is the subject of my Trade Tripper column in this Friday-Saturday issue of BusinessWorld:
This is in continuation of our reflections on the country’s unfortunate (but quirkily illuminating) loss in the WTO case Philippines -- Taxes on Distilled Spirits (docketed as DS396 and DS403). The issue in that case essentially is whether the excise tax laws of the Philippines on distilled spirits violated Article III.2, first and second sentence, of the GATT. Both the panel which tried the case and the Appellate Body said yes.
The first thing, then, needed to be discussed is the “national treatment” principle, which GATT Article III embodies. In the simplest of terms, national treatment prohibits less-favorable treatment to imported goods in relation to similar local products. This same concept was also the focus in another (albeit victorious) WTO case: DS371, otherwise known as Thailand -- Customs and Fiscal Measures on Cigarettes from the Philippines. That case had to do with Thai taxes imposed on imported cigarettes.
As described by Brendan McGivern of White and Case: “This dispute was adjudicated under the two core national treatment disciplines of GATT Article III: the so-called ‘charge’ provision of Article III:2, and the ‘non-charge’ provision of Article III:4. Thailand’s measures were found to be inconsistent with both disciplines. Under the ‘charge’ provision of Article III:2, imported products cannot be subjected to internal taxes in excess of those applied to like domestic products. The jurisprudence of the GATT and the WTO has interpreted this obligation strictly. In the present case, the Appellate Body affirmed an earlier ruling that ‘even the smallest amount of ‘excess’ is too much.’ The Philippines successfully challenged a Thai law that granted a VAT exemption for resellers of domestic cigarettes, but not for resellers of imported cigarettes. Accordingly, the law was found to breach GATT Article III:2. The ‘non-charge’ provision of GATT Article III:4 does not deal with taxes or internal charges. Instead, it requires that imported products must be provided treatment that is ‘no less favorable’ than that provided to like domestic products with respect to regulations affecting internal sale.”
One can see an almost similar nature of issues between the two WTO cases. As the ADB commentary on the WTO states: “The principle of National Treatment set out in Article III GATT addresses another form of discrimination, namely that between imported and locally produced goods. Article III requires that imported and locally produced goods be treated equally. In other words, Members are prevented from adopting internal or domestic policies designed to favour their domestic producers vis-a-vis foreign producers of a given product, even though the latter may all be treated in a uniform way. Article III:2 GATT concerns tax rules. It requires that internal taxes on imported products shall not be in excess of those applied to domestic goods. Article III:4 GATT imposes nearly the same obligation with respect to regulations and requirements affecting the internal sale of imported products. It provides that the products of the territory of any Contracting Party imported into the territory of another Contracting Party shall be accorded treatment no less favorable than that accorded to like products of national origin, in respect of all laws, regulations and requirements affecting their internal sale.”
It must be noted that there have been three (only three) liquor tax disputes prior to ours that went through the gauntlet of the WTO dispute settlement system. All three were resolved in favor of the EC as complainants. And all involved national treatment as the main issue. The first, Japan -- Alcoholic Beverages (DS8, 10, 11), had the EC complaining that, since vodka, gin, and white rum are “like products” to two categories of shochu, by applying a higher tax rate on the latter, the law violated GATT Article III:2, first sentence. The AB agreed -- ruling, among others, that the Panel’s finding that vodka was taxed in excess of shochu was correct. It also accepted the Panel’s interpretation that Art. III:2, first sentence, requires a determination of the presence of two elements: (i) whether the taxed imported and domestic products are like; and (ii) whether the taxes applied to the imported products are in excess of those applied to the like domestic products.
The second case, Korea -- Alcoholic Beverages (DS75, 84), relates to Korea’s multi-tiered taxation regime (the Liquor Tax Law of 1949 and the Education Tax Law of 1982) on the sale of alcoholic beverages. The complaint here centered on GATT Article III:2. In this case, the AB held, among others, that evidence of “present direct competition” and the Panel’s approach of grouping the liquor products were appropriate. Finally, Chile -- Alcoholic Beverages (DS87, 110) dealt with the “Additional Tax on Alcoholic Beverages,” levying an excise tax on the sale and importation of alcoholic beverages. The complaint again looked at GATT Art. III:2, second sentence.
This article hopefully demonstrated some of the intertwining concepts involved in GATT Article III. Succeeding articles will try to discuss why the WTO considered our excise tax laws on distilled spirits were in violation of the same.