## Facts

- Japan’s Liquor Tax Law imposed different internal tax rates across categories of distilled spirits.
- The tax schedule treated domestically significant shochu more favorably than several largely imported spirits, including vodka, whisky, brandy, rum, gin, genever, and liqueurs.
- The European Communities, Canada, and the United States challenged the tax differentials as inconsistent with GATT 1994 national-treatment rules on internal taxation.
- A single WTO panel heard the consolidated disputes and found violations of GATT Article III:2 for (i) vodka versus shochu as “like products” and (ii) other spirits versus shochu as “directly competitive or substitutable products.”
- Japan appealed issues of law and legal interpretation; the United States cross-appealed certain points.

## Issues

1. Whether vodka and shochu are “like products” and, if so, whether Japan taxed vodka “in excess of” shochu in violation of GATT 1994 Article III:2, first sentence.
2. Whether shochu and other spirits (whisky, brandy, rum, gin, genever, liqueurs) are “directly competitive or substitutable products” and whether Japan’s dissimilar taxation was applied “so as to afford protection” in violation of Article III:2, second sentence (as informed by Ad Article III).
3. Whether establishing a violation under Article III:2, second sentence requires proof of subjective legislative intent to protect domestic production.
4. How WTO adjudicators should interpret Article III:2 under customary rules of treaty interpretation, including the role of prior adopted panel reports.

## Decision

- The Appellate Body largely upheld the panel’s findings that Japan’s Liquor Tax Law violated GATT 1994 Article III:2.
- It affirmed that vodka and shochu are “like products” and that taxing vodka more heavily than shochu breached Article III:2, first sentence.
- It affirmed that shochu and the other challenged spirits are “directly competitive or substitutable products” and that Japan’s dissimilar taxation breached Article III:2, second sentence because it was applied so as to afford protection to domestic production.
- It rejected the view that adopted GATT/WTO panel reports are binding “subsequent practice” or “decisions” for interpretation, while recognizing they can provide valuable guidance.
- It confirmed that proof of subjective protective intent is not required under Article III:2, second sentence; the inquiry is objective and focuses on the measure’s design, structure, and application.
- The recommendation to bring the Liquor Tax Law into conformity with Japan’s GATT obligations was left undisturbed.

## Legal Principles

- WTO covered agreements are interpreted using the customary rules of treaty interpretation reflected in VCLT Articles 31 and 32, emphasizing text, context, and object and purpose.
- Article III:2, first sentence analysis asks whether (1) the products are “like,” and (2) the imported product is taxed “in excess of” the domestic like product; if both are met, a violation is established without an additional protective-application element.
- “In excess of” under Article III:2, first sentence does not require a minimum threshold; even small tax differentials may breach the provision where the imported like product is taxed more heavily.
- Article III:2, second sentence requires (1) a competitive relationship (“directly competitive or substitutable”), (2) dissimilar taxation, and (3) application “so as to afford protection,” assessed objectively.
- The “so as to afford protection” inquiry does not turn on legislative motive; it is determined from the measure’s design, structure, and overall application, including whether the tax pattern disadvantages imports in favor of domestic production.
- Prior adopted panel and Appellate Body reports are not formally binding interpretations, but may generate legitimate expectations and should be taken into account as persuasive guidance when relevant.

## Conclusion

The Appellate Body held that Japan’s liquor tax structure breached GATT national treatment rules by imposing higher internal taxes on imported spirits that were like, or directly competitive with, domestic shochu, and it clarified that Article III:2 violations are assessed through an objective examination of the tax measure and competitive conditions rather than proof of subjective protectionist intent.


Japan—Taxes on Alcoholic Beverages, WTO Doc. WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (App. Body Oct. 4, 1996)