13 October 1987

5.9 The Panel then examined the European Communities' contention (see above paragraph 3.5) that Japanese internal taxes on whiskies, brandies, still wines, sparkling wines, spirits and liqueurs imported from the EEC were in excess of those applied to like Japanese products, and reached the following conclusions:

a) Whiskies and brandies subject to the grading system: The Panel noted that the Japanese specific tax rates on imported and Japanese whiskies/brandies special grade (2,098,100 yen/kl) were considerably higher than the Japanese specific tax rates on whiskies/brandies first grade (1,011,400 yen/kl) and second grade (296,200 yen/kl). The Panel was unable to find that these tax differentials corresponded to objective differences of the various distilled liquors, for instance that they could be explained as a non-discriminatory taxation of their respective alcohol contents. The Panel further found that, as a result of this differential taxation of "like products", almost all whiskies/brandies imported from the EEC were subject to the higher rates of tax whereas more than half of whiskies/brandies produced in Japan benefited from considerably lower rates of tax. The Panel concluded, therefore, that (special and first grade) whiskies/brandies imported from the EEC were subject to internal Japanese taxes "in excess of those applied... to like domestic products" (i.e. first and second grade whiskies/brandies) in the sense of Article III:2, first sentence.

b) Wines, spirits and liqueurs subject to the "mixed" system of specific tax and ad valorem tax: The Panel noted that imported and domestic wines, whiskies, brandies, spirits and liqueurs were subject to ad valorem taxes in lieu of the specific tax when the manufacturer's selling price (CIF and customs duty for imported products) exceeded a specified threshold (see Annex IV). The Panel was of the view that a "mixed" system of specific and ad valorem liquor taxes was as such not inconsistent with Article III:2, which prohibits only discriminatory or protective taxation of imported products but not the use of differentiated taxation methods as such, provided the differentiated taxation methods do not result in discriminatory or protective taxation.

The Panel noted that the ad valorem taxes were not applied to all liquor categories such as the traditional Japanese products shochu, mirin and sake (first and second grades). The Panel was unable to find that the differences as to the applicability and non-taxable thresholds of the ad valorem taxes were based on corresponding objective product differences (e.g. alcohol contents) and formed part of a general system of internal taxation equally applied in a trade-neutral manner to all like or directly competitive liquors (e.g. "alcohol taxes" equally applied to all alcoholic beverages). The Panel was of the view that "like" products do not become "unlike" merely because of differences in local consumer traditions within a country (e.g. consumption of shochu mainly in specific regions within Japan) or differences in their prices, which were often influenced by external government measures (e.g. customs duties) and market conditions (e.g. supply and demand, sales margins). The Panel was convinced that such an interpretation would run counter to the objective of Article III:2 to avoid that discriminatory or protective internal taxation of imported products would distort price competition with domestic like or directly competitive products, for instance by creating different price and consumer categories and hardening consumer preferences for traditional home products.

The Panel concluded from the preceding findings that - since liquors above the non-taxable thresholds were subjected to ad valorem taxes in excess of the specific taxes on "like" liquors below the threshold (e.g. ad valorem tax rates up to 8 times higher than the specific tax rates on wines, 4 times higher than the specific tax rates on liqueurs and 2 times higher than the specific tax rates on spirits) - the imposition of ad valorem taxes on wines, spirits and liqueurs imported from the EEC, which are considerably higher than the specific taxes on "like" domestic wines, spirits and liqueurs, was inconsistent with Article III:2, first sentence.

c) The different methods of calculating ad valorem taxes on imported and domestic liquors: The Panel shared the view expressed by both parties that Article III:2 does not prescribe the use of any specific method or system of taxation. The Panel was further of the view that there could be objective reasons proper to the tax in question which could justify or necessitate differences in the system of taxation for imported and for domestic products. The Panel found that it could be also compatible with Article III:2 to allow two different methods of calculation of price for tax purposes. Since Article III:2 prohibited only discriminatory or protective tax burdens on imported products, what mattered was, in the view of the Panel, whether the application of the different taxation methods actually had a discriminatory or protective effect against imported products. The Panel could therefore not agree with the European Community's view that the mere fact that the so-called "fixed subtraction system" was available only for domestic liquors constituted in itself a discrimination contrary to Article III:2 or 4. Nor could the Panel agree with the EEC submission that the mere possibility of exceptional tax rates available only for domestic whiskies/brandies provided sufficient evidence of tax discrimination contrary to Article III:2. The Panel shared the doubts expressed by the European Community that the deduction from the retail price of a uniform 30 per cent non-taxable allowance (designed to cover trade profits, manufacturer's rebate and manufacturer's delivery charges) must not necessarily result in what would have been the manufacturer's selling price. Yet, the Panel did not dispose of sufficient evidence for concluding that the application of this simplified method of tax base assessment had actually resulted, or was likely to result, in tax discrimination against liquors imported into Japan.

d) Taxation according to extract content: The Panel recalled its earlier finding that imported and Japanese-made sparkling wines, as well as imported and Japanese-made "classic" liqueurs, were "like products", respectively and that minor differences in taste, colour and other properties (including different alcohol contents) did not prevent products qualifying as "like products". It followed from the clear wording of Article III:2 that imported liquors "shall not be subject... to internal taxes... in excess of those applied... to like domestic products". The Panel was of the view that this unqualified wording must not necessarily mean that there could never be any circumstances in which different tax treatment of "like products" was compatible with the General Agreement. The Panel noted, for instance, that GATT Article II:2,a 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. The Panel further noted that, pursuant to the "general exceptions" listed in Article XX, Article III:2 must not be construed "to prevent the adoption or enforcement by any contracting party of measures... (b) necessary to protect human, animal or plant life or health" (Article XX: (b)); non-discriminatory measures under this exception clause might also entail differential tax rates on like products. The Panel noted that Japan's specific and ad valorem tax rates on liqueurs and sparkling wines differed according to alcohol and extract contents and that Japan considered these differential taxes to be compatible with Article III:2 regardless of their justifiability as a non-discriminatory internal taxation of these ingredients equally applied to all products with such ingredients, and regardless of their justifiability under any of the exception clauses of GATT Article XX. The Panel noted also the contrary view of the EEC "that taxation according to extract content is artificial and irrational and discriminates against imports contrary to Article III:2" because it ensured "that almost all Community liqueurs are subject to the higher rate of specific tax whilst some Japanese liqueurs are able to benefit from a lower specific rate (one third of the rate on most Community liqueurs) together with a lower ad valorem rate (50 per cent as opposed to 100 per cent) and a much lower increment per degree of alcohol (9.780 yen per 1 per cent over 13 per cent compared with 24.5 yen per 1 per cent over 15 per cent in the higher rate category)". Having found that

the Panel concluded that this imposition of higher taxes on "classic" liqueurs and sparkling wines with higher raw material content was inconsistent with Article III:2, first sentence.

5.10 The Panel next turned to examining the European Community's contention (see above paragraph 3.7) that the Japanese liquor taxes were inconsistent with Article III:2, second sentence, because

5.11 The Panel recalled its findings that distilled liquors, including all grades of shochu types A and B, were "directly competitive or substitutable products" in terms of the interpretative note to Article III:2 (see above paragraph 5.7). The Panel noted that shochu was not subject to ad valorem taxes and that the specific tax rates on shochu were many times lower than the specific tax rates on whiskies, brandies and other spirits. The Panel noted that, whereas under the first sentence of Article III:2 the tax on the imported product and the tax on the like domestic product had to be equal in effect, Article III:1 and 2, second sentence, prohibited only the application of internal taxes to imported or domestic products in a manner "so as to afford protection to domestic production". The Panel was of the view that also small tax differences could influence the competitive relationship between directly competing distilled liquors, but the existence of protective taxation could be established only in the light of the particular circumstances of each case and there could be a de minimis. level below which a tax difference ceased to have the protective effect prohibited by Article III:2, second sentence. The Panel found that the following factors were sufficient evidence of fiscal distortions of the competitive relationship between imported distilled liquors and domestic shochu affording protection to the domestic production of shochu:

Since it has been recognized in GATT practice that Article III:2 protects expectations on the competitive relationship between imported and domestic products rather than expectations on trade volumes (see L/6175, paragraph 5.1. 9), the Panel did not consider it necessary to examine the quantitative trade effects of this considerably different taxation for its conclusion that the application of considerably lower internal taxes by Japan on shochu than on other directly competitive or substitutable distilled liquors had trade-distorting effects affording protection to domestic production of shochu contrary to Article III:1 and 2, second sentence.

5.12 The Panel next examined the contention of the EEC that wines, whiskies, brandies, other spirits and liqueurs imported from the EEC and subject to ad valorem tax were at a disadvantage in comparison with Japanese "traditional" products which were only subject to specific taxes. The Panel noted that the "traditional" Japanese liquors sake (first and second grade), sake compound, shochu and mirin were. not subject to ad valorem taxes and that the grading of sake was voluntary so that less than 0.1 per cent of all sake was subject to ad valorem taxation. The Panel recalled its findings that shochu and other distilled liquors were "directly competitive or substitutable" products in terms of the interpretative note to Article III:2. The Panel further recalled its finding that the application of higher internal taxes on imported whiskies, brandies and other spirits than on shochu afforded protection to the domestic production of shochu contrary to Article III:1 and 2, second sentence.

The Panel noted that the European Communities had not specified whether and why they considered sake, sake compound and mirin to be "directly competitive or substitutable" products in relation to wines of fresh grapes or to distilled spirits and liqueurs imported from the EEC. The Panel noted that rice wine (sake) and wines of fresh grapes were classified under separate headings in the CCCN nomenclature. The Panel did not exclude that there could be a directly competitive or substitutable" relationship between sake, sake compound, mirin and liquors imported from the EEC into Japan. The Panel did, however, consider it neither necessary nor appropriate to decide on this question because, in any case, the Panel had not been presented sufficient evidence to determine whether and to what extent wines and other liquors imported from the EEC had actually been subjected to higher tax burdens than domestic sake, sake compound or mirin affording protection to the domestic production of these latter products.

5.13 Having concluded that whiskies, brandies, other distilled spirits, liqueurs, still wines and sparkling wines imported into Japan were subject to discriminatory or protective Japanese taxes contrary to Article III:2, the Panel examined whether these discriminatory or protective taxes could be justified by the argument submitted by Japan that the tax differentials were designed to realize the basic Japanese tax policy objective of "taxation according to tax-bearing ability" of the respective consumers. The Panel agreed with the submissions of both parties that Article III:2 does not impose an obligation on contracting parties to adopt a specific tax system or specific taxation methods. Nor does a finding of an inconsistency of a tax with Article III:2 oblige the contracting party to reduce the tax on the imported product, as it could also remove any discriminatory or protective effect by raising the tax on the domestic product concerned. The General Agreement also explicitly permits 'imposing at any time on the importation of any product... a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part" (Article II:2,a), for instance a charge on the alcohol component of imported liquors equivalent to a non-discriminatory internal alcohol tax. The "general exceptions" provided for in GATT Article XX might also justify internal tax differentiations among like or directly competitive products, for instance if "necessary to protect human... or plant life or health (Article XX, b). The Panel found, therefore, that the General Agreement reserved each contracting party a large degree of freedom to decide autonomously on the objectives, level, principles and methods of its internal taxation of goods.

The Panel noted the Japanese submission that, for instance, the grading system for whisky was "based on the circumstances of production and consumption of whiskies in Japan", and that generally "taxes on liquors are levied according to the tax-bearing ability on the part of consumers of each category of liquor". The Panel was of the view that the use of product and tax differentiations with the view of maintaining or promoting certain production and consumption patterns could easily distort price-competition among like or directly competitive products by creating price differences and price-related consumer preferences which would not exist in case of non-discriminatory internal taxation consistent with Article III:2. The Panel noted that the General Agreement did not make provision for such a far-reaching exception to Article III:2, and that the concept of "taxation according to tax-bearing ability of prospective consumers" of a product did not offer an objective criterion because it relied on necessarily subjective assumptions about future competition and inevitably uncertain consumer responses. The Panel was of the view that a national policy of "taxation according to tax-bearing ability" did not necessitate discriminatory or protective taxation of imported products and could be pursued by each contracting party in many ways in compliance with Article III:2. A national policy of promoting the domestic production of certain goods could likewise be pursued in conformity with the General Agreement (e.g. by means of production subsidies) without discriminatory or protective taxation of imported goods. The Panel concluded therefore from the text, system and objectives of the General Agreement that, even though each contracting party retained broad freedom as to its internal tax policy also in respect of its internal taxation of goods, the General Agreement did not provide for the possibility of justifying discriminatory or protective taxes inconsistent with Article III:2 on the ground that they had been introduced for the purpose of "taxation according to the tax-bearing ability" of domestic consumers of imported and directly competitive domestic liquors.

5.14 The Panel then examined the European Community's claim that Japan had violated its obligation under GATT Article IX:6 to "cooperate... with a view to preventing the use of trade names in such manner as to misrepresent the true origin of a product, to the detriment of such distinctive regional or geographical names of products of the territory of a contracting party as are protected by its legislation", and to "accord full and sympathetic consideration to such requests or representations as may be made by any other contracting party regarding the application of the undertaking set forth in the preceding sentence to names of products which have been communicated to it by the other contracting party". The Panel noted from the drafting history relating to Article IX:6 that it had been agreed that the text of Article IX:6

The Panel noted that the Japanese Law and Cabinet Order concerning Liquor Business Association and Measures for Securing Revenue of Liquor Tax stipulated that "Any manufacturer of liquors must indicate, at a legible location of the container of liquors... which are shipped out from the manufacturing premise..., the name of the manufacturer, the place of the manufacturing premise..., the capacity of the container..., the category of liquors..., the grade of liquors and the following matters according to the category of liquors, in a conspicuous manner", including the alcohol content in the case of wine, whisky, brandy, spirits and liqueurs. The Panel examined a large number of labels, photos, wine bottles and packages submitted by the EEC as evidence. The Panel found that this evidence seemed to confirm the Japanese submission to the Panel that the labels on liquor bottles manufactured in Japan indicated their Japanese origin.

5.15 The Panel examined the view of the European Community that the use of French words, French names, of other European languages and European label styles or symbols by japanese manufacturers continued to mislead Japanese consumers as to the origin of the liquors, and that the indication of a Japanese manufacturer did not clarify his precise activities because, for instance, wines bottled in Japan could contain as much as 95 per cent imported bulk wine. The Panel inferred from the wording of Article IX:6 that it was confined to an obligation to "cooperate with each other with a view to preventing the use of trade names in such manner as to misrepresent the true origin of a product, to the detriment of such distinctive regional or geographical names of products of the territory of a contracting party as are protected by its legislation". The Panel noted that there was no definition of a "trade name" in the General Agreement, and that there were differences in the laws of various countries as to what might constitute a trade name. The Panel did not consider it necessary to define the term "trade name" in this case for the following reasons: Article IX:6 was designed to protect "distinctive regional or geographical names of products of the territory of a contracting party as are protected by its legislation". The Panel did not dispose of evidence and was unable to find that the use by Japanese manufacturers of labels written partly in English (in the case of whisky and brandy) or in French (in the case of wine), the use of the names of varieties of grapes (such as "Riesling" or "Semillon"), or the use of foreign terms to describe Japanese spirits ("whisky", "brandy") or Japanese wines ("chateau", "reserve", "vin rose") had actually been to the detriment of "distinctive regional or geographical names of products" produced and legally protected in the EEC. Nor could the Panel find that Japan - given, for example, its participation in the Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods and its internal laws and regulations on labelling and on the protection of distinctive regional or geographical names (such as "Armagnac" or "Chianti") - had failed to meet its obligation to cooperate pursuant to GATT Article IX:6.

5.16 The Panel recalled the established GATT principle that "where there is an infringement of the obligations assumed under the General Agreement, the action is considered prima facie to constitute a case of nullification or impairment" (BISD 26S/216). Having found that whiskies, brandies, other distilled spirits, liqueurs, still wines and sparkling wines imported into Japan were subject to discriminatory or protective Japanese taxes contrary to Article III:2, the Panel concluded that these taxes inconsistent with Article III:2 had to be presumed to cause nullification or impairment of benefits accruing to the European Community under the General Agreement. The Panel noted the Japanese submission that imports of these liquors into Japan had considerably increased since the 1960's. The Panel shared, however, the view expressed in another panel report adopted by the CONTRACTING PARTIES that an increase in imports could not refute the presumption that discriminatory or protective taxes inconsistent with Article III:2 had impaired the competitive benefits protected under Article III:2 because, inter alia, an increase in imports did say nothing about what the trade might have been in the absence of the inconsistent trade restrictions (see the Panel Report on US Taxes on Petroleum, L/6175, paragraphs 5.1.6 to 5.1.10).

5.17 The Panel therefore suggests that the CONTRACTING PARTIES recommend that Japan bring its taxes on whiskies, brandies, other distilled spirits (such as gin and vodka), liqueurs, still wines and sparkling wines in conformity with its obligations under the General Agreement.

Source: Submission by Japan.

ARTICLE 3 DEFINITION OF TERMS

1. The expression "alcoholic content" shall mean, the amount of ethyl alcohol (volume percentage) contained in liquor at a temperature of 15 degrees C.

2. The expression "extract content" shall mean the amount of unvolatile ingredients (gram) contained in 100 cm3 of liquor at a temperature of 15 degrees C.

3. The expression "seishu" shall mean liquors which are made by:

4. The expression "Gosei-Seishu (sake compound)" shall mean liquors which can be made from alcohol (including liquors which fall under the subsequent item except the part concerning the alcoholic content and at the same time whose alcoholic content is from 36 per cent to 45 per cent both inclusive, but excluding liquors to which any material other than water is added - the same applies for the following except item (9) and article 8 - (3)), shochu (excluding those to which any material other than water is added - the same applies for (6) and (8)), seishu, and grape sugar or any of the other raw materials listed in the government ordinance, and whose taste, colour and other properties are similar to those of seishu (with regards to liquors for which rice or any product purely or partially made from rice is used as raw material, the total weight of rice - including rice used as sole or partial ingredient for such a product as being used to make liquors - should not exceed 5 per cent of the weight of liquor when it is calculated, setting the alcoholic content at 20 per cent).

5. The expression "shochu" shall mean liquors made by distilling alcoholic substance (including those to which water is added, and those produced, as being provided in the government ordinance, by adding water, sugar (the sugar here is limited to those kinds listed in the Group 2 and 3 under Paragraph (1) of Article 2 of the Sugar Consumption Tax Law) or any of the other materials listed in the government ordinance excluding those which have an extract content of 2 per cent or over but excluding those listed below) and the alcoholic content of which is 45 per cent and less (but below 36 per cent for those produced by a continuous distillation machine - which can remove fusel oil, aldehyde and some other impurities while distilling a continuous flow of alcoholic substances; the same applies to the following).

6. The expression "mirin" shall mean liquors which are produced by:

7. The expression "beer" shall mean liquors which are produced by:

8. The expression "wines" shall mean the liquors listed below whose extract content is below 21 degrees (but no limit is set for the extract content of liquors which come under (a) below)

9. The expression "whiskies" shall mean liquors which are listed below. As for the liquors listed in (a), (b), (d), (e) and (g), however, those which fall under the categories of (b), (c) and (d) of item 5 but those liquors which are stipulated otherwise by the government ordinance are not included here.

10. The expression "spirits" shall mean liquors which do not fall under any of the items from 3 to 9 and whose extract content is less than 2 per cent (excluding those liquors which contain malt (but not products made by distilling an alcoholic substance made partially from malt: the same applies to the following) as an ingredient, and at the same time are sparkling).

11. The expression "Liqueurs" shall mean liquors made from liquors and saccharide or other materials (including liquors but excluding materials stipulated otherwise by the ordinance) which contain an extract content of 20 or higher (excluding those which come under 3 to 9, those which include malt as an ingredient and at the same time are sparkling, and powdered liquor which when dissolved contains alcoholic content of 10 or higher as mentioned in the first paragraph of Article 2).

12. The expression "miscellaneous liquors" shall mean liquors which are included in none of the following categories: sake, sake compound, shochu, mirin, beer, wines, whiskies, spirits and liqueurs.

The Community has prepared the following summary in tabular form of the products made in Japan which it considers to be like or directly competitive with or substitutable for products exported to Japan. It believes that in view of the complexity of the facts of the dispute this summary presentation may be helpful.