ii) The Liquor Tax and the Education Tax are "Internal Taxes"

1.99. The complainants state that the Liquor Tax and the Education Tax are levied on all distilled spirits and liqueurs intended for consumption in Korea, whether locally manufactured or imported, and not just "on" or "in connection" with the importation of distilled spirits and liqueurs. Accordingly, in the EC view, they constitute "internal taxes" in terms of GATT Article III:2, and not "import charges" within the purview of GATT Articles II and VIII.

iii) Vodka is "Like" Soju

1.100. The complainants state that GATT does not define the notion of "like product". According to the complainants, the approach followed by previous Panels has been to examine whether products are "like" on a case-by-case basis in light of factors such as the physical characteristics of the products concerned, their end uses and their customs classification. This approach was endorsed expressly by the Appellate Body in Japan - Taxes on Alcoholic Beverages II⁷⁰ and in Canada - Certain Measures Concerning Periodicals.⁷¹

1.101. The complainants note that in the same reports the Appellate Body held that the terms "like products" should be construed "narrowly" for the purposes of Article III:2, first sentence⁷². The complainants further notes that "like" products need not be identical in all respects⁷³. Thus, it has been established by a previous Panel that in the case of alcoholic beverages:

1.102. The complainants take the position that in this instance, vodka and soju are "like" products because they have the same physical characteristics and, consequently, are objectively apt to serve identical end uses. Furthermore, according to the complainants, Korean soju is the same liquor as Japanese shochu, which has already been found by the two Panels on Japan - Taxes on Alcoholic Beverages to be "like" vodka.

(a) Soju and Vodka Have Virtually the Same Physical Characteristics and, Therefore, Serve for the Same end Uses

1.103. According to the complainants, the essential characteristics of vodka and soju can be summarised as follows:

1.104. According to the complainants, from the above table, it emerges that the main differences between soju and vodka are confined to the following:

1.105. At the request of the EC industry, the Scotch Whisky Research Institute has conducted a series of analyses on a sample of well known brands of soju and vodka, which prove that the manufacturing processes and the physical characteristics of the two liquors are nearly identical⁷⁵ According to the European Communities the analyses indicate that:

(b) The Differences Between Vodka and Soju are the Same as Between Vodka and Japanese Shochu

1.106. According to the complainants, the differences between vodka and soju are clearly minor and do not prevent soju and vodka from being "like" products. In the EC view, the existence of the very same differences between vodka and Japanese shochu did not prevent the two Panels on Japan - Taxes on Alcoholic Beverages from reaching the conclusion that those two liquors were "like" in the sense of Article III:2, first sentence.

1.107. The complainants state that the average alcoholic strength of shochu A is, as that of Korean diluted soju, around 25%. In spite of that, notes the complainants, the two Panel Reports on Japan - Taxes on Alcoholic Beverages concluded that shochu A was like vodka. The Panel Report on Japan - Taxes on Alcoholic Beverages II noted in this regard that:

1.108. The complainants further note that like distilled soju, both shochu B and shochu A may not, by law, be filtered through white birch charcoal. In addition, the complainants note that the Japanese Liquor Tax Law requires that shochu B must be obtained through discontinuous distillation. In the EC view, however, these differences were not an obstacle for the Panel Report on Japan - Taxes on Alcoholic Beverages II to conclude that both types of shochu were like vodka.

(c) Korean Soju is Treated as Shochu in Japan

1.109. As mentioned above, Korean soju is exported in large quantities to Japan, where it is treated for all purposes as being the same product as shochu. Diluted soju corresponds to Japanese shochu A, whereas distilled soju is the equivalent to Japanese shochu B.

1.110. The complainants note that in Japan - Taxes on Alcoholic Beverages II, the Japanese Government stated that:

1.111. The complainants further note that in response to these claims, the Panel "accepted the evidence submitted by Japan according to which a shochu-like product is produced in various countries outside Japan, including the Republic of Korea..."⁷⁸ In the US view, the similarities in the way Japanese shochu and Korean soju are advertised further confirm the "equivalence" of these products.

1.112. The complainants conclude that the "likeness" of soju and shochu is further confirmed by the results of the analytical tests conducted by the Scotch Whisky Research Institute.⁷⁹

iv) Imported Vodka is Taxed "in Excess of" Soju

1.113. The complainants argue that the prohibition of discriminatory taxes in Article III:2, first sentence, is not conditional on a trade effects test nor is it qualified by a de minimis standard⁸⁰. The complainants refer to the Appellate Body in Japan -Taxes on Alcoholic Beverages II, which stated that "even the smallest amount of 'excess' is too much"⁸¹.

1.114. The Table below is presented by the complainants purportedly to summarise the differences in taxation between vodka and soju. It purportedly indicates that both the Liquor Tax and the Education Tax are applied to vodka at a much higher rate than to diluted soju and distilled soju. In all, the combined tax rate applied on vodka is 1.9 times higher than the combined rate on distilled soju and 2.7 times higher than the combined tax rate on diluted soju.

1.115. The complainants conclude that it is indisputable that the taxes applied to imported vodka pursuant to both the Liquor Tax Law and the Education Tax Law are "in excess of" those applied to soju.

(B) GATT Article III:2, Second Sentence

i) General

1.116. The complainants note that GATT Article III:2, second sentence, reads as follows:

1.117. The complainants further note that GATT Article III:1 provides in relevant part that:

1.118. The complainants further note that the Interpretative Note to Article III:2 states that:

1.119. According to the complainants, in Japan - Taxes on Alcoholic Beverages II,⁸² the Appellate Body confirmed that in order to determine whether an internal tax measure is inconsistent with Article III:2, second sentence it is necessary to address the following three issues:

1.120. The European Communities in particular note that, in addition, it must be determined whether the measures at issue are "internal taxes". As already discussed above in connection with the application of Article III:2, first sentence, both the Liquor Tax and the Education Tax are internal taxes within the meaning of Article III:2, rather than import charges within the purview of GATT Articles II and VIII. That conclusion, in the complainants' view, is equally valid for the purposes of applying Article III:2, second sentence.

ii) Soju and all other Distilled Spirits and Liqueurs are Competitive and Substitutable Products

1.121. According to the complainants, in Japan - Taxes on Alcoholic Beverages II, the Appellate Body stated that a determination whether two products are "competitive or substitutable" must be made on a case-by-case basis and in light of "all the relevant facts in that case".⁸³

1.122. The complainants further argue that in the same report, the Appellate Body found that in deciding whether two products are directly competitive or substitutable, it may be appropriate to look not only at such matters as physical characteristics, end uses and customs classification but also "at competition in the relevant markets".⁸⁴ In doing so, it is appropriate, according to the Appellate Body, to examine the "elasticity of substitution".⁸⁵

1.123. The complainants argue that it is important to note that Article III:2, second sentence is concerned not only with differences in taxation between products which are actually competitive on a given relevant market but also with differences in taxation between products which are potentially competitive. Indeed, according to the complainants, whereas consumer tastes and habits may differ from one market to another, tax measures should not be used to "freeze" consumers' preference for a domestic product. For that reason, the complainants argue, evidence that two products are not competing actually in a market at a given point in time is not a defense if the absence of actual competition is due, at least in part, to the tax measures in dispute.⁸⁶

To continue with Soju and all other Distilled Spirits Have the Same Physical Characteristics

⁷⁰ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., p.20.

⁷¹ Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., p. 21.

⁷² Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., pp 19-20; See also Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., p.21

⁷³ See Panel report on Japan - Taxes on Alcoholic Beverages II, supra., para 6.21. See also the Panel Report on Japan - Taxes on Alcoholic Beverages I, supra, para 5.5, referring to the Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, supra, para 5.11, where the Panel found that some of the imported and domestic products, albeit not identical, were like products since they served substantially the same uses.

⁷⁴ Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., para 5.9.

⁷⁵ See EC Annex 8

⁷⁶ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para 6.22

⁷⁷ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para 4.178.

⁷⁸ Ibid., para 6.35.

⁷⁹ See EC Annex 8.

⁸⁰ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., p. 23.

⁸¹ Ibid.

⁸² Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., p. 24; See also Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., pp. 24-25.

⁸³ Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., p. 25

⁸⁴ Ibid.

⁸⁵ Ibid.

⁸⁶ Panel Report on Japan - Taxes on Alcoholic Beverages II, supra., para 6.28. See also Appellate Body Report on Canada - Certain Measures Concerning Periodicals, supra., p.28.