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World Trade
Organization

WT/DS87/R
WT/DS110/R

15 June 1999
(99-2313)
Original: English

Chile – Taxes On Alcoholic Beverages

Report of the Panel


The report of the Panel on Chile – Taxes on Alcoholic Beverages is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 15 June 1999 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.

Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal. Information on the current status of the Panel Report is available from the WTO Secretariat.

Table of Contents

I. Procedural Background
II. Factual Aspects

A. Measures in Issue
1. Transitional System
2. New Chilean System
B. Products in Issue
1. Pisco
2. The Other Spirits in Issue
C. History of taxation of alcoholic beverages in Chile
III. Claims of the Parties
IV. Arguments of the Parties
A. Overview
1. GATT Article III:2, second sentence
2. Transitional System
3. New Chilean System
B. "directly competitive or substitutable"
1. Overview
2. General Consideration
3. Potential Competition
4. Relevant Factors and Their Evidentiary Weight
a. Relevant Factors
b. Evidentiary Weight
i. Physical Characteristics
ii. End-uses
iii. Tariff Classification
iv. Market Place
5. Product Categories
6. Arguments on Each Factor
a. Physical Characteristics
b. End-uses
i. Drinking styles
ii. Drinking occasion
iii. Drinking place
iv. Consumer profile
v. Advertising
c. Tariff Classification
d. Channels of Distribution
e. Price Differentials
f. Cross-Price Elasticity
i. Market developments
ii. The 1998 Search Marketing Survey
iii. The 1995 Gemines Study
iv. The 1996 Gemines Study
v. The Adimark Survey
vi. Position of Domestic Industry and the Government of Chile

C. "not similarly taxed"

1. Overview
2. EC Main Argument
a. Transitional System
b. New Chilean System
3. Chile - "Objective Criteria" Argument
4. Reach of Japan/Korea – Taxes on Alcoholic Beverages cases
5. "Direct Proportionality" Argument
D. "so as to afford protection to domestic production"
1. Overview
2. Transitional System
3. New Chilean System
a. Magnitude of Tax Differentials
b. Legislative Objective
c. Percentage of Less Taxed Products in Domestic Products
d. Percentage of More Taxed Products in Imported Products
e. Position of Domestic Industry toward New Chilean System
f. Low Import Duty on Alcoholic Beverages

V. Third-Party Arguments

A. Canada
1. Introduction
2. Legal Arguments
a. "directly competitive or substitutable"
b. "not similarly taxed"
c. "so as to afford protection"
B. Mexico
1. Introduction
2. Legal Arguments
a. "directly competitive or substitutable"
i. Physical Characteristics
ii. End-uses
iii. Tariff Classification
iv. Recognition of Government of Chile
b. "not similarly taxed"
c. "so as to afford protection"
C. Peru
D. United States
1. Introduction
2. Legal Arguments
a. General
b. Old Chilean System: Background
c. Transitional System
d. New Chilean System
VI. Interim Review
VII. Findings
A. Claims of The Parties
B. Interpretation of Article III:2
C. "directly competitive or substitutable"
1. General
2. Evidentiary matters
a. Potential competition
b. Product categories
3. Product comparisons
a. General
b. End-uses
c. Physical characteristics
d. Channels of distribution and points of sale
e. Prices
4. Conclusions with respect to "directly competitive or substitutable"
D. "not similarly taxed"
1. General
2. Transitional System
3. New Chilean System
E. "so as to afford protection to domestic production"
1. General
2. Transitional System
3. New Chilean System
a. Arguments
b. Discussion
VIII. Conclusions

 


    I. Procedural Background

  1. This proceeding has been initiated by a complaining party, the European Communities.
  2. On 4 June 1997, the European Communities requested consultations with Chile under Article XXII:1 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994") and Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") with regard to the Special Sales Tax on Spirits of Chile (WT/DS87/1). Chile agreed to the request. Peru, the United States, and Mexico requested, in communications dated 19 June 1997 (WT/DS87/2), 23 June 1997 (WT/DS87/3) and 20 June 1997 (WT/DS87/4) respectively, to be joined in those consultations, pursuant to Article 4.11 of the DSU. Consultations between the European Communities and Chile were held on 3 July 1997, in which Peru, the United States and Mexico participated, but the parties were unable to settle the dispute.
  3. On 3 October 1997, the European Communities requested the establishment of a panel pursuant to Article 6 of the DSU (WT/DS87/5).
  4. In its panel request, the European Communities claims that:
  5. Chile, by according a preferential tax treatment, through the Special Sales Tax on Spirits, to pisco vis-à-vis certain alcoholic beverages falling within HS heading 2208, has acted inconsistently with Article III:2 of GATT 1994, therefore nullifying or impairing the benefits accruing to the European Communities under GATT 1994.

  6. The Dispute Settlement Body (DSB) agreed to this request for a panel at its meeting of 18 November 1997, establishing a panel pursuant to Article 6 of the DSU with standard terms of reference.
  7. Canada, Mexico, Peru and the United States reserved their rights to participate in the Panel proceedings as third-parties.
  8. On 15 December 1997, the European Communities further requested consultations with Chile under Article XXII:1 of GATT 1994 and Article 4 of the DSU with regard to the Additional Tax on Alcoholic Beverages ("Impuesto Adicional a las Behidas Alcoholicas"), as modified by Law No. 19,534 (WT/DS110/1). The United States and Mexico requested, in communications dated 23 December 1997 (WT/DS110/2) and 27 December 1997 (WT/DS110/3) respectively, to be joined in those consultations, pursuant to Article 4.11 of the DSU. Also, on 16 December 1997, the United States requested consultations with Chile under Article XXII of GATT 1994 and Article 4 of the DSU (WT/DS109/1). Peru and Mexico requested, in communications dated 17 December 1997 (WT/DS109/2) and 27 January 1998 (WT/DS109/3) respectively, to be joined in those consultations, pursuant to Article 4.11 of the DSU. Joint consultations between the European Communities and the United States, the requesting parties, and Chile, were held on 28 January 1998, in which Peru and Mexico participated, but the parties were unable to settle the dispute.
  9. On 9 March 1998, the European Communities requested the establishment of a panel pursuant to Article 6 of the DSU (WT/DS110/4).
  10. In its panel request, the European Communities claims that:
  11. Like the measures which are subject of the Panel established on 18 November 1997, the modifications introduced by Law No. 19.534, including those to be applied on a transitional basis until 1 December 2000, are inconsistent with Chile's obligations under the GATT. In particular, the modifications introduced by Law No. 19.534 impose a lower tax rate on domestic pisco than on certain other like distilled spirits and liqueurs imported from the European Communities, thus infringing GATT Article III:2, first sentence. Those modifications also impose a lower tax rate on domestic pisco than on certain other directly competitive or substitutable distilled spirits and liqueurs imported from the European Communities so as to afford protection to Chile's domestic production, thereby violating GATT Article III:2, second sentence.

  12. The DSB agreed to this request for a panel at its meeting of 25 March 1998, establishing a panel pursuant to Article 6 of the DSU with standard terms of reference. At this meeting, the DSB further agreed, pursuant to Article 9 of DSU, that the Panel established at the DSB meeting of 18 November 1997, should also examine the complaint of the European Communities in WT/DS110/4.
  13. The Panel has the following standard terms of reference:
  14. To examine, in the light of the relevant provisions of the covered agreements cited by the European Communities in documents WT/DS87/5 and WT/DS110/4, the matter referred to the DSB by the European Communities in those documents and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.

  15. Canada, Mexico, Peru and the United States reserved their rights to participate in the Panel proceedings as third-parties.
  16. On 10 and 11 June 1998, the European Communities and Chile, respectively, requested the Director-General, pursuant to Article 8.7 of the DSU, to determine the composition of the Panel. On 1 July 1998, the Chairman of the DSB informed the parties that the Director-General composed the Panel as follows:
  17. Chairman: Mr. Wilhelm Meier
    Members: Mr. Mohan Kumar
    Professor Colin McCarthy

  18. The Panel had substantive meetings with the parties on 6 and 7 October 1998, and on 11 November 1998.
  19. II. Factual Aspects

    A. Measures in Issue

    1. Transitional System

  20. The measure at issue is the so-called "Additional Tax on Alcoholic Beverages" ("Impuesto Adicional a las bebidas Alcohólicas", hereafter "ILA"), contained in Law No. 19,534.1
  21. The ILA is an excise tax levied on the sale and importation of alcoholic beverages. It is payable by the seller or, in the case of imports, by the importer. The ILA takes the form of an ad valorem tax. The tax basis is the same as for the assessment of the Value Added Tax.
  22. Law No. 19,534 was signed by the President of the Republic of Chile on 13 November 1997, and promulgated on 18 November 1997, and entered into force as of 1 December 1997, replacing Decree-Law 825/1974, which provided a tax system until 30 November 1997 (hereafter, the "Old Chilean System"). Law No. 19,534 provides a new tax system which will become applicable as of 1 December 2000, and a transitional system which is applicable until 1 December 2000 (hereafter, the "Transitional System").
  23. The Old Chilean System distinguished three types of distilled spirits ("pisco", "whisky" and "other spirits", a residual category comprising all distilled spirits other than pisco and whisky) and applied to each of them a different ad valorem tax rate. 2 The Transitional System also applies different rates of taxes depending on whether the product is considered "pisco", "whisky" or "other spirits," until 1 December 2000. Nevertheless, as a transitional measure, it provides for a progressive reduction of the rate on whisky in accordance with the schedule shown in Table 1 below, while applies the same rate to pisco as the Old Chilean System until the new tax system takes effect on 1 December 2000. 3 4
  24. Table 1

    Applicable tax rates from 1 December 1997 to 1 December 2000

     

    Whisky

    Pisco

    Other Spirits

    Until 30.11.1997*

    70 %

    25 %

    30 %

    From 1.12.1997

    65 %

    25 %

    30 %

    From 1.12.1998

    59 %

    25 %

    30 %

    From 1.12.1999/Until 1.12.2000

    53 %

    25 %

    30 %

    *Old Chilean System

    2. New Chilean System

  25. The new tax system introduced by Law 19,534 (hereafter referred to as the "New Chilean System") abolishes the distinction between pisco, whisky and "other spirits". Instead, all distilled spirits are taxed according to a scale based on their degree of alcohol content. 5
  26. Law 19,534 provides that, as shown in Table 2 below, all spirits with an alcohol content of 35° or less are taxed at the rate of 27 %. From that base, the rate escalates in increments of 4 percentage points per additional degree of alcohol, peaking at a rate of 47 % for all spirits bottled over 39° .
  27. Table 2 6

    Tax rates applicable from 1 December 2000

    Alcohol content

    Tax rate ad valorem

    Less or equal to 35°

    27 %

    Less or equal to 36°

    31 %

    Less or equal to 37°

    35 %

    Less or equal to 38°

    39 %

    Less or equal to 39°

    43 %

    Over 39°

    47 %

To continue with Products in Issue


1 Law No. 19,534 of 13 November 1997, amending Article 42 of Decree Law 825/74 (hereafter, "Law 19,534/97") (EC Exhibit 3). The European Communities claims that the measure in issue is contained in Decree-Law No. 825, of 27 December 1974, on the Tax on Sales and Services (hereafter, "Decree-Law 825/74" (EC Exhibit 4), amended by Law No. 19,534. The text of this Decree-Law was replaced by Decree-Law No. 1606, of 30 November 1976 ("hereafter", Decree-Law 1606/76) (EC Exhibit 6). In contrast, Chile claims that Law No. 19,534 constitutes an entirely new law, repealing and replacing Decree-Law 825/74. The Panel considers that there is no substantive difference between the two positions.

2 Article 42 of Decree 825/74, as lastly amended by Article 4.III of Law No. 18,413, of 8 May 1985 (hereafter, "Law 18,143/85") (EC Exhibit 11).

3 Transitional Article of Law 19,534/97 (EC Exhibit 3).

4 EC First Submission, Table 4.

5 Single Article of Law 19,534/97 (EC Exhibit 3).

6 EC First Submission, Table 5.