61 Since the total level of ODCs currently imposed by the Dominican Republic on cigarettes, including the transitional surcharge, is less than 30 per cent, the transitional surcharge is consistent with Article II:1(b), second sentence.

(ii) The Dominican Republic has the right to maintain the Foreign Exchange Fee

The transitional Foreign Exchange Fee is justified by Article XV:9(a) of the GATT

4.115 The Dominican Republic has the right under Article XV:9(a) of the GATT to impose the foreign exchange fee established by the decision of the Monetary Board of 22 October 2003. Where a Member implements exchange restrictions or exchange controls that are consistent with the International Monetary Fund Articles, those exchange measures cannot be the basis for a finding of violation of the GATT.

4.116 The transitional foreign exchange fee is an exchange restriction within the jurisdiction of the IMF, not a charge on imports within the jurisdiction of the GATT. It is provided for in a regulation of the Dominican Republic monetary authorities, not a regulation of the trade or customs authorities, and it applies to exchange transactions, not to import transactions as such. An exchange charge can legitimately be levied only on imports, as a means of implementing a multiple exchange rate system; if so, that does not alter the fact that the nature of the charge is an exchange charge, and not an import charge.

4.117 The practice of the GATT 1947, following the agreed standards of the IMF, was to determine whether a measure was an exchange measure not on the basis of the purpose or effect of the measure in question, but by applying the formal criterion of whether the measure involved a direct governmental limitation on the availability or use of exchange as such. The foreign exchange fee is an exchange measure because it is a direct governmental limitation on the availability or use of exchange as such. It would also qualify as an "exchange control" in the sense of Article XV:9(a), since it effectively and legitimately requires all payments to be channelled through the banking system.

4.118 The foreign exchange fee is being used by the Dominican Republic "in accordance with" the Articles of Agreement of the IMF, as provided in Article XV:9(a). The IMF was aware of the Dominican Republic's non-unified exchange rate and approved its retention until the end of December 2003. On 11 February 2004, the IMF Executive Board completed its first review of the Dominican Republic's performance under the 29 August 2003 stand-by arrangement, and approved the Dominican Republic's request to waive the non-observance of structural performance criteria regarding, inter alia, the unification of the foreign exchange market, the continuous performance criteria concerning accumulation of external arrears, exchange rate restrictions, and multiple currency practices.62

The transitional Foreign Exchange Fee is consistent with Article II:1 of the GATT

4.119 Even if the Panel finds that the transitional foreign exchange fee is not an exchange measure justified by Article XV:9(a), the claim that it is inconsistent with Article II:1 must still fail because it is within the level of ODCs recorded in the Dominican Republic's Schedule.63 Through its rectification of 14 September 1994, the Dominican Republic recorded in its Schedule XXIII the list of ODCs "applied by the Dominican Republic as of April 1994". According to that Schedule, a 30 per cent level of ODCs applied to cigarettes as of April 1994.64 No Member, including Honduras, notified any objection to the list of ODCs recorded by the Dominican Republic. Since the total level of ODCs currently imposed by the Dominican Republic on cigarettes, including the foreign exchange fee, is less than 30 per cent, the transitional foreign exchange fee must be found in conformity with Article II:1(b), second sentence.

4.120 The Dominican Republic has rebutted Honduras's claim that the transitional foreign exchange fee is inconsistent with Article II:1(b), second sentence. Therefore, Honduras's claim that the foreign exchange fee is "consequently" inconsistent with Article II:1(a) must also be dismissed.

3. Conclusion

4.121 For the reasons stated above, the Dominican Republic requests the Panel to dismiss the claims made by Honduras in its first written submission of 16 March 2004. In particular, the Dominican Republic requests that the Panel:

(a) Dismiss the claim that the determination of the tax base of the Selective Consumption Tax levied on imported cigarettes is inconsistent with Articles III:2 of the GATT.

(b) Dismiss the claim that the manner in which the Dominican Republic administers its provisions governing the SCT is inconsistent with Article X:3(a) of the GATT.

(c) Dismiss the claim that the surveys that identify the retail selling price to be used as the tax base for the SCT are inconsistent with Article X:1 of the GATT.

(d) Dismiss the claim that the requirement to affix a tax stamp in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT. Nevertheless, should the Panel find that this requirement is inconsistent with Article III:4, the Dominican Republic requests that the Panel find that the requirement is justified by the general exception in Article XX(d) of the GATT.

(e) Dismiss the claim that the requirement that importers of cigarettes post a bond is inconsistent with Article XI of the GATT or, in the alternative, with Article III:4 of the GATT. Nevertheless, should the Panel find that this requirement is inconsistent with either Article XI or Article III:4, the Dominican Republic requests that the Panel find that the requirement is justified by the general exception in Article XX(d) of the GATT.

(f) Dismiss the claim that the transitional surcharge on imports is inconsistent with Article II:1 of the GATT.

(g) Dismiss the claim that the transitional foreign exchange fee is inconsistent with Article II:1 of the GATT or find that it is an exchange measure justified by Article XV:9(a) of the GATT.

C. ORAL STATEMENT OF HONDURAS AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL

4.122 This dispute is not just about cigarettes. Its outcome could have broader implications on all products, not just cigarettes.

4.123 Honduras submitted that the transitional surcharge is inconsistent with Article II:1(b), and consequently with Article II:1(a) of the GATT. In response, the Dominican Republic alleges that its Schedule of Concessions "…lists an ODC level of 30 per cent for tariff heading 2402...", concluding that "...as the properly recorded level of ODCs imposed on cigarettes as of 15 April 1994 is 30 per cent, and the total level of ODCs currently imposed by the Dominican Republic on cigarettes, including the transitional surcharge, is less than 30 per cent, the transitional surcharge is consistent with Article II:1(b), second sentence". In support of this allegation, the Dominican Republic presents WTO Doc. No. G/SP/3. This document and Law 11-92 of the Dominican Republic (in force as of 15 April 1994) confirm that what the Dominican Republic had inscribed in Doc. No. G/SP/3, under "other duties or charges" was the Selective Consumption Tax, an internal tax levied on selected products, both domestic and imported.

4.124 However, even if the recording of the Selective Consumption Tax engendered legal effects, then the Dominican Republic has always acted and continues to act inconsistently with Article II:1(b) of the GATT because (i) the Selective Consumption Tax is imposed on selected products, and the transitional surcharge is imposed on all products; (ii) the rates ostensibly "bound" in the Dominican Republic's Schedule of Concessions indicate that the rates specified therein are to be applied on an ad valorem basis, meaning on 100 per cent of the value of the product. On the other hand, the Dominican Republic had applied the Selective Consumption Tax on 100 per cent of the tax base, inflated by 20 per cent, rendering the effective ad valorem rate imposed higher than the rates ostensibly "bound". Furthermore, in the case of cigarettes, the rate applied was 50 per cent, which is higher than the 30 per cent ostensibly bound in the Dominican Republic's Schedule of Concessions; (iii) the current specific tax applied on cigarettes -RD$0.48 per cigarette- is much higher than the ostensibly bound rate of 30 per cent ad valorem.

4.125 According to the Understanding on the Interpretation of Article II:1(b) of the GATT, the "nature and level of any 'other duties or charges' … shall be recorded in the Schedules of concessions annexed to GATT 1994 against the tariff items to which they apply". The nature of the "Impuesto Selectivo" is not the same as that of the transitional surcharge. Therefore, the Dominican Republic had not recorded the transitional surcharge as "other duties or charges" in its Schedule of Concessions. The Dominican Republic could not have recorded the transitional surcharge in its Schedule of Concessions, as what could have been recorded was "other duties or charges… imposed on [15 April 1994]" in the context of Article II:1(b), second sentence, of the GATT. The transitional surcharge was first imposed on 30 June 2003. Even if the recording of the "Impuesto Selectivo" as "other duties or charges" in the Dominican Republic's Schedule of Concessions were to be deemed as a proper recording of the transitional surcharge, the transitional surcharge would nevertheless still be inconsistent with Article II:1(b) of the GATT to the extent that it is imposed on products not included in the "Lista de productos …que pagan el Impuesto Selectivo en Aduanas".

4.126 Should the Panel find that the transitional surcharge is inconsistent with the second sentence of Article II:1(b) of the GATT, it should also find that the transitional surcharge is likewise inconsistent with Article II:1(a) of the GATT.

4.127 The foreign exchange fee is inconsistent with the second sentence of Article II:1(b), and consequently also inconsistent with Article II:1(a) of the GATT. In response, the Dominican Republic contends that the claim of inconsistency with "…Article II:1 must still fail because [the foreign exchange fee] is within the level of [other duties or charges] recorded in the Dominican Republic's Schedule". As already stated, the Dominican Republic had recorded only the "Impuesto Selectivo" under its "other duties or charges" in its Schedule of Concessions. It did not record the foreign exchange fee. Even assuming that the recording of the "Impuesto Selectivo" as "other duties or charges" in the Dominican Republic's Schedule of Concessions were to be deemed as a proper recording of the foreign exchange fee, the foreign exchange fee would nevertheless still be inconsistent with the second sentence of Article II:1(b) of the GATT (i) to the extent that the foreign exchange fee is imposed on products not included in the "Lista de productos importados que pagan el Impuesto Selectivo en Aduanas" and (ii) to the extent that the rate currently being applied, 10 per cent, is higher than the rate applied as of 15 April 1994 –1.5 per cent.

4.128 The Dominican Republic contends that the foreign exchange fee is justified under Article XV:9(a) of the GATT. However, the foreign exchange fee is an import charge because (i) the operative act giving rise to the foreign exchange fee is importation, (ii) the amount of the fee is calculated based on the transaction value of the merchandise imported. It is not an "exchange restriction" even in the context of the IMF's definition, because it is not a "direct… limitation on the availability or use of exchange as such". The fee merely increases the costs of imports, but foreign exchange is still unrestrictedly available to pay for imports. The Dominican Republic has likewise failed to substantiate its assertion that the foreign exchange fee is a "multiple currency practice" in accordance with the Articles of Agreement of the IMF. Even if the foreign exchange fee were an exchange restriction or a multiple currency practice, the Dominican Republic has failed to establish that the IMF has approved the same, in accordance with Sections 2 and 3 of Article VIII of the Agreement.

4.129 Honduras claimed that the requirement under Article 2 of Decree 130-02 and Article 37 of Decree 79-03 that the tax stamp on cigarette packets be affixed in the territory of the Dominican Republic in the presence of tax authorities, in combination with the practice of allowing domestic producers to purchase tax stamps in advance, is inconsistent with Article III:4 of the GATT as it accords to imported cigarettes treatment less favourable than that accorded to domestic cigarettes. Domestic producers of cigarettes have the privilege of being able to purchase tax stamps in advance and affix those stamps to cigarette packets in the course of the production process. After one continuous production process, domestic cigarettes are ready for sale in the domestic market.

4.130 On the other hand, because the Dominican Republic does not allow the purchase of tax stamps in advance for affixation on imported cigarettes, upon importation and even after customs clearance, and notwithstanding the payment of all customs duties and other charges in connection with importation and the Selective Consumption Tax and other internal taxes imposed at the border, imported cigarettes still could not be sold in the domestic market. Upon importation and even after customs clearance, imported cigarettes have to be processed further before they could be sold in the domestic market.

4.131 Imported cigarettes first have to be transferred to a warehouse or other facility. This requires a prior investment in that warehouse or other facility. Then the imported cigarettes have to be further processed, which requires additional investments in manpower and costs of materials used in repackaging the cigarettes, as well as additional inventory days, which entails additional financing costs. Production includes each and every process required to render a product capable of being introduced into the market. Introduction of a product into any market means not only rendering the product as such available, but packaging that product in a manner suitable to consumer preferences, taking into consideration conditions of competition. Thus, an entity wanting to engage in the business of selling cigarettes in the Dominican Republic has two options: (i) to buy from a domestic producer or (ii) to import. If that entity were to purchase from a domestic producer, it could sell the domestic cigarettes immediately after purchase. On the other hand, if that entity were to import cigarettes, it cannot sell the imported cigarettes immediately even after customs clearance. At its own cost and expense, (i) it must make a prior investment in warehouses or similar facilities (ii) hire manpower and (iii) go through the process of unpacking, affixing stamps and repacking, all of which is essentially an additional production process. Therefore, there is a built-in disincentive against importing cigarettes, as compared to buying from domestic producers. Consequently, the requirement that tax stamps be affixed in the territory of the Dominican Republic in the presence of the tax authorities distorts conditions of competition between imported cigarettes in relation to domestic cigarettes, to the disadvantage of imported cigarettes.

4.132 Conditions of competition are likewise distorted to the disadvantage of imported cigarettes at the point of sale to the ultimate consumer. The tax stamps of domestic cigarettes are uniformly affixed by machine as part of the production process of domestic cigarettes underneath the cellophane wrapping of the individual cigarette packets. On the other hand, because of the requirement that the tax stamps be affixed in the territory of the Dominican Republic in the presence of tax authorities, tax stamps are affixed manually on the cellophane wrapping of individual cigarette packets to minimize costs. Necessarily, the affixation is not uniform, and the risk of technical and other imperfections is enhanced. For purposes of the final presentation to the ultimate consumer therefore, imported cigarettes are rendered less appealing than domestic cigarettes.

4.133 That the requirement that the tax stamps be affixed in the territory of the Dominican Republic in the presence of tax authorities is applied equally to both imported and domestic cigarettes is irrelevant in this instance as formal equality is the factor that precisely results in less favourable treatment to imported cigarettes as compared to domestic cigarettes. As Guatemala and the European Communities have referred to, less favourable treatment can arise both from formally different and formally identical treatment of imports and like domestic products. The Dominican Republic likewise contends that the additional costs incurred by importers are "negligible", implying the need for a trade effects test. However, it must be recalled that the GATT protects expectations of equal competitive opportunities, not trade volumes. Since the additional process and the additional costs affect competitive opportunities, the degree of onerousness is not material.

4.134 That Honduras has not submitted evidence to demonstrate that the requirement of affixing the stamp in the Dominican Republic is a measure implemented "so as to afford protection to the domestic industry" is not material for establishing a violation of Article III:4 as confirmed by Appellate Body jurisprudence.65 Therefore, as Honduras has established that there is "less favourable treatment", Honduras has likewise established that the measure at issue is implemented "so as to afford protection to the domestic industry".

4.135 The Dominican Republic contends that the requirement that tax stamps be affixed in the territory of the Dominican Republic in the presence of tax authorities is justified under Article XX(d) of the GATT. However, the Dominican Republic has not discharged the burden of establishing that the requirement at issue is justified under that provision. The Dominican Republic states that the requirement that stamps be affixed in its territory is a measure necessary to secure compliance with "other Dominican Republic tax laws and regulations; particularly, the Dominican Republic's Tax Code, including but not limited to the [Selective Consumption Tax] for cigarettes". Even assuming that this is correct, the fact is that, prior to customs clearance, imported cigarettes are within the custody and control of the Dominican Republic authorities and customs clearance cannot be obtained without the payment of all (i) customs duties and charges and (ii) the Selective Consumption Tax and all other internal taxes imposed at the border. Thus, the affixation of the tax stamp in the presence of the tax authorities after all of these duties, charges and internal taxes imposed at the border have been paid is not necessary to ensure that they will be paid. In short, the requirement at issue is not necessary to enforce the tax laws of the Dominican Republic.

4.136 The Dominican Republic contradicts itself when it states that the "stamp requirement exists as a state measure to prevent tax evasion". As the stamps are affixed on domestic cigarettes prior to the payment of the Selective Consumption Tax (which may be paid up to the 20th day of the month following that in which the sale is made) then the stamp cannot be a mark that the applicable taxes have been collected. In any event, even assuming that the requirement at issue is closer to the pole of "indispensable", as distinguished from the pole of "making a contribution to", there are other less-trade restrictive alternatives available, such as allowing affixing tax stamps outside the territory of the Dominican Republic or resort to pre-shipment inspection and certification at the expense of the importer.

4.137 If the defence of the Dominican Republic were to be upheld, then any Member could require that tax stamps be affixed on any product in its territory in the presence of tax authorities. Domestic industry would be able to affix those stamps in the course of the production process. That same opportunity will not be available to imported products. Importers would have to make additional investments and incur additional expenses. Thus, any Member could always accord less favourable treatment to imported products, as compared to domestic products, by requiring the affixation of stamps in its territory and in the presence of its tax authorities.

4.138 The requirement to post a bond as a condition for the importation of cigarettes into the Dominican Republic is inconsistent with Article XI:1 of the GATT. Based on the distinction cited by the Dominican Republic between measures that fall under the scope of Article XI:1 and measures that fall under the scope of Article III, the requirement to post a bond is a condition for importation related to "the opportunities for importation itself". It applies prior to the entry of both domestic and imported cigarettes into the domestic market. Therefore, the requirement to post a bond does not affect "the competitive opportunities on the domestic market", and therefore, Article XI:1 applies, not Article III. The bond requirement operates as a "restriction" in the context of Article XI:1.

4.139 Even assuming that the Panel were to consider the bond requirement as an internal measure falling under Article III of the GATT, the bond requirement is inconsistent with Article III:4 of the GATT. For both imported and domestic cigarettes, the bond requirement is an accessory obligation related to the payment of the Selective Consumption Tax. In respect of imported cigarettes, the Selective Consumption Tax is collected in its entirety upon importation. On the other hand, for domestic cigarettes, the Selective Consumption Tax may be paid up to the 20th day of the month following that in which the sale is made. Therefore, for domestic producers, there is a tax liability the non-payment of which the bond properly secures. However, for imported cigarettes, since the Selective Consumption Tax accrues and is immediately paid upon importation, there is no similar tax liability. Furthermore, domestic producers can collect the Selective Consumption Tax in advance as part of the purchase price paid by buyers. This accords domestic producers the opportunity to earn interest income on the Selective Consumption Tax for a period of 20-50 days. On the other hand, importers have to pay the Selective Consumption Tax in advance. This entails either financing costs or opportunity costs.

4.140 An entity wanting to engage in the business of selling cigarettes in the Dominican Republic has two options: (i) to buy from a domestic producer or (ii) to import. If that entity were to purchase from a domestic producer, it need not post a bond. On the other hand, if that entity were to import cigarettes, it has to post a bond and incur additional costs. Therefore, there is a built-in disincentive against importing cigarettes, as compared to buying from domestic producers.

4.141 The Dominican Republic argues that the bond requirement is justified under Article XX(d) of the GATT. The Dominican Republic has not discharged the burden of establishing that the requirement at issue is justified under that provision. The bond requirement is not necessary to secure the payment of the Selective Consumption Tax for imported cigarettes as that tax is paid in full prior to customs clearance.

4.142 The Dominican Republic states that the bond requirement is a measure necessary to secure compliance with "other Dominican Republic tax laws and regulations; particularly, the Dominican Republic Tax Code, including but not limited to the [Selective Consumption Tax] on cigarettes". The Dominican Republic attempts to link the bond requirement with the circumstances provided for in Article 81 of the Tax Code, on the basis of which, the Tax Administration may impose "precautionary measures" on goods where there is a risk of non-payment of tax obligations as a result of the possible disappearance of those goods. In the case of imported products, prior to customs clearance, the products are in the custody and complete control of the customs authorities. Customs clearance is given only after payment of (i) customs duties and other charges in connection with importation and (ii) the Selective Consumption Tax and other internal taxes imposed at the border. Thus, if imported products "disappear" before customs clearance, the disappearance would be before importation, and the tax liabilities would not accrue. Furthermore, the customs authorities could be held accountable for the disappearance.

4.143 Honduras presented specific arguments in support of its claims relating to the Selective Consumption Tax. The Dominican Republic did not present any substantive arguments in specific rebuttal of any of the arguments presented by Honduras in support of these claims. Instead, the sole defence presented by the Dominican Republic is that the claims of Honduras "are based on an outdated version of Article 367 of the Tax Code…", and that "all three claims target measures that the Dominican Republic eliminated on the same day this Panel was established". The Dominican Republic then concludes that the Panel should dismiss the claims of Honduras as "they are based on measures that no longer exist". Law 3-04 was signed by the President of the Dominican Republic on 9 January 2004, and was published in the Official Gazette on 14 January 2004. Through its assertion that "all three claims…" of Honduras in relation to the Selective Consumption Tax "… target measures that the Dominican Republic eliminated on the same day this Panel was established", the Dominican Republic seeks to convey that Law 3-04, published on 14 January 2004, came into force as of 9 January 2004.

4.144 In any event, under the Constitution and the Civil Code of the Dominican Republic, laws take effect only after publication, and not earlier than the lapse of the periods specified in the Civil Code to be considered known in each part of the territory of the Dominican Republic.

4.145 Thus, Law 3-04 was not in force as of 9 January 2004, prior to its publication on 14 January 2004, and prior to the lapse of the periods provided by law for it to be considered known in each part of the territory of the Dominican Republic. As of 8 December 2003, when the request for the establishment of a Panel was made, the operative provisions of Article 367 of the Tax Code and related provisions that constitute the basis for the claims of Honduras were in force and were in existence. The Panel is therefore competent to examine measures existing as of that date. There are cogent policy reasons for upholding the competence of Panels to examine the WTO consistency of measures that are withdrawn after the request for the establishment of a Panel is made. If withdrawal of a measure after the request for the establishment of a Panel is made were deemed to be a ground for dismissal of a claim based on the pre-existing measure, then all that the defendant has to do each time is to withdraw the measure after the Panel request is made, and once the case is dismissed, the defendant can again re-introduce the pre-existing measure. And this could go on indefinitely. Under these circumstances, the dispute settlement system would cease to provide security and predictability to the multilateral trading system. In any event, as of the date of the establishment of the Panel on 9 January 2004, the measure in existence consisted of, among others, Articles 367 and 375 of the Tax Code, as amended, but excluding the amendments introduced by Law 3-04 of 14 January 2004.

4.146 Finally, it would appear that the Dominican Republic treats payments on tax stamps for domestic cigarettes as an advance payment of the Selective Consumption Tax. On the other hand, when an importer pays for tax stamps the receipt issued indicates: "[Impuesto] adicional sobre cigarillos". Thus, for domestic cigarettes, the effective cost of tax stamps is zero, as it is credited as part of the payment for the Selective Consumption Tax. For imported cigarettes, the cost of the stamps is in addition to the Selective Consumption Tax. Therefore, the Selective Consumption Tax as applied to imported cigarettes is higher than that applied to domestic cigarettes, and is therefore inconsistent with Article III:2 of the GATT.

D. ORAL STATEMENT OF THE DOMINICAN REPUBLIC AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL

4.147 Honduras's objection to the way in which the tax base of the Selective Consumption Tax on imported cigarettes is determined and to certain aspects of the survey of average prices conducted by the Central Bank of the Dominican Republic relies mainly on Article 367(b) of the Tax Code of the Dominican Republic, and additionally on Article 37 of Decree 79-03 and General Rule 02 96. However, Article 367(b) of the Tax Code was amended by Law 3-04 of 9 January 2004.66 The new tax base and the amount of the Selective Consumption Tax bear no relationship, likeness or similarity to the measures that Honduras is challenging. The new Article 367 of the Tax Code does not fall within the terms of reference of this Panel. The Dominican Republic would therefore ask the Panel, as a preliminary matter, to reject Honduras's complaint with respect to these two measures.

4.148 Honduras objects to the bond requirement on the basis of Article XI and, alternatively, on the basis of Article III:4 of the GATT.

4.149 The bond is an internal measure that does not even fall within the scope of that provision. According to WTO jurisprudence, measures that apply both to imported products and to like domestic products are considered to be internal measures subject to the requirements of Article III.67 If a measure leads to the same result for both products, it is an internal measure, regardless of whether it is applied at the border or once the product has cleared customs.68 In the case of cigarettes, the obligation to post a bond applies to both the domestic product and the imported product, without any distinction or discrimination whatsoever. Consequently, it is an internal measure. It is not an import measure. The bond does not regulate the importation of cigarettes, but guarantees the tax interests of the State, regardless of the origin of the product.69

4.150 The fact that the bond is not even required at the border is additional proof that it is an internal measure and not a restriction on the importation of cigarettes. The bond is required by the Directorate General of Internal Taxes (DGII), and not the customs authorities. It does not have to be posted for every importation.

4.151 Honduras acknowledges that the amount of the bond -RD$5 million (approximately US$100,000)- is the same for importers as for domestic producers.70 The only difference that Honduras mentions between the situation of the importer and that of the domestic producer is the moment at which the importer must pay the Selective Consumption Tax. This circumstance has nothing to do with the bond.

4.152 Contrary to Honduras's assertion, the bond does fulfil the purpose of ensuring compliance with the tax obligations associated with the sale of imported cigarettes.

4.153 It often happens that the payment made by the importer upon importation of the goods does not cover the totality of taxes due, including the Selective Consumption Tax. Many are the cases in which, upon reassessing the taxes, the competent authority finds that the payment made upon importation falls short of the tax obligation. In such cases, the Value Control Department of the Directorate General of Customs must ensure that the tax payer pays the missing amount and complies fully with its tax obligation. The bond helps to ensure that the taxpayer does not evade this tax obligation.

4.154 There is yet another reason why Honduras's erroneous argument that the bond serves no purpose fails to convince. As can be seen from the copy of the certification issued by the Director General of DGII, which the Dominican Republic has submitted to the Panel, the bond for imported cigarettes fulfils the double purpose of preventing the incursion of unregulated importers into the market and "guaranteeing the collection of other internal taxes ... such as income tax, the tax on the transfer of industrialized goods and services (ITBIS) and official and employee salary deductions".71

4.155 The only other argument adduced by Honduras against the bond is that its amount is fixed while the amount of the tax is variable. In other words, Honduras considers that a bond whose amount is not a percentage of the tax obligation to which it corresponds is a measure which results in less favourable treatment for imported products. The fact that the amount of the bond is fixed does not imply less favourable treatment for imported cigarettes. Honduras fails to demonstrate that there is discrimination against imported cigarettes in the case of the bond.

4.156 The Appellate Body has stated that Article III:4 is a specific expression of the overarching "general principle" set forth in Article III:1.72 In addition to altering the conditions of competition to the detriment of the imported product, the measure in question must be applied so as to afford protection to domestic production.73

4.157 The bond is not applied so as to afford protection to domestic production. The Directorate General of Internal Taxes, which is the authority responsible for enforcing the bond, has no discretion regarding its application. The amount of the bond is the same, and it is enforced in exactly the same way. The cost for the importer and for the domestic producer is also identical. Both obtain the bond from insurance companies or banking institutions accredited in the country, which fix their charges according to the laws of the market.

4.158 Honduras's arguments in support of its objection to the stamp requirement must be rejected. Honduras's line of reasoning leaves the importing country no choice but to forego its desired level of enforcement of tax laws or take the measures necessary to apply its laws extraterritorially, regardless of the cost to the government, and regardless of what public international law has to say on the subject.

4.159 The stamp is an internationally recognized instrument for controlling tobacco imports, and its purpose is to prevent the smuggling of cigarettes and the resulting tax evasion.

4.160 GATT and WTO jurisprudence recognize that there can be de facto discrimination when the law accords identical treatment to domestic and imported products.74 However, differences in the conditions of competition in cases in which treatment is identical do not necessarily mean that there is de facto discrimination. In order to establish whether there is such discrimination, it is necessary to determine whether the identical treatment fulfils a legitimate objective, or whether its sole purpose is to protect domestic production. In this case, the identical treatment accorded by the law -i.e. the requirement that the stamp be affixed in the presence of internal tax inspectors- is necessary to ensure the desired level of enforcement of the Dominican Republic's tax laws, whose WTO-consistency Honduras has not challenged.

4.161 It is important to bear in mind here the Appellate Body's recognition that "[i]t is not open to doubt that Members of the WTO have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations".75 The Dominican Republic decided that the best way to secure compliance with its tax laws in the case of cigarettes was through direct supervision by the Directorate General of Internal Taxes of the affixation of the stamps. This is what the Dominican Republic determined to be the necessary control measure to ensure the desired level of enforcement of its tax laws. In cases where there has been no direct supervision by the Directorate General of Internal Taxes (DGII) of the affixation of stamps, there have been problems of smuggling and stamp forgery. As the Dominican Republic demonstrated with documentary evidence, this has occurred in the case of alcoholic beverages.76

4.162 The only way to maintain the desired level of enforcement -that is, to prevent tax evasion by requiring that the stamp be affixed under the supervision of inspectors- while at the same time permitting, as Honduras would require, that the stamp be affixed during the production of the imported cigarettes, would be to have inspectors in the producing country. However, this option is costly, possibly contrary to public international law, and potentially impossible to implement.

4.163 It is costly because it would require the Dominican Republic to have more inspectors to carry out the supervision at the place of production, wherever that may be.77 It is possibly contrary to public international law because it would mean that the Dominican Republic would be enforcing its laws in the territory of other sovereign States in which it has neither jurisdiction nor the possibility of State enforcement.78 It is potentially impossible to apply, because the most-favoured-nation obligation would require the Dominican Republic to have an inspector in each one of the centres producing cigarettes for export to the Dominican Republic, throughout the world.79

4.164 Besides, to require that the stamps be affixed under the supervision of inspectors from the Directorate General of Internal Taxes in the territory of the Dominican Republic does not alter the conditions of the competition to the detriment of imported cigarettes. Whatever differences may exist in the conditions of competition are not the result of the laws of the Dominican Republic. The additional cost the importer may have to bear as a result of the requirement to affix the stamp in the presence of official inspectors is no different in nature from the additional cost resulting from transport, or from affixing labels in the official language of the importing country, or the cost of sanitary or phytosanitary inspections in the territory of the importing country.80

4.165 Even if there were some difference in the treatment that the stamp requirement accords to imported cigarettes, the fact is that the measure is not applied for protectionist reasons or purposes. As the Dominican Republic stated earlier, the jurisprudence reveals that the purpose of Article III is to ensure that internal measures are not applied so as to afford protection to domestic production.81 It is not enough to determine that the measure alters the conditions of competition; its actual application must additionally have a protectionist effect. Consequently, it is unacceptable that Article III should be invoked as a basis for challenging measures whose effect is not to protect the domestic industry.

4.166 In the case of the importation of cigarettes from Honduras, the measure has not been applied so as to protect the domestic industry. In fact, imports increased by much more than half between 2002 and 2003.82 During the first quarter of this year, imports of cigarettes from Honduras increased almost fifty-fold compared to the same period last year.83 Thus, the stamp requirement clearly has not limited or adversely affected the volume or value of cigarette imports.

4.167 The stamp requirement and the bond are justified by Article XX(d) of the GATT since both measures are necessary in order to secure compliance with laws or regulations which are not inconsistent with the GATT.84 These measures do not constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade. The stamp requirement meets the three criteria of Article XX(d). First, it is a measure which secures compliance with domestic laws; second, these laws are consistent with the GATT; and third, the stamp is necessary to secure compliance with these domestic laws.85 The Dominican Republic shall refer briefly to each one of these elements.

4.168 The requirement to affix stamps under the supervision and control of the Directorate General of Internal Taxes secures compliance with the tax obligations of the domestic producers and importers of cigarettes. The stamp avoids or prevents smuggling and tax evasion. When the stamps are not affixed under the supervision of inspectors from the Directorate General of Internal Taxes, tax evasion and even forgery of the stamps occurs.86 Indeed, this is what happened in the case of alcoholic beverages.

4.169 The stamp is a measure that is necessary to secure compliance with tax obligations under the Tax Code of the Dominican Republic. According to the Appellate Body, the factors to be taken into account in determining whether a measure is "necessary" prominently include the contribution made by the measure to enforcement of the law at issue, the importance of the purpose of the law, and the impact of the law on imports.87

4.170 The stamp's contribution to the prevention of smuggling and tax evasion is internationally recognized.88 According to the Appellate Body "[t]he greater the contribution, the more easily a measure might be considered to be 'necessary'".89 The requirement to affix the stamp in the presence of inspectors makes a greater contribution to the prevention of tax evasion than if the stamp were affixed abroad, without this direct control of the Directorate General of Internal Taxes. This is demonstrated, inter alia, by the frequency with which smuggling and forgery of stamps has taken place in the Dominican Republic when the stamp is affixed on products abroad without the supervision of the inspectors.90

4.171 Compliance with tax laws is of critical importance in the case of the Dominican Republic. Tax evasion is particularly serious worldwide in the case of cigarettes and would block revenue from this source.91

4.172 The Appellate Body stated that "[a] measure with a relatively slight impact upon imported products might more easily be considered as 'necessary' than a measure with intense or broader restrictive effects".92 Between January and March of this year, imports into the Dominican Republic of cigarettes from Honduras increased by more than 4,800 per cent in comparison to the same period last year. This shows that the stamp requirement has no real impact on imports.

4.173 The Dominican Republic currently has no reasonable GATT consistent alternative for dealing with the problem of smuggling and tax evasion in the case of cigarettes.93 None of the alternatives can secure the desired level of enforcement to which the Dominican Republic is entitled.94

4.174 The stamp requirement is also consistent with the chapeau of Article XX. The measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail. As in the case of domestically produced cigarettes, a tax stamp must be affixed in the presence of inspectors from the Directorate General of Internal Taxes to every packet of imported cigarettes, regardless of its origin. Consequently, there is no discrimination of any kind within the meaning of Article XX.

4.175 Lastly, the measure is not a disguised restriction on international trade. The stamp requirement fulfils a legitimate objective: to prevent smuggling and secure the payment of taxes. There can be no trade restriction when imports of cigarettes from Honduras increased by more than 80 per cent between 2003 and 2004, and by more than 4,800 per cent during the first quarter of this year as compared to the same quarter in 2003.95

4.176 The arguments the Dominican Republic has adduced thus far to justify the stamp requirement under Article XX(d) of the GATT apply mutatis mutandis to the obligation to post a bond. In conclusion, both the stamp requirement and the bond requirement are measures which, even if they were inconsistent with Article III:4 of the GATT – which they are not – would in any case be justified under the general exception in Article XX(d).

4.177 The foreign exchange fee is an exchange control or exchange restriction within the meaning of Article XV:9(a) of the GATT. Consequently, in accordance with that Article nothing in the GATT, including Article II, can preclude a WTO Member, including the Dominican Republic, from maintaining such a measure.

4.178 The foreign exchange fee is a transitional measure which is justified under Article XV:9(a) of the GATT, since it is an exchange control or an exchange restriction in accordance with the Articles of Agreement of the International Monetary Fund (IMF). As such, it is under the exclusive jurisdiction of that institution.

4.179 The foreign exchange fee is an exchange control or exchange restriction, and hence covered by Article XV of the GATT. The foreign exchange fee was imposed by the monetary authorities as an element of the new foreign exchange system, and was placed under the responsibility of the Central Bank. Once the fee had been introduced, the Central Bank delegated the responsibility for collecting it to the Directorate General of Customs, not because it was a trade measure, but to facilitate its administration. The resolution of the Monetary Board establishing the fee shows that it targets foreign currency transactions and not imports of goods. It is not a charge levied on imports, but a charge levied on foreign currency outflows from the territory of the Dominican Republic. This charge increases the cost of foreign currency transactions, enabling the Government to limit the outflow of foreign currency. Consequently, it is an exchange control or exchange restriction.

4.180 The IMF agreed that the Dominican Republic could maintain its current exchange system while taking the necessary measures to unify its exchange markets. On 11 February 2004, the IMF announced that it had approved a request by the Dominican Republic, seeking inter alia a temporary waiver for certain commitments, including those relating to exchange rate restrictions and multiple currency practices.96 In other words, the foreign exchange fee was permitted by the IMF.

4.181 In any event, as applied to cigarettes the foreign exchange fee, like the transitional surcharge, is consistent with Article II of the GATT.

4.182 Contrary to what Honduras asserts, the Dominican Republic did record in its Schedule of tariff concessions the other duties or charges applied to imports of cigarettes, at a level that far exceeds the level of the transitional surcharge and the foreign exchange fee.

4.183 Under paragraph 1(b) of Article II, if a Member applies an ordinary customs duty to imports of a product in excess of the tariff bound in its Schedule for that product, the importing Member is violating its obligation under Article II. Similarly, if a Member imposes other duties or charges on imports of a product in excess of the level of other duties or charges bound in its Schedule for that product, the importing Member is likewise in violation of its obligation under Article II. On the other hand, a Member is not in violation of that obligation merely because it has levied duties or charges other than ordinary customs duties. What determines whether a Member has met its obligation under Article II is the applied level as compared to the level bound in its Schedule. According to this criterion, the Dominican Republic has faithfully fulfilled its obligations under Article II.

4.184 The Dominican Republic has recorded, in its Schedule XXIII of tariff concessions, a level for other duties or charges of 30 per cent ad valorem levied on cigarettes classified under tariff heading 2402.97 The transitional surcharge and the foreign exchange fee taken individually or together do not exceed 12 per cent of the value of imported cigarettes. Consequently, the Dominican Republic clearly accords Honduras and other WTO Members "treatment no less favourable" than that provided for in its Schedule of concessions for cigarettes, in accordance with Article II of the GATT.

4.185 The 30 per cent level corresponding to other duties or charges for cigarettes was recorded in the Dominican Republic's Schedule as an addition on 14 September 1994. Honduras expressed no objection or reservation.

4.186 As its title indicates, this dispute between Honduras and the Dominican Republic concerns measures affecting the importation and internal sale of cigarettes. Products other than cigarettes are not included in the scope of the dispute.


To continue with  E. Second Written Submission of Honduras

1 Request for Consultations by Honduras, Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes (Dominican Republic – Import and Sale of Cigarettes), 13 October 2003, WT/DS302/1.

2 Request for the Establishment of a Panel by Honduras, Dominican Republic – Importation and Internal Sale of Cigarettes, 8 December 2003,WT/DS302/5.

3 Constitution of the Panel Established at the Request of Honduras, Dominican Republic – Importation and Internal Sale of Cigarettes, 18 February 2004, WT/DS302/6, para. 2.

4 Ibid., para. 3.

5 Ibid., para. 4.

6 Letter dated 25 June 2004 addressed to Chairman of the Panel, from the General Counsel of the International Monetary Fund, in response to Panel request for information (See Annex D).

7 The text of Decree 646-03, dated 30 June 2003, and Decree 693-03, dated 16 July 2003, of the Dominican Republic was submitted by Honduras, as Exhibit HOND-2.

8 The text of Decree 79-03 of the Dominican Republic, dated 4 February 2003, approving the Regulations on the implementation of Section IV of the Tax Code (Reglamento para la Aplicación del Título IV del Código Tributario de la República Dominicana, the Regulation), was submitted by Honduras, as Exhibit HOND-4.

9 The text of Decree 130-02 of the Dominican Republic, dated 11 February 2002, was submitted by Honduras, as Exhibit HOND-5.

10 Portions of the text of the Dominican Republic Tax Code, Law 11-92 (Código Tributario de la República Dominicana, as modified by Law 147-00) were submitted by Honduras, as Exhibit HOND-6.

11 The text of General Rule 02-96 of the Dominican Republic, dated 1 June 1996, was submitted by Honduras, as Exhibit HOND-7.

12 Appellate Body Report, Korea – Various Measures on Beef, para. 133.

13 Report of the GATT Working Party on Border Tax Adjustments, adopted on 2 December 1970, BISD 18S/97, L/3464, para. 18.

14 Appellate Body Report, EC –Asbestos, paras. 101-103.

15 GATT Panel Report, US – Section 337, para. 5.11. See also, GATT Panel Report, Canada – Provincial Liquor Boards (US), paras. 5.30–5.31.

16 Appellate Body Report, Japan – Alcoholic Beverages II, p. 20.

17 Panel Report, Argentina – Hides and Leather, para. 11.68 (italics in text).

18 "Dead measures" was the terminology used throughout these proceedings by the parties to refer to measures no longer in existence, either because they had expired or had been withdrawn.

19 The text of Law 3-04, dated 9 January 2004, published in the Official Journal of the Dominican Republic on 14 January 2004, was submitted by the Dominican Republic as part of Exhibit DR-1.

20 The tax base of the SCT for cigarettes is provided for by Article 367(c) of the Tax Code, as amended by Law 3-04. The tax rate of the SCT for cigarettes is provided for by Article 375, Para. V, of the Tax Code, as amended by Law 3-04.

21 First written submission of Honduras, 16 March 2004, paras. 108, 110.

22 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 215.

23 Framework Convention Alliance, "The FCTC and Tobacco Smuggling: NGO Briefing for the International Conference on Illicit Trade in Tobacco", New York, 30 July – 1 August 2002, submitted by the Dominican Republic as Exhibit DR-4.

24 Statistics regarding imports made by the firm British American Tobacco (BAT) – República Dominicana, January – December 2003, submitted by the Dominican Republic as Exhibit DR-5.

25 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 205; Appellate Body Report, EC – Asbestos, paras. 93, 98; Panel Report, Canada – Periodicals, para. 5.37.

26 Appellate Body Report, Japan – Alcoholic Beverages II, p. 18.

27 Cf., Ibid., p. 29.

28 Decree 130-02, supra note 9, Articles 1 and 2.

29 See Decree 79-03, supra note 8, Article 37.

30 Calculation by the Dominican Republic, based on official statistics of imports of BAT from Honduras for 2003 and on Honduras's own estimate of costs in para. 82 of its first written submission.

31 See information submitted by the Dominican Republic as Exhibit DR-8.

32 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

33 See S.S. Lotus (France v. Turkey), P.C.I.J Ser. A No. 10; Ian Brownlie, Principles of Public International Law, Fifth Edition, Oxford University Press, 1998, p. 310.

34 See Exhibit DR-7.

35 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

36 Panel Report, US –Certain EC Products, para. 6.43.

37 First written submission of Honduras, 16 March 2004, para. 4.

38 Law 11-92, supra note 10, Article 21; Law 3489, Article 118, submitted by the Dominican Republic as Exhibit DR-11.

39 Letter from the Director General of Internal Taxes, dated 12 April 2004, submitted by the Dominican Republic as Exhibit DR-12.

40 Appellate Body Report, US – Gasoline, p. 22.

41 Law 3-04, supra note 19.

42 Appellate Body Report, Korea – Various Measures on Beef, para. 161.

43 Ibid., para. 164.

44 Ibid., para. 163.

45 Panel Report, Argentina – Hides and Leather, para. 11.305.

46 International Conference on Illicit Tobacco Trade, Chairperson's Executive Summary, 30 July‑1 August 2002, submitted by the Dominican Republic as Exhibit DR-9.

47 WHO Framework Convention on Tobacco Control (21 May 2003), Article 15:2, submitted by the Dominican Republic as Exhibit DR-17.

48 See information submitted by the Dominican Republic as Exhibit DR-8.

49 Statistics regarding imports by the firm British American Tobacco – República Dominicana, supra note 24.

50 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

51 Appellate Body Report, US –Shrimp, para. 150.

52 The New Shorter Oxford English Dictionary, Fourth Edition, Oxford University Press, 1993, Vol. I, p. 107.

53 Appellate Body Report, US – Shrimp, paras. 177-184.

54 The New Shorter Oxford English Dictionary, supra note 52, Vol. I, p. 1,466, and Vol. II, p. 3,493. Panel Report, Argentina – Hides and Leather, paras. 11.324-11.325, 11.330.

55 Panel Report, EC – Asbestos, paras. 8.234-8.235, 8.237.

56 Ibid., para. 8.236.

57 Letter from the Director General of Internal Taxes, supra note 39.

58 Ibid.

59 See Note Ad Article III of the GATT.

60 The text of Law 2-04, dated 6 January 2004, published in the Official Journal of the Dominican Republic on 14 January 2004, was submitted by the Dominican Republic as part of Exhibit DR-1.

61 Preparatory Committee for the World Trade Organization, "Additions to Schedules Annexed to the Marrakesh Protocol to the GATT 1994, Schedule XXIII – Dominican Republic", G/SP/3, 12 October 1994, submitted by the Dominican Republic as Exhibit DR-19.

62 International Monetary Fund Press Release No. 04/23, 11 February 2004, text at http://www.imf.org/external/np/sec/pr/2004/pr0423.htm (visited on 12 April 2004), submitted by the Dominican Republic as Exhibit DR-27.

63 Additions to Schedules, Schedule XXIII – Dominican Republic, G/SP/3, supra note 61.

64 Ibid.

65 Appellate Body Report, EC – Asbestos, para. 100.

66 Law 3-04, supra note 19.

67 First written submission of the Dominican Republic, 13 April 2004, paras. 73 and 74.

68 Panel Report, EC – Asbestos, paras. 8.91-8.99.

69 First written submission of the Dominican Republic, 13 April 2004, para 76.

70 First written submission of Honduras, 16 March 2004, para. 4.

71 Letter from the Director General of Internal Taxes, supra note 39.

72 Appellate Body Report, EC – Asbestos, para. 93.

73 See Panel Report, Canada – Periodicals, para. 5.38.

74 GATT Panel Report, US – Section 337, para. 5.11.

75 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

76 See information submitted by the Dominican Republic as Exhibit DR-8.

77 First written submission of the Dominican Republic, 13 April 2004, para. 58.

78 Ibid., paras. 56 and 57.

79 Ibid., paras. 35-59.

80 Ibid., paras. 39-40, 42.

81 Ibid., paras. 46-52.

82 Statistics regarding imports by the firm British American Tobacco – República Dominicana, supra note 24.

83 Statistics of imports of cigarettes into the Dominican Republic in the period January – March 2004, submitted by the Dominican Republic as Exhibit DR-30.

84 First written submission of the Dominican Republic, 13 April 2004, paras. 97-167.

85 Panel Report, Argentina – Hides and Leather, para. 11.290.

86 See information submitted by the Dominican Republic as Exhibits DR-8 and DR-29.

87 Appellate Body Report, KoreaVarious Measures on Beef, para. 164.

88 First written submission of the Dominican Republic, 13 April 2004, paras. 110-113.

89 Appellate Body Report, Korea – Various Measures on Beef, para. 163.

90 First written submission of the Dominican Republic, 13 April 2004, para. 113; information submitted by the Dominican Republic as Exhibit DR-8.

91 See "The FCTC and Tobacco Smuggling", supra note 23.

92 Appellate Body Report, Korea – Various Measures on Beef, para. 163.

93 Panel Report, Korea – Various Measures on Beef, para. 652.

94 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

95 See Statistics of imports of cigarettes, supra note 83.

96 International Monetary Fund Press Release, supra note 62.

97 Additions to Schedules, Schedule XXIII – Dominican Republic, G/SP/3, supra note 61.