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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

(Continued)


E. SECOND WRITTEN SUBMISSION OF HONDURAS

1. Introduction

4.187 Throughout these proceedings, the main arguments of the Dominican Republic have been that: the measures no longer exist, the measures are outside the terms of reference of the Panel and, even if they were inconsistent with the basic provisions of the GATT, they were justified by exceptions to those provisions because they were being undertaken to pursue legitimate policy goals, such as macroeconomic stabilization, monetary policies, the prevention of smuggling and the reduction of tax evasion. However, all the measures still exist or were in existence at the time of the establishment of the Panel and are therefore covered by the Panel's terms of reference. Moreover, the measures all violate basic GATT provisions and do not meet the requirements set out in the exceptions invoked by the Dominican Republic. The arguments of the Dominican Republic are based on novel interpretations of the provisions of the GATT that -if upheld by the Panel- would jeopardise the effectiveness of the GATT as a legal framework for the incorporation of market access concessions. The issues raised in this dispute have for these reasons legal implications that go far beyond the importation and internal sale of cigarettes.

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

4.188 The requirement that a stamp be affixed on cigarette packets in the territory of the Dominican Republic is inconsistent with Article III:4 of the GATT because it accords to imported cigarettes treatment less favourable than that accorded to domestic cigarettes. The Dominican Republic argues that because the requirement applies equally to both imported and domestic cigarettes, there is no inconsistency with Article III:4. However, in this instance, formal equality is the very factor that results in less favourable treatment being accorded to imported cigarettes as compared to domestic cigarettes: by imposing costs and administrative burdens on importers that domestic producers do not have to bear and by making imported cigarettes less attractive than domestic cigarettes for the consumer. Thus, an entity wishing 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 could not 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 are essentially additional production processes. Therefore, there is a built-in disincentive against importing cigarettes, as compared to buying from domestic producers. As a consequence, the requirement distorts conditions of competition between imported cigarettes and domestic cigarettes, to the disadvantage of imported cigarettes. The Dominican Republic has argued that the "additional costs are inevitably linked to the condition of an imported product" and are basically the result of the "inherent differences in the normal conditions under which imported products compete with domestic products". Honduras reiterates that the additional costs result from the imposition of the stamp affixation requirement and that they are not the inherent costs of doing business. Inherent costs of doing business would include freight charges and insurance premiums. Any additional cost that is incurred as a result of governmental action cannot be an "inherent cost". Honduras considers that whether the governmental action is origin-neutral or not is completely irrelevant in order to determine that the measure at issue has caused additional costs to importers. The Dominican Republic argues that "many of the 'additional steps' that Honduras refers to… are either avoidable or are steps that domestic producers also have to perform... The step of unpacking cigarettes from cartons before affixing stamps could be avoided if importers simply packaged individual cigarette packets into boxes". In Exhibits HOND 14, 15, 23, 24 and 25, Honduras had substantiated the number of steps and additional costs that importers have to undergo. In contrast, the Dominican Republic has made an assertion that these steps are avoidable, but has not specified which steps would be avoidable nor has it provided any proof to support this assertion. In Exhibit DR-3, the Dominican Republic has described the steps that a domestic producer in the Dominican Republic has to undertake in order to comply with the stamp requirement. There is no indication that the domestic producers have to comply with steps 3, 4, 6, 7 and 8 of the steps required for imported goods as stated in the comparative diagram presented in the first submission of Honduras. The Dominican Republic has suggested that the step of unpacking cigarettes from cartons before affixing stamps could be avoided if importers simply packaged individual cigarette packets. As demonstrated in Exhibit HOND-39, it is not feasible to export individual cigarettes or to export unwrapped cigarette packets as they would lose their firmness, freshness, humidity and visual attractiveness, and would be more susceptible to damage in the course of transportation.

4.189 Honduras submits that whether or not the effect of the measure on imported products is negligible is irrelevant for the purpose of establishing a violation of Article III:4. Honduras reiterates the fundamental principle that the GATT protects equality of competitive conditions for imported products in relation to domestic products, not trade volumes. The concept of "negligibility" implies a trade effects test. In this regard, Article III does not contain a de minimis exception. Even though trade volumes are not a relevant factor to be taken into consideration in this dispute, Honduras nevertheless observes that in the context of its market share of cigarettes in the Dominican Republic, $65,641 per year represents 8.41 per cent of the total amount of sales by Honduran exporters to the Dominican Republic. This amount is not negligible for a country like Honduras. Indeed, as Honduran exporters are attempting to increase their share in the cigarette market of the Dominican Republic, this amount is only expected to increase.

4.190 In addition, Honduras considers that the Dominican Republic implements the requirement to affix stamps in a manner that makes imported cigarettes less attractive than domestic cigarettes for the consumer. Therefore, conditions of competition are also adversely affected for imported cigarettes from this perspective. 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. The manual affixation of the stamp results in a product that is not as visually pleasing as the professionally packaged product. The final "look" of a product influences consumer preferences and therefore adversely affects conditions of competition. Exhibits HOND–25 (a) to (n), and Exhibits HOND–27 (a) to (n) show that, as a result of the lack of opportunity to affix tax stamps as part of the production process for imported cigarettes (a privilege accorded to domestic producers), less favourable treatment is accorded to imported cigarettes in that domestic cigarettes are more aesthetically packaged as compared to imported cigarettes. Of course, imported cigarettes could also be as aesthetically packaged as domestic cigarettes, but in order to achieve the same result, the importer would have to incur even further costs with respect to the purchase or lease of the appropriate specialised equipment.

4.191 Honduras also considers that in order to establish a violation of Article III:4 of the GATT, Honduras need not demonstrate that the requirement to affix stamps is applied "so as to afford protection to domestic production". The Dominican Republic asserts that Honduras has not demonstrated that the requirement of affixing the stamp in the Dominican Republic is a measure implemented "so as to afford protection to the domestic industry" in the context of Article III:1 of the GATT. In the first place, affording protection to domestic industry is not a material element in establishing a violation of Article III:4. As Honduras has established that there is "less favourable treatment", Honduras has also established that the measure at issue is applied "so as to afford protection to the domestic industry".

4.192 The Dominican Republic has further noted that "if there are differences in the conditions of competition, but such differences do not afford protection to the domestic production, there can be no violation of Article III:4. In conclusion, whether the application of a measure affords protection to domestic production is not a separate inquiry, but rather an inquiry that is part of the determination of whether a measure 'accords less favourable treatment'". However, in EC – Bananas III, the Appellate Body sharply rejected an initiative of the Panel to inquire into the purpose of the measure at issue before finding it inconsistent with Article III:4. It ruled that "Article III:4 does not specifically refer to Article III:1. Therefore, a determination of whether there has been a violation of Article III:4 does not require a separate consideration of whether a measure 'afford[s] protection to domestic production'".98 Honduras considers that the Dominican Republic's conclusion does not flow from the wording of the Appellate Body statement. Honduras agrees with the Appellate Body that distinctions do not necessarily lead to less favourable treatment as there could be positive as well as negative distinctions. The conclusion drawn by the Dominican Republic that one needs to ascertain whether the measure affords protection to domestic production is not warranted, and implies a test that does not exist in WTO jurisprudence.

(b) The requirement to affix a stamp in the territory of the Dominican Republic is not justified under Article XX(d) of the GATT

4.193 The Dominican Republic has argued that if the Panel finds that the stamp requirement is inconsistent with Article III:4, then it further submits that the stamp requirement is justified under Article XX(d) of the GATT. Article XX(d) is an affirmative defence and the Dominican Republic has the burden of establishing that the requirement at issue is justified under that provision. Honduras considers that the Dominican Republic has not discharged that burden. 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". However, the Dominican Republic has failed to demonstrate that Selective Consumption Tax and the other fiscal laws and regulations that the Dominican Republic claims to enforce through the requirement to affix stamps on cigarettes in the territory of the Dominican Republic are consistent with the GATT; it has merely asserted the GATT-consistency of these measures, without any substantiation. In addition, it has not specified which "tax laws and regulations" the stamp requirement is intended to secure compliance with. It has not provided any details on the relevant "tax laws or regulations" nor did it provide any copies of the relevant rules thereof. Therefore, Honduras asks that the Panel draw an adverse inference and find that the Dominican Republic's tax laws insofar as they relate to the Selective Consumption Tax are inconsistent with the GATT. Even if the Panel were to find that the Dominican Republic has, at the very least, identified the three taxes listed in its reply to the Panel's question, Honduras then submits that, as the party bearing the burden of proof, the Dominican Republic has failed to demonstrate that the Selective Consumption Tax, the tax on the transfer of goods and services (ITBIS) and the income tax are consistent with the GATT.

4.194 Even if the Panel were to find that the tax laws and regulations of the Dominican Republic are not inconsistent with the GATT, then Honduras submits that the stamp requirement is not a measure to secure compliance with the Selective Consumption Tax, the ITBIS and the income tax. The measure at issue is contained in the provisions of the specific Regulations of the Application of Title IV of the Tax Code (Selective Consumption Tax) and not in the general tax laws and regulations of the Dominican Republic. An examination of the design, structure and architecture of the measure at issue reveals that it is not related to any tax laws or regulations, other than the specific Regulations for the Application of Title IV if the Tax Code (Selective Consumption Tax). As the party bearing the burden of proof, the Dominican Republic has failed to demonstrate that the stamp requirement is designed to secure compliance with the laws imposing the Selective Consumption Tax or other tax laws.

4.195 Furthermore, the Dominican Republic has stated that: "[t]he stamp requirement exists as a state measure to prevent tax evasion – i.e., it exists as a mark to alert Dominican Republic tax authorities that the applicable taxes have been collected". Nonetheless, in its response to Question No. 67 from the Panel, the Dominican Republic noted that: "[t]ax stamps may be affixed to domestic cigarette packets before the Selective Consumption Tax is paid (Article 368 of the Dominican Republic Tax Code, Exhibit HOND–6)" (Emphasis added). In the case of domestic cigarettes, the stamps are affixed 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. Therefore, it is clear that as the stamp may be affixed on domestic cigarettes before the Selective Consumption Tax is paid, it cannot be "a mark to alert Dominican Republic tax authorities that [the Selective Consumption Tax has] been collected". In addition, given the fact that the stamp on domestic cigarettes may be affixed before the payment of the Selective Consumption Tax is made, it may not be characterised as "indispensable" to ensure the collection of the Selective Consumption Tax. In the light of the fact that not all the products that are subject to the Selective Consumption Tax are also subject to the stamp requirement, the question arises as to why the stamp requirement is necessary to secure compliance with the Selective Consumption Tax. Second, if all imported products have to pay the Selective Consumption Tax upon importation at the border, then the question arises as to why the stamp requirement on imported cigarettes is necessary to secure compliance with a Selective Consumption Tax that has already been paid.

4.196 The Dominican Republic has referred to an "… international agreement that properly affixed and monitored tax stamps are necessary to prevent the smuggling of cigarettes". In support of this assertion, the Dominican Republic has referred to documents related to the International Conference on Illicit Tobacco Trade (ICITT) in 2002 (Exhibit DR–4) and to the World Health Organization Framework Convention on Tobacco Control of 2003 (WHO Framework Convention) (Exhibit DR–17). As noted by Honduras, Exhibit DR–4 is a briefing paper presented by the Framework Convention Alliance in the course of the ICITT in 2002. The Framework Convention Alliance is a non-governmental organization described as "a heterogeneous alliance of non-governmental organizations from around the world". Exhibit DR-4 therefore has no legal status and is not legally binding on both parties to this dispute. The WHO Framework Convention (Exhibit DR-17) has not entered into force. The number of parties required for its entry into force is 40 contracting parties. Of the 116 signatories to the Convention, thus far, only 16 have deposited their instruments of ratification. The Dominican Republic and Honduras are not signatories. Therefore, that Convention is not legally binding on the parties to this dispute. There is no obligation for the parties, pursuant to this Convention, to enact a stamp requirement to prevent smuggling. Honduras further notes that even if the WHO Framework Convention were binding on the parties, Article 15 which is the relevant provision of this Convention would not provide cover for the stamp requirement the Dominican Republic has. The Dominican Republic's stamp requirement is not used for determining the origin of cigarettes, so as to ascertain "any possible point of diversion from the exporters' factory to the importing country". As the Dominican Republic has itself stated, "[t]he stamp requirement exists as…a mark to alert Dominican Republic tax authorities that the applicable taxes have been collected".99 The stamp requirement, therefore, serves only fiscal purposes. On the other hand, there are other less-trade restrictive alternatives available that would fulfil the concerns raised in Article 15 of the Convention, such as allowing stamps to be affixed in the exporting country and/or permitting pre-shipment inspections, which would facilitate the objective of determining the origin of cigarettes to monitor the movement of such goods between the exporting and the importing country, in order to determine any possible intervening diversion.

4.197 In any event, even if the stamp requirement were closer to the pole of "indispensable", as distinguished from the pole of "making a contribution to", Honduras submits that there are other less-trade restrictive alternatives available to which the Dominican Republic could easily resort to enforce its tax laws and regulations. For example, the Dominican Republic could make the stamps available for affixation on cigarette packets as part of the production process of the producer abroad, prior to importation into the Dominican Republic. The authenticity of the stamps could be verified upon importation. Furthermore, as domestic producers are held accountable and are required to keep track of their inventory of tax stamps, importers could be held accountable in the same manner. As a matter of fact, in respect of alcoholic beverages and matches in boxes, the Dominican Republic allows affixation of tax stamps outside its territory. There is no reason why it could not apply the same system to cigarettes. Another less trade-restrictive option is pre-shipment inspection and certification at the expense of the importer. For example, the SGS, a private certification and verification company has confirmed that pre-shipment inspection services are available to ensure that tax stamps of the Dominican Republic are affixed on tobacco products in Honduras. Both these options would be less trade-restrictive than the current stamp requirement and would at least fulfil the objective of countering smuggling in keeping with the concerns raised in Article 15 of the WHO Framework Convention.

4.198 The Dominican Republic has also not demonstrated that the stamp requirement is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail. Even though Honduras does not bear the burden of proof on this matter, it nevertheless takes this opportunity to demonstrate that the stamp requirement is applied in a manner constituting arbitrary and unjustifiable discrimination.

4.199 As demonstrated in Exhibit DR-3 (RP-01), the Dominican Republic treats payments on tax stamps for domestic cigarettes as an advance payment of the Selective Consumption Tax. 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. The Dominican Republic has defined "arbitrary" as "dependent on will or pleasure; dependent on the decision of a legally recognized authority; discretionary" or "based on mere opinion or preference as opposed to the real nature of things; capricious, unpredictable, inconsistent". Honduras notes that there is no provision either in the Tax Code or in the Regulations for the Application of the Selective Consumption Tax which would authorise domestic producers to deduct the cost of the stamp from the Selective Consumption Tax. Thus, Honduras submits that such discriminatory treatment in the application of the stamp requirement depends on the will of the Dominican Republic's tax authorities, and therefore, it is "arbitrary" according to the Dominican Republic's own definition. This discriminatory application of the tax stamp is also "unjustifiable" as there is no reason for such less favourable treatment accorded to imported cigarettes.

4.200 The Dominican Republic has suggested that in WTO jurisprudence, "unjustifiable discrimination means discrimination that is not unavoidable or discrimination that is coercive". It added that "in Argentina – Hides and Leather, in particular, the Panel equated the question of whether discrimination is justifiable with the question of whether it is unavoidable. The Panel in that case found the application of the measures in question was not justifiable because the extra tax burden imposed on importers as a result of those measures was not unavoidable" (Emphasis added). In this case, applying the Dominican Republic's own definition of "unjustifiable discrimination", Honduras notes that by allowing domestic producers to deduct the cost of the stamps from their payment of the Selective Consumption Tax, and not similarly providing this option to importers, the Dominican Republic is imposing an extra tax burden on importers. This extra tax burden would be avoidable if either domestic producers were not allowed to deduct the cost of the stamp or if importers were given the option to so deduct. Therefore, the manner in which the stamp requirement is applied by the Dominican Republic constitutes a means of arbitrary or unjustifiable discrimination.

(c) The requirement to post a bond is inconsistent with Article XI:1 of the GATT

4.201 In its first submission, Honduras claimed that the requirement to post a bond is a restriction on the importation of cigarettes into the Dominican Republic that is inconsistent with Article XI:1 of the GATT. In response to this claim, the Dominican Republic cites the distinction between Article XI and Article III. Based on Note Ad Article III, as well on the Panel's findings in EC – Asbestos100 that when the applied measure leads to the same result for both the imported product and the like domestic product, it falls within the terms of the Note Ad Article III the Dominican Republic concludes that because the bond "does not affect the opportunities for importation itself, but rather opportunities on the domestic market", the bond requirement is subject to Article III:4. However, a careful examination of Note Ad Article III indicates that it contains two separate requirements that are relevant for Honduras's purpose; namely, (i) that the measure applies to an imported product and to the like domestic product; and, (ii) that it is "an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1". In its response to Question 86 from the Panel, the Dominican Republic states that: "the bond requirement does not "affect" the internal sale, offering for sale, or distribution of imported cigarettes in the sense of Article III:4 [and therefore Article III:1] of the GATT". Indeed, the Dominican Republic goes even further to state: "[t]he bond requirement is not even related and does not affect the 'specific transactions' covered by Article III:4 of the GATT, and is thus outside the scope of that provision". Given the fact that the Dominican Republic has acknowledged that the "bond requirement does not "affect" the internal sale, offering for sale, or distribution of cigarettes", Honduras submits the bond requirement is not subject to Article III:4 and III:1, and by implication, Note Ad Article III, of the GATT. Applying the test in India – Autos set out by the Dominican Republic, the bond requirement must therefore be a measure subject to Article XI:1 of the GATT. Based on this definition, the requirement to post a bond is related to "the opportunities for importation itself, i.e., entering the market". The bond is required for both domestic and imported cigarettes prior to their entry on the domestic market. As the bond requirement is a condition for the importation of cigarettes, it operates as a "restriction" within the meaning of Article XI:1 of the GATT.

(d) In the alternative, the bond requirement is inconsistent with Article III:4 of the GATT

4.202 If the Panel were to consider that the bond requirement is a measure falling under Article III of the GATT, then Honduras submits that the bond requirement is inconsistent with Article III:4. The less favourable treatment results from the modification of the conditions of competition between imported and domestic cigarettes. The bond requirement adversely modifies the incentives for a local buyer who wishes to purchase imported cigarettes for sale. A company that sells cigarettes in the Dominican Republic has two options: (i) to buy from a domestic producer; or, (ii) to import. If that company were to purchase from a domestic producer, it would not have to post a bond. On the other hand, if that company were to import cigarettes, it would have to post a bond and incur additional costs of the amount of the bond. Therefore, there is a built-in disincentive against importing cigarettes, as compared to buying from domestic producers.

4.203 In addition, the bond requirement accords less favourable treatment to importers in the context of the liability and payment for the Selective Consumption Tax. For domestic producers, the bond requirement is imposed under Article 376 in Title IV of the Tax Code. Title IV of the Tax Code deals only with the Selective Consumption Tax. For both imported and domestic cigarettes, the bond requirement is a supplementary obligation related to the principal obligation which is the payment of the Selective Consumption Tax. However, with respect to 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, the bond serves as a security in the event that the tax obligation is not properly discharged. However, for imported cigarettes, as the importers pay the full amount of Selective Consumption Tax upon importation, there is no liability that the bond requirement would serve to secure. On a related point, the Dominican Republic has argued that "the timing of the payment of the SCT, however, is not tied to or contingent on the bond…It is an entirely distinct measure not specified in either Honduras's Request for Consultations or in its Request for Establishment of a Panel". Honduras notes that the measure at issue is the bond requirement which is clearly set out as a challenged measure in both Requests. As the Dominican Republic has noted in its response to Question 88, "[a]rticle 376 of the Dominican Republic Tax Code explicitly provides that the bond shall secure the Selective Consumption Tax". It is obvious that the Selective Consumption Tax has to be paid at a certain time for importers and domestic producers, respectively, as set out in Articles 368 and 369, in relation to Article 353 of the Tax Code of the Dominican Republic. Furthermore, domestic producers can collect the Selective Consumption Tax as of the time of the purchase of the packet of cigarettes by the buyers. This accords domestic producers the opportunity to earn interest income on the money they receive as payment of the Selective Consumption Tax for the period between the time of the purchase and the time they have to remit that amount to the tax authorities.

4.204 The Dominican Republic has also argued that "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. As a result, the tax liability for a particular importer and transaction may have to be adjusted". From the evidence of the 20 letters from the Directorate General of Customs submitted in Exhibit DR-28, it appears that the reassessments have been made with respect to unpaid customs duties and other charges, and not the Selective Consumption Tax. Therefore, the Dominican Republic has not demonstrated that the reassessments are necessary to cover shortfalls in the collection of the Selective Consumption Tax. It follows from that conclusion that the Dominican Republic has not demonstrated that the bond requirement secures the payment of the Selective Consumption Tax after reassessments.

4.205 In any event, the Dominican Republic has acknowledged that, out of the 494 companies on the list of reassessment for the period of March 2003 to April 2004, only cigarette and tobacco companies were required to post bonds. It further noted that the list "...include[s] at least one cigarette importer…" However, Honduras wishes to advise the Panel that, in that particular instance, the duties or taxes that were reassessed were related to the importation of merchandising material and not of tobacco products. In any event, as the Dominican Republic has acknowledged, out of the 494 companies on the list of reassessment for the period of March 2003 to April 2004, the majority of the companies listed have not posted bonds.

(e) The bond requirement is not justified under Article XX(d) of the GATT

4.206 The Dominican Republic has argued that if the Panel finds that the bond requirement is inconsistent with either Article XI:1 or Article III:4, it should also find that the bond requirement is justified under Article XX(d) of the GATT. In order to support this defence, the Dominican Republic has merely asserted the GATT-consistency of its measures, without any substantiation. The Dominican Republic has not provided the Panel with a definitive listing of all the legal obligations that are supposed to be guaranteed by the bond. The Dominican Republic has indicated that the bond requirement is also used to guarantee obligations, other than those it had specified, namely the withholding of salaries of officials and employees. There may be other legal obligations that the bond is intended to secure that the Dominican Republic has failed to reveal. As the Dominican Republic has not provided complete information on all the legal obligations the bond requirement would secure compliance with, the Panel cannot find that all the measures that the bond is intended to secure compliance with, are GATT-consistent. Even if the Panel were to limit its examination to the three taxes specified in the Dominican Republic's reply to the Panel's question, Honduras would nevertheless submit that, as the party bearing the burden of proof, the Dominican Republic has failed to demonstrate that these three taxes; namely the Selective Consumption Tax, the ITBIS and the income tax are consistent with the GATT.

4.207 Even if the Panel were to assume that the Tax Code or any other tax obligation of the Dominican Republic is not inconsistent with the GATT, then Honduras submits that the bond requirement is not a measure to secure compliance with the Tax Code, including the Selective Consumption Tax, the ITBIS and the Income Tax. An examination of the design, structure and architecture of the measure at issue reveals that it is not related to any tax laws or regulations, other than the specific Regulations for the Application of Title IV of the Tax Code (Selective Consumption Tax). As the party bearing the burden of proof, the Dominican Republic has not demonstrated the manner in which that the bond requirement is a measure to secure compliance with the tax obligations other than the Selective Consumption Tax.

4.208 As not all the products that are subject to the Selective Consumption Tax are also subject to the bond requirement, the question arises as to why the bond requirement is necessary to secure compliance with the Selective Consumption Tax. The Selective Consumption Tax is imposed on many products. However, the bond is only required for tobacco and cigarettes. If the bond were necessary to secure compliance with the Selective Consumption Tax, then presumably, it should be applied to all products subject to the Selective Consumption Tax. Second, if all imported products have to pay the Selective Consumption Tax upon importation at the border, then the question arises as to why the stamp requirement on imported cigarettes is necessary to secure compliance with a Selective Consumption Tax that has already been paid.

4.209 The Dominican Republic has argued that the bond requirement is also intended to secure the payment of reassessments. However, as noted above based on Exhibit DR–28, the Dominican Republic has acknowledged that out of the 494 companies on the list of reassessment for the period of March 2003 to April 2004, only cigarette and tobacco companies on that list had to post a bond. Furthermore, based on Exhibit DR-28, it appears that the reassessments have been made with respect to unpaid customs duties and other charges, and not the Selective Consumption Tax. Therefore, the Dominican Republic has not demonstrated that the reassessments are necessary to cover shortfalls in the collection of the Selective Consumption Tax. Following from that conclusion, the Dominican Republic has not demonstrated that the bond requirement is a measure necessary to secure reassessments of the Selective Consumption Tax.

4.210 The Dominican Republic has argued that "bonding and guarantee requirements" have been identified by the 2002 International Conference on Illicit Tobacco Trade "as an aid to monitoring and documenting the movement of tobacco products to ensure control over the movement of such goods". As Honduras has previously stated, the document that the Dominican Republic refers to is not legally binding. In any event, Honduras considers that the bond identified by the 2002 ICITT is a bond of a different nature than that currently required by the Dominican Republic. The bond that the ICITT identified "as an aid to monitoring and documenting the movement of tobacco products to ensure control over the movement of such goods" is a bond intended to be provided by the exporters with the view to tracking and tracing the movement of tobacco products from the exporters' factory to the declared importer or buyer in the importing country; it does not refer to bonds imposed on importers to secure the payment of general tax obligations. Furthermore, the fact that the bond may be "an aid" does not mean that it is necessary. Recalling the Appellate Body finding in Korea – Various Measures on Beef, a measure that is "necessary" must be closer to "indispensable" than to "making a contribution". The Dominican Republic has contended that WTO Members have the right to determine the level of enforcement of their laws and regulations. However, the Dominican Republic only partially quoted the Appellate Body's finding. The full quote, contained in paragraph 176 of the Appellate Body Report in Korea – Various Measures on Beef should be considered. Honduras fully agrees that WTO Members have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations, provided that the condition set forth by the Appellate Body, i.e. that such law and such level of enforcement must be the same for imported and domestically-produced products. In this case, that condition is not observed by the Dominican Republic.

4.211 Furthermore, in Exhibit DR-12, the Dominican Republic attempts to link the bond requirement with the circumstances provided for in Article 81 of the Tax Code. However, this provision of the Tax Code is not applicable.

4.212 As it is clear that the bond requirement cannot be provisionally justified under Article XX(d), then there is no need for the Panel to proceed with the examination of compliance with the chapeau of Article XX(d).

(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

4.213 With respect to the Selective Consumption Tax imposed under Article 367 of the Dominican Republic's Tax Code, Honduras has submitted the following:

  • that the Selective Consumption Tax, as applied to imported cigarettes, is inconsistent with Article III:2 of the GATT;
     

  • that the Dominican Republic's failure to establish or apply transparent and generally applicable criteria for determining the value of imported cigarettes is inconsistent with Article X:3(a) of the GATT; and,
     

  • that the Dominican Republic's failure to publish the surveys that are used to determine the Selective Consumption Tax is inconsistent with Article X:1 of the GATT.

4.214 The Dominican Republic has not presented any substantive arguments in specific rebuttal of any of the claims made by Honduras. 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 states that "Law No. 3-04 of 9 January 2004 amended Articles 367 and 375 of the Tax Code", and that "Articles 367 and 375 of the Tax Code, as amended, establish a specific and identical tax base for the [Selective Consumption Tax] for imported and domestic cigarettes". Furthermore, according to the Dominican Republic, Law 3-04 was "enacted and published on [1]4 January 2004". The Dominican Republic then concluded that the Panel should dismiss the claims of Honduras as "they are based on measures that no longer exist".

4.215 The Dominican Republic has now acknowledged that Law 3-04 entered into force on 15 January 2004, 6 days following the establishment of the Panel. Therefore, when the Panel was established, the Selective Consumption Tax that was in force was the measure challenged by Honduras in its request for the establishment of the Panel dated 8 December 2003; 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. The Panel is therefore competent to examine measures existing as of that date. The Panel should make findings on the claims related to the determination of the tax base for the Selective Consumption Tax. The "matter" before a Panel is determined by its terms of reference. The "matter" referred by Honduras to the DSB is clearly indicated in document WT/DS302/5 and includes "the Selective Consumption Tax in accordance with Article 367 of its Tax Code, Article 3 of Decree 79-03 and Article I of General Rule 02-96", in the context of those provisions as they existed and were applied as of 8 December 2003, the date of the Request of the Establishment of a Panel by Honduras.

4.216 In addition to the legal obligation of the Panel to make an objective assessment of the "matter before it", 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 then a WTO Member could escape the enforcement of its obligations by revoking the measures challenged by another Member after the request for the establishment of a Panel is submitted and re-introducing them as soon as the Panel is established. In order to avoid such circumvention, GATT and WTO Panels have agreed to examine measures that have been withdrawn or that were no longer in existence.

4.217 In India – Autos, the Panel confirmed that the measure at issue as it existed at the time of the complainants' request for the establishment of a Panel are expressly contained in the Panel's terms of reference and are consequently within its jurisdiction in accordance with Articles 6.2 and 7 of the DSU.

4.218 As the Dominican Republic has only presented a procedural defence to address the claims of Honduras with respect to the Selective Consumption Tax, and as Honduras has shown that this defence is baseless, Honduras requests the Panel to find that the measure is properly before it and to proceed with its examination of the consistency of the measure based on the arguments and evidence that Honduras has submitted throughout these proceedings. The Dominican Republic has not presented any substantive defences to these claims and arguments. Therefore, Honduras has made a prima facie case which the Dominican Republic has not rebutted.

4.219 In addition, as stated above, it appears that the Dominican Republic treats payments on tax stamps for domestic cigarettes as an advance payment of the Selective Consumption Tax.

4.220 The Dominican Republic has stated that "[t]he authorities of the Dominican Republic relied on several factors, including the declared customs value of the imported cigarettes, whenever there was evidence that the pricing policies of the importer alone could not be relied on to determine the nearest similar product in the domestic market". However, there is no provision in either the Tax Code or the Regulation 79-03 which would allow the tax authorities to exercise discretion as to the selection of the factors that they could consider to determine the nearest similar product in the domestic market. There is no provision that would allow the authorities to rely on the declared customs value. As a matter of fact, Article 15 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 establishes that "'customs value of imported goods' means the value of goods for the purposes of levying ad valorem duties on customs of imported goods". Pursuant to Article 367 and Article 3 of Decree 79-03, the relevant factor to determine the tax base for the Selective Consumption Tax is the "retailing selling price". There are no other factors listed. Recourse to ""customs value" is certainly not listed. Therefore, the manner in which the authorities have recourse to factors other than those listed in the laws is not reasonable and is, therefore, inconsistent with Article X:3(a).

4.221 The Dominican Republic has alleged that it determined that the "nearest similar product" to Viceroy was Marlboro "given the disparity and inconsistency in the information by the importer". First, Honduras notes that the Dominican Republic has not provided any evidence supporting the alleged disparities and inconsistencies in the information from the importer. On the other hand, the importer has presented detailed evidence of the prices that Viceroy, Líder, Kent and Marlboro (among others) were selling at. There is no legal basis for the authorities to disregard the relevant criterion of the retail selling price established in the law. As a result of this unreasonable and arbitrary administration of the regulations governing the Selective Consumption Tax, the Dominican Republic has acted inconsistently with Article X:3(a) of the GATT. In addition, the arbitrary determination of the tax base for imported cigarettes has resulted in the imposition of the Selective Consumption Tax at higher amount than that applied to the like domestic product, e.g. less favourable treatment provided to Viceroy as compared to Líder.

4.222 The Dominican Republic acknowledges that for determining the nearest similar product to imported cigarettes it uses criteria other than the retail selling prices. However, these are not stated in any of the regulations governing the Selective Consumption Tax.

(g) The transitional surcharge for economic stabilization is inconsistent with Article II:1(a) and Article II:1 (b) of the GATT

4.223 Honduras notes that both Decree 646-93 and Law 2-04 are within the terms of reference of the Panel. Therefore, the Panel's finding in respect of the transitional surcharge should refer to both instruments establishing it. The Dominican Republic has argued that this dispute between Honduras and the Dominican Republic relates to cigarettes, and, the transitional surcharge as it relates to products other than cigarettes is outside the terms of reference of the Panel.

4.224 As a matter of principle, Article 6.2 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") which sets out the requirements of a request for the establishment of a Panel does not require the identification of products. El Salvador and Nicaragua have noted that the Appellate Body has confirmed that " …Article 6.2 of the DSU does not explicitly require that the products to which the 'specific measures at issue' apply be identified".101 Honduras acknowledges that the Appellate Body has also stated that: "[h]owever, with respect to certain WTO obligations, in order to identify "the specific measures at issue", it may also be necessary to identify the products subject to the measures in dispute". Honduras is of the view that it would be illogical for a challenge of the transitional surcharge which, by definition, applies to all products, to require the complainant to "identify the products subject to the measure in dispute". In the view of this fact, both the request for consultations and the request for the establishment of the Panel challenged the transitional surcharge as applied to all "imported goods". In US – FSC, the United States argued that a claim brought by the EC concerning the U.S. Foreign Sales Corporation scheme and its inconsistency with Articles 3 and 8, in conjunction with Articles 9.1(d), 10.1 and 10.3 of the Agreement on Agriculture, was inconsistent with Article 6.2 of the DSU as the EC had failed to identify specific products. Following the same reasoning, the text of the Panel request by Honduras shows that the claim regarding the WTO-inconsistency of the transitional surcharge has an "all-encompassing nature". It is a claim that gives rise to violations of Articles II:1(a) and II:1(b) of the GATT with respect to any imported good. Furthermore, from the text of the Panel request both the Dominican Republic and third parties were put on notice that Honduras was asserting the existence of violations of Articles II:1(a) and II:1(b) of the GATT with respect to all imported goods.

4.225 The transitional surcharge is an "other duty or charge" that was not imposed as of 15 April 1994. A Member may not impose "other duties or charges of any kind" … "in excess of those imposed on the date of [the] Agreement" i.e. on 15 April 1994, in excess of the levels applying on that date.

4.226 The transitional surcharge was first imposed by Decree 646-03 of 30 June 2003, as subsequently modified by Decree 693-03 of 16 July 2003, and more recently by Law 2-04. The Dominican Republic acknowledges that "the transitional surcharge for economic stabilisation was introduced for the first time in June 2003" and that "it did not replace any previous similar or equivalent measure". It is therefore undisputed that the transitional surcharge was not imposed on 15 April 1994. The provisions set out in the second sentence of Article II:1(b), however, cannot justify the imposition of charges that did not exist on that date.

4.227 In any event, the transitional surcharge was not recorded in the Dominican Republic's Schedule of concessions and, therefore, it is inconsistent with Article II:1(b) of the GATT.

4.228 The nature and level of "other duties or charges" levied on bound tariff items should have been recorded in the Schedules of concessions annexed to the GATT 1994 against the tariff item to which they apply.

4.229 Therefore, even if a Member had imposed an "other duty or charge" as of 15 April 1994, that fact alone would not authorize that Member to impose that "other duty or charge" thereafter. The Understanding requires the recording of the "nature and level" of that "other duty or charge" in the Schedules of concessions annexed to the GATT 1994 against the tariff item to which they apply. Thus, both the nature and the level of any "other duty or charge" that is recorded are bound.

4.230 The Understanding provides that the recording "does not change the legal character of 'other duties or charges'". In relation to Article II:1(b) of the GATT, what could have been recorded therefore were only "other duties or charges", "imposed on or in connection with… importation" as of 15 April 1994. Thus, if a Member had recorded an internal tax in its Schedule of concessions, the recording does not change the nature of that tax into an "other duty or charge" the imposition of which is, subject to certain conditions, permitted under Article II:1(b) of the GATT.

4.231 In its Schedule of concessions, the Dominican Republic did not record the transitional surcharge; it recorded only the Selective Consumption Tax.

4.232 An examination of Law 11-92 of the Dominican Republic in force as of 15 April 1994 confirms that what the Dominican Republic had recorded in its Schedule of concessions as "other duties or charges" was the Selective Consumption Tax, an internal tax levied on selected products, both domestic and imported. Title IV, Chapter VI of that law contains a list of selected products entitled "Lista de productos importados que pagarán el Impuesto Selectivo en Aduanas". Thus, both the Schedule of concessions of the Dominican Republic and Law 11-92 refer to "Impuesto Selectivo", or the Selective Consumption Tax. Furthermore the products listed in Exhibit DR-19 and in Law 11-92 and the respective ad valorem tax rates imposed on them are identical.

4.233 Considering that "other duties or charges" may be levied only if they were imposed on 15 April 1994 and only to the extent of the levels applied on that date, it is incumbent on the Dominican Republic to establish that as of 15 April 1994, there was another law in existence (other than the legislation establishing the Selective Consumption Tax) under which "other duties or charges" "imposed on or in connection with… importation" were levied on the specific products and at the ad valorem rates recorded in the Dominican Republic's Schedule. The Dominican Republic has not provided this demonstration. The simple explanation is that there is no such other law. As a matter of fact, the Dominican Republic acknowledges that "[T]he only duty or charge in force on 15 April 1994 was the exchange fee, at a rate of 1.5 per cent …" (emphasis supplied). Therefore, the recording by the Dominican Republic must refer to the Selective Consumption Tax which had been applied on 15 April 1994.

4.234 As the Dominican Republic recorded only the Selective Consumption Tax (an internal tax) the Dominican Republic effectively did not record any "duty or charge" of the kind that could be recorded in its Schedule of Concessions according to the Understanding. Thus, even assuming that the transitional surcharge was imposed on 15 April 1994, it is inconsistent with Article II:1(b) of the GATT, because it has not been recorded in the Dominican Republic's Schedule of Concessions.

4.235 Members retain their right to challenge at any time the WTO consistency of "other duties or charges" imposed by other Members.

4.236 The Dominican Republic contends that since no objection was made to the addition of the Selective Consumption Tax as "other duties or charges" in its Schedule of concessions within the period specified in the note of the Secretariat, "the addition was approved". If the Dominican Republic implies that approval of the addition means that Members have waived the right to challenge the WTO consistency of what was recorded under "other duties or charges", the Dominican Republic is in error.

4.237 The Secretariat's statement in the note -that "[i]f no objection is notified to the Secretariat within thirty days from the date of this document, the rectifications to Schedule XXIII – Dominican Republic will be deemed to be approved and will be annexed to the Protocol Supplementary to the Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994"- simply means that if there are no objections, the Dominican Republic's additions will be annexed, i.e. they will be deemed to have been recorded in the Dominican Republic's Schedule. That is all that it means. The above statement certainly cannot be interpreted to mean that the Secretariat intended -as it has no authority to do so- to divest Members of their right to challenge the WTO-consistency of what is recorded under "other duties or charges". That right is governed solely by WTO law.

4.238 Thus, the recording of "other duties or charges" is without prejudice to their consistency with rights and obligations under GATT 1994, and Members retain the right to challenge that consistency "at any time". The sole exception to this general rule is paragraph 4 of the Understanding. However, as the party raising the exception, it is incumbent on the Dominican Republic to establish that the exception applies.

4.239 In any event, paragraph 4 does not apply because what the Dominican Republic had recorded under "other duties or charges" was an internal tax, not "other duties or charges" in the context of Article II:1(b) of the GATT.

4.240 Thus, paragraph 4 applies only to "other duties or charges" imposed on "a tariff item [that] has previously been the subject of a concession". Even assuming that the Dominican Republic had previous concessions on all tariff items currently bound and that other duties or charges had been imposed on those tariff items, the three-year prescriptive period applies only to the "existence of an 'other duty or charge' … at the time of the original binding, as well as the consistency of any 'other duty or charge' with the previously bound level". In short, if a Member that had a previously bound concession on a tariff item imposed a 10 per cent ad valorem "other duty or charge" at the time of the first incorporation of its concession in the appropriate Schedule and imposed a 20 per cent ad valorem "other duty or charge" on that tariff item on 15 April 1994, other Members had three years after the date prescribed to challenge the 20 per cent ad valorem "other duty or charge". After that three year period, other Members can no longer challenge the imposition of the 20 per cent ad valorem duty or charge on the ground that it is higher than the 10 per cent ad valorem "other duty or charge" imposed at the time of the first incorporation of the (previous) concession in the appropriate Schedule of Concessions. After the lapse of the three-year period, the WTO consistency of the 20 per cent ad valorem "other duty or charge" may still be challenged at any time, pursuant to paragraph 5 of the Understanding.

4.241 In any event, according to the Dominican Republic, the only "other duty or charge" imposed on 15 April 1994 was the foreign exchange fee, which was then imposed at the rate of 1.5 per cent.

4.242 The recording of the Selective Consumption Tax at the level of 30 per cent does not give the Dominican Republic the authority to levy other types of duties or charges up to that level now. The Dominican Republic proceeds on a fundamental misunderstanding of paragraph 7 of the Understanding and Article II:1(b) of the GATT. The Dominican Republic implies that an "other duty or charge" need not have been imposed on 15 April 1994 for it to be recorded in a Member's Schedule of Concessions. It further implies that every Member reserved the right to impose any "other duties or charges" at any level (notwithstanding the non-existence of that ODC on 15 April 1994 or notwithstanding that the level imposed on 15 April 1994 was lower), subject only to the condition that it recorded those "other duties or charges" within the period provided for under paragraph 7 of the Understanding.

4.243 Paragraph 7 of the Understanding refers to two categories of "other duties or charges": (i) those omitted from a Schedule at the time of the deposit of the instrument of incorporation into the Schedule in question and (ii) those recorded at a level lower than that prevailing on the applicable date. Paragraph 7 allows corresponding "additions or changes" within the six-month period specified. But those "other duties or charges" allowed to be added or changed cannot be just any "other duties or charges".

4.244 Each Member therefore had the obligation to record the "nature and level of any 'other duties or charges' levied on bound tariff items, referred to in that provision…" That provision is "paragraph 1(b) of Article II [of the GATT]". The second sentence of Article II:1(b) of the GATT in turn refers to "all other duties or charges of any kind imposed on or in connection with… importation in excess of those imposed on [15 April 1994] …" Thus, no Member had a right to record any "other duty or charge" and to impose that solely on the basis that the ODC had been recorded. Rather, it is necessary that that "other duty or charge" must have been (i) imposed on 15 April 1994, (ii) on or in connection with importation and, (iii) recorded in the appropriate Schedule of Concessions. A Member may incorporate in its Schedules of Concessions an act yielding its rights, but not diminishing its obligations.

(h) The Foreign Exchange Fee

4.245 The Dominican Republic makes the same argument with respect to the foreign exchange fee that it made with respect to the transitional surcharge, namely that this dispute relates to cigarettes and that products other than cigarettes are outside the terms of reference of the Panel. Honduras briefly recalls the arguments it submitted with respect to the competence of the Panel to examine the transitional surcharge as it applies to products other than cigarettes. Honduras therefore considers that the foreign exchange fee, as it applies to products other than cigarettes, is within the terms of reference of the Panel, and therefore, requests the Panel to examine the WTO-consistency of the foreign exchange fee as it applies to products other than cigarettes.

4.246 The imposition of the foreign exchange fee is inconsistent with Article II:1(b) of the GATT, in relation to the Understanding, because it was not recorded as an "other duty or charge" in the Dominican Republic's Schedule. The foreign exchange fee currently applied is imposed pursuant to the First Resolution of the Monetary Board of 22 October 2003. The operative act giving rise to the accrual of "other duties and charges" under Article II:1(b) is "importation". The operative act giving rise to the accrual of the foreign exchange fee is likewise "importation", and not the purchase of foreign currency to pay for the imported products. Thus, regardless as to when payment is actually made, importation gives rise to the liability for the foreign exchange fee. Furthermore, the foreign exchange fee is computed on the "value of imports at the selling rate of foreign exchange". This is no different from the "transaction value" for purposes of the imposition of customs duties. The phrase "at the selling rate of foreign exchange" does not effectively establish a distinction between customs duties and the foreign exchange fee, as the "transaction value" of most, if not all, imports is denominated in the currency of the exporter, and customs duties are paid in the currency of the importer. Invariably, in the imposition of customs duties, there is also a conversion from one currency to another. Thus, the foreign exchange fee constitutes another "duty or charge" imposed on or in connection with importation within the meaning of Article II:1(b) of the GATT.

4.247 Furthermore, Honduras makes the following points:

  • The nature and level of "other duties or charge" levied on bound tariff items should have been recorded in the Schedules of concessions annexed to the GATT 1994 against the tariff item to which they apply.
     

  • The recording of a tax or charge under the Schedules of concessions does not change the legal character of "other duties or charges".
     

  • In its Schedule, the Dominican Republic had recorded only the Selective Consumption Tax, an internal tax.
     

  • Therefore, for all intents and purposes, the Dominican Republic had not recorded any "other duties or charges" in its Schedule, including the foreign exchange fee.

  • Members retain their right to challenge at any time the WTO consistency of "other duties or charges" imposed by other Members.

4.248 Even assuming that the Dominican Republic had recorded the foreign exchange fee as an "other duty or charge" in its Schedule, the foreign exchange fee would be inconsistent with Article II:1(b) of the GATT because it is imposed at a rate in excess of the rate applicable on 15 April 1994.

4.249 The foreign exchange fee currently applied pursuant to the First Resolution of the Monetary Board of 22 October 2003 is 10 per cent of the value of imports. According to the Dominican Republic, the "only duty or charge in force on 15 April 1994 was the exchange fee, at a rate of 1.5 per cent…" Thus, the rate currently applied is higher than that imposed on 15 April 1994. This is inconsistent with Article II:1(b) of the GATT, which provides that "all other duties or charges of any kind imposed on or in connection with... importation [shall not be] in excess of those imposed on [15 April 1994]".

4.250 The foreign exchange fee is not justified under Article XV:9 of the GATT. The International Monetary Fund ("IMF") has its own "guiding principle" in determining what constitutes a "[foreign] exchange restriction". As cited by the Dominican Republic, "[t]he guiding principle in ascertaining whether a measure is a restriction on payments and transfers for current transactions under Article VIII, Section 2, is whether it involves a direct governmental limitation on the availability or use of exchange as such".

4.251 Since there does not exist in the WTO "a formal decision on how to distinguish between trade and exchange controls … the [WTO Members] have thus in practice used the same definition as the IMF even though they have not formally taken a decision to that effect". Thus, applying the IMF's guiding principle, Honduras submits that the foreign exchange fee is not a "[foreign] exchange restriction" because it is not a "direct… limitation on the availability or use of exchange as such". "As such" in relation to "limitation on the availability or use" means that the limitation must be on access to or the use of (foreign) exchange, as such, or per se . While the foreign exchange fee increases the costs of imports (which renders it a "trade restriction"), the availability of foreign exchange to pay for those imports remains unrestricted.

4.252 The Dominican Republic itself confirms that the foreign exchange fee is a measure applied to imports of goods, not on exchange transactions as such.

4.253 Even if the foreign exchange fee is determined to be an exchange restriction in the context of Article XV:9(a), its use is not in accordance with the Articles of Agreement of the IMF. Under Sections 2 and 3 of Article VIII of the Agreement, exchange restrictions or multiple currency practices, respectively, cannot be imposed without the approval of the IMF. The Dominican Republic has not presented evidence that the IMF has approved the imposition of the foreign exchange fee either as an exchange restriction or a multiple currency practice.

4.254 The Dominican Republic contends that the approval of the stand-by arrangement by the IMF on the basis of Letters of Intent constitutes such an approval. Without establishing what "continuous performance criteria" concerning exchange rate restrictions and multiple currency practices have been waived, the Dominican Republic regards this statement by the Executive Board of the IMF as providing a carte blanche for the imposition of exchange restrictions or multiple currency practices. Regardless of what those "continuous performance criteria" might be, a waiver thereof is not equivalent to the approval of the imposition of exchange restrictions or multiple currency practices in the context of Sections 2 and 3 of the Article VIII of the Articles of Agreement of the IMF.

4.255 Paragraph 3 of the Agreement between the International Monetary Fund and the World Trade Organization provides that the IMF "shall inform the WTO of any decisions approving restrictions on the making of payments or transfers for current international transactions, decisions approving discriminatory currency arrangements or multiple currency practices, and decisions requesting a IMF member to exercise controls to prevent a large or sustained outflow of capital. A search of the WTO website as of 6 May 2004 reveals that thus far, there have been 31 notifications relating to exchange restrictions, exchange measures, or exchange systems of 18 countries. The latest decision reported to the WTO was taken on 24 March 2004, relating to the exchange restrictions of Botswana. The IMF has not reported any decision on any approval of the imposition of an exchange restriction or a multiple currency practice by the Dominican Republic. That no such approval by the IMF has been notified to the WTO is further confirmed by the WTO Secretariat. Honduras is submitting a copy of the letter of the Trade and Finance Division dated 5 May 2004 confirming that "…no such notification from the IMF has been received by the WTO". The simple explanation is that the IMF has not granted any such approval.

4.256 Therefore, even assuming that the foreign exchange fee is an exchange restriction or a multiple currency practice, the Dominican Republic has not discharged its burden of establishing that the foreign exchange fee is imposed "in accordance with the Articles of Agreement of the [IMF]" in the context of Article XV:9(a) of the GATT.

F. SECOND WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC

1. Introduction

4.257 The Dominican Republic responds to Honduras's latest arguments in this second written submission, which is organized into three sections, showing the measures challenged by Honduras are not GATT-inconsistent or are justified by the GATT. The First Section deals with the "Dead Measures": (a) the manner in which the Selective Consumption Tax (SCT) tax base was determined, (b) the manner in which the Dominican Republic administered the provisions used to determine the "nearest similar product in the domestic market", and (c) the Central Bank surveys that identified the retail price to be used as the SCT tax base. The Second Section deals with the "Measures Applied to Guarantee Compliance with Internal Tax Laws": (a) the obligation of domestic producers and importers to post a bond, and (b) the requirement to affix tax stamps to domestic and imported cigarette packets in the presence of tax inspectors in the territory of the Dominican Republic. The Third Section deals with the "Temporary Measures Imposed on Imports": (a) the transitional surcharge, and (b) the foreign exchange fee.

2. Rebuttal of Honduras's claims

(a) Dead measures

4.258 The Panel should issue no recommendations and make no findings regarding withdrawn laws and practices of the Dominican Republic because: (i) recommendations in this case would be legal error and devoid of purpose, inutile, and redundant; (ii) there is no evidence that the measures are still in place or have lingering effects; (iii) there is no evidence that the Dominican Republic will reintroduce the measures; and (iv) the measures were revoked before the Panel began its adjudication process.

(i) The measures challenged by Honduras have been withdrawn

4.259 Honduras continues to argue against (a) the manner in which the SCT tax base was determined, (b) the manner in which the Dominican Republic administered the provisions used to determine the "nearest similar product in the domestic market", and (c) the Central Bank surveys that identified the retail price to be used as the SCT tax base (the "Dead Measures"). However, those measures were based on a version of Article 367(b) of the Dominican Republic Tax Code that has been radically modified by Law 3-04 of 9 January 2004. The current determination of the SCT tax base is completely different, and the Central Bank surveys no longer exist, as confirmed by the Directorate General of Internal Taxes (DGII). Even Honduras agrees that the Dominican Republic has completely eliminated the challenged measures.102 Therefore, the Panel should dismiss Honduras's claims regarding these Dead Measures.

(ii) A recommendation with respect to the dead measures would constitute legal error

4.260 WTO jurisprudence makes clear that Panels should not rule on expired or withdrawn measures.103 In fact, it is legal error for Panels to issue recommendations regarding measures no longer in existence, or make findings regarding such measures unless necessary to "secure a positive solution" to the dispute.104

4.261 In addition, making recommendations in this case would violate the principle of judicial economy, which states that Panels should address only those claims on which a finding is necessary for recommendations and rulings that would resolve the matter at issue and "secure a positive solution to the dispute".105 In India – Autos, the Panel considered modifications made by India during the proceedings because it felt those changes may affect its ability to make meaningful recommendations to the DSB.106 This shows that if a finding or recommendation cannot help secure a positive solution, the Panel should not make that finding or recommendation.

(iii) There is no evidence that the dead measures are still in place or have lingering effects

4.262 In cases where Panels have made findings regarding withdrawn measures, those measures have been carried forward in some way. For instance, the Panel in EC – Poultry found it not moot to examine a measure that was within its terms of reference, but which had been withdrawn, because of such "lingering effects".107 Similarly, in India – Autos, a case cited by Honduras, the Panel considered withdrawn measures, noting that although the challenged framework measure had ceased to operate, related Memorandums of Understanding (MOUs) remained.108 The circumstances in the present case are fundamentally different. Honduras does not contest that the Dead Measures have been withdrawn, nor does it claim any lingering effects from those measures. Honduras's only concern is that the measures may be reintroduced.109

(iv) There is no evidence that the Dominican Republic will reintroduce the dead measures

4.263 Honduras's argument that the Panel should make findings on the Dead Measures lest the Dominican Republic revert to them110 is incorrectly premised on the assumption that WTO Members will act in bad faith and violate the principle of pacta sunt servanda. The Appellate Body has made clear that the correct assumption is that Members act in good faith.111 Panels have applied this assumption and refused to assume respondents would reintroduce withdrawn measures.112 In the present case, there is no evidence the Dominican Republic will reintroduce the Dead Measures. Accordingly, the Panel must assume the Dominican Republic is acting in good faith and must not make findings based on a bad faith presumption.

(v) The dead measures were revoked before the panel began its examination

4.264 Honduras erroneously believes that if the measures complained of are within the terms of reference and jurisdiction of the Panel, the Panel will be compelled to make recommendations and findings regarding these measures. As such, Honduras has devoted most of its energy to demonstrating that Law 3-04 entered into force six days after the Panel was established on 9 January 2004.

4.265 What is dispositive, however, is not whether these measures were in force on the date the Panel was established, but whether they were revoked before the Panel began its adjudication process, which is a question of fact based on individual circumstances. In the present case, the Panel began its adjudication process long after the elimination of these measures, as it did not hold an organizational meeting until almost two months after establishment. Therefore, the Panel should not review these Dead Measures.

4.266 In its Replies to Questions Addressed by the Panel, Honduras has relied almost entirely on cases where a measure was modified, amended, or withdrawn long after these Panels began their adjudication process. In US – Wool Shirts and Blouses, the measure in question was withdrawn several weeks after the issuance of the interim report to the parties.113 In Indonesia – Autos, the respondent's communication that the measure in question had been terminated came after the Panel's deadline for submitting information and arguments, and moreover, the complainants challenged the effective termination of the measure.114

(vi) The dead measures do not cause nullification or impairment of the benefits of Honduras

4.267 Should the Panel decide to find the Dead Measures were GATT-inconsistent, the Dominican Republic requests it find no resulting nullification or impairment to Honduras. The withdrawal of these measures is sufficient evidence to rebut the presumption in DSU Article 3.8 that a rules breach adversely impacts other Members. No prospective adverse impact can result from measures that no longer exist.

4.268 For the reasons stated above, the Dominican Republic requests the Panel to dismiss Honduras's claims against the Dead Measures and make no recommendations or findings with regard to these claims. Furthermore, the Dominican Republic requests the Panel to find that such Dead Measures, at present, do not constitute a case of nullification or impairment.

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

(i) The bond requirement for domestic and imported cigarettes is consistent with Article XI:1 and Article III:4 of the GATT

4.269 The bond requirement is neither a restriction or prohibition on the importation of cigarettes contrary to Article XI:1, nor an internal measure that discriminates against imported cigarettes contrary to Article III:4. Honduras and the Dominican Republic agree that Article XI and Article III cannot apply concurrently to the same measure.115 In any event, Honduras did not request a cumulative analysis of the bond requirement under the two provisions.116 Instead, Honduras claimed a violation of Article XI:1 and, in the alternative, a violation of Article III:4.117 Both claims are unfounded and should be dismissed.

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

4.270 Honduras argument that the bond requirement is contrary to Article XI:1 is incorrect for two reasons. First, the bond requirement is outside the scope of Article XI:1. Second, even if it were within the scope of Article XI:1, it is not a "prohibition" or "restriction" "on the importation" of cigarettes.

4.271 The bond requirement is outside the scope of Article XI:1 because, contrary to Honduras's argument118, it is not a "condition" for the importation of cigarettes that applies "prior" to importation, as there is no law or regulation in the Dominican Republic that stipulates such. Article 14 of Decree 79-03 provides that importers and domestic producers of cigarettes alike must provide the bond, which is enforced by the DGII. Article 40 of Decree 79-03 requires importers of cigarettes to obtain an import license from the DGII, but posting the bond is not among the conditions for obtaining a license.119 Moreover, after a bond is posted, a local producer or importer must simply renew it prior to expiration – i.e. importers need not post a new bond every time they import. Customs authorities do not even check if an importer has posted the bond, as evidenced by the fact that the importer BAT República Dominicana has been importing cigarettes from Honduras for years despite never posting the bond.120

4.272 The bond requirement is also outside the scope of Article XI:1 because it is an internal measure that applies equally to imported and domestic cigarettes, not a measure "on the importation" of cigarettes. When an applied measure leads to the same result for both imported and like domestic products, it is subject to Article III:4, not Article XI:1.121 Honduras admits that the bond's application leads to the same result122, and it does not deny that the bond requirement applies identically to importers and domestic cigarette producers.123 Rather, it argues that identical treatment between imported and domestic products can result in less favourable treatment124, which is a separate issue under the purview of Article III.

4.273 Even if the bond requirement is a measure "on the importation" of cigarettes, Honduras has not established that it prohibits or restricts the importation of cigarettes, as its only argument along these lines is based on the same incorrect assertion highlighted above that the bond requirement is a "condition" for the importation of cigarettes.125 The facts show that Dominican Republic authorities do not regard nor require, either de jure or de facto, the posting of the bond as a pre-requisite for the importation of cigarettes, as evidenced by the fact that BAT República Dominicana has been importing cigarettes for several years without ever having posted the bond.126 Honduras also specifically chose not to answer the Panel's question asking whether its cigarette exports to the Dominican Republic had suffered restrictive effects, given the fact that such exports seem to have increased.127

4.274 In conclusion, the Dominican Republic requests the Panel find that the bond requirement is not a measure "on the importation" of cigarettes, and therefore outside the scope of Article XI:1. Should the Panel find otherwise, the Dominican Republic requests the Panel find that it is not a "prohibition" or "restriction" on the importation of cigarettes, and therefore not contrary to Article XI:1.

The bond requirement is also outside the scope of Article III:4 of the GATT

4.275 The bond requirement is outside the scope of Article III:4, and consequently cannot be contrary to that Article, because it does not affect the "internal sale, offering for sale, purchase, transportation, distribution or use" of imported cigarettes.128 The Appellate Body has agreed that it is a requirement that, in addition to being an internal measure, a measure must fall within the scope of Article III:4.129 In fact, Honduras has stated, in unequivocal terms, that "the requirement to post a bond does not affect" these specific transactions.130 The bond does not preclude cigarette importers from clearing cigarettes through customs, selling or offering them for sale, transporting them, or distributing them within the territory of the Dominican Republic. Moreover, it does not preclude consumers from buying or using imported cigarettes. As already mentioned, BAT República Dominicana has been importing and selling cigarettes in the Dominican Republic for years, despite not having posted the bond.131

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

4.276 Assuming the bond requirement is within the scope of Article III:4, it is nevertheless not contrary to that Article since it does not accord "less favourable treatment" to imported cigarettes, which according to the Appellate Body depends on whether a measure "modifies the conditions of competition in the relevant market to the detriment of imported products".132 Honduras acknowledges that the bond "does not affect per se 'the competitive opportunities on the domestic market,'"133 and it has not disagreed that the bond applies identically to importers and domestic producers.134 Honduras argues instead, based on US – Section 337 (GATT), that identical treatment can result in less favourable treatment.135 The situation in that case, however, is different from the situation in the present case because that Panel did not deal with a situation involving formally identical legal treatment for domestically produced and imported products.136

4.277 Honduras has not demonstrated how the equal treatment accorded by the bond to domestic and imported cigarette producers modifies conditions of competition, for it does not. All foreign cigarettes can be imported, offered for sale, sold, transported, distributed, purchased, and used within the Dominican Republic, just like any domestic cigarette. Moreover, the bond does not impose an additional charge on the importation of cigarettes, which Honduras recognizes as it desisted from pursuing such a claim.137

4.278 Honduras seems to challenge the timing of the payment of the SCT, rather than the bond requirement itself, as it continues to highlight the difference in timing between importers and domestic producers.138 That difference, however, does not explain how the bond affects importers' conditions of competition. Moreover, requiring importers to post the bond at the time of importation is consistent with Note Ad Article III. In any event, the timing issue is not within the Panel's terms of reference.

4.279 Honduras has also not demonstrated how the identical treatment accorded to domestic and imported cigarettes by the bond requirement modifies conditions of competition "to the detriment of imported products".139 To ascertain detriment and find an Article III:4 violation, the Panel must determine whether differences in conditions of competition afford protection to domestic producers140, which Honduras has not shown. To the contrary, the fact that cigarette imports into the Dominican Republic have increased in recent years shows that importers have not been disadvantaged by the bond requirement.141

(ii) The stamp requirement for imported and domestic cigarettes is consistent with Article III:4 of the GATT

4.280 Honduras has not established that the stamp requirement accords "less favourable treatment" to imported cigarettes, thereby violating Article III:4, as it has not shown that the stamp affords protection to domestic producers, which is a necessary inquiry under Article III:4.142 Honduras argues that affording protection to domestic industry "is not a material element" of Article III:4143, citing the Appellate Body's statement in EC – Asbestos that where there is less favourable treatment, there is conversely protection of the like domestic product.144 That statement, however, does not support Honduras's conclusion.

4.281 The inquiry of whether a measure "afford[s] protection to domestic production" is an integral part of the determination of whether a measure "accords less favourable treatment" –i.e. it is not a separate inquiry. Only those modifications of the conditions of competition that are detrimental to imported products are considered "less favourable treatment" under Article III:4.145 "Detriment" means "loss sustained by or damage done to a person or thing" or "a cause of loss or damage".146 Determining detriment requires inquiry into the thrust and effects of the measure to ascertain if imported products have sustained damage relative to like domestic products.147

4.282 Thus, it is of course true that a finding of "less favourable treatment" necessarily includes: "so as to afford protection to domestic production"148, which is consistent with the Appellate Body's conclusion in EC – Asbestos mentioned above.149 This, however, does not contradict the necessity of examining the effects that differences in conditions of competition have on imported products.

4.283 The Dominican Republic has shown that the stamp requirement is not applied "so as to afford protection".150 The fact that Honduras's cigarette imports have increased significantly in 2003 and the first trimester of 2004 shows that the stamp requirement has had no, or at most negligible, detrimental effect on imports.151 Honduras has not reconciled this fact with its assertions that the stamp requirement adds costs to the production process and affects the presentation of cigarettes to consumers.

4.284 The Dominican Republic reiterates that any difference in the conditions of competition between imported and domestic products caused by the stamp requirement is inherent in the nature of imported products, not the result of formally equal treatment as Honduras claims.152 While Article III:4 prohibits Members from modifying the conditions of competition to the detriment of imported products, it does not require Members to compensate for the inherent differences between imported and domestic products.

(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

4.285 The Dominican Republic has argued, in the alternative, that the stamp and bond are both justified by GATT Article XX(d), as they are necessary to secure compliance with the Dominican Republic's GATT-consistent tax laws, and are consistent with the Article XX chapeau.153 The Dominican Republic rebuts Honduras's few counter-arguments below, bearing in mind the purpose of Article XX.

4.286 As noted by the Appellate Body, Article XX establishes a "line of equilibrium" between the trade-specific rights of exporting members and the equally-important non-trade specific rights of importing members.154 In this case, Honduras has the right to import cigarettes, which it claims is affected by the Dominican Republic's stamp and bond requirements. However, these measures are not trade-restrictive at all, as they are not structured to have protective application, apply equally to imported and domestic products, and have not resulted in fewer imports. On the other hand, the Dominican Republic has the right to enforce its GATT-consistent tax laws, and it has demonstrated these measures are necessary to ensure the collection of taxes, which is especially crucial given the country's serious macroeconomic crisis.

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

4.287 The Dominican Republic has already demonstrated that its stamp requirement is justified by Article XX(d) of the GATT, as it is necessary to secure compliance with its GATT-consistent Tax Code, and is not arbitrary or unjustifiable discrimination or a disguised restriction on international trade contrary to the Article XX chapeau.155 Honduras only questions the necessity of the stamp requirement to secure compliance with the Dominican Republic Tax Code. The Dominican Republic answers below.

4.288 First, the Dominican Republic has already shown, and there is no dispute over, the fact that the stamp secures compliance with its Tax Code, specifically the SCT, which is all GATT consistent.156

4.289 Honduras primarily argues the stamp is not a necessary measure, claiming it does not alert tax authorities that applicable taxes have been collected157, especially since the dispute is over cigarettes that enter through regular customs channels.158 Honduras's argument misses the point of the stamp requirement and is wrong for two reasons. First, even if customs agents collect the taxes, the stamp still serves to alert authorities that required taxes have been paid. Second, alerting authorities is only one objective of the stamp requirement. Another is to foreclose non-legitimate channels of commerce and ensure cigarettes enter through regular channels, thereby allowing authorities to log the number of cigarette imports and account for the taxes on those cigarettes. Without stamps, cigarette smuggling would increase, leading to a diminution of tax collection. Thus, the stamp requirement is indeed necessary to secure tax compliance.

4.290 Honduras also argues the stamp requirement is not necessary because there are reasonable alternatives. However, these alternatives would not achieve zero tolerance of tax evasion and cigarette smuggling, which the Dominican Republic has the sovereign right to pursue.159 These alternatives also do not recognize the Dominican Republic's limited resources and the history of smuggling in similar products. First, Honduras suggests tax stamps be made available to importers abroad.160 This would require customs agents to spend extra time verifying the affixation and authenticity of the stamps, while this is currently ensured by affixation in the presence of DGII agents. Moreover, sending stamps abroad has led to smuggling and tax evasion with alcohol161, while there have been no such problems with cigarettes. Consequently, the stamp requirement may be extended to alcohol.162 Second, Honduras suggests pre-shipment inspection and certification at the importer's expense.163 However, private companies cannot substitute for the state in enforcing domestic laws. Finally, Honduras highlights that in the United States, agents stamp both domestic and imported cigarettes at warehouses.164 This would require extra resources to ensure all cigarettes are properly transported to and stamped at this facility. It cannot be assumed the Dominican Republic has the means to implement the system of a developed Member.

4.291 Honduras also failed to answer the Panel's question as to whether less trade-restrictive methods used by other countries have achieved zero-tolerance enforcement. Instead, Honduras tried to shift the burden of this question to the Dominican Republic165, which it cannot do simply because the Dominican Republic has the original burden with respect to the issue underlying the question. The Dominican Republic has met its burden of proof under Article XX(d) by demonstrating the stamp is necessary to achieve zero-tolerance enforcement, as it has led to no known instances of cigarette smuggling, while there have been such problems with alcoholic beverages where there is no similar stamp requirement.

4.292 Finally, the stamp is consistent with the chapeau of Article XX, which only admonishes discrimination "between countries where the same conditions prevail"; a discrimination standard different from elsewhere in the GATT.166 As the stamp is applied consistently across all countries where the same conditions prevail, there is no discrimination of any kind, let alone arbitrary or unjustifiable discrimination, or disguised restrictions on trade.

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

4.293 The Dominican Republic has already shown that its bond requirement is justified by Article XX(d) of the GATT, as it is necessary to secure compliance with its GATT-consistent Tax Code, and is not arbitrary or unjustifiable discrimination or a disguised restriction on international trade contrary to the Article XX chapeau.167 Honduras only questions whether the bond secures compliance with the Tax Code, and whether it is necessary to do so. The Dominican Republic answers below.

4.294 Honduras first claims that the bond cannot secure compliance with the Dominican Republic Tax Code because tax liabilities cannot accrue to imported products that disappear before clearing customs.168 The Dominican Republic has already demonstrated how the bond requirement indeed secures such compliance, especially as tax liabilities can arise after a product has cleared customs and after a tax has been paid.169

4.295 Honduras then argues that the bond is not necessary to secure such compliance. First, it notes that taxes are paid before customs clearance.170 However, the bond is indeed necessary to secure payment of tax liabilities that may arise after customs clearance and tax payment. Second, it points out there is no bond requirement for other products also subject to the SCT.171 However, a bond may be necessary to collect taxes only for some products, especially those susceptible to smuggling, such as alcohol and cigarettes.172

4.296 Moreover, the Dominican Republic has no reasonable alternatives available to it to achieve the same zero-tolerance level of enforcement it has chosen, which is its sovereign right.173 Honduras specifically failed to answer the Panel's question regarding reasonable alternatives to the bond, choosing instead to reiterate, erroneously, that there is no fiscal obligation for the bond to secure.174 The lack of cigarette smuggling to date in the Dominican Republic shows the bond is necessary.

4.297 Finally, the bond is consistent with the chapeau of Article XX, which only admonishes discrimination "between countries where the same conditions prevail"; a discrimination standard different from other GATT provisions.175 As the bond is applied consistently across all countries where the same conditions prevail, there is no discrimination of any kind, whether arbitrary, unjustifiable, or disguised.

(c) Temporary measures imposed on imports

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

4.298 The Dominican Republic has argued that the foreign exchange fee is an exchange measure justified by GATT Article XV:9(a), and, in the alternative, is consistent with Article II:1 since it is within the level of other duties or charges (ODCs) recorded by the Dominican Republic in its Schedule. As the Dominican Republic has explained, GATT Article XV establishes that where a Member implements exchange restrictions or exchange controls consistent with the Articles of Agreement of the International Monetary Fund (IMF), those exchange measures cannot be the basis for a GATT violation.

4.299 Honduras wrongly tries to resurrect its Article XV:4 claim, which it raised in its Request for the Establishment of a Panel176, but not in its first written submission. Parties must "present the facts of the case and their arguments" in their first written submission.177 Honduras's assertion that Article XV:4 is an exception to Article XV:9 is specious. Article XV:9 is unqualified. Honduras could have raised its Article XV:4 claim, at least in the alternative, in its first written submission. Having not done so, it must be deemed to have abandoned this claim now.

4.300 Honduras also claims the Dominican Republic acknowledges the exchange fee is a "trade restriction"178 , but Honduras fails to distinguish arguments in the alternative from admissions of fact. The Dominican Republic argued that even if the Panel finds the exchange fee is not justified by Article XV:9(a), Honduras's Article II:1 claim still fails as the fee is consistent with the ODCs recorded in the Dominican Republic's Schedule.179 This was an argument in the alternative, not an admission of fact.

(ii) The transitional surcharge and foreign exchange fee are consistent with Article II:1 of the GATT

4.301 Honduras still argues the Dominican Republic's transitional surcharge and foreign exchange fee are inconsistent with Articles II:1(a) and II:1(b) of the GATT.180 The Dominican Republic disputes these claims below, and objects to Honduras's undue expansion of the product coverage of these claims.

The transitional surcharge and foreign exchange fee are consistent with Article II:1(b) of the GATT

4.302 Honduras argues the transitional surcharge and foreign exchange fee are inconsistent with GATT Article II:1(b) because the Dominican Republic did not record them as ODCs in its Schedule181, and because they are "in excess of" the ODCs imposed -i.e. did not exist- as of 15 April 1994.182 The Dominican Republic has already shown it properly recorded these ODCs in accord with paragraph 7 of the Understanding on the Interpretation of Article II:1(b) of the GATT 1994 (the "Understanding").183 Honduras acknowledges no Member objected to this recording184 which means the recorded ODCs properly reflect those imposed as of 15 April 1994. The Dominican Republic has also already shown that the surcharge and exchange fee are within this recorded level of ODCs.185 Nevertheless, the Dominican Republic shows below that Honduras is time-barred from challenging the recording or existence of these ODCs based on the Understanding, and that such challenge is not within the Panel's terms of reference.

4.303 Honduras's claim, based on paragraph 5 of the Understanding, that it can challenge the recording or existence of the Dominican Republic's ODCs at any time186, is wrong. Paragraph 5 of the Understanding does not apply to rights affected by paragraph 4, which states the right to challenge "the existence of an 'other duty or charge'" or "the consistency of the recorded level of any 'other duty or charge'" lapses three years after the recording of the ODCs (14 September 1997 in this case). The negotiating history of the Understanding demonstrates that this time limit for such challenges was established to ensure certainty over the legal status of ODCs.187 Therefore, Honduras's current claims as to the recording and existence of the surcharge and exchange fee as ODCs are time-barred. Even if Honduras challenges these ODCs under Articles XXII and XXIII of the GATT, the GATT Secretariat has indicated that Panels should find "an ODC, having been recorded in the schedule for more than three years, could no longer be challenged".188

4.304 In addition, as the right to challenge the recording or existence of ODCs is established by paragraph 4 of the Understanding, Honduras needed to raise these claims under the Understanding, not under Article II:1(b) of the GATT. Honduras has not done so, and may not do so now. Honduras's claims that the surcharge and exchange fee are inconsistent with Article II:1(b) because they were not recorded as ODCs or did not exist as ODCs as of 15 April 1994 are therefore outside the terms of reference of this Panel and should be dismissed.

The transitional surcharge and foreign exchange fee are consistent with Article II:1(a) of the GATT

4.305 Honduras's arguments that the surcharge and exchange fee are inconsistent with Article II:1(a) must be rejected for two reasons. First, contrary to Honduras's claim that Article II:1(a) forbids all ODCs189, only ordinary customs duties or ODCs "in excess of" those recorded in a Schedule can be inconsistent with Article II:1(a).190 The European Communities agrees.191 Second, Honduras has only argued inconsistency with Article II:1(a) as a consequence of inconsistency with Article II:1(b).192 Honduras's contention that the Dominican Republic has not rebutted its Article II:1(a) arguments193 is therefore unfounded, as the Dominican Republic has done so by rebutting its Article II:1(b) arguments.194 There is nothing separate for the Dominican Republic to rebut.

Honduras attempts to unduly expand the product coverage of its claims in respect of the Transitional Surcharge and the Foreign Exchange Fee

4.306 Honduras's expansion of the product coverage of its challenge to the surcharge and exchange fee is barred by due process, equity, and good faith, which must be accorded to all WTO respondents to give them full and fair opportunity to defend.195 As the Appellate Body recognizes, an important element of due process is setting terms of reference early.196 Although a complainant's Panel request initially defines the terms of reference, they can be narrowed by the proceedings. A complainant that does not raise, in its first written submission, claims listed in its request for the establishment of a Panel should be deemed to have waived such claims.197 Otherwise, respondents may not have adequate opportunity to respond, as in the case where a complainant raises a claim for the first time during its closing statements at the second Panel meeting with the parties.

4.307 The product coverage of a dispute is an integral element of the terms of reference that must also be defined at an early stage so as not to thwart due process and equity.198 The present case has been confined specifically to cigarettes based on consultations between the parties, Honduras's reference to the surcharge and exchange fee "as [they apply] to the bound item of cigarettes"199, and the very title of this dispute. Therefore, Honduras may not expand the product coverage of its challenge to the surcharge and exchange fee at this late stage, as it attempts to do200, for that would undermine due process, equity, and good faith.

3. Conclusion

4.308 For these reasons, the Dominican Republic again asks the Panel to dismiss Honduras's claims.201

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

1. Introduction

4.309 The Dominican Republic declared that it intended to use the opportunity to respond directly to the assertions made by Honduras in its latest written submission to the Panel which, in its opinion, remains silent as regards many of the arguments and much of the documentary evidence submitted by the Dominican Republic.

4.310 The Dominican Republic began with a general remark. Honduras claims that in this case, what is at issue is the effectiveness of the GATT as a legal framework securing the results of market access negotiations.202 The main theme of this dispute is not the threat of market access concessions, as Honduras contends. What this dispute is essentially about is an importing country that is enforcing its laws in its own territory, laws which are applied in an identical manner to domestic products and imported products, laws which pursue a legitimate objective and not a protectionist one, namely preventing smuggling and ensuring that taxpayers meet their tax obligations.

4.311 The Dominican Republic stated that it would refer briefly to each one of the measures or categories of measures attacked by Honduras, starting with the stamp requirement.

2. Stamp requirement for domestic and imported cigarettes

4.312 Before turning to Honduras's arguments regarding the stamp requirement, it is important to remember that in its purpose, design, structure and application, the stamp requirement is intended to secure compliance by taxpayers with their fiscal obligations and to combat smuggling. In that respect, it has been an effective measure.

4.313 Honduras argues that if the Panel recognizes that the stamp requirement for cigarettes is a legitimate measure, this could lead to the imposition of the requirement for any product.203 The Dominican Republic has explained that it is the particular circumstances surrounding smuggling and tax evasion in the case of cigarettes that justify the stamp requirement. Until Honduras has acknowledged that there is a global problem of smuggling of tobacco products, and until it has recognized that the stamp requirement contributes to eliminating or preventing such smuggling, it will not be able to understand that the affixing of stamps in the presence of inspectors from the Directorate General of Internal Taxes is a legitimate, non-discriminatory and necessary measure.

4.314 Unfortunately, Honduras continues to ignore these two fundamental facts. The Dominican Republic has submitted documentary evidence showing that the problem of the smuggling of tobacco products is recognized worldwide.204 More specifically, the Dominican Republic presented an international convention negotiated in the World Health Organization and an instrument issued by an alliance of NGOs. Honduras's response was surprising: it said that these documents were not legally binding on either Honduras or the Dominican Republic.205 The Dominican Republic submitted these documents for their value as evidence in respect of the fact alleged, and not because they represented a source of international rights or obligations for the parties to the case. The Dominican Republic does not need to negotiate, sign and ratify an international treaty stating that the sun rises in the east and sets in the west for this to be an incontrovertible fact. Similarly, the fact that the two instruments submitted by the Dominican Republic as evidence are not binding on Honduras and the Dominican Republic does not alter the truthfulness of their content. In fact, Honduras did not even try to refute their content.

4.315 At the same time, Honduras states that the stamp requirement does not control the movement of tobacco products within the meaning of Article 15 of the WHO Framework Convention – the same convention which, according to Honduras, the Panel should not consider at all.206 In fact, the stamp requirement does control the movement of tobacco products, since the absence of a stamp on a cigarette packet indicates to the authorities, traders and consumers that that packet entered the market through illegal channels, without paying taxes. And yet Honduras argues that the stamp cannot be a mark to alert Dominican Republic tax authorities that the Selective Consumption Tax has been collected, since the stamp is affixed before that tax is paid.207 What is important is for the stamp to be affixed before the cigarette packets enter the market. No packet, whether domestic or imported, may enter the market without a stamp having been affixed. The internal tax authorities control the stamps that have been sold to each trader and importer. They also know how many of these stamps have been affixed to the packets, and hence how many packets have entered the market. Consequently, traders cannot evade tax control by declaring a number of packets lower than the number that entered the market, and hence they cannot evade their taxes by attempting to be assessed on a lower number of packets.

4.316 Honduras's complaint with respect to the stamp requirement is that it accords identical treatment to imported and domestic cigarettes.208 According to Honduras, given the conditions in which the two products are competing, identical treatment under the law implies discrimination; specifically, insisting that the imported product having to comply with the requirement in the territory of the Dominican Republic increases the cost of the imported products.209 According to this reasoning, the "additional cost" of complying with the importing country's non-discriminatory law is a source of discrimination. If this were the case, all WTO Members would be under the obligation to apply differential measures for imported products to eliminate any cost or inconvenience to the importer resulting from compliance with the laws applied to domestic products. The cost of complying with laws which do not discriminate, in letter, between imported and domestic products, is something that any importer takes into account and assumes as a condition and cost inherent to international trade.

4.317 Honduras argues that the Dominican Republic failed to specify which additional steps to comply with the stamp requirement in the case of imported products could be avoided.210 However, two paragraphs further on Honduras explains why one of the steps that the Dominican Republic suggested as unnecessary is unavoidable.211 This is one of Honduras's many contradictions according to the Dominican Republic. The Dominican Republic said it would be identifying others in the course of this oral submission.

4.318 Before discussing the Dominican Republic's defence under Article XX of the GATT, the Dominican Republic would briefly mention some other arguments that Honduras has made with respect to the stamp requirement. Honduras did not include, in its request for the establishment of a Panel, the difference in the moment at which the domestic producer and the importer pay the Selective Consumption Tax.212 The additional steps that the importer must go through before being able to sell the imported product on the local market are inevitable (except, perhaps, in cases where there is a perfect customs union). For example, the importer will always have to complete import forms and fulfil certain requirements which obviously do not apply to the domestic product. Consequently, Honduras's argument that cigarette importers are disadvantaged by the requirement that stamps be affixed in the presence of inspectors is without merit.213 As regards additional costs, Honduras has ignored the fact that affixing stamps during the production process also has its cost for the domestic producer.

4.319 In its effort to rebut the Dominican Republic's defence under Article XX(d) of the GATT, Honduras errs in its appreciation of the facts and contradicts itself. Honduras claims that the Dominican Republic failed to identify the tax laws in respect of which compliance is secured by the stamp requirement. It also argues that these laws are inconsistent with the GATT.

4.320 Regarding the first of these claims, Honduras contradicts itself once again: in paragraph 42 of its second written submission, it states that the Dominican Republic has not specified which laws the stamp requirement secures compliance with. Two paragraphs later, Honduras cites the reply given by the Dominican Republic to questions of the Panel, namely that the stamp requirement guarantees the payment of the Selective Consumption Tax, the tax on the transfer of goods and services (ITBIS) and the income tax.214 In its replies, the Dominican Republic states that the ITBIS is established and collected in accordance with Articles 335 to 360 of the Dominican Republic Tax Code, and the income tax in accordance with Articles 267 to 334 of the Dominican Republic Tax Code.215 In its first written submission, the Dominican Republic pointed out that the Selective Consumption Tax is collected in accordance with Article 367 of the Tax Code as amended by Law 3-04 of 9 January 2004.216 This was confirmed by a letter from the Director General of the DGII, submitted as Exhibit DR-2.217

4.321 Honduras's second argument is that the Dominican Republic's tax laws are contrary to the GATT.218 Honduras refers in particular to the Selective Consumption Tax, and then goes on to repeat the same argument with respect to the bond requirement.219 And yet, the Dominican Republic did demonstrate that the Selective Consumption Tax is GATT-consistent. The Selective Consumption Tax on imported and domestic cigarettes is a specific duty of RD$0.48 per cigarette, both in the case of the imported product and in the case of the domestic product. The tax base is provided for by Article 367(c) of the Tax Code, as amended by Law 3-04 of 9 January 2004. The specific amount is provided for by Article 375, paragraph V, of the Tax Code, as amended by Law 3-04. This was all mentioned by the Dominican Republic in its first written submission.220 No further explanation is needed to demonstrate that the Selective Consumption Tax on cigarettes is not contrary to the national treatment obligation or any other obligation under the GATT. The Dominican Republic has established a prima facie case of consistency of its tax laws with the GATT.

4.322 Honduras nevertheless insists on trying to demonstrate that the Selective Consumption Tax, before its amendment by Law 3-04, is contrary to the GATT.221 The Dominican Republic stresses that the versions of Articles 367 and 375 of the Tax Code on which Honduras is basing its argument have ceased to exist, and that it is unnecessary, and indeed a legal error, to refer to a version of a law that is no longer in effect.

4.323 Also in connection with the Dominican Republic's defence of its measures under Article XX(d) of the GATT, Honduras argues that the measures are not "necessary" within the meaning of paragraph (d) as interpreted by the Appellate Body. According to Honduras, for a measure to be necessary, it must be indispensable, and the Dominican Republic's measures are not indispensable to the enforcement of its tax laws.222 Honduras cites paragraph 161 of the Appellate Body Report in Korea – Various Measures on Beef, in which the Appellate Body speaks of "indispensable". However, what Honduras fails to mention is what the Appellate Body states three paragraphs further on:

"In sum, determination of whether a measure, which is not 'indispensable', may nevertheless be 'necessary' within the contemplation of Article XX(d), involves in every case a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports".223

4.324 The Dominican Republic has demonstrated how the stamp requirement contributes to securing the desired level of enforcement of its tax laws. Since the introduction of the stamp requirement, there has been practically no cigarette smuggling. On the other hand, in the case of alcoholic beverages and matches, for which the stamp requirement is different, smuggling continues to pose a problem. Nor is there any question of the importance of tax laws and the payment of taxes, especially in a country with little resources like the Dominican Republic. Finally, the Dominican Republic has demonstrated that the impact of the stamp requirement on imports of cigarettes is almost nil. This can clearly be seen from the growth rate in cigarette imports from Honduras, which reached more than 4,800 per cent during the first quarter of this year as compared to the same period last year.224 Thus, following the Appellate Body's interpretation of the word "necessary" in Article XX(d), the Dominican Republic can only conclude that the stamp requirement is a measure that is necessary to secure compliance with laws and regulations which are not inconsistent with the provisions of the Agreement.

4.325 Honduras asks how the stamp requirement can secure compliance with tax obligations when there are other products that are subject to the Selective Consumption Tax to which the stamp requirement does not apply.225 The need for the stamp requirement in respect of cigarettes must be assessed in relation to that product alone. It is determined by the particular nature of the product. The stamp requirement is applied to the sale of cigarettes, both imported and domestically produced, because cigarette smuggling is so common and poses such a serious problem. The Dominican Republic knows of no cases of Jacuzzi or jet ski smuggling, or if such smuggling has taken place, it certainly does not represent 25 to 30 thousand million dollars (i.e. 25 to 30 billion dollars) in losses for governments across the world. The evidence shows that cigarette smuggling is a serious problem, whose repercussions at the global level are so serious that they have led to the negotiation of declarations and international treaties under the auspices of such international governmental organizations as the World Health Organization, and non-governmental organizations.226

4.326 Honduras contends that there are alternatives to the requirement to affix a stamp in the presence of the Dominican Republic's internal tax inspectors. It insists, for example, that one alternative would be to allow foreign cigarette producers to affix the stamps abroad.227 However, the Dominican Republic has provided clear evidence, which has not been refuted by Honduras, that when the stamp is allowed to be affixed abroad, without the supervision of inspectors from the Directorate General of Internal Taxes, smuggling and forgery of stamps occur.228 This is precisely why the Dominican Republic is considering imposing the same stamp requirement on alcoholic beverages. Another alternative measure suggested by Honduras is allowing the stamp to be affixed abroad and then checking at the border that the packets are stamped and that the stamps are authentic.229 This would require increased resources in the Directorate General of Internal Taxes, since in addition to inspecting each shipment of packets, it would have to open each one of the cigarette boxes and cartons in order to ensure that the stamps had not been forged, a process that would delay the arrival on the market of the imported product and would possibly entail higher costs for importers.

4.327 With respect to the chapeau of Article XX, Honduras argues that the stamp requirement is an arbitrary and unjustifiable discrimination.230 Firstly, Honduras does not deny that it is not just any type of discrimination that the chapeau of Article XX prohibits, but only discrimination that is arbitrary and unjustifiable, between countries where the same conditions prevail.231 Secondly, Honduras's entire argument concerning the chapeau is based on the incorrect assumption that the purchase of the stamp by the domestic producer is credited towards payment of the Selective Consumption Tax.232 Honduras bases this assumption on an internal document of one of the domestic cigarette producers in the Dominican Republic which was presented as Exhibit DR-3 merely to illustrate the procedure followed by domestic producers in requesting and obtaining the stamps. The contents of that document do not implicate the Government of the Dominican Republic. In any case, paragraph III of Article 37 of Decree 79-03 expressly stipulates that stamp payments shall not be credited to the payment of the Selective Consumption Tax. This is confirmed by the certification from the Directorate General of Internal Taxes that the Dominican Republic circulated as Exhibit DR-50. Thus, since the payment of stamps is not an advance on the payment of the Selective Consumption Tax, the only arguments put forward by Honduras with respect to the consistency of the Dominican Republic's measures with the chapeau of Article XX are discredited.

4.328 In conclusion, the Dominican Republic has shown that the stamp requirement is not contrary to Article III:4 of the GATT, and even if it were, it would be justified under Article XX(d) of the GATT.

3. Bond requirement for domestic and imported cigarettes

4.329 Honduras argues that should the Panel uphold the Dominican Republic's right to require bonds to be posted for the sale of imported cigarettes, it will be opening the door for any member to impose bond requirements that would make imports prohibitive.233 In addition to being an exaggeration, this argument is contradicted by Honduras's other arguments concerning the bond. Honduras never claimed that the bond was a prohibition under Article XI of the GATT. It merely claimed, without any explanation or substantiation, that the bond was a restriction. However, the Dominican Republic demonstrated that the bond was neither a restriction, nor a disincentive, and still less a prohibitive measure. This is best illustrated by the fact that BAT República Dominicana imported for more than two years without posting the bond. It was only some four days after the Dominican Republic delegation informed the Panel that BAT República Dominicana had not paid the bond, that the company hastily turned to the authorities to rectify its illegal situation. This shows that the imports are not subjected to any such restriction or prior condition. Furthermore, the significant increase in cigarette imports from Honduras over the past year and a half shows that there is no restriction or prohibition.

4.330 It is also important to remember that in this case, Honduras recognized that the bond applies in exactly the same way to domestic cigarettes and imported cigarettes. Indeed, this is precisely Honduras's complaint: that they are given identical treatment. If the law does not discriminate, in letter, as to the origin of the product, the discrimination that Honduras claims exists in this case must be a de facto discrimination. If it is a de facto discrimination, Honduras must demonstrate how, in this particular case, and not in hypothetical, alleged or invented cases, there is discrimination. However, in spite of its references to the differences in the moment at which the importer and domestic producer pay their respective taxes, Honduras has not been able to explain how a bond which must be posted both for the domestic product and for the imported product, and which does not in any way affect the sale, supply, distribution, transport, use or purchase of the imported product, can be restrictive. If it is not restrictive, then there is no threat that it will become a prohibitive requirement.

4.331 In its second written submission, Honduras focuses its efforts with respect to the bond on explaining why the bond does not reflect one of the situations described in Note Ad Article III of the GATT. It asserts that the said Note does not apply because the bond requirement does not "affect" the internal sale, offering for sale, purchase, transport, distribution or use of products.234 This is a matter on which the Dominican Republic and Honduras agree. The bond requirement does not affect the sale, offer for sale, purchase, transport, distribution or use of products on the domestic market. Consequently, Article III does not apply to the bond. However, contrary to what was said earlier, Honduras then claims that the bond is contrary to Article III:4.

4.332 Honduras would appear to think that it is enough to argue that the bond requirement does not match any of the suppositions of Note Ad Article III in order to demonstrate that the bond falls within the scope of Article XI. This is an incorrect interpretation of Article XI, and moreover, it does not comply with the general rule of burden of proof so often mentioned by Honduras in its second written submission. It is Honduras that bears the burden of proof with respect to the claim that the bond is contrary to Article XI. And yet, in its legal argument, which is barely two paragraphs long, Honduras fails to demonstrate how a measure that is not even required as a prior condition or upon importation can constitute an import prohibition or restriction. Its legal argument boils down to two paragraphs in its first written submission.235 In its latest submission, the legal argument consists of one sentence. One sentence which merely claims, without substantiation, that the bond operates as a restriction within the meaning of Article XI.236

4.333 This is one of the many occasions on which Honduras fails to respond to the arguments and documentary evidence submitted by the Dominican Republic. Exhibit DR-43 submitted by the Dominican Republic shows that imported cigarettes enter its territory without the Directorate General of Customs even noting whether the importer has posted the bond. Exhibit DR-35 shows that during the period of over two years in which BAT has been importing cigarettes into the Dominican Republic, it has never posted the bond. On the basis of these facts, Honduras cannot seriously argue that the bond is a restriction on importation and therefore contrary to Article XI of the GATT.

4.334 At the same time, Honduras claims that the bond does not secure compliance with any tax, since the Selective Consumption Tax is paid upon importation.237 And yet, the Dominican Republic demonstrated through Exhibit DR-28 that the payment made upon importation frequently has to be adjusted, and as a result, there is a shortfall. In such cases, the bond secures the payment of the tax. Honduras responded to this evidence by stating, without substantiation, that the reassessment of taxes does not include the Selective Consumption Tax. It repeated this same argument in its second written submission, as regards both the stamp requirement and the bond requirement.238 In its reply to Honduras's written question, the Dominican Republic explained that the reassessments did include the shortfall in the Selective Consumption Tax. The letters sent by the Director General of Customs to importers, provided as Exhibit DR-28, do not exclude the Selective Consumption Tax. Honduras has not proved the contrary, although it is up to Honduras to do so, since it is Honduras that claims that the reassessment in no case includes the Selective Consumption Tax.

4.335 Another issue in respect of which Honduras has not offered a response or explanation is the fact demonstrated by the Dominican Republic through a declaration by the Director General of the DGII that, in practice, the bond secures the payment of other taxes and not only the Selective Consumption Tax.239 Honduras simply repeats that the provision establishing the bond requirement for domestic producers is contained in the chapter of the Tax Code of the Dominican Republic in which the Selective Consumption Tax is established.240 This is not a response to what is the actual practice of the authorities of the Dominican Republic. That practice qualifies the measure in the same way that the letter of the law qualifies the measure. The ruling of the Panel in the US - Section 301 Trade Act confirms this.241

4.336 In that case, the practice and statements of the authorities of the United States Government were sufficient to reverse the conclusion that the letter of sections 301-310 of the United States Trade Act was contrary to the provisions of the Dispute Settlement Understanding. Likewise, in this case, the practice of the Dominican Government authorities should be taken into account. Exhibit DR-12 establishes that the practice of the authorities of the Dominican Republic is to use the bond established under Article 376 of the Tax Code and Article 14 of Decree 79-03 as a guarantee of compliance with other taxes.

4.337 Another of Honduras's arguments with respect to the Dominican Republic's defence under Article XX(d) of the GATT is that the Dominican Republic failed to specify all of the obligations in respect of which compliance is secured by the bond.242 This is yet another of Honduras's contradictions. On the one hand, Honduras argues that the bond does not secure compliance with any obligation, and on the other hand, it argues that it secures compliance with more than one obligation.243 Moreover, Honduras speculates, without any grounds, that these other unspecified obligations may be contrary to the GATT.

4.338 When it comes to demonstrating that the obligations in respect of which compliance is secured by the bond are contrary to the GATT, Honduras once again relies on a version of Article 367(b) of the Tax Code that no longer exists.244 The Dominican Republic has shown that the Selective Consumption Tax under the current law cannot under any circumstance be considered contrary to the GATT. It is now up to Honduras to provide evidence to the contrary, and it has not done so. Rather, Honduras persists in asking the Panel to examine a law and a measure that no longer exist.

4.339 With respect to the bond, Honduras repeats what it said with respect to the stamp requirement. It asks how the bond can secure compliance with tax obligations if there are other products that are subject to the Selective Consumption Tax but not to the same bond requirement.245 The Dominican Republic reverts to the reply it gave to the same argument by Honduras with respect to the stamp requirement. No other product subject to the Selective Consumption Tax is as likely to be smuggled as cigarettes and alcoholic beverages.

4.340 Honduras recognizes the Dominican Republic's right to establish its desired level of enforcement. However, it maintains that according to the Appellate Body, the level of enforcement must be the same for domestic products as for imported products. It argues that in the case of the bond for cigarettes in the Dominican Republic, the level is not the same. The Dominican Republic agrees. The level of enforcement is more strict for domestically produced cigarettes. In its reply to questions 80 and 81 of the Panel, the Dominican Republic explains how in the case of domestically produced cigarettes, the bond must be posted as a pre-requisite to the marketing of the product.246 In the case of imported cigarettes, on the other hand, the bond is not a prerequisite to importation. If this were not so, it would mean that BAT República Dominicana has been operating illegally and in violation of the law of the Dominican Republic over the past few years, since although it has been selling cigarettes imported from Honduras and other countries, it has not yet paid the bond.247

4.341 Honduras does not provide any argument with respect to the consistency of the bond requirement with the chapeau of Article XX.248 Consequently, the prima facie case for consistency made by the Dominican Republic in its written submission has not been refuted.

4. Interpretation of Article III:4 of the GATT

4.342 Before responding to Honduras's arguments regarding the other measures, the Dominican Republic would like to refer to Honduras's interpretation of Article III:4 of the GATT in relation to the stamp and bond requirements.

4.343 The Dominican Republic has explained how it thinks these measures should be examined from a legal point of view under Article III. Honduras points out that Article III:4 does not require a separate inquiry of whether the measures are applied so as to afford protection to the domestic industry.249 The Dominican Republic does not challenge this conclusion. On the contrary, it recognises what the Appellate Body has stated with respect to a separate inquiry of this element under paragraph 4. The Dominican Republic is not asking the Panel to conduct this inquiry separately. What the Dominican Republic is asking of the Panel is to conduct a complete inquiry under paragraph 4, which requires it to determine whether as a result of the stamp and bond requirements imported cigarettes are being accorded less favourable treatment than that accorded to like domestic products. According to the Appellate Body, a measure accords less favourable treatment to imported products when it modifies the conditions of competition to the detriment of imported products.250 The definition of the word "detriment" includes the notion of damage or loss. Consequently, it must be determined whether the measure modifies the conditions of competition, and in addition, it must be determined whether this modification causes damage or loss to imports.

4.344 The effect that the measure has on trade in the product in question is also relevant. It can stand as evidence that the differences in the conditions of competition are not detrimental to the imported product, and hence do not result in less favourable treatment. The Appellate Body also pointed out that the determination of whether there was less favourable treatment under Article III:4 must be grounded in close scrutiny of the "fundamental thrust and effect of the measure itself".251 It is pertinent in this case that the effect of the stamp and bond requirements on imports of cigarettes from Honduras was practically nil.

4.345 Honduras's arguments in its second written submission do not respond to the arguments put forward by the Dominican Republic on the basis of a correct interpretation of Article III:4.

5. Dead measures

4.346 The Dominican Republic turned to what it called the "dead measures". Honduras insists that the Panel has the jurisdiction to examine measures that have already been abolished. Throughout these proceedings it has persisted in trying to demonstrate that the law abolishing the measures which Honduras is challenging entered into force six days after the Panel was established. The Dominican Republic has explained that the law was signed on the day that the Panel was established, and that even if it entered into force six days later, this was not sufficient reason for the Panel to rule and make recommendations concerning measures that had already been abolished.

4.347 The Dominican Republic has submitted arguments, cited precedent, and pointed to various provisions explaining why the Panel should not issue rulings with respect to measures that have been abolished. The Appellate Body itself pointed out, in similar circumstances, that to issue recommendations with respect to measures that had already been abolished was a legal error.252

4.348 The main reason given by Honduras to justify the Panel's examining measures that have already been abolished and issuing a recommendation is that failure to do so would mean that WTO Members could evade their obligations by abolishing measures when they were challenged and reinstating them once the Panel established to examine them had issued its ruling. In essence, what Honduras is saying is that the Dominican Republic appears to be acting in bad faith and intends to reinstate the measures. Apart from being untrue, Honduras's presumption of bad faith is contrary to the principles of international law and to Appellate Body precedent. As the Dominican Republic stated in its second written submission, according to the Appellate Body in Chile – Alcoholic Beverages, "Members of the WTO should not be assumed, in any way, to have continued previous protection or discrimination through the adoption of a new measure".253

4.349 At the same time, according to the Panel in Argentina – Textiles and Apparel, "in the absence of clear evidence to the contrary, we cannot assume that Argentina will withdraw the safeguard measure and reintroduce the specific duties measure in an attempt to evade panel consideration of its measures. We must assume that WTO Members will perform their treaty obligations in good faith, as they are required to do by the WTO Agreement and by international law".254 Honduras has not presented any evidence that the Dominican Republic intends to reintroduce the measure. All that Honduras has done is to submit press Articles expressing the discontent of certain producers of alcoholic beverages with the new measure. Honduras cannot expect this Panel to presume that the Government of the Dominican Republic has the intention of reintroducing the measure it has just withdrawn simply because certain productive sectors are not content with the new measure.

4.350 Consequently, on the basis of the arguments set forth in its second written submission, the Dominican Republic requests the Panel to reject Honduras's complaint against the dead measures.

To continue with  6. Transitional surcharge and foreign exchange fee

Return to Index

98 Appellate Body Report, EC – Bananas III, paras. 215-216 (italics in original).

99 First written submission of the Dominican Republic, 13 April 2004, para. 102.

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

101 Appellate Body Report, EC – Computer Equipment, para. 67 (italics in original).

102 See Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 39, p. 31.

103 Panel Report, Japan – Film, para. 10.58.

104 Appellate Body Report, US – Certain EC Products, para. 81; Panel Report, Chile – Price Band System, para. 7.112.

105 Appellate Body Report, Australia – Salmon, para. 223.

106 Panel Report, India – Autos, para. 7.30.

107 Panel Report, EC – Poultry, paras. 153, 252.

108 Panel Report, India – Autos, para. 7.28.

109 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 40, p. 34.

110 Ibid., reply to question No. 39, p. 31.

111 See Appellate Body Report, Chile – Alcoholic Beverages, para. 74. See also Panel Report, US – Certain EC Products, para. 6.110.

112 Panel Report, Argentina – Footwear (EC), para. 6.14.

113 Panel Report, US – Wool Shirts and Blouses, para. 6.2.

114 Panel Report, Indonesia –Autos, para. 14.9.

115 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 18, p. 19. Replies of the Dominican Republic to the questions addressed by the Panel, reply to question No. 18, para. 28.

116 See Panel Report, EC – Asbestos , para. 8.100 (finding that a claim by Canada for cumulative application of Article III:4 and Article XI:1 would not be within the terms of reference of the Panel).

117 Request for the Establishment of a Panel by Honduras, supra note 2, para. 4. First written submission of Honduras, 16 March 2004, section IV.G. and para. 112.

118 Oral statement of Honduras to the Panel, 11 May 2004, para. 79 (English version). Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30.

119 Decree 79-03, supra note 8, Article 40.

120 Certification by the Director General of Customs, dated 26 May 2004, submitted by the Dominican Republic as Exhibit DR-43. Certification by the Directorate General of Internal Taxes, dated 24 May 2004, submitted by the Dominican Republic as Exhibit DR-35.

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

122 Oral statement of Honduras to the Panel, 11 May 2004, para. 79 (English version). See also Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30.

123 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 31, p. 27.

124 Ibid.

125 Oral statement of Honduras to the Panel, 11 May 2004, para. 80 (English version). First written submission of Honduras, 16 March 2004, para. 113.

126 See Certification by the Directorate General of Internal Taxes, supra note 120.

127 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 32, p. 29.

128 GATT, Article III:4.

129 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 208.

130 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30 (emphasis added).

131 See Certification by the Directorate General of Internal Taxes, supra note 120.

132 Appellate Body Report, Korea – Various Measures on Beef, para. 137 (emphasis in original).

133 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30 (emphasis in original). See also oral statement of Honduras to the Panel, 11 May 2004, para. 79 (English version).

134 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 31, p. 27.

135 Ibid.

136 See GATT Panel Report, US – Section 337, para. 3.11.

137 Request for the Establishment of a Panel by Honduras, supra note 2, para. 4.

138 First written submission of Honduras, 16 March 2004, paras. 115-116. Oral statement of Honduras to the Panel, 11 May 2004, para. 86 (English version).

139 Appellate Body Report, Korea – Various Measures on Beef, para. 137.

140 See Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to question No. 75, para. 89.

141 Oral statement of the Dominican Republic to the Panel, 11 May 2004, para. 41. See also Statistics of imports of cigarettes, supra note 83.

142 First written submission of the Dominican Republic, 13 April 2004, paras. 34, 44, 46-54.

143 Oral statement of Honduras to the Panel, 11 May 2004, para. 64 (English version). See also Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 29, p. 25.

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

145 Appellate Body Report, Korea – Various Measures on Beef, para. 137.

146 The New Shorter Oxford English Dictionary, supra note 52, Vol. I, p. 652.

147 See Appellate Body Report (Article 21.5), US – FSC, para. 215.

148 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 29, p. 26.

149 See Appellate Body Report, EC – Asbestos , para. 100.

150 First written submission of the Dominican Republic, 13 April 2004, para. 53.

151 Oral statement of the Dominican Republic to the Panel, 11 May 2004, para. 41. First written submission of the Dominican Republic, 13 April 2004, para. 114. See also Statistics regarding imports by the firm British American Tobacco – República Dominicana, supra note 24 and Statistics of imports of cigarettes, supra note 83.

152 Oral statement of Honduras to the Panel, 11 May 2004, para. 59 (English version).

153 First written submission of the Dominican Republic, 13 April 2004, paras. 97-167; Oral statement of the Dominican Republic to the Panel, 11 May 2004, paras. 33-47.

154 Appellate Body Report, US – Shrimp, para. 159.

155 First written submission of the Dominican Republic, 13 April 2004, paras. 100-140.

156 Ibid., paras. 102-105.

157 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 25, p. 22.

158 Oral statement of Honduras to the Panel, 11 May 2004, para. 69 (English version).

159 First written submission of the Dominican Republic, 13 April 2004, para. 117.

160 Oral statement of Honduras to the Panel, 11 May 2004, para. 71 (English version). See also Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 25, p. 22.

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

162 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to question No. 65, para. 70.

163 Oral statement of Honduras to the Panel, 11 May 2004, para. 72 (English version). Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 25, p. 22.

164 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 12, p. 16.

165 Ibid., reply to question No. 26, p. 23.

166 First written submission of the Dominican Republic, 13 April 2004, para. 122.

167 Ibid., paras. 141-167.

168 Oral statement of Honduras to the Panel, 11 May 2004, paras. 92-93 (English version).

169 First written submission of the Dominican Republic, 13 April 2004, paras. 82-91, 143-145.

170 Oral statement of Honduras to the Panel, 11 May 2004, para. 91 (English version).

171 Ibid.

172 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to question No. 79, para. 97.

173 First written submission of the Dominican Republic, 13 April 2004, para. 150.

174 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 33, p. 29.

175 First written submission of the Dominican Republic, 13 April 2004, para. 153.

176 Request for the Establishment of a Panel by Honduras, supra note 2, para. 6.

177 Panel Report, US –Steel Plate, paras. 7.27-7.29.

178 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 10, p. 12, citing first written submission of the Dominican Republic, 13 April 2004, para. 204.

179 First written submission of the Dominican Republic, 13 April 2004, paras. 189 and 202.

180 Oral statement of Honduras to the Panel, 11 May 2004, paras. 4-21 (English version). Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 24, pp. 20-21.

181 First written submission of Honduras, 16 March 2004, paras. 53-56, 64-66. Replies of Honduras to the questions addressed by the Panel, 27 May 2004, question No. 23, p. 20.

182 First written submission of Honduras, 16 March 2004, paras. 57-58, 67.

183 First written submission of the Dominican Republic, 13 April 2004, paras. 179-183, 203-205. Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, para. 4.

184 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 3, p. 3.

185 First written submission of the Dominican Republic, 13 April 2004, paras. 183, 204.

186 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 3, p. 3.

187 See "Article II:1(b): Legal Questions, Note by the Secretariat", Group of Negotiations on Goods (GATT), Negotiating Group on GATT Articles, MTN.GNG/NG7/W/61, 16 November 1989, paras. 7-10, submitted by the Dominican Republic as Exhibit DR-49.

188 Ibid.

189 First written submission of Honduras, 16 March 2004, para. 2.

190 First written submission of the Dominican Republic, 13 April 2004, paras. 174-178, 206.

191 Third party submission by the European Communities, 27 April 2004, para. 4.

192 Oral statement of Honduras to the Panel, 11 May 2004, paras. 4, 15-17 (English version).

193 Ibid., para. 15.

194 First written submission of the Dominican Republic, 13 April 2004, paras. 184-186, 207.

195 See Panel Report, Thailand – H-Beams, para. 7.24. See also Appellate Body Report, US – FSC, para. 166.

196 See Appellate Body Report, Brazil – Desiccated Coconut, p. 22.

197 See Panel Report, US – Steel Plate, paras. 7.27-7.29. See also Appellate Body Report, Mexico –Corn Syrup (Article 21.5 – US), para. 50 (noting a Member must raise objections in a timely manner or risk waiving them).

198 See GATT Panel Report, EEC – Import Restrictions, para. 30.

199 First written submission of Honduras, 16 March 2004, paras. 50, 61.

200 Oral statement of Honduras to the Panel, 11 May 2004, paras. 14, 21 (English version).

201 First written submission of the Dominican Republic, 13 April 2004, para. 208.

202 Second written submission of Honduras, 10 June 2004, para. 7.

203 Ibid., para. 4.

204 See "The FCTC and Tobacco Smuggling", supra note 23. See also, WHO Framework Convention on Tobacco Control, supra note 47.

205 Second written submission of Honduras, 10 June 2004, paras. 53 and 116.

206 Ibid., para. 55.

207 Ibid., para. 49.

208 Ibid., para. 12.

209 Ibid., para. 13.

210 Ibid., para. 21.

211 Ibid., para. 23.

212 Ibid., para. 14.

213 Ibid., para. 17.

214 Ibid., para. 44.

215 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, replies to questions 70 and 78, paras. 78 and 96.

216 First written submission of the Dominican Republic, 13 April 2004, para. 19 and footnotes 11 and 12.

217 Certification by the Director General of Internal Taxes, dated 5 April 2004, submitted as Exhibit DR-2.

218 Second written submission of Honduras, 10 June 2004, para. 42.

219 Ibid., para. 100.

220 First written submission of the Dominican Republic, 13 April 2004, footnote 11.

221 Second written submission of Honduras, 10 June 2004, para. 45.

222 Ibid., paras. 50, 51 and 117.

223 Appellate Body Report, Korea – Various Measures on Beef, para. 164.

224 Oral statement by the Dominican Republic before the Panel, 11 May 2004, para. 41. See also Statistics of imports of cigarettes, supra note 83.

225 Second written submission of Honduras, 10 June 2004, para. 52.

226 See "The FCTC and Tobacco Smuggling", supra note 23. See also WHO Framework Convention on Tobacco Control, supra note 47.

227 Second written submission of Honduras, 10 June 2004, para. 58.

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

229 Second written submission of Honduras, 10 June 2004, para. 58.

230 Ibid., paras. 68-72.

231 First written submission of the Dominican Republic, 13 April 2004, para. 125.

232 Second written submission of Honduras, 10 June 2004, paras. 68-72.

233 Ibid., para. 5.

234 Ibid., para. 79. See also Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, para. 30.

235 First written submission of Honduras, 16 March 2004, paras. 115-116.

236 Second written submission of Honduras, 10 June 2004, para. 82.

237 Ibid., para. 86.

238 Ibid., paras. 89, 115.

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

240 Second written submission of Honduras, 10 June 2004, para. 111.

241 Panel Report, US – Section 301 Trade Act.

242 Second written submission of Honduras, 10 June 2004, para. 105.

243 Ibid., paras. 86 and 105.

244 Ibid., para. 124.

245 Ibid., para. 112.

246 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to questions 80 and 81, paras. 98 and 99.

247 Certification by the Directorate General of Internal Taxes, supra note 120.

248 Second written submission of Honduras, 10 June 2004, para. 122.

249 Ibid., para. 30.

250 Appellate Body Report, Korea – Various Measures on Beef , para. 137.

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

252 Appellate Body Report, US – Certain EC Products, para. 81. Second written submission of the Dominican Republic, 10 June 2004, para. 6.

253 Appellate Body Report, Chile – Alcoholic Beverages, para. 74 (italics in original).

254 Panel Report, Argentina – Textiles and Apparel, para. 6.14 (footnote removed).