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Chile � Taxes On Alcoholic Beverages

Report of the Panel

(Continued)


    (e) Position of Domestic Industry toward New Chilean System

  1. The European Communities claims that the terms of Law 19,354 were negotiated and agreed formally by the Government with the pisco industry and are largely responsive to the interests and demands of that industry. As discussed below, those demands were by no means circumscribed to the level of the taxes applied to pisco.
  2. Chile replies that the European Communities devotes many pages to an entirely irrelevant description of past taxation of alcoholic beverages in Chile and an even longer and also irrelevant purported "drafting history of Law 19,534," in which the European Communities claims to know the Chilean legislative process and even motivations of elected officials and industry groups. The "drafting history" is particularly curious, in that the European Communities apparently intended to try to establish protectionist motivations, but even the selective and partial record to which the European Communities refers includes ample demonstration that the motivation of many legislators was to remove discrimination and protectionism in the old system that the European Communities had previously attacked.
  3. In the view of Chile, in any event, the previous tax system of Chile and the motivations of Chilean legislators and industries are not at issue in this dispute, nor are they relevant to the interpretation of Article III:2.
  4. The European Communities alleges that Law 19,534 was adopted in an attempt to address longstanding complaints from the European Communities and other WTO members to the effect that the ILA was contrary to GATT Article III:2. The European Communities had requested formal consultations with Chile under GATT Article XXIII with respect to the ILA already in 1989. 265 Following the conclusion of the Uruguay Round, the European Communities renewed its requests to Chile to bring the ILA in conformity with its GATT obligations. The EC complaints were expressly mentioned in the message of the President of the Republic attached to the first of the Executive's proposals for amending the ILA 266 and were extensively discussed during the subsequent debate by the Chilean Congress.
  5. In the view of the European Communities, at first, the pisco industry and the representatives of the zona pisquera in Congress were opposed to any modification of the ILA. Eventually, however, even the pisco industry accepted that an amendment of the ILA was inevitable in order to avoid an outright condemnation of Chile in the WTO. The Foreign Relations Minister Mr Insulza summed up accurately the prevailing view in Chile when, following a meeting with representatives of the pisco industry, he declared that "consensus exists that the current legislation is discriminatory and a change must be made267". Similarly, during the debate by Congress of Law 19,534, many legislators (including the representatives of the zona pisquera) admitted openly that a reform of the ILA was necessary because the existing legislation was "discriminatory" and "favoured" the pisco industry. 268
  6. The European Communities then argues that although the pisco industry realised that it was no longer possible to maintain the formal discrimination between pisco and other spirits, it had no intention to renounce the protection which it had enjoyed for decades. Rather, according to the European Communities, the objective of the pisco industry was to perpetuate the tax differentials between pisco and other spirits in a less conspicuous manner. The European Communities argues that the process of amendment of the ILA was driven by the purpose to find a formula that, whilst being ostensibly less inconsistent with GATT Article III:2, allowed Chile to preserve to the largest extent possible the tax differentials between pisco and whisky.
  7. The European Communities goes on to claim that in the course of that process, the Chilean Executive submitted two formal proposals for amending the ILA. The first proposal was tabled as early as October 1995 269 (the "1995 Proposal"). That proposal was even more favourable to the interests of the pisco industry than the amendment eventually adopted in November 1997. As shown in Table 39, the 1995 proposal differed from Law 19,534 in three respects:
    1. the rate on spirits of 35° or less was 25 % instead of 27 %;
    2. from that base, the rate increased in increments of 5 percentage points per each additional degree of alcohol content instead of 4 percentage points per degree;
    3. the tax rate continued to increase until 42° instead of peaking at 39° .

    Table 39 270

    1995 Proposal for amending the ILA

    Alcohol strength

    Tax rate ad valorem

    Less or equal to 35°

    25 %

    Less or equal to 36°

    30 %

    Less or equal to 37°

    35 %

    Less or equal to 38°

    40 %

    Less or equal to 39°

    45 %

    Less or equal to 40°

    50 %

    Less or equal to 41°

    55 %

    Less or equal to 42°

    60 %

    Over 42°

    65 %

  8. According to the European Communities, in addition, the 1995 Proposal differed from Law 19,534 in that it did not envisage any transitional period. Instead, the new tax rates would have become applicable immediately after the entry into force of the amendment.
  9. The European Communities argues that the 1995 Proposal was strongly supported by the pisco industry. That support was expressed at the hearing of interested parties hold by the Committee on Foreign Relations of the Chamber of Deputies. On that occasion, the only request made by the pisco industry was that, between 35° and 42° , the tax rate should increase by 6 percentage points per each additional degree of alcohol instead of by 5 percentage points. 271 Had this demand been accepted, the applicable rate on pisco reservado would have been 55 % instead of 50 %, and the rate on gran pisco 73 % instead of 65 %. According to the European Communities, this request shows that Chile's pisco industry was more concerned by the reduction of the taxes applied to whisky than by the increase of the taxes on high strength pisco.
  10. The European Communities further argues that, significantly, the 1995 Proposal was vigorously opposed by all the other interested parties that expressed their opinion before the Foreign Relations Committee. The opponents to the bill included not only the importers of spirits (represented by the Asociación Nacional de Importadores) but also the Sociedad de Fomento Fabril (the "SFF", Chile's federation of industrialists) and the Asociación Gremial de Licoristas (a trade association of liquor producers), as well as Chile Vid (the association of producers of fine export wines) and the Asociación de Exportadores y Embotelladores de Vino (the association of exporters and bottlers of wine). 272
  11. The European Communities further claims that according to the SFF, the 1995 Proposal was still contrary to GATT Article III:2 because although it "eliminate[d] the explicit discrimination against whisky � it replace[d] it by disguised discrimination". 273 Furthermore, both the SFF and the Asociación Gremial de Licoristas noted that the 1995 Proposal would give pisco even a greater advantage with respect to other spirits. 274 Similar views were expressed by the producers and exporters of wine. 275
  12. According to the European Communities, the 1995 Proposal failed to attract sufficient support within the Foreign Relations Committee due to its perceived incompatibility with Chile's WTO obligations. According to the chairman of the Committee, Mr Renán Fuentealba, the 1995 Proposal:
  13. � does not resolve the problem for Great Britain nor the WTO. We are not giving a voluntary political signal of eliminating the [tax] discrimination and we are running the risk that they will take us to a panel and we will lose. 276

  14. The European Communities goes on to argue that, confronted with the opposition of the Foreign Relations Committee, the Government announced that it would present to Congress an amendment ("indicación") to the 1995 Proposal providing for a larger reduction of the tax differential between pisco and whisky. According to press reports, the Government was envisaging to set the tax rate on whisky of 40° in the range of 40 % to 45 %, instead of at 50 %, as provided by the 1995 Proposal. 277
  15. The European Communities further contends that the pisco industry and the representatives in Congress of the zona pisquera 278 staunchly resisted any such modification of the 1995 Proposal. In order to pre-empt the Government from presenting the announced amendment, the opposition parties forced a vote on the 1995 Proposal by the Foreign Relations Committee on 30 July 1996. This strategy failed because the members of the governmental coalition voted against the Government's own proposal. 279
  16. According to the European Communities, the support of the pisco industry to the 1995 Proposal was reiterated at a seminar of pisco producers organised by APICH (the national association of pisco producers) in La Serena in June 1996. Significantly, the seminar was entitled: "Pisco industry: challenges and threats". According to press reports, one of the main conclusions of that seminar was that :
  17. [T]he pisco producers � rejected any [modification by the Government] to its proposal to amend Article 42 of Decree Law No 825 now under the discussion, even if that proposal is not totally satisfactory for the industry, [since such a modification] could leave pisco in an even more disadvantageous position with respect to whisky. 280

    According to the same reports, the seminar was attended by Mr A. Gutiérrez Ortega, Under-Secretary of Agriculture.

  18. The European Communities emphasizes that the reduction of the tax on whisky to 40%-45 % envisaged by the Government would have benefited not only whisky, but also all other spirits over 39° , including pisco reservado and gran pisco. The European Communities claims that the opposition of the pisco industry to that reduction constitutes additional proof that its overriding concern was to preserve a large tax differential between whisky and a large majority of pisco, even if that required "sacrificing" high strength pisco.
  19. The European Communities also contends that, as soon as it became apparent that the 1995 Proposal would not be approved by Congress, the Government entered into negotiations with the pisco industry to try and agree on a new proposal that was (or, at least, appeared to be) less plainly inconsistent with Chile's obligations under the GATT. Those discussions led to the signature in September 1996 of a "protocol" by representatives of the Chilean Government and of the pisco industry. During the consultations with the European Communities, the Chilean Government described the contents of that protocol in the following terms:
  20. The so-called protocol contains the summing up of the consultations held with the private sector as normally done in matters of public interest. It contains three distinct parts: the first simply reflects the acquiescence of the private sector with the Government's proposal to send a bill to Congress with the tax scale and transition period that later became law. The second and third part refer to other unrelated matters such as the agreement to initiate efforts at promoting exports of pisco through the governmental agency Pro - Chile. 281

  21. The European Communities further argues that, despite its carefully chosen terms, this statement constitutes a recognition that the second proposal submitted by the Executive to Congress had been previously agreed with the pisco industry and, therefore, reflected the interests of that industry. According to the European Communities, the terms of that agreement were that in exchange for its acceptance of a marginal increase in the rate applied to pisco corriente and pisco especial and of a greater reduction of the tax rate on whisky than had originally been proposed (from 70 % to 47 %, instead of 50 %), the pisco industry would obtain financial "compensation" for the reduction of the level of protection.
  22. According to the European Communities, in addition, the pisco industry would benefit from a long transitional period to adapt itself to the new situation. At the insistence of the pisco industry, that transitional period would apply not only with respect to the increase of the taxes in pisco but also with respect to the decrease of the taxes on whisky. The European Communities argues that this demonstrates, once again, that it was the reduction of the taxes on whisky, and not the increase of the taxes on pisco, which worried most the pisco industry.
  23. The European Communities further claims that, following the signature of the protocol, the Chilean Government appears to have had second thoughts with respect to the WTO compatibility of the terms agreed with the pisco industry. Indeed, although the protocol was signed in September 1996, the Chilean Government failed to act upon it for nearly one year, which caused considerable alarm among the pisco producers. 282
  24. The European Communities argues that, following insistent calls by the pisco industry and the representatives of regions III and IV in Congress283, a new proposal embodying the terms of the protocol was eventually presented by the Government to Congress on 9 June 1997. This bill was approved by the Chamber of Deputies on 30 September 1997, and by the Senate (without debate) on 4 November 1997.
  25. According to the European Communities, the minutes of the Chamber of Deputies' debate on 17 July 1997 284 provide an extensive record of the objectives pursued by its proponents, among whom the representatives of regions III and IV figured very prominently. While declaring their support for the amendment, the representatives of those regions emphasised its negative impact for the pisco producers in their constituencies. The European Communities argues that, in doing so they were led to admit openly that pisco is directly competitive and substitutable with other distilled spirits (and in particular with whisky) and that the ILA had been effective in providing protection to the pisco industry.
  26. The European Communities claims that the positions taken by the pisco industry during the amendment process of the ILA show that its overriding concern was to preserve a large tax differential between low strength pisco and whisky, even at the expense of increasing the tax on high strength pisco. According to the European Communities, this concern would have been totally irrational unless maintaining a tax differential between low strength pisco and whisky served to afford protection to the pisco industry.
  27. The European Communities goes on to state that the pisco industry requested that the 1995 Proposal be amended so that, between 35° and 42° , the tax rate increased by 6 percentage points per each additional degree of alcohol instead of by 5 percentage points. This request would have increased the rate on pisco reservado from 50 % to 55 % and the rate on gran pisco from 65 % to 73 %. The European Communities claims that, for the pisco industry it would have been senseless to make such a demand unless it had been convinced that increasing the tax on whisky would afford additional protection to the pisco industry as a whole.
  28. The European Communities further states that later in the legislative process, the pisco industry opposed an amendment of the 1995 Proposal that would have lowered the tax rate on spirits above 39 ° to 40-45 % (instead of 50 %). This amendment would have benefited not only whisky and other imported spirits above 39° , but also pisco reservado and gran pisco. Again, according to the European Communities, the pisco industry's position would have been irrational unless it was premised on the conviction that, overall, a larger tax differential between low strength pisco and whisky would afford additional protection to pisco, despite the "sacrifice" of high strength pisco.
  29. The European Communities also claims that according to the official reports of the Foreign Relations Committee of Chile's Chamber of Deputies, Capel and Control submitted two requests to that Chamber in the course of the parliamentary debate of the New Chilean System. Specifically, the Committee's reports read in relevant part as follows:
  30. [Capel and Control] point out that in accordance with the wording of the draft, pisco is withdrawn as a taxed substance since the draft refers to spirits, in which category pisco is not included; the same holds for pisco which is excluded from the regulation as a specific concept.

    They propose that the rate should vary by 6 % for each degree in alcohol instead of the 5 % proposed by the single article of the draft. They also suggest editorial changes to avoid confusion arising from vagueness in concepts used. 285

  31. In the view of the European Communities, in any event, a document provided by Chile in response to questions deals exclusively with the first of the two requests above mentioned. The reasons which led the pisco industry to demand an increase of the taxes on high strength pisco (the second of the above mentioned requests) still await an explanation by Chile. According to the European Communities, the only rational explanation for such an unusual demand is that the pisco industry was seeking to increase the tax differential between whisky and low strength pisco, which accounts for the vast majority of pisco sales.
  32. In rebuttal, Chile argues that such points argued by the European Communities are simply an attempt to impugn the New Chilean System because, in Chile's democracy, a domestic industry seeks to have the tax or trade system be as favorable to it as possible, and the Chilean Government tried to obtain an understanding of a domestic industry that faced a wrenching change to the tax system that had been in effect for many years.
  33. In the view of Chile, in the same vein, the European Communities devotes many pages listing excerpts from Chile's legislative debate about the new taxation system. Some of these examples show that legislative representatives of the regions that produce pisco in Chile were seeking to minimize the adverse effects of a New Chilean System on pisco producers and, because adverse effects could not be avoided, also sought other government help for their constituents. At least in the case of the legislative history, the European Communities, while presenting a distorted picture, did note many remarks from legislators who announced that the new system was eliminating discrimination against foreign products. Chile submits that if such developments infringe Article III or are even evidence of such infringement, then all WTO Members are in deep peril, not least the European Communities.
  34. Chile contends that the Memo No. 5886 was prepared in connection with the first bill submitted to Congress in November 1995, for amending the tax system on alcoholic beverages. As the Panel and the European Communities are aware, this bill was eventually replaced by the Government and some time later an amendment bill was introduced which eventually became actual Law No. 19.534. The memo is therefore completely irrelevant to this case. In addition, this Memo was originally an internal document prepared by a lawyer of Cooperativa Control for his General Manager, whereby he gives certain explanations about the system apparently used in the bill before Congress for taxing different alcoholic beverages, according to the definitions of the same contained in several Chilean Regulations.
  35. Chile argues that it appears worth pointing out to the Panel, that any motivation the industry or other sectors in Chile may have had during the rather lengthy discussing process that eventually led to the inacting of Law 19,534, are at this stage completely irrelevant. It has already been ruled in GATT-WTO dispute settlement system, that panels should concentrate on the results and effects of the prevailing governmental measure or piece of legislation, and not on their possible aims. Such rulings are perfectly appropriate and understandable, even more in a Civil Law system, where the text of the law � particularly when it is crystal clear as in this case � will always prevail over any interpretation.
  36. Chile reiterates that the issue before this Panel is not the objectives of the Chilean pisco industry (or those of the Scotch Whisky Association). It is curious that the European Communities, which laboured so hard in Japan � Taxes on Alcoholic Beverages II to discredit the "aims and effects" test, now seems to want to revive the test for private industry. Chile has no doubt that private industry associations want to do well by their private members, and be seen to have been successful on behalf of their members.
  37. In the view of Chile, the issue is not the motive of the different private distillers of Chile or Scotland; both doubtless would like to make as much money as possible. That is not surprising, nor does it constitute a violation of the GATT. However, the issue before the Panel is whether the European Communities has demonstrated the three elements of a violation of Article III:2, second sentence.
  38. Chile indicates that the Appellate Body has already cautioned against this kind of subjective effort to discern motivation. In Japan - Taxes on Alcoholic Beverages II, the Appellate Body stated that the issue of "affording protection to domestic production" is an objective question of effect, not a subjective question of the intent of legislators. 286
  39. Chile further argues that the European Communities likewise has not demonstrated that the New Chilean System operates so as to afford protection to domestic production. It is true that the result of the application of Chile's uniform, objective system of taxation may be that the majority of domestic distilled spirits will be taxed at a relatively low tax rate and the majority of imports will be taxed at a relatively high tax rate (if foreign producers or importers choose not to adapt their products in the simple manner required to benefit from the lowest tax category). However, that result does not constitute a violation of Article III:2. As to the EC's claims that the New Chilean System is GATT � illegal as evidenced by political statements and the ultimate acceptance of the pisco industry of the need for this change in Chile's law, such "evidence" has about the same value as a claim that the European Communities must be violating its obligations because politicians claim to have done well by domestic farmers or because EC farmers cease demonstrating after the European Communities makes a change in farm policy. Finally, Chile has explained that there are multiple considerations behind the legislation, including significantly minimizing the regressive effects of a flat tax rate.
  40. Chile also claims that it, in an attempt to avoid a burdensome and costly dispute settlement procedure and to address EU complaints, did not wait for a panel to decide on whether or not it ought to modify its legislation regarding its tax regime for alcoholic beverages. Chile after much consideration adopted a new final regime that Chile believes both fully complies with the GATT 1994 rules and provides immediate commercial benefit to the European Communities.
  41. According to Chile, the Chilean legislature promulgated Law No. 19.534 on taxes on alcoholic beverages on 13 November 1997. This law provides a transitional period from 1997 to 2000 in order to permit a progressive and orderly change of the taxation regime applicable to alcoholic beverages in Chile. However, under the Old Chilean System whisky had been subject to a tax significantly higher than any other distilled spirit, which was the primary complaint of the European Union concerning the old law. To respond to those complaints, it was considered important to begin immediate phased reductions of the tax on whisky.
  42. Chile states that it is worth recalling that the European Communities originally challenged in the WTO the Old Chilean System, which imposed taxes according to type of distilled spirits, with pisco taxed at 25%, whisky at 70% and all other spirits at 30%. Chile believed � and still does believe � that the old Chilean law was defensible because pisco is not directly competitive or substitutable with other distilled spirits in the Chilean market.
  43. According to Chile, Chile amended its tax laws, in large part because of the complaints of the European Communities, especially in regard to whisky. In addition, the decision of the Appellate Body in the Japan � Taxes on Alcoholic Beverages II case suggested that, if the European Communities were able to show that pisco is directly competitive or substitutable with other distilled spirits, then a tax system that differentiated by type was likely to be found inconsistent with Article III:2.
  44. In the view of Chile, pisco has not been shown to be directly competitive or substitutable with other distilled spirits. Nevertheless Chile enacted fundamental changes in this law.
  45. Chile claims that in amending its laws, Chile had in mind several objectives, including:
    1. maintaining fiscal revenue;
    2. eliminating type distinctions such as those that had existed in Japan (which also would eliminate the alleged discrimination against whisky in the previous system);
    3. discouraging alcohol consumption; and
    4. minimizing the potential regressive aspects of reforming the tax system.

To continue with Low Import Duty on Alcoholic Beverages


265 Gatt doc. DS9/1.

266 Presidential Message No 78-332, 26 October 1995 (EC Exhibit 14).

267 La Tercera, 10 June 1997 (EC Exhibit 46).

268 See the Minutes of the debate by the Chamber of Deputies of 27 July 1997, EC Exhibit 16 and Las Ultimas Noticias, 7 November 1996, EC Exhibit 37, and El Diario, 13 February 1997 (EC Exhibit 41).

269 Presidential Message No. 78-332, 26 October 1995 (EC Exhibit 14).

270 EC First Submission, Table 8.

271 See the Report of the Committee on Foreign Relations, Inter Parliamentary Affairs and Latin American Integration, Bulletin No L732-05, dated 6 August 1996 (hereafter, "Report of the Committee on Foreign Relations"), p. 5. A translation into English is attached as EC Exhibit 17. See also Minutes, p. 16 (p. 2 of the English translation) (EC Exhibit 16).

272 Report of the Committee on Foreign Relations, pp. 5-7 (EC Exhibit 17).

273 SFF's submission to the Committee on Foreign Relations, p. 6 (EC Exhibit 18).

274 Ibid., p. 7. See also the Report of the Committee on Foreign Relations, p. 6 (EC Exhibit 17).

275 Ibid., pp. 6-7 (EC Exhibit 17).

276 El Diario, 4 June 1996 (EC Exhibit 27).

277 El Diario, 23 de Julio 1996 (EC Exhibit 32).

278 See, e.g., the statements made by Representative Encina to La Epoca, 12 June 1996 (EC Exhibit 28); by Representative Pizarro to El Diario, 23 July 1996 (EC Exhibit 32) and El Mercurio, 24 July 1996 (EC Exhibit 33); and by Representative Munizaga (of the opposition party Renovación Nacional) to Estrategia, 31 July 1996 (EC Exhibit (36).

279 See El Diario, 31 July 1996 (EC Exhibit 34); El Mercurio, 31 July 1996 (EC Exhibit 35); Estrategia, 31 July 1996 (EC Exhibit 36); and La Epoca, 31 July 1996 (EC Exhibit 37).

280 El Mercurio, 30 June 1996 (EC Exhibit 29).

281 The European Communities notes that to the best of the EC's knowledge, the Chilean Government did not sign similar "protocols" with any other interested party of the "private sector", such as the importers of whisky.

282 See El Mercurio, 10 April 1997 (EC Exhibit 45).

283 Ibid. See also Las Ultimas Noticias, 7 November 1996 (EC Exhibit 38); La Segunda, 12 February 1997 (EC Exhibit 41); and El Diario, 13 February 1997 (EC Exhibit 43).

284 Attached as EC Exhibit 16.

285 See EC Exhibit 17, p.5.

286 Appellate Body Report on Japan - Taxes on Alcoholic Beverages II, supra., pp. 27-28.