Japan - Taxes on Alcoholic Beverages

FACTS: JAPAN AND THE UNITED STATES APPEAL FROM CERTAIN ISSUES OF LAW AND LEGAL INTERPRETATIONS IN THE PANEL REPORT, JAPAN - TAXES ON ALCOHOLIC BEVERAGES (THE "PANEL REPORT"). THAT PANEL (THE "PANEL") WAS ESTABLISHED TO CONSIDER COMPLAINTS BY THE EUROPEAN COMMUNITIES, CANADA AND THE UNITED STATES AGAINST JAPAN RELATING TO THE JAPANESE LIQUOR TAX LAW (SHUZEIHO), LAW NO. 6 OF 1953 AS AMENDED (THE "LIQUOR TAX LAW"). WT/DS8/R, WT/DS10/R, WT/DS11/R. The Applicable Law: Article III* National Treatment on Internal Taxation and Regulation 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.* DECISION OF THE APPELLATE BODY -The Appellate Body, examining the points raised by the appellants, highlighted that the broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III "is to ensure that internal measures are not to be applied to imported or domestic products so as to afford protection to domestic production". The intention of the drafters of the General Agreement on Tariffs and Trade was clearly to treat the imported products in the same way as like domestic products once they had been cleared through customs. Otherwise, indirect protection could be given. Moreover, it is irrelevant that the trade effects of the tax differential between imported and domestic products as reflected in the volumes of imports, are insignificant or even non-existent; Article III GATT 1994 protects expectations not of any particular trade volume but rather of the equal competitive relationship between imported and domestic products. WTO members are free to pursue their own domestic goals through internal taxation or domestic regulation, so long as they do not do so in a way that violates Article III or any of the other commitments they have made in

the WTO Agreement. The obligation clearly extends also to products not bound under Article II, as is confirmed in the Brazilian Internal Taxes Report. The Appellate Body interpreted the first sentence of Article III:2 GATT 1994 as underlining the fundamental principle that this sentence does not invoke Article III:1 to admonish WTO members not to apply measures "so as to afford protection" to domestic production. The presence of protective tax treatment need not be established separately. Once the specific requirements set out in the first sentence are proved, the impugned tax measure will be found to be inconsistent with the general principles of Article III without need of further. This means that Article III:2, first sentence, is an application of the general principle set out in Article III:1. The first sentence requires an examination of the conformity of an internal tax measure with Article III by first determining whether the taxed imported and domestic product are "like" and, second, whether the tax applied to the imported products are "in excess of" those applied to the like domestic products. If the imported and domestic products are "like products", and if the taxes applied to the imported products are "in excess of" those applied to the like domestic products, the measure is inconsistent with Article III:2, first sentence. These results form the prima facie finding of discrimination and protective intent. Article 3.8 of the Dispute Settlement Understanding provides that such a violation is prima facie presumed to nullify or impair benefits under Article XXIII GATT 1994. Article III:1 informs Article III:2, second sentence, through specific reference. Article III:2, second sentence, contains a general prohibition against "internal taxes or other internal charges" applied to "imported or domestic products in a manner contrary to the principles set forth in paragraph 1". As mentioned before, Article III:1 states that internal taxes and other internal charges "should not be applied to imported or domestic products so as to afford protection to domestic production". Ad Article III:2 states that "[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". The Ad Article does not replace or modify the language contained in Article III:2, second sentence, but in fact clarifies its meaning. Accordingly, the language of the second sentence and the Ad Article must be read together. Article III:2 specifically invokes Article III:1. The significance of this distinction is that whereas Article III:1 acts implicitly in addressing two issues that must be considered in applying Article III:2, first sentence, it acts explicitly as an entirely separate issue that must be addressed along with the two other issues that are raised in applying the second sentence. Giving full meaning to the text in its context, three separate issues must be addressed to determine whether an internal tax measure is inconsistent with Article III:2, second sentence. These three issues are: (i) whether the imported product and the domestic products are "directly competitive or substitutable products which are in competition with each other"; (ii) whether the directly competitive or substitutable imported and domestic products are "not similarly taxed"; and (iii) whether the dissimilar taxation of the directly competitive or substitutable imported products is "applied...so as to afford protection to domestic production". Again, these are three separate issues. Each must be established separately by the complainant for a panel to find that a measure imposed by a WTO member is inconsistent with Article III:2 GATT 1994, second sentence.

The Appellate Body affirmed the WTO Panels finding that shochu and vodka are like products and that Japan, by taxing imported products in excess of like domestic products, was in violation of its obligations under Article III:2, first sentence, GATT 1994. Moreover, it concluded that shochu and the other distilled spirits and liqueurs listed, except for vodka, are "directly competitive and substitutable products", and that Japan, in the application of the Liquor Tax Law, did not similarly tax imported and directly competitive or substitutable domestic protects and as such afforded protection to domestic production in violation of Article III:2, second sentence, GATT 1994. In addition however, it found, inter alia, that the Panel erred in law (I) in failing to take account Article III:1 in interpreting Article III:2, first and second sentences, and (ii) in failing to examine whether the taxes were imposed "so as to afford protection" to domestic production under Article III:1 as a separate inquiry from whether the imported products "not similarly taxed" in Ad Article III:2, second sentence, to domestic production. The Appellate Body recommended that the Dispute Settlement Body request Japan to bring the Liquor Tax Law into conformity with its obligations under GATT 1994. CONCLUSION The decision of the Appellate Body in JapanTaxes on Alcoholic Beverages has made it very clear that for a respondent to successfully defend itself against allegations of discrimination and protectionism, it needs to be able to convince the Dispute Settlement Body that it has always acted in good faith and with the needs of the open trading community in mind. In its dealings with the institutions of the WTO and the complaining party or parties the respondent WTO member needs not only to co-operate fully, but also to be seen to be doing so. Additional Notes: Re: Interpretation of decisions of the Appellate Body The Vienna Convention and the Law on Treaties is applied to determine the interpretation of the decision of the panel reports. Whereas, Decision of the Panel Reports are often considered by subsequent panels. They create legitimate expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute. However, they are not binding, except with respect to resolving the particular dispute between the parties to that dispute.

United States Import Prohibition of Certain Shrimps and Shrimp Products FACTS The panel was convened to examine a prohibition imposed by the United States on the importation of certain shrimp and shrimp products under section 609 of Public Law 101-162 ("section 609") and associated regulations and judicial decisions. Section 609 prohibited importation to the U.S. of shrimp harvested with commercial fishing technology that may adversely affect sea turtles. It also provided an exception for shrimp imported from states certified thereunder. The relevant portion of this exception, applicable where sea turtles are otherwise threatened, permits certification if the exporting state adopts a regulatory program governing the incidental taking of sea turtles comparable to that of the U.S. and with an average incidental taking rate comparable to U.S. vessels. This regulatory program would require turtle excluder devices to be used by commercial shrimp trawling vessels operating in areas where turtles are likely to be found. US claim that the measures are justified under Article XX (g) of the GATT 1994. Also that measures were in connection with the Preamble attached to the WTO which mandates sustainable development by protecting and preserving the environment. (policy goal is protection of sea turtles). India, Malaysia, Pakistan, and Thailand alleged violation of the GATT Agreement. Panel ruled that the measures adopted by the US are inconsistent with Article XI and is not justified under Article XX and a threat to the multilateral trading system Applicable Laws Article XI General Elimination of Quantitative Restrictions General Elimination of Quantitative Restrictions 1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. Article XX General Exceptions General Exceptions Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: xxx

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; APPELLATE COURT FINDINGS The Appellate Body found that art. XX(g), referring to exhaustible natural resources, includes living resources such as sea turtles. Referring to the drafting history of art. XX(g), which involved discussions of mineral resources, the Appellate Body endorsed an organic approach to interpretation: the words exhaustible natural resources must be read by a treaty interpreter in the light of contemporary concerns of the community of nations about the protection and conservation of the environment. The Appellate Body specifically declined to rule on whether there is a territorial or jurisdictional limitation in art. XX(g)--whether the extraterritorial nature of the U.S. measure removed it from eligibility for an exception under that provision. It was able to do so because the sea turtles at issue are migratory, migrating to and from U.S. waters. Continuing its analysis of the availability of an exception under art. XX(g), the Appellate Body examined whether section 609 relates to the conservation of exhaustible natural resources. This relates to requirement has been interpreted to require that the measure be primarily aimed at this goal. The Appellate Body applied a means-ends analysis, finding that the U.S. measure satisfies this test (despite the fact that it might be construed as aimed at changing exporting state policy, rather than at directly protecting turtles). The Appellate Body also found that the U.S. measure satisfies the third prong of art. XX(g): that it is made effective in conjunction with restrictions on domestic harvesting of shrimp. The Appellate Body then turned to the chapeau. Here, the Appellate Body relied heavily on its analysis in the Gasoline case, to the effect that the measures falling within the particular exceptions must be applied reasonably, with due regard both to the legal duties of the party claiming the exception and the legal rights of the other parties concerned. This formulation, and its use here, sets up a kind of balancing test for availability of exceptions under art. XX. The Appellate Bodys application of this balancing test is colored by the language regarding sustainable development contained in the first paragraph of the preamble to the WTO Agreement. Appellate Body Report, para. 151, quoting United States--Gasoline, adopted 20 May 1996, WT/DS2/AB/R, p. 22. See also paras. 156 and 159. Finally, the Appellate Body found real discrimination in the way that the U.S. (i) negotiated multilateral agreements and (ii) applied phase-in periods to different countries, and considered this discrimination unjustifiable within the meaning of the chapeau. The rigidity of section 609 including its failure to distinguish among countries in which different conditions prevail, as well as the lack of transparency of the certification process, makes this discrimination also arbitrary under the chapeau. The Appellate Body imposed a requirement of due process in connection with the application of exceptions under art. XX. -Unjustifiable discrimination

-Mandatory adoption of TEDs without consideration to circumstances or else, embargo -No Consultation with trade partners -Inter-American Agreement is limited -Arbitrary Discrimination -In certification, there is no transparency, predictable process (only ex-parte) -None compliance with Article X with regard standards for transparency and procedural fairness CONCLUSION -The United States measure, while qualifying for provisional justification under Article XX(g), fails to meet the requirements of the chapeau of Article XX, and, therefore, is not justified under Article XX of the GATT 1994. -APPELLATE BODY recommends that the DSB request the United States to bring its measure found in the Panel Report to be inconsistent with Article XI of the GATT 1994, and found in this Report to be not justified under Article XX of the GATT 1994, into conformity with the obligations of the United States Additional Notes: Integral for actions protecting the environment. Considered that endangered species are exhaustible. Procedure for application of the exception. Determine whether it falls under the enumeration then use the first paragraph qualifications (chapeau).