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In Japan-Taxes on Alcoholic Beverages, the Panel and the Appellate Body agreed with the US, the EC, and Canada that the Japanese Liquor Tax Law violated Japan's obligations under Article III:2 GATT 1994 by taxing shochu at a lower rate than other liquors. Article III:2 prohibits imported products from being subject to internal taxes in excess of taxes levied on "like" domestic products.[6] Imported products that are "directly competitive" with domestic products cannot be taxed dissimilarly, as stated in the interpretive note to Article III:2, Ad Article III:2.[7] The US, the EC, and Canada requested that the Panel find that the other liquors are either "like" shochu or, alternatively, "directly competitive" with shochu. The tax rates would then have to be the same or at least similar for shochu and the other liquors. The Panel and the Appellate Body found that shochu and the other liquors are either "like" or "directly competitive," and therefore the different rates of taxation in the Japanese Liquor Tax Law violated Article III:2. However, the reasoning used to arrive at this outcome was acceptable only to the EC and Canada, and not to the US or Japan.[8]
The test the Panel and the Appellate Body used to find the violation of Article III:2 relied exclusively on descriptive criteria to classify the alcoholic beverages as "like" or "directly competitive."[9] Whether the products are "like" or "directly competitive" is assessed on a case-by-case basis using a panel's "best judgment."[10] For potentially "like" products, a panel looks to the physical characteristics, end-uses, and tariff classifications of the products. After determining that products are "like," a panel decides if the tax on imports is "in excess" of the tax on domestic goods. If the tax is "in excess," then the measure is presumed to be protective and violates Article III:2. Products are considered "directly competitive" if they have similar consumer end-uses, as illustrated, for example, by the cross-price elasticity of demand. Once the products are found to be "directly competitive," then a panel determines if the products are similarly taxed, and, finally, if the fiscal measure has a protective effect. Essentially, if there is a greater than de minimus tax difference between the products, then the measure is presumed to be discriminatory.
Even though the United States agreed with the outcome of the dispute, it appealed the Panel's test for determining a violation under Article III:2 and again offered the aim-and-effect test as an alternative.[11] The US based its argument on the language of Article III:2 and Article III:1. Article III:1 lays out the general obligation of the Contracting Parties not to apply internal measures to imported or domestic products "so as to afford protection to domestic production."[12] The US argued that the specific obligations of Article III:2 must be read in light of Article III:1, which forms part of the context of Article III:2. A panel should determine the likeness and competitiveness of products by evaluating whether the defendant government categorized the products "so as to afford protection" to the local product. "Applied...so as to afford protection" should be interpreted to mean that the measure was both intended to and has the effect of protecting domestic production. If a measure does not have both the aim and the effect of protection, then the products are not "like" or "directly competitive" for the purposes of Article III:2. The Appellate Body, like the Panel, rejected the aim-and-effect test to the long-term detriment of the fiscal sovereignty of the Contracting Parties.
[6] For the full text of Article III:2, see infra p. 16.
[7] For the full text of Ad Article III:2, see infra p. 16.
[8] See Panel Report, paras. 6.6 - 6.35, for the Panel's Findings; See Appellate Body Report, Japan-Taxes on Alcoholic Beverages, AB-1996-2, 4 Oct. 1996 (96-0000), sec. I, for the Appellate Body's findings [hereinafter referred to as the Appellate Report].
[9] Panel Report, para. 6.21; Appellate Report, sec. H.1.a.
[10] Id.
[11] Submission of the United States (Appellant), WTO Appellate Body, Japan-Taxes on Alcoholic Beverages, AB-1996-2, 23 Aug.1996, paras. 39-48 [hereinafter referred to as the Appellate Submission]; Japan also appealed the Panel's reasoning advocating the aim-and-effect test, although with a different outcome.
[12] For the full text of Article III:1, see infra p. 17.
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