13 October 1987



Report of the Panel adopted on 10 November 1987
(L/6216 - 34S/83)

3.11 As regards the interpretation of Article III:1 and 2, Japan believed that, since there existed a substantial domestic production of products which were almost identical with the products of the EC and both imported and domestic products were subject to the same taxation, there was no discrimination in violation of GATT Article III: 1 and 2. Article III:2, first sentence, did not require a contracting party to apply the same internal tax rate to all like products, if imported and almost identical domestic products were equally taxed and there was substantial domestic production of these almost identical products. Nor did Article III:2, second sentence, prohibit any favourable taxation on any domestic product which might be directly competitive with or substitutable for an imported product, if equal taxation was actually assured between the imported product and the like domestic product which was domestically produced in substantial quantities. The question of likeness, direct competitiveness or substitutability of imported and domestic products did not have to be examined under this interpretation as long as the importing country's tax system did not discriminate between imported and domestically produced goods of the same tax category and as long as there was substantial domestic production in all the tax categories and, even if there was no substantial import of products in some tax categories, import of such products was neither prohibited not limited and production was possible in other countries.

In the view of Japan, this interpretation was supported by the drafting history of Article III:2. The reports of the 1948 Havana Conference relating to Article 18 (i.e. Article III of GATT) mentioned that

"The Sub-Committee was in agreement that under the provisions of Article 18 regulations and taxes would be permitted which, while perhaps having the effect of assisting the production of a particular domestic product (say, butter) are directed as much against the domestic production of another product (say, domestic oleomargarine) of which there was a substantial domestic production as they are against imports (say, imported oleomargarine)." (Reports of Committees and Principal Sub-Committees, UN Conference on Trade and Employment, 1948, P. 64; GATT Analytical Index, Article III at p. 17).

This interpretation had been confirmed by the Swedish delegation at the 9th session of the CONTRACTING PARTIES in 1954-55. The GATT Panel report on EEC -measures on animal feed proteins, in examining whether the EEC's quantitative restrictions afforded protection to domestic production in terms of Article III:1 and 5, had likewise "noted that, although globally about 15 per cent of the EEC apparent consumption of vegetable protein was supplied from domestic sources, not all the individual products subject to the EEC measures were produced domestically in substantial quantities" (BISD 25S/65). The EEC's assertion that GATT Article III:2 required a contracting party to apply the same tax-rate on all like products, did not seem appropriate and was contradicted also by the case-law of the EC Court of Justice relating to Article 95 of the EEC Treaty which had almost the same wording as Article III:2 of GATT. In the case of Hansen and Balle, for instance, the Court had held with respect to Article 95:

"At the present stage of its development and in the absence of any unification or harmonization of the relevant provisions, Community law does not prohibit Member States from granting tax advantages, in the form of exemption from or reduction of duties, to certain types of spirits or to certain classes of producers". (European Court Reports 1978, p. 1806).

Among the series of decisions given by the EC Court of Justice on distilled liquor taxes in 1980 in circumstances where distilled liquor taxes imposed by France, Italy and Denmark were lower on their domestic distilled liquor (brandy, grappa, aquavitte, respectively) and were higher on imported distilled liquor (whisky, rum, etc.), the following findings of the Court deserved attention in the view of Japan:

"the legitimacy of certain differentiations concerning the taxation of alcohol was only recognised for the purpose of enabling the maintenance of productions or enterprises which otherwise would no longer be profitable, owing to the increase of the cost of production; on the other hand, such tax exemption or tax reduction in favour of certain products are valid only if these measures do not hide a discrimination due to the origin of the products taxed or if they do not have a protective character... the Italian fiscal system is characterized by the fact that the most typical of the national products are in the most favoured fiscal category, while two sorts of products which are nearly entirely imported from other member states are more heavily taxed... This means that this practice in reality hides a discrimination against imported products." (Text quoted from the Japanese submission).

At the 1947 preparatory conference at Geneva, the following explanation had been given of the second sentence of GATT Article III:2:

"Let us suppose that some country in its negotiations has secured the binding of the duty on oranges. Country A gets a binding on the duty of oranges from Country B. Now, Country B after that can proceed to put on an internal duty of any height at all on oranges, seeing that it grows no oranges itself. But by putting on that very high duty on oranges, it protects the apples which it grows itself. The consequence is that the binding duty which Country A has secured from Country B on its oranges is made of no effect, because in fact the price of oranges is pushed up so high by this internal duty that no one can buy them. The consequence is that the object of this binding is defeated." (Document EPCT/A/PV.9, at p. 7).

The case envisaged here was one where there was no domestic production of like products (i.e. oranges). In the 1947 Geneva draft, the provision which corresponded to the current second sentence of GATT Article III:2 had been written in such a way as to have it applied when there was no substantial domestic production of like products:

"In cases in which there is no substantial domestic production of like product of national origin, no contracting parties shall apply new or increased taxes on the products of the territories of other contracting parties for the purpose of affording protection to the production of directly competitive or substitutable products which are not similarly taxed; and existing internal taxes of this kind shall be subject to negotiation for their reduction or elimination."

The Geneva draft had been revised at the Havana Conference the following year. Though the expression "In cases in which there is no substantial domestic production of like product of national origin" had been deleted in the process, the Havana Report said the following:

"The recommended text differs considerably in form from the Geneva text but has been changed substantially in only one respect. The second sentence of paragraph 1 of the Geneva draft provided that existing internal taxes which afford protection to directly competitive or substitutable products in cases in which there was no substantial domestic production of the like product could be maintained, subject to negotiation for their elimination or reduction in the manner provided for in Article 17. The Sub-Committee recommended their outright elimination"... (Reports of Committees and Principal Sub-Committees, UN Conference on Trade and Employment, 1948, p. 61).

When the aforementioned interpretation was applied to Japan's liquor tax system, there was no inconsistency with Article III: 2 second sentence as there was substantial domestic production of like products for all the EC products in question. In fact, 91 per cent of the whiskies consumed in Japan was domestically produced, and of the special grade whiskies, 83 per cent of that consumed in Japan was produced in Japan. Of the spirits which included vodka, gin, rum, etc. under the Japanese Liquor Tax Law, 94 per cent was produced in Japan (FY 1985).

3.12 Regarding Article III:1 and 2, Japan believed that it was not necessary to examine the question of likeness, competitiveness, and substitutability in this case. Only in case of a different interpretation of Article III:1 and 2 had the likeness, competitiveness or substitutability of the EC and Japanese alcoholic beverages to be examined. There was no precise definition of the term "like products" and the problems arising from the interpretation of this term should be examined on a case-by-case basis. In the view of Japan, the various elements to consider in judging whether likeness exists among certain products included their price, property, image, pattern of consumption and end-use. There existed no likeness, direct competitiveness or substitutability among the products complained of by the EEC. As was mentioned in 3.10(b) above, the differences in quality, product images and prices of the various grades of whisky/brandy led to distinctive user classes and consumption patterns, and the various grades were not "like" products. Also, as was explained in 3.1(e) above, "quality liqueurs" and "other liqueurs" were fundamentally different in terms of their use and their alcohol content, so that there was no competitiveness nor substitutability, let alone likeness, between these two types of liqueur. Concerning shochu and spirits such as vodka, the latter were generally strong distilled liquors with 40 to 50 per cent of alcohol content while the former normally sold was a liquor with 20 to 25 per cent of alcohol content which was extremely low as a distilled liquor. Shochu was largely consumed in the limited areas and drunk by being diluted with hot water so as to reduce its alcohol content to almost the same level as that of sake. Thus, shochu and vodka could not be regarded as either "like" products or "directly competitive or substitutable" products in view of their different alcohol contents and uses by consumers.

Article III:2 did not prohibit the use of a taxation method for imported products different from that for like domestic products unless the differing taxation methods resulted in a heavier tax burden on imported products than on domestic like products. As long as GATT was not violated every contracting party retained the right to adopt a tax system that was in its own judgment rational.

Article IX:6

3.13 With respect to labelling, Japan maintained that the EEC's arguments -that the ingredients of wine and whisky, their origin and percentages should be indicated on the label - had no relevancy in relation to GATT Article IX:6. In order to verify an alleged infringement of Japan's obligations under Article IX:6, the EC should first specify what trade names of EC products were being used by Japan's domestic products, and what distinctive regional or geographical names protected by the laws of the EC members were being infringed. However, the EC had not clarified these matters in its submission to the Panel. And the EC's submission did not clarify whether the indications of labelling in Japan were to be considered as trade names provided for in the provision of Article IX:6. Moreover, the indications of the ingredients of wine and whisky and the percentages of contents on the label were irrelevant to the said obligation under the provision of Article IX:6. Japan maintained that the provision of Article IX:6 stipulated the cooperative obligation to prevent misrepresentation as to the true origin and did not require specific measures with penalties to this end. The use of distinctive regional or geographical names was regulated for beverages of japanese origin, since Japan acceded in 1965 to the Madrid Agreement and the use of these names was regulated by the Law for the Prevention of Unfair Competition which contained penal provisions. Consequently, there existed in fact no alcoholic beverages produced in Japan which had such appellations. As appropriate legal measures were thus in force and were firmly observed in Japan to prevent the misrepresentation as to the country of origin, Japan did not violate Article IX:6. The labelling system in Japan consisted not only of self-imposed rules of the industry but also of a range of additional legal controls described in the Japanese submission. Thus, the labelling of alcoholic beverages was regulated no less strictly than that of other food products. For instance, the Law and the Cabinet Order concerning Liquor Business Association and Measures for Securing Revenue of Liquor Tax provided that the name of the manufacturer, the place of manufacturing premise, etc. must be indicated in a conspicuous manner in Japanese lettering at a legible location of the container for any alcoholic beverages domestically produced. It was common in many countries other than Japan to use for domestically produced alcoholic beverages labels written in languages other than their own. Article IX:6 aimed at protecting "trade names", which did not go so far as to protect a total "image" of a certain product such as "French wine", and did not require each contracting party to prohibit generally the use of certain styles and languages of other contracting parties regarding its products. The Fair Trade Commission's "Notification on Misleading Representations concerning the Country of Origin of Goods" did not prohibit representations where "all or the principal part of the literal description is made in foreign lettering", but banned such representations that were "likely to make it difficult for consumers to distinguish the goods as domestically made". The Commission applied the notification in order to have the domestic origin of the product clearly indicated, e.g. by having the manufacturer's name marked clearly in Japanese. In addition to the above-mentioned legal regulations, the wine industry in Japan, taking into account the requests of the EC, had established the self-imposed rules on labelling of domestic wine. Since the establishment of the rule, the names of the manufacturer had been indicated clearly in Japanese lettering on the main labels of domestic wines in accordance with the rule. The polls conducted by the Fair Trade Commission in 1984 and 1986 had shown that very few consumers had ever mistaken domestic wines for imported ones on account of the labels. Thus, Japanese consumers were not misled as to the origin of the products. With regard to spirits, the fair competition code, which had been established in accordance with the provision of Article 10 of the Act against Unjustifiable Premiums and Misleading Representations, provided that representations using the terms "Scotch", "Bourbon", "Irish" and "Canadian", which were internationally famous as the names of whisky-producing areas, should not be used. As a result, there existed no whiskies produced in Japan which had such appellations.


4.1 Argentina

Argentina expressed its general concern at the Japanese customs duties and taxes on wine and alcoholic beverages, notably the discriminatory treatment of bottled wine exported from Argentina, which had caused very high consumer prices and had limited the export opportunities of Argentina.

4.2 Canada

Canada stated that imported whisky and domestic Japanese whisky should qualify as "like products" in terms of GATT Article III:2 because of their similar uses and characteristics. At the very least, Japan's special, first and second grades of whisky could be considered "directly competitive and substitutable products" in the sense of Article III:2. The routine classification of imported whisky in the "special grade" category and its taxation at a rate approximately seven times higher than the tax applied to the "second grade" whisky limited sales of Canadian whisky to Japan and afforded protection to domestic production inconsistent with Article III:2 first or second sentence, depending on whether the grades of whisky were held to be "like" products in terms of the first sentence or "directly competitive or substitutable" products in terms of the second sentence of Article III:2.

4.3 Finland

Finland stated that the negative impact of the Japanese alcohol taxation system extended to a number of products not specifically mentioned in the EEC complaint such as imported vodka. Finland had found it difficult to expand its exports of vodka to Japan due to tough competition with the Japanese product "shochu" which benefited from a more favourable internal tax treatment that openly discriminated against vodka and could only be explained as resulting from intentional protection of the competing product shochu. Vodka and shochu should be considered as "like" products in terms of Article III:2 because they were both white/clean spirits, made of similar raw materials, and their end uses were identical: either as straight "schnaps" type of drinks or in various mixtures. At the very least, vodka and shochu would have to be considered "directly competitive or substitutable" products in terms of Article III: 2. The difference of the liquor tax on vodka and shochu (both of an alcohol content of 40 per cent in volume) was at present 31.3 per cent. This different tax treatment was in violation of both Article III:2 first sentence and second sentence. The Japanese liquor tax system was an example of how "indirect tax discrimination" in the meaning of Article III:2 could be effectuated.

4.4 United States

4.4.1 The United States shared the concern of the European Community that Japan's categorization and taxation of distilled spirits and wine discriminated against western style alcoholic beverages by taxing them as luxury items differently from traditional and competitive Japanese beverages. Most other countries had just three tax classes for alcoholic beverages (i.e. malt beverages, wine and distilled spirits) and, if at all, provided for different tax rates within individual tax classes on the basis of alcohol content. In Japan, the tax differentiations based on class, grade, extract levels and alcohol content were used to tax western style beverages higher than the domestic products. For example, for each additional one per cent of alcohol, special grade whisky (western style) was taxed an additional 45 yen/litre, while second grade whisky (Japanese style) was taxed only an additional 36 yen/litre. For each additional one per cent of alcohol of the distilled spirit shochu, a Japanese beverage competing in the spirits market, the tax increased just 2.8 yen/litre for Group B shochu having an alcoholic content of between 26-31 per cent and 10.1 yen/litre for Group B shochu having and alcoholic content greater than 31 per cent. For Group A shochu having an alcoholic content of between 26 and 31 per cent, the tax increased by only 4.4 yen/litre for each additional one per cent of alcoholic content and increased by 16.8 yen/litre for Group A shochu having an alcoholic content exceeding 31 per cent. The method used by Japan for grading whisky into three categories with different specific taxes, barrier prices and ad valorem tax rates was arbitrary and had the effect of discriminating against US exports in favour of competitive domestic products. Even a low-priced US whisky was classified as a luxury good in Japan and taxed at a high rate. The different tax categories, specific tax rates and ad valorem taxes, combined With high tariffs, placed semi-sweet wines, wine coolers and imported still wines at an artificial price disadvantage.

4.4.2 The United States imposed taxes on all distilled spirits at the same rate and treated all distilled spirits as "like products" for tax purposes. In GATT practice, the term "like product" had been defined in a flexible case-by-case manner taking into account the facts of the particular case and the rationale for the like product test in GATT Article III, namely to avoid discrimination against imports. Tariff classifications had been found not to be determinative of the "like product" question (BISD 28S/102). With regard to Article III:2, the United States would not insist that all distilled spirits be considered like products. In the United States' view:

a) all grades within a given category (whisky, brandy, sake) were like products;

b) the subcategory of "spirits similar to whisky in colour, flavour and other properties" were like products to whisky;

c) type A shochu and type B shochu were like products;

d) the two subcategories of mirin were like products;

e) shochu and "spirits" were like products; and

f) all bottled unsweetened still wines were like products.

The United States pointed out that the Japanese tariff system did not distinguish between the various grades of whisky that were used for tax purposes. In order to avoid classifying shochu as a "spirit", which was more highly taxed, Japan had developed an artificial definition of shochu which distinguished it from similar western style spirits. For example, shochu could not:

- be made from malt or fruit (such as whisky, brandy and certain spirits);

- be filtered with charcoal (such as vodka);

- be made from sugar cane and distilled at less than 95 per cent alcohol (such as rum);

- have other ingredients added at the time of distillation (such as gin).

Japan had distinguished shochu from other spirits on the basis of seemingly minor differences. By contrast, Japan had combined other spirits such as gin, vodka, rum, etc. into a single category of "spirits", uniformly taxed at a high rate. To the extent that these spirits were "like" products for purpose of taxation, it would appear that shochu should be included in the spirits category.

4.4.3 The test for a "directly competitive or substitutable product" appeared to encompass products which were not sufficiently similar as to be "like" but which were similar in end use and were price sensitive. Beer, wine and distilled spirits competed directly with each other and were substitutable, primarily because they were all alcoholic beverages. But substitution occurred more readily within, rather than between, different categories of alcoholic beverages. At a minimum, the United States would consider all distilled spirits (including shochu, sake compound, whisky and spirits) as directly competitive and substitutable. Moreover, wine coolers were directly competitive and substitutable not only with bottled still wine, but also with other low and medium priced beverages, such as shochu which was popularly mixed with fruit juice as a cocktail.

4.4.4 In the United States' view, the following Japanese tax practices affecting exports from the United States violated Article III:2, first sentence:

- taxation of different grades of whiskies or spirits with properties similar to whisky at different tax rates;

- an inconsistent system of taxation of bottled unsweetened still wine, whereby wines priced below a barrier price were taxed at a specific rate, while wines priced above the barrier were subject to an ad valorem tax;

- taxation of the various subcategories of shochu at rates lower than the rates applicable to spirits.

Even though the United States did not consider it necessary to demonstrate that tax discrimination between "like" products afforded protection to domestic production, the United States did present data on their protective trade effects in case the Panel should determine that any of these alcoholic beverages were not "like" but "directly competitive or substitutable". The United States took the position that Japan's tax system violated Article III:1 and the second sentence of Article III:2 with respect to wine coolers and semisweet wines, which it considered directly competitive with and substitutable for, shochu; and in the event the Panel did not consider all still wines or all whiskies or shochu and spirits to be "like products", with respect to still wines, whiskies, and shochu/spirits.

4.5 Yugoslavia

Yugoslavia pointed out that recent changes of Japanese customs duties on wine had reduced the preferential margin under the Generalized System of Tariff Preferences and thereby also the sales opportunities of Yugoslav wine to Japan. This had brought about a sharp decline in Yugoslav exports of bulk wine to Japan. Yugoslav exporters had also raised objections concerning the calculation and collection of the internal tax, testing and certification procedures in Japan. Yugoslavia expressed the hope that in considering the Yugoslav concerns the Panel would take into account paragraphs 5 and 23 of the 1979 Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (BISD 26S/210).


5.1 The Panel began the examination of the matter referred to it by noting that the dispute over Japanese taxes on imported wines and alcoholic beverages was due to the diverging views of the European Communities and japan on the interpretation of GATT Article III:1 and 2, which reads:

"1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production."

"2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1."

The interpretative note to Article III:2 adds as follows:

"A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed."

5.2 The Panel noted that this part of the complaint by the European Communities consisted of a cluster of complaints relating to a large number of alcoholic beverages, liquor categories and subcategories, liquor tax rates and taxation methods. The examination of these complaints in the light of Article III raised certain general questions relating to the interpretation of this GATT Article, on the answering of which the Panel findings would necessarily depend. The Panel considered it therefore appropriate to clarify first certain general questions common to these various complaints regarding Article III:2.

5.3 The Panel noted the view of the European Communities that Article III:2 should be construed in accordance with its clear wording to the effect that it required, first, a product comparison so as to determine what are "like products" or "directly competitive or substitutable products", and, second, a fiscal comparison in order to determine whether imported products were taxed in excess of like domestic products or were subject to internal taxes affording protection to domestic production of directly competitive or substitutable products.

5.4 The Panel then considered the contrary view argued by Japan that, because each contracting party remained free to classify products for tax purposes, the "likeness" or "directly competitive or substitutable" relationship of imported and domestic products were legally not relevant to the interpretation of Article III:2 if

a) imported and domestic products were taxed in a non-discriminatory manner, regardless of their origin, within one and the same product category defined by a contracting party for tax purposes, and

b) there was both domestic production and importation of products within the product category defined for tax purposes.

5.5 The Panel carefully examined these two divergent interpretations of Article III:2 and reached the following conclusions:

a) The text of the first sentence of Article III:2 clearly indicates that the comparison to be made is between internal taxes on imported products and those applied... to like domestic products". The wording "like" products (in the French text: "products similaires") has been used also in other GATT Articles on non-discrimination (e.g. Article I:1) in the sense not only of "identical" or "equal" products but covering also products with similar qualities (see, for instance, the 1981 Panel Report on Tariff Treatment by Spain of Imports of Unroasted Coffee, BISD 28S/102, 112).

b) The context of Article III:2 shows that Article III:2 supplements, within the system of the General Agreement, the provisions on the liberalization of customs duties and of other charges by prohibiting discriminatory or protective taxation against certain products from other GATT contracting parties. The Panel found that this context had to be taken into account in the interpretation of Article III: 2. For instance, the prohibition under GATT Article I:1 of different tariff treatment for various types of "like" products (such as unroasted coffee, see BISD 28S/102, 112) could not remain effective unless supplemented by the prohibition of different internal tax treatment for various types of "like" products. Just as Article I:1 was generally construed, in order to protect the competitive benefits accruing from reciprocal tariff bindings, as prohibiting "tariff specialization" discriminating against "like" products, only the literal interpretation of Article III:2 as prohibiting "internal tax specialization" discriminating against "like" products could ensure that the reasonable expectation, protected under GATT Article XXIII, of competitive benefits accruing under tariff concessions would not be nullified or impaired by internal tax discrimination against like products. It had therefore been correctly stated in another Panel Report recently adopted by the CONTRACTING PARTIES that "Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products" (L/6175, paragraph 5.1.9). And it had been for similar reasons that, during the discussion in the GATT Council of the panel report on Spain's restrictions on the domestic sale of soyabean oil which had not been adopted by the Council, several contracting parties, including Japan, had emphasized "with regard to Article III:4 that the interpretation of the term 'like products' in the Panel Report as meaning 'more or less the same product' was too strict an interpretation" (C/M/152 at page 16).

c) The drafting history confirms that Article III:2 was designed with "the intention that internal taxes on goods should not be used as a means of protection" (see: UN Conference on Trade and Employment, Reports of Committees, 1948, page 61). As stated in the 1970 Working Party Report on Border Tax Adjustments in respect of the various GATT provisions on taxation, "the philosophy behind these provisions was the ensuring of a certain trade neutrality" (BISD 18S/99). This accords with the broader objective of Article III "to provide equal conditions of competition once goods had been cleared through customs" (BISD 7S/64), and to protect thereby the benefits accruing from tariff concessions. This object and purpose of Article III:2 of promoting non-discriminatory competition among imported and like domestic products could not be achieved if Article III:2 were construed in a manner allowing discriminatory and protective internal taxation of imported products in excess of like domestic products.

d) Subsequent GATT practice in the application of Article III further shows that past GATT panel reports adopted by the CONTRACTING PARTIES have examined Article III: 2 and 4 by determining, firstly, whether the imported and domestic products concerned were "like" and, secondly, whether the internal taxation or other regulation discriminated against the imported products (see, for instance, BISD 25S/49, 63; L/6175, paragraph 5). Past GATT practice has clearly established that "like" products in terms of Article III:2 are not confined to identical products but cover also other products, for instance if they serve substantially identical end-uses (see L/6175, paragraph 5.1.1).

The Panel concluded that the ordinary meaning of Article III:2 in its context and in the light of its object and purpose supported the past GATT practice of examining the conformity of internal taxes with Article III:2 by determining, firstly, whether the taxed imported and domestic products are like" or "directly competitive or substitutable" and, secondly, whether the taxation is discriminatory (first sentence) or protective (second sentence of Article III:2). The Panel decided to proceed accordingly also in this case.

5.6 The CONTRACTING PARTIES have never developed a general definition of the term "like products" in Article III:2. Past decisions on this question have been made on a case-by-case basis after examining a number of relevant factors. The working party report on border tax adjustments, adopted by the CONTRACTING PARTIES in 1970, concluded that problems arising from the interpretation of the terms "like" or "similar" products, which occurred some sixteen times throughout the General Agreement, should be examined on a case-by-case basis using, inter alia, the following criteria: the product's end-uses in a given market; consumers' tastes and habits, which change from country to country; and the product's properties, nature and quality (BISD 18S/102, paragraph 18). The GATT drafting history confirms that "the expression had different meanings in different contexts of the Draft Charter" (EPCT/C II/65, page 2). Subsequent GATT practice indicates that, as stated in respect of GATT Article I:1 in the 1981 Panel Report on the Tariff Treatment applied by Spain to Imports of Unroasted Coffee, "neither the General Agreement nor the settlement of previous cases gave any definition of such concept" (BISD 28S/102, III). The Panel was aware of the more specific definition of the term "like product" in Article 2:2 of the 1979 Antidumping Agreement (BISD 26S/172) but did not consider this very narrow definition for the purpose of antidumping proceedings to be suitable for the different purpose of GATT Article III:2. The Panel decided, therefore, to examine the table of "like products" submitted by the EEC (see Annex V) on a product-by-product basis using the above-mentioned criteria as well as others recognized in previous GATT practice (see BISD 25S/49, 63), such as the Customs Cooperation Council Nomenclature (CCCN) for the classification of goods in customs tariffs which has been accepted by Japan. The Panel found that the following alcoholic beverages should be considered as "like products" in terms of Article III:2 in view of their similar properties, end-uses and usually uniform classification in tariff nomenclatures:

- imported and Japanese-made gin;

- imported and Japanese-made vodka;

- imported and Japanese-made whisky (including all grades classified as "whisky" in the Japanese Liquor Tax Law) and "spirits similar to whisky in colour, flavour and other properties" as described in the Japanese Liquor Tax Law;

- imported and Japanese-made grape brandy (including all grades classified as "brandy" in the Japanese Liquor Tax Law);

- imported and Japanese-made fruit brandy (including all grades classified as "brandy" in the Japanese Liquor Tax Law);

- imported and Japanese-made "classic" liqueurs (not including, for instance, medicinal liqueurs);

- imported and Japanese-made unsweetened still wine;

- imported and Japanese-made sparkling wines.

The Panel agreed in this respect with the arguments submitted to it not only by the European Communities but also by other important producing countries of wines and distilled spirits that gin, vodka, whisky, grape brandy, other fruit brandy, certain "classic" liqueurs, still wine and sparkling wine, respectively, were recognized not only by governments for purposes of tariff and statistical nomenclature, but also by consumers to constitute "each in its end-use... a well defined and single product intended for drinking" (BISD 28S/102, 112, paragraph 4.7). The Panel also agreed in this respect with the finding of an earlier panel report adopted by the CONTRACTING PARTIES that minor differences in taste, colour and other properties did not prevent products qualifying as "like products" (BISD 28S/102, 112).

5.7 The Panel did not exclude that also other alcoholic beverages could be considered as "like" products. Thus, even though the Panel was of the view that the "likeness" of products must be examined taking into account not only objective criteria (such as composition and manufacturing processes of products) but also the more subjective consumers' viewpoint (such as consumption and use by consumers), the Panel agreed with the arguments submitted to it by the European Communities, Finland and the United States that Japanese shochu (Group A) and vodka could be considered as like" products in terms of Article III:2 because they were both white/clean spirits, made of similar raw materials, and their end-uses were virtually identical (either as straight "schnaps" type of drinks or in various mixtures). Since consumer habits are variable in time and space and the aim of Article III:2 of ensuring neutrality of internal taxation as regards competition between imported and domestic like products could not be achieved if differential taxes could be used to crystallize consumer preferences for traditional domestic products, the Panel found that the traditional Japanese consumer habits with regard to shochu provided no reason for not considering vodka to be a "like" product. The Panel decided not to examine the "likeness" of alcoholic beverages beyond the requests specified in the complaint by the European Communities (see Annex V). The Panel felt justified in doing so also for the following reasons: Alcoholic drinks might be drunk straight, with water, or as mixes. Even if imported alcoholic beverages (e.g. vodka) were not considered to be "like" to Japanese alcoholic beverages (e.g. shochu Group A), the flexibility in the use of alcoholic drinks and their common characteristics often offered an alternative choice for consumers leading to a competitive relationship. In the view of the Panel there existed - even if not necessarily in respect of all the economic uses to which the product may be put - direct competition or substitutability among the various distilled liquors, among various liqueurs, among unsweetened and sweetened wines, and among sparkling wines. The increasing imports of "Western-style" alcoholic beverages into Japan bore witness to this lasting competitive relationship and to the potential products substitution through trade among various alcoholic beverages. Since consumer habits vis-a-vis these products varied in response to their respective prices, their availability through trade and their other competitive inter-relationships, the Panel concluded that the following alcoholic beverages could be considered to be "directly competitive or substitutable products" in terms of Article III:2, second sentence:

- imported and Japanese-made distilled liquors, including all grades of whiskies/brandies, vodka and shochu Groups A and B, among each other; - imported and Japanese-made liqueurs among each other;

- imported and Japanese-made unsweetened and sweetened wines among each other; and

- imported and Japanese-made sparkling wines among each other.

5.8 Having compared the imported and domestic alcoholic beverages in order to determine their "likeness" or "directly competitive or substitutable" relationship, the Panel next proceeded to a comparison of the fiscal burdens on these products. The Panel noted that the first sentence of Article III:2 prohibited the direct or indirect imposition of "internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products". The Panel noted that the wording of this prohibition of tax discrimination was strict. It had been applied in GATT practice also in a strict manner, for instance as prohibiting even very small tax differentials amounting to US dollar 0.0002 per litre of imported petroleum (see the panel report adopted by the CONTRACTING PARTIES on US taxes on petroleum, L/6175) and as excluding a de minimis. argument based on allegedly minimal trade effects (see L/6175, paragraphs 5.1.2 to 5.1.9). The Panel further found that the wording "directly or indirectly" and "internal taxes... of any kind" implied that, in assessing whether there is tax discrimination, account is to be taken not only of the rate of the applicable internal tax but also of the taxation methods (e.g. different kinds of internal taxes, direct taxation of the finished product or indirect taxation by taxing the raw materials used in the product during the various stages of its production) and of the rules for the tax collection (e.g. basis of assessment).