* This text is part of an academic paper delivered to evaluation in the LL.M. in European and Transglobal Business Law
The National Treatment Principle
The National Treatment Principle is one
of the fundamental principles of trade in goods (GATT Article III). National
Treatment is a principle of non-discrimination applicable to internal measures,
whereas Tariffs and Quantitative Restrictions are border measures. The goal of
the principle in analysis is to suppress occult barriers to trade. According to the National Treatment
principle, imported goods must be treated in the same way as domestic goods,
i.e., there should not be any kind of discrimination between them. Once
imported products have paid their corresponding tariffs to ingress into a
particular market they should be treated as locally produced goods and should
be subjected to a similar regulatory regime[1]. The internal taxation of foreign
goods is regulated on GATT Article III:2, whereas the internal regulation is
stated on GATT Article III:4. In this paper we will emphasize GATT Article
III:2, because this is the Article appreciated on the Japan – taxes on
alcoholic beverages case.
It is important to note that the Principle
of National Treatment is not only applicable to goods, but also to services,
copyrights, patents and trademarks, as we can see in GATS Article XVII and
TRIPS Article III. However for the reasons mentioned above in this paper we will
highlight its application to trade in goods. The case that we now turn the analysis
contains an excellent summary of this principle saying that “a national
treatment obligation is a general prohibition on the use of internal taxes and
other internal regulatory measures so as to afford protection to domestic
production".
The Japan
– Taxes on alcoholic beverages case
The case in analysis is the most
important case on National Treatment concerning to internal taxation. In 1995
United States, Canada and European Communities (EC) complained of Japan’s Liquor
Tax Law. The complainants requested the Dispute Settlement Body (DSB) to
establish a Panel. They claimed that alcoholic beverages exported to Japan were
discriminated against under Japan’s liquor tax system. Their claim was founded
on GATT article III:2.
The European Communities, United States
and Canada alleged that Japan violated the National Treatment principle,
because Japan taxed a traditional Japanese drink (called shochu) at an inferior
rate than other alcoholic beverages. Japanese liquor tax law fixed a system of
internal taxation applicable to all liquors at different tax rates depending on
which category they fell within. This system used two criteria to distinguish
the taxation of alcoholic beverages in Japan.[2] The first criterion was related to the
alcohol content of the particular beverage. The other criterion was related to
the kind of alcoholic beverage. There were several categories corresponding to
each type of beverage. These criteria were applied to both imported and locally
produced beverages. According to these criteria imported and domestic shochu
were taxed exactly in the same way, but vodka and other spirits were taxed at a
higher rate than shochu. A Panel was established to see if there was a
violation of GATT article III:2.
The Panel Report
Article III:2, first sentence
According to this Report the analysis
of GATT Article III:2 implies a distinct examination of the first and the
second sentences.[3] The first sentence states that:
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.
The benchmark in Article III:2, first
sentence, is that internal taxes on foreign products shall not be imposed in
excess of those imposed on like domestic products. The first problem was
to establish which products were like domestic products. In first place
the Panel observed that the term “like product” appears in several GATT
provisions. According to the Panel it did not necessarily follow that the term
had to be interpreted in a uniform way. For example there is a discrepancy
between Article III:2 and Article III:4.[4] The Panel also observed that preceding
panel and working party reports had agreed that the term “like product” in GATT
Article III:4 has a broader sense than Article III:2.
The Panel decided that only vodka and
shochu were like products because, apart from commonality of end-uses, both
shared most physical characteristics. A 1987 Panel Report (related with an
earlier Japanese tax Law)[5] was taken in consideration by the
Panel to reach to this decision.[6] The Panel noted that vodka and shochu
are made of identical materials, they are both white spirits and the end-uses
are similar. Excluding for filtration, there is a practical correspondence in
the definition of both.[7] The Panel also noted that vodka and shochu
were classified in the same heading in the Japanese tariffs and that both were
covered by the same Japanese tariff binding at the time of its negotiation.
Besides, Japan offered no further persuasive evidence that the conclusion
reached by the 1987 Panel Report was wrong. These were the main reasons why the
Panel concluded that shochu and vodka are like products.
Once it was determined that vodka and
shochu are like products the Panel had to observe the treatment of imported and
domestic products to understand if there was a taxation "in excess
of" imposed on like domestic products according to GATT Article III:2,
first sentence. The Panel noted that, in fact, vodka was taxed in excess,
because even the smallest difference of amount charged is considered "in
excess" and it is inadmissible. Thus, the Panel concluded that shochu and
vodka are like products, and that by taxing vodka in excess than shochu
Japan is in violation of its obligation under Article III:2 first sentence.[8]
Article III/2, second sentence
Substantial differences in physical
characteristics exist between shochu and the rest of alcoholic beverages
(whisky, brandy, rum, gin, and liqueurs) and so the Panel decided not to
qualify them as being like products. However, we can also find a
violation to the National Treatment Principle on the second sentence of GATT
Article III/2, which states that:
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, which provides that “the
contracting parties recognize that internal taxes and other internal
charges…should not be applied to imported or domestic products so as to
afford protection to domestic production”.
And the Ad Note to GATT 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.
According to Article III:2 second
sentence and to the Ad note, “directly competitive or substitutable” products
must be similarly taxed. Having this in mind the Panel decided to determine if
shochu and the rest of alcoholic beverages at dispute in the case are “directly
competitive or substitutable” products.[9]
In examining whether the products at dispute
were directly competitive or substitutable, the Panel noted that the above
mentioned 1987 Panel Report that dealt with this subject concluded that both
“white” and “brown” spirits were directly competitive or substitutable products
to shochu.[10] The Panel also observed that “the
extent to which two products are competitive in economics is measured by the
responsiveness of the demand for one product to the change in the demand for
the other product (cross-price elasticity of demand)”.[11] In other words, the extent to which
two products directly compete is measured by elasticity of substitution. In
this case, the Complainants provided some studies that included several
evidences that there is a significant elasticity of substitution among the
products in dispute.
Thus, the Panel concluded that shochu
and the rest of alcoholic beverages were directly competitive or substitutable
products. It noted that the products concerned were all distilled spirits. Moreover
the Panel gave particular importance to some issues, namely the findings of the
1987 Panel Report; the studies put forward by the complainants (that contained
persuasive evidence that there is significant elasticity of substitution among
the products in dispute); the survey submitted by Japan that after all shows
elasticity of substitution among the products in dispute; and, finally, the
evidence submitted by complainants concerning the 1989 Japanese tax reform
which showed that whisky and shochu are essentially competing for the same
market.[12]
After this determination has been made,
the treatment of the imported and domestic products was studied to comprehend
if this treatment “afforded protection” to shochu. The
Panel here has confused the phrases "so as to afford protection" and
"not similarly taxed" instead of analyse them separately (as we will
see below). Nevertheless, the Panel main conclusions were that the tax rates
applicable to the different directly substitutable drinks in dispute were
dissimilar by more than de
minimis. Taxes on shochu were much lower than the taxes on the rest of
alcoholic beverages and this protection was afforded to shochu inconsistently with Japan’s
obligations under Article III:2, second sentence.[13]
In conclusion, the Panel concluded that
shochu and the rest of alcoholic beverages at dispute are directly competitive
or substitutable products and Japan, by not taxing them similarly is in
violation of its obligations under Article III:2, second sentence.[14] The Panel recommended that the Dispute
Settlement Body (DSB) requested Japan to bring the Liquor Tax Law in conformity
with its obligations under the GATT.
Appellate Body Report
In 1996 Japan and United States filed
an appeal.[15]
This was only the second Report of the Appellate Body (AB)[16].
Japan disagreed with the Panel’s overall findings and conclusions and argued
that the Panel erred in its interpretation of Article III:2, first and second
sentences of the GATT. The U.S. supported the Panel’s general conclusions, but
alleged several errors in the findings and in the legal interpretations
developed by the Panel. The European Communities supported the Panel's
conclusions, and largely agreed with the legal interpretations. Canada confined
its submissions and arguments on appeal to Article III:2, second sentence. The
Appellate Body has provided a much more thorough analysis of Article III:1 and
Article III:2, first and second sentences of the GATT.
Article III
This Article is entitled “National
Treatment on Internal Taxation and Regulation”. According to Appellate Body
the main purpose of this Article, is “to avoid protectionism in the application
of internal tax and regulatory measures”.[17] Members of WTO have to offer equivalence
of competitive conditions for imported products in relation to domestic products.
The AB Report also says that this obligation obviously extends also to products
not bound under Article II.
Article III:1
The Appellate Body affirmed that the
proper interpretation of this Article is a textual interpretation. It said that
the Panel was right in watching a distinction between Article III:1 and Article
III:2. Article III:1 contains general principles, whereas Article III:2
provides specific obligations regarding internal taxes and internal charges. The
intention of Article III:1 is to establish the general principle that internal
measures must not be applied so as to afford protection to domestic production,
which works as a guide interpreting and comprehending the precise obligations
contained in Article III:2.[18]
Article III:2, first sentence
The Appellate Body noted that Article
III:2, first sentence does not mention specifically to Article III:1. However,
it considered that it is not necessary because the first sentence of Article
III:2 is, in effect, an application of this general principle.
The examination of this sentence involves
an analysis determining, in first place, whether the taxed imported and locally
produced products are "like" and, in second place, whether the taxes
applied to the imported products are "in excess of" those applied to
the domestic products.
"Like products"
The AB agreed with the Panel that the
definition of "like products" should be interpreted narrowly. How
narrowly is a question that should be determined individually for each tax
measure in each case.[19]
The Appellate Body said that the
criteria used in the Report of the Border
Tax Adjustment should be examined. According to these criteria, to
determine if two products are "like" we should attend to the
product's end-uses in a given market; the product's properties, nature and
quality; and the consumer's habits. Yet it is important to remember that this
is not an absolute criterion since there is not a precise definition of what is
"like", because this concept is a relative one.[20]
Tariff classification has also been applied
as a criterion for defining "like products" in numerous previous
adopted Panel Reports. Still the Appellate Body notes that there are risks
using tariff bindings that are too broad as a measure of product
"likeness". It is true that there are numerous tariff bindings which
are in fact extremely precise with regard to product description and which,
therefore, can provide significant guidance as to the identification "like
products". Obviously these determinations must be made on a case-by-case
basis. However, tariff bindings that include a wide range of products are not a
reliable criterion for determining products "likeness" under Article
III:2. [21]
With these modifications to the legal
reasoning in the Panel Report, the Appellate Body reaffirms the legal
conclusions of the Panel with respect to "like" products.
"In excess of"
If a WTO Member imposes taxes on
imported products in excess of domestic products, then this Member is not in
compliance with Article III. According to the AB, “even the smallest amount of
excess is too much”. The AB agreed with the Panel's legal reasoning and with
the conclusions on this aspect of the interpretation of Article III:2, first
sentence. [22]
Article III:2, second sentence
According to
AB the
language of the second sentence and the Ad Article need be read together
so as to give them their correct meaning. Different of Article III:2 first
sentence, Article III:2 second sentence specifically refers Article III:1. “The
significance of this distinction lies in the fact that whereas Article III:1
acts implicitly in addressing the two issues that must be considered in
applying the first sentence, it acts explicitly as an entirely separate issue
that must be addressed along with the two other issues that arise in applying
the second sentence”. Three separate subjects need be addressed to conclude
whether an internal measure is inconsistent with Article III:2, second
sentence.[23]
"Directly competitive or
Substitutable Products"
The Appellate Body noted that the
determination of the proper range of “directly competitive or substitutable
products” should be made on a case-by-case basis. In this case the Panel
took in consideration not only the common end-uses, physical characteristics and
tariff classification, but also the “market place”. The AB considered that this
was appropriated. It is appropriated to examine competition in the relevant
markets. And it is also appropriated to analyse the elasticity of substitution as one means
of examining those relevant markets. The Panel Report sustains that the
cross-price elasticity of demand is not the decisive criterion. “The decisive
criterion is whether they have common end-uses, inter alia, as shown by
elasticity of substitution”. The Appellate Body agreed with the Panel’s legal
analysis of whether the products are “directly competitive or substitutable”.[24]
“Not similarly taxed”
The Appellate Body decided that the
phrase “not similarly taxed” cannot be interpreted so as to mean the same thing
as the phrase “in excess of” in the first sentence. The phrase “in excess of”
means any amount of tax in imported products. According to the AB “there
may be an amount of excess taxation that may well be more of a burden on imported
products than on domestic directly competitive or substitutable products but
may nevertheless not be enough to justify a conclusion that such products are
“not similarly taxed” for the purposes of Article III:2, second sentence”. [25]
The AB agreed with the Panel that the
amount of differential taxation must be more than de minimis to be considered
“not similarly taxed” in any given case. Like the Panel, the AB defends that
whether any particular differential amount of taxation is de minimis or
not de minimis need be determined on a case-by-case basis.
The Appellate Body decided that the
Panel applied the correct legal reasoning in determining whether “directly
competitive or substitutable” imported and domestic products were “not
similarly taxed”. Nevertheless, the AB concluded that the Panel made a mistake
in blurring the distinction between this issue and the totally separate issue
of whether the tax measure in question was applied “so as to afford
protection”. These are separate issues that must be addressed individually.
“So as to afford protection”
The Appellate Body considers that any analysis
in any case of whether divergent taxation has been applied “so as to afford
protection” needs a comprehensive and objective examination of the structure
and application of the measure in question.[26] While
it is true that the aim of a measure may not be easily ascertained,
nevertheless its protective application can most frequently be determined from “the
design, the architecture, and the revealing structure of a measure”. According
to the AB “the very magnitude of the dissimilar taxation in a particular case
may be evidence of such a protective application as the Panel rightly concluded
in this case. Most often, there will be other factors to be considered as well.
Panels should give full consideration to all the relevant facts and all the
relevant circumstances in any given case”. In this aspect the AB agrees with
the Panel's acknowledgment in the 1987 Japan - Alcohol Report.
The Appellant Body has reviewed the
Panel's reasoning on the issue of "so as to afford protection". According
to the AB, having the Panel initiated with the correct legal approach to apply
with respect to Article III:2, second sentence, the Panel then equated
dissimilar taxation above a de minimis level with the distinct
requirement of demonstrating that the tax measure "affords protection to
domestic production". It is important to note that a finding that
"directly competitive or substitutable products" are "not
similarly taxed" is necessary to find a violation of Article III:2. However
this is not sufficient. The dissimilar taxation has to be more than de
minimis. It may be so much more that it will be obvious from that very
differential that the dissimilar taxation was applied "so as to afford
protection". In other cases, there may be other factors that will be just
relevant to demonstrating that the dissimilar taxation at issue was applied
"so as to afford protection". But it is important to remember that
the three issues that need be addressed in determining whether there is such a
violation must be addressed separately in each case and on a case-by-case
basis.[27]
The Appellate Body concluded that even
though the Panel blurred its legal reasoning in this respect, nevertheless the
Panel reasoned correctly that in this case, the Liquor Tax Law is not a compliance
with Article III:2.[28] The
Appellate Body observed that its interpretation of Article III “is faithful to
the customary rules of international interpretation of public international law
and that WTO laws are not so rigid or inflexible as not to leave room for
reasoned judgments in confronting the endless and ebb and flow of real facts in
real cases in the real world. They will serve the multilateral trading system
best if they are interpreted with that in mind”.
Conclusion
Due to the Japan – Taxes on alcoholic beverages case today we have the perfect
notion of the meaning of the Article III:2. This case provides excellent
instructions for advancing the concept of the most important terms of Article
III:2, such as “like products”, “directly competitive or substitutable
products”, “taxation in excess of”, “not similarly taxed”, and “so as to afford
protection”.
In 1996 this was
only the second Report of the Appellate Body. Today the Japan – Taxes on alcoholic beverages case is still the leading case
on National Treatment with respect to internal taxation. This case has revealed
to be fundamental for the interpretation and understanding of the Article III:2
of the GATT. [29] Until
1996 this Article has never been so thoroughly discussed. Nowadays, most of the
times that the Article III:2 is in dispute the Japan – Taxes on alcoholic beverages case is invoked (as we can see
in the Korea – Taxes on alcoholic beverages
case and many others). This is why this case was so important, because it
provided the guidelines for the comprehension of the GATT Article III:2, which
is a manifestation of the National Treatment Principle.
By Francisco Portugal
January, 2014
[1]
Andrew Guzman/Joost Pauweylen, International Trade Law, page 226
[2]
Panel Report, Japan - Taxes on alcoholic Beverages, page 3. The Report of the
Panel it is available at
https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=%28@Symbol=%20wt/ds8/r*%20not%20rw*%29&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#
[20/01/2014]
[3]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 130
[4]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 135
[5]
Panel Report, Japan – Custom Duties, Taxes and Labeling
Practices on Imported Wines and Alcoholic Beverages
[6]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 7
[7]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 138
[8]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 141
[9]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 9
[10]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 143
[11]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 144
[12]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 145
[13]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 147
[14]
Panel Report, Japan - Taxes on alcoholic
Beverages, page 149
[15] Japan -
Taxes on Alcoholic Beverages - The Report of the Appellate Body is available at
https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=%28@Symbol=%20wt/ds8/ab/r*%20not%20rw*%29&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#
[20/01/2014]
[16] Andrew
Guzman/Joost Pauweylen, International Trade Law, page 227
[17]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 16
[18] Appellate
Body Report, Japan – Taxes on alcoholic Beverages, page 18
[19] Appellate
Body Report, Japan – Taxes on alcoholic Beverages, page 19
[20] Appellate
Body Report, Japan – Taxes on alcoholic Beverages, page 21
[21]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 22
[22]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 23
[23]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 24
[24]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 25
[25]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 27
[26]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 29
[27]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 30
[28]
Appellate Body Report, Japan – Taxes on alcoholic Beverages, page 31
[29] As we
can see at http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_02_e.htm#article3
WTO makes several references to the Japan
– Taxes on alcoholic beverages case with the purpose of explaining the
Article III.
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