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Chile � Taxes On Alcoholic Beverages

Report of the Panel

(Continued)


    (v) The Adimark Survey

  1. The European Communities notes that the same press reports referred to another survey commissioned by APICH (the "Adimark survey") in order to assess the reactions of the different socio-demographic segments of the Chilean population to the proposed tax changes. The survey concluded, inter alia, that young consumers, in particular, considered that the reduction in the tax applied to whisky would provide a "good alternative to replace pisco".144
  2. According to the European Communities, the Adimark survey is a qualitative study based on the opinions expressed by consumers within four "focus groups", composed of 6 to 8 people (all males) each. The study covers two socio-economic segments: ABC1 (which is believed to correspond to the middle-high to high income segments) and C2 (which would correspond to the middle-middle income segment); and two group ages: from 19 to 24 years and from 25 to 36 years.
  3. The European Communities explains that although the use of "focus groups" is a usual research method for marketing purposes, its results are less reliable than those obtained through quantitative research methods (such as those used in the 1997 and 1998 Search Marketing studies submitted by the European Communities). Nonetheless, the findings of the Adimark study provide further confirmation that whisky and pisco are directly competitive and substitutable in the Chilean market.
  4. The European Communities states that according to the Adimark study, a decrease in the price of whisky would provoke the following reactions in the ABC1 segment145:
    1. "a strong incidence in the frequency of whisky consumption (it would be purchased more often)";
    2. "a feeling of displacement of pisco mainly (as opposed to other beverages)"; and
    3. "a tendency to substitute [whisky] for the consumption of pisco (including for consumption in 'carretes' by the young population)".

  5. According to the European Communities, in the case of segment C2, reactions are more nuanced, but nevertheless strongly supportive of a finding of direct competition. 146 On the one hand, the consumers in this segment express the view that, if the price of whisky decreased, they would increase their consumption of whisky at the expense of pisco. On the other hand, they anticipate that in the longer term they would progressively revert to pisco. However, the main reason given for that prediction is that pisco is a "traditional" drink with a strong Chilean identity, whereas whisky is a "foreign" spirit. Thus, the apparent resistance of consumers in this segment to a permanent change is motivated by their subjective perceptions about the identity of the products, rather than by the existence of objective differences between them. Those subjective perceptions are likely to change as the consumption of whisky becomes more frequent and whisky looses its "foreign" label in this segment (a process which, according to the study, would have already been completed in the higher income ABC1 segment, where consumers have been exposed to foreign spirits longer and are less "nationalistic" in their choices).
  6. Chile argues that in regard with the Adimark survey, it is worth mentioning that it is a qualitative study, based on 4 "focus group" of 6 - 8 people each. Therefore the total sample is just about 30 people, which does not constitute, under any consideration, a sample that allows for drawing valid conclusions about market behaviour. This type of study, being a research method employed for marketing purposes, conveys only preliminary results on the issue investigated. In terms of the quality of the information provided, they are less reliable than normal and well conducted quantitative market research analysis.
  7. Chile goes on to state that as it has shown, the illogical quantitative results of the Search Marketing study render it useless as an evidence before this Panel; a fortiori, the Adimark survey has even less usefulness as evidence.
  8. Chile further argues that if, in spite of the above, the Panel would still consider the Adimark survey as evidence, the conclusions drawn from it validate Chile's position, that is, that pisco and whisky are competitive only to a very limited extend, based on the following:
    1. According to the survey pisco and whisky are both consumed by the ABC1 segment, but in different occasions: Pisco when hanging out with friends and whisky in important social events (e.g., wedding parties, official receptions at the European embassies, and the like).
    2. The survey shows that young people belonging to the ABC1 segment will change from pisco to whisky only in case the price of whisky is reduced substantially, as to reach the price of pisco, which seems extremely unlikely to occur, even if taxes are not levied at all.
    3. The survey shows those in segment C2 (the most important segment in terms of consumption and certainly poorer than ABC1) would not substitute whisky for pisco due to considerations concerning the national attribute of pisco.
    4. According to the survey, the only substitution that has been proved is that between whisky and high alcohol content pisco (which is taxed identically with whisky).

    (vi) Position of Domestic Industry and the Government of Chile

  9. The European Communities also argues that the producers of pisco have recognised openly that pisco and other spirits are directly competitive and substitutable products. As mentioned above, in July 1996 APICH gave broad publicity to the findings of the 1996 Gemines study, which concluded that lowering the tax on whisky to 50 % would result in a 17 % drop in the sales of pisco. According to the same reports, Mr. Peñafiel (the general manager of Capel, speaking as the representative of APICH) recalled on that occasion that:
  10. ... at the beginning of the 80s the tax difference between pisco and whisky was 5 % and pisco producers were almost chased out of the market. Nowadays, this is a latent risk. The situation may have changed a lot, but whisky is a pole of attraction for an important segment of the population. 147

  11. The European Communities further points out that equally open as to the existence of a competitive relationship between whisky and pisco was Mr. Elorza, general manager of Control, who reportedly stated that:
  12. Any change in the taxes may strongly affect us. Pisco is an agricultural product and for that reason the law is protectionist. In contrast, whisky is an industrial product. 148

  13. The European Communities concludes that beyond these statements by two of the industry's top managers, it is evident that the concern shown by the pisco producers throughout the amendment process of the ILA would have been totally unwarranted, had that industry not been convinced that pisco and the other spirits are directly competitive and substitutable products.
  14. The European Communities alleges that in particular, the pisco industry's request that the tax rate be increased by 6 percentage points per degree of alcohol instead of by 5 percentage points (as provided for in the 1995 Proposal) evidences that its main concern was to limit the reduction of the taxes on whisky, rather than the increase of the taxes on high strength pisco. That concern would have been irrational unless the pisco industry had recognised the existence of direct competition between pisco and whisky.
  15. The European Communities also claims that likewise, the strong resistance of the pisco industry to the further reduction of the tax rate on whisky to 40-45 % (instead of 50 %, as provided for in the 1995 Proposal) that was envisaged by the Government in July 1996 would have been senseless if whisky and pisco were not directly competitive products, the more so since that reduction would have benefited not only whisky but also pisco reservado and gran pisco.
  16. The European Communities further asserts that similarly, the pisco industry's insistence on a long transitional period not just for phasing in the increase of the taxes on pisco but also the reduction of the taxes on whisky would be difficult to understand unless it was based on the assumption that those two spirits are directly competitive and substitutable.
  17. The European Communities goes on to state that the pisco industry was not alone in considering that pisco and other spirits were directly competitive and substitutable. During the debate of the 1997 Proposal by the Chamber of Deputies, the existence of direct competition between pisco and whisky was assumed without discussion by all the speakers, including those who championed the cause of the pisco industry. Indeed, the representatives of the zona pisquera tended to emphasise that relationship in order to demonstrate the extent of the "sacrifice" consented by the pisco industry and, therefore, the need for public financial support to that industry.
  18. The European Communities further alleges that the open recognition by the Chilean Government, as well as by many legislators, that the tax system in force until November 1997 needed to be amended because it was "discriminatory" against whisky and favoured the pisco producers necessarily presupposes the admission that pisco and other spirits are directly competitive and substitutable.
  19. The European Communities notes a recent factual development of some importance for this dispute. According to press reports149, Chile's anti-trust watchdog just authorised the merger of Control or Capel, the two largest producers of pisco, with a combined market share of 99 %. The main reason invoked by Chile's anti-trust authorities for clearing the merger was that the new company will be subject to competition from other "substitutable" liquors, including imported distilled spirits. According to the same press reports, another consideration taken into account was that the new company would be better positioned "to face external competition".
  20. C. "not similarly taxed"

    1. Overview

  21. The European Communities argues that under the Transitional System pisco and other "directly competitive or substitutable" distilled spirits are "not similarly taxed," and under the New Chilean System, the majority of pisco and the other distilled spirits are "not similarly taxed". In both cases, the tax differentials are well above de minimis.
  22. The European Communities also claims that while the two panel reports on Japan � Taxes on Alcoholic Beverages I and II stand for the proposition that the application of specific taxes in direct proportion to the alcohol contained in each type of distilled spirits does not constitute "dissimilar" taxation of the spirits, this reasoning does not apply to the New Chilean System.
  23. In rebuttal, Chile states that in the New Chilean System, all spirits, regardless of type and regardless of whether imported or domestic, are taxed according to the identical objective criteria of alcohol content and value, two objective criteria that have been widely accepted as taxation basis. According to Chile, objective criteria can result in taxation that, by some alternative measures, is not identical; for example, a specific tax system results in a higher tax on low priced goods, measured in ad valorem terms as well as distorting price relationships. However, in the view of Chile, GATT Article III does not prohibit a tax or regulation simply because, as a result of the application of objective criteria, some or even many imported products are by some measures treated worse than some or many like or competing domestic products. This position is supported by past panel reports and the Appellate Body in Japan - Taxes on Alcoholic Beverages II.
  24. 2. EC Main Argument

  25. The European Communities states that, as confirmed by the Appellate Body in Japan � Taxes on Alcoholic Beverages II, two competitive or substitutable products must be considered as not being "similarly taxed" whenever the difference in taxation between them is more than de minimis. 150 According to the same report, whether any particular tax differential is or not de minimis must be determined on a case-by-case basis. 151
  26. (a) Transitional System

  27. The European Communities points out that as shown in Table 1 above, the rate on whisky will be higher than the rate on pisco throughout the duration of the transitional period. Moreover, despite the progressive reduction of the rate on whisky, the tax differential will remain very large. As from 1 December 1999, when the tax differential will reach its lowest level, the rate on whisky (53 %) will still be more than twice the rate on pisco (25 %). A tax differential of such magnitude is more than de minimis.
  28. The European Communities also notes that as shown in the same table, pisco will also be taxed at a lower rate than the category of "other spirits" during the transitional period. The European Communities argued that although the tax differential is smaller than the differential between pisco and whisky, it is still large enough to be capable of affecting the competitive relationship between the products concerned, as attested by the findings of the 1998 SM survey discussed above.
  29. (b) New Chilean System

  30. The European Communities claims that the Appellate Body considered a similar situation in Canada - Periodicals. One of the measures in dispute in that case was an internal excise tax applied by Canada to "split-run" periodicals (both imported and domestic), which was not imposed on "non-split-run" periodicals (whether imported or domestic). Canada claimed that there was no violation of Article III:2 because imported periodicals "as a class" were not taxed in excess of domestic products "as a class". The Appellate Body rejected this argument. According to the Appellate Body, although all "split-run" periodicals were equally taxed irrespective of their origin, the fact that imported "split-run" periodicals were not similarly taxed to domestic "non-split run" periodicals was sufficient to establish that there was "dissimilar taxation" for the purposes of Article III:2, second sentence:
  31. Following the reasoning of the Appellate Body in Japan � Taxes on Alcoholic Beverages, dissimilar taxation of even some imported products as compared to directly competitive or substitutable products is inconsistent with the provisions of the second sentence of Article III:2. 152

  32. The European Communities further explains that in reaching that conclusion, the Appellate Body invoked the well-known principle established by the Panel Report on United States � Section 337 of the Tariff Act of 1930, according to which:
  33. ... the "no less favourable treatment" requirement of Article III:4 has to be understood as applicable to each individual case of imported products ... 153

  34. The European Communities then states that as evidenced by Table 3 above, under the New Chilean System the majority of pisco will continue to be taxed at a lower rate than the main types of imported spirits. Whereas pisco tradicional and pisco especial (which together account for 90 % of the sales of pisco) will be taxed at 27 %, whisky, vodka, rum, gin and tequila will be taxed at 47 % and brandy at a rate ranging from 39 % to 47 %. Those tax differentials are well above the de minimis threshold.
  35. In the view of the European Communities, the fact that under the New Chilean System some pisco is taxed at the same rate as the main types of imported spirits does not mean that pisco and those spirits are "similarly taxed" for the purposes of the second sentence of Article III:2. The imported spirits in question do not compete with pisco reservado or gran pisco only. They are "directly competitive or substitutable" with all types of pisco and, therefore, should be taxed "similarly" to all pisco.
  36. The European Communities also argues that the two panel reports on Japan � Taxes on Alcoholic Beverages I and II 154 suggest that the application of specific taxes on alcoholic beverages according to alcohol content does not constitute "dissimilar taxation" for the purposes of Article III:2, provided that the tax rate per degree of alcohol is the same, irrespective of the beverage in which the alcohol is contained. The underlying rationale is that those taxes are not so much taxes on the alcoholic beverages themselves as taxes on their principal common ingredient: the alcohol content.
  37. The European Communities refers to the Panel Report on Japan � Taxes on Alcoholic Beverages I, which stated that:
  38. [The] unqualified wording [of Article III:2, first sentence] does not necessarily mean that there could never be circumstances in which different tax treatment of "like products" was compatible with the General Agreement. The panel noted, for instance, that GATT Article III:2, a) [sic] permitted the non-discriminatory taxation "of an article from which the imported product has been manufactured or produced in whole or in part" and that such a non-discriminatory alcohol tax on like alcoholic beverages with different alcohol contents could result in differential tax rates on like products. 155

  39. The European Communities then claims that the present dispute, however, is concerned with a totally different system of taxation. To begin with, the ILA is an ad valorem tax and not a specific tax. Furthermore, although the applicable rates vary according to alcohol content, the ILA is assessed on the value of the beverage, which is not directly related to the value of the alcohol content. For those reasons, unlike the specific taxes considered by the two panel reports on Japan � Taxes on Alcoholic Beverages I and II, the ILA cannot be characterised as a tax on the alcohol content.

To continue with Chile - "Objective Criteria" Argument


144 Ibid.

145 Adimark study, submitted by Chile, p. 18. See also pp. 20-21.

146 Ibid., pp. 18 and 21-23.

147 El Diario, 2 July 1996, (EC Exhibit 30). The European Communities adds that the successive increases of the tax rate on whisky from 30 % to 70 % between 1983 and 1985 were prompted by complaints of the pisco industry against growing imports of whisky.

148 Qué Pasa, 2 March 1996 (EC Exhibit 26).

149 EC Exhibit 65.

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

151 Ibid.

152 Appellate Body Report on Canada - Periodicals, supra., p.29.

153 Panel Report on United States � Section 337 of the Tariff Act of 1930 (hereafter "United States - Section 337"), BISD 36S/345, para. 5.14.

154 The European Communities notes that the taxes applied by Japan in that case were expressed in terms of a certain amount of Yen per litre of beverage. That amount varied according to (but not proportionally) to the alcohol content.

155 Panel Report on Japan - Taxes on Alcoholic Beverages I, supra., para. 5.9 d).