WORLD TRADE WT/DS8/15
WT/DS10/15
WT/DS11/13
ORGANIZATION 14February 1997
(97-0558)
Japan -Taxes onAlcoholic Beverages
Arbitration
under Article 21(3)(c) ofthe
Understanding onRules andProcedures
Governing theSettlement ofDisputes
Award oftheArbitrator
Julio Lacarte-MuróWT/DS8/15
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I. Introduction
1. On1November 1996, theDispute Settlement Body (the"DSB") adopted (WT/DSB/M/25)
theAppellate Body Report andthePanel Report, asmodified bytheAppellate Body Report, in
Japan -Taxes onAlcoholic Beverages (WT/DS8/11, WT/DS10/11 andWT/DS11/8). Asrequired
byArticle 21(3) oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes
(the"DSU" ),Japan informed theDSB on20November 1996 ofitsintentions inrespect ofthe
implementation oftheDSB'srecommendations andrulings (WT/DSB/M/26). Japan indicated that
itwould notbeabletoimplement immediately butonlywithin a"reasonable period oftime". Japan
didnotpropose totheDSBa"reasonable period oftime" forthelatter'sapproval asprovided forunder
Article 21(3)(a) oftheDSU.Itindicated thatitwould initiate negotiations withtheEuropean
Communities, theUnited States andCanada, theother parties tothedispute, onwhatconstitutes "a
reasonable period oftime". These negotiations didnotsucceed, andnomutual agreement within the
meaning ofArticle 21(3)(b) oftheDSUwasreached. Thenegotiations withtheEuropean Communities
did,however, leadtoanagreement onanaccelerated reduction ofthetariffratesonwhisky andbrandy
ascompensation fordelayed implementation, butthisagreement doesnotprejudge theirposition on
theissue ofa"reasonable period oftime".
2. Intheabsence ofanagreement under Article 21(3)(b) oftheDSU,theUnited States requested
on24December 1996, thatthe"reasonable period oftime" should bedetermined through binding
arbitration asisprovided forbyArticle 21(3)(c). After Japan andtheUnited States failed toagree
ontheappointment ofanarbitrator within thetendaysenvisaged bythenotetoArticle 21(3)(c), the
United States requested on7January 1997thattheDirector-General appoint anarbitrator. Following
consultations withtheUnited States andJapan, theDirector-General appointed measarbitrator on
17January 1997.
3. Atanorganizational meeting on20January 1997, itwasagreed thatalltheoriginal parties
tothedispute could participate inthearbitration process, notwithstanding thatonlytheUnited States
hadrequested binding arbitration. Itwasfurther agreed that,inthecircumstances ofthiscase, the
90-day period provided forbyArticle 21(3)(c) oftheDSU,which started on1November 1996, would
notprovide sufficient timeforafullreview ofthematter. Accordingly, theparties agreed toextend
thedeadline forthearbitrator 'saward bytwoweeks, toexpire on14February 1997. Theparties
gavewritten assurances thatthearbitrator 'saward would nevertheless beaccepted bythemas"binding
arbitration" within themeaning ofArticle 21(3)(c).WT/DS8/15
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4. Written submissions were received from Japan andtheUnited States on27January 1997.
Irequested certain additional information fromJapan on28January 1997. Japan replied tothisrequest
promptly, on30January 1997.
5. Having reached apolitical consensus onthenecessary liquor taxamendments inmid-December
1996afterconsultations withthegovernment party (theLiberal Democratic Party) andwiththeinterest
groups concerned, theGovernment ofJapan formally adopted itsproposal foraLawtoAmend aPortion
oftheLiquor TaxLaw(Law No.6,1953) andsubmitted ittotheDietforapproval on31January
1997, i.e.thedeadline forproposals fornewtaxlegislation. Throughout thesearbitration proceedings,
theGovernment ofJapan hasinsisted thatitwould ordinarily bealmost impossible toamend thedraft
legislation nowbefore theDiet.
6. Anoralhearing washeldon3February 1997, andwasattended byallfourparties tothedispute.
II. TheProposed Implementing Legislation
7. Intheproposal currently before theDiet, theGovernment ofJapan proposes toimplement
therecommendations andrulings oftheDSBinJapan -Taxes onAlcoholic Beverages inthree steps.
Inthefirststep,on1October 1997, Japan would reduce thetaxratesonbrown spirits (whisky, etc.),
andincrease thetaxratesonShochu AandShochu B.Theapplicable rateswould remain respectively
greater andlessthanthose levied onwhite spirits (vodka, etc.), i.e.theratetowards which allother
ratesaretoconverge. Liqueurs would betaxed atthesame ratesaswhite spirits. Inthesecond step,
on1October 1998, therateoftaximposed onShochu Awould become equal tothatlevied onwhite
spirits andliqueurs. Thetaxonbrown spirits (whisky, etc.)would befurther reduced, butwould remain
greater thanthatimposed onwhite spirits andliqueurs (i.e.3%higher). ThetaxonShochu Bwould
befurther increased, remaining lessthanthatimposed onwhite spirits andliqueurs. Inthethirdstep,
on1October 2001, Japan would increase thetaxrateonShochu Btothelevelimposed onwhite spirits
andliqueurs.
8. Theproposed amendments totheLiquor TaxLawwould implement therecommendations and
rulings oftheDSBwithin 23months of1November 1996, except insofar astheyapply toShochu B.WT/DS8/15
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With regard toShochu B,theincrease ofthetaxwould beimplemented inthree stages1andfull
compliance withtheDSB'srecommendations andrulings would beattained by1October 2001, i.e.
within fiveyears.
III. TheLegal Framework
9. Asageneral andfundamental obligation imposed onallWTO Members, Article XVI:4 of
theMarrakesh Agreement Establishing theWorld Trade Organization (the"WTO Agreement" )requires
thateachMember shallensure theconformity ofitslaws, regulations andadministrative procedures
withitsobligations asprovided intheWTO Agreement .Topreserve therights andobligations of
Members under theWTO Agreement ,theWTO provides foradispute settlement system thatisset
outintheDSU.
10. Asbasic principles ofWTO dispute settlement, Article 3(3)oftheDSUstipulates that:
Theprompt settlement ofsituations inwhich aMember considers thatanybenefits accruing
toitdirectly orindirectly under thecovered agreements arebeing impaired bymeasures taken
byanother Member isessential totheeffective functioning oftheWTO andthemaintenance
ofaproper balance between therights andobligations ofMembers.
andArticle 3(7)oftheDSUstates that:
Intheabsence ofamutually agreed solution, thefirstobjective ofthedispute settlement
mechanism isusually tosecure thewithdrawal ofthemeasures concerned ifthese arefound
tobeinconsistent withtheprovisions ofthecovered agreements.
11. Article 21(1) oftheDSUstipulates that"prompt compliance withrecommendations andrulings
oftheDSBisessential inorder toensure effective resolution ofdisputes tothebenefit ofallMembers"
(emphasis added). Thisobligation isfurther elaborated inArticle 21(3) oftheDSU,where itisstipulated
that"ifitisimpracticable tocomply immediately withtherecommendations andrulings, theMember
concerned shall have areasonable period oftimeinwhich todoso"(emphasis added). When
this"reasonable period oftime" isdetermined through binding arbitration asprovided forunder
1On1October1997, thetaxonShochu Bwouldbeincreased from102,100 Yen/ki lolitreofalcohol to150,700 Yen/ki lolitre,
on1October 1998 to199,400 Yen/kilolitre andfinally on1October 2001 to248,100 Yen/kilolitre.WT/DS8/15
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Article 21(3)(c) oftheDSU,thisprovision states thata"guideline" forthearbitrator should bethat
the"reasonable period oftime" should notexceed 15months fromthedateoftheadoption ofapanel
orAppellate Body Report. Article 21(3)(c) oftheDSUalsostipulates, however, thatthe"reasonable
periodoftime"maybeshorterorlongerthan15months,dependinguponthe"particularcircumstances".
Theterm, "particular circumstances", isnotdefined intheDSU.
IV. Arguments oftheParties
United States
12. With regard towhat constitutes the"particular circumstances" which needtobetaken into
account when determining the"reasonable period oftime" forthepurpose ofArticle 21(3)(c) ofthe
DSU,theUnited States argues thatonlythefollowing arerelevant:
(a) thetype(legislation, regulation, decree, etc.)andtechnical complexity (e.g.making
asimple change inatariff rate,ascompared tomaking more complex changes like
thedevelopment ofanewscientific standard) ofthemeasures thattheMember must
draft, adopt andimplement; and
(b) theminimumperiodoftimeinwhichtheMembercanachieveimplementation,assuming
thattheMember actsingood faith.
13. According totheUnited States, thequestion of"particular circumstances" doesnot,therefore,
imply apolicy judgement, butrather atechnical inquiry intothedomestic legislative orregulatory
system intheMember country concerned. Domestic political, economic andsocial considerations
should notbetaken intoaccount. TheUnited States asserts thathardship ofaneconomic and/or social
nature andpolitical tension areinevitable whenever agovernment proposes toenditsprotection of
adomestic industry. TheUnited States argues thatifsuchconsiderations aretaken intoaccount, this
would threaten theintegrity oftheWTO dispute settlement system. Thequestion forthearbitrator
iswhatistheshortest period oftimeinwhich implementation canpracticably takeplace, notwhether
alonger period oftimewould make implementation lessburdensome andpainful fortheimplementing
Member.WT/DS8/15
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14. Applying these general considerations inthisparticular case, theUnited States argues thatit
would bereasonable todetermine thatJapan canimplement thenecessary taxchanges inApril 1997,
i.e.fivemonths from theadoption oftheDSB'srecommendations andrulings. TheUnited States
suggests thisperiod because:
(a) itfallswithin theonetosix-month period thatJapan allegedly claimed itgenerally
needed tochange indirect taxes;
(b) itismorethanadequate toachieve thesimple amendment totheLiquor TaxLawneeded
tochange taxratesonalcoholic beverages;
(c) theDietnormally enacts fiscal measures inMarch eachyear; and
(d) itisthebeginning ofJapan'sfiscal yearwhen taxchanges areroutinely implemented.
15. TheUnited States alsopoints outthatJapan hasdemonstrated inthepastthatitiscapable of
implementing changes toitsLiquor TaxLawinashort period oftime. Theamendment totheLiquor
TaxLawpassed on10April 1984came intoeffect 20dayslater, andthelegislation which wasadopted
inimplementation ofthe1987GATT panel onJapan -Customs Duties, Taxes andLabelling Practices
onImported Wines andAlcoholic Beverages2andwhich involved more sweeping reforms, was
implemented injustoverthree months following thepassage ofthebill.
16. More generally, theUnited States asserts thatWTO Members have astrong interest in
establishing anexample ofprompt compliance with, andfullimplementation of,theDSB's
recommendations andrulings. Although itwould behypothetically possible toreach animmediate
settlement thatwould partially offset some ofthecommercial losses associated withthedeficiencies
inJapan'sproposedimplementation,theUnitedStatesmaintainsthatsuchasettlementwouldnotaddress
thecompetitive harm produced byacontinuing national treatment violation. TheUnited States also
suggests thatthefailure ofJapan, asoneoftheworld 'sleading trading nations, tocomply fullyand
inatimely manner withtheDSB'srecommendations andrulings would bedamaging tothecredibility
oftheWTO dispute settlement system. TheUnited States believes thatallowing fora5-year "reasonable
period oftime" would haveadevastating impact onthedispute settlement system.
2BISD 34S/83, adopted on10November 1987.WT/DS8/15
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Japan
17. Japan agrees that,ingeneral, the"reasonable period oftime" should bedetermined inlight
oftheDSU'sgeneral objective ofprompt compliance, butitnotes thattheDSUisalsoveryclearin
allowing forflexibility. Japan stresses thatalthough Article 21(3)(c) oftheDSUindicates that15months
isaguideline forthearbitrator toaward forimplementation, thisperiod oftimecanbeextended if
"particular circumstances" exist. Japan considers thatnowhere intheDSUarethere anyprovisions
which prescribe thescope ofthe"particular circumstances" tobeconsidered andargues thateachand
every circumstance relevant toeachindividual caseshould becarefully examined. Japan considers
thatinthepresent case,a23-month period forimplementation isa"reasonable period oftime" because
there areanumber of"particular circumstances" justifying suchaperiod.
18. First, Japan invokes, asarelevant "particular circumstance", thelimited powers oftheexecutive
branch overtaxation andtheneedforformal legislation adopted bytheDietinorder toimplement
therecommendations andrulings oftheDSB. Since theproposed amendments involve drastic increases
inthetaxes onshochu andare,therefore, veryunpopular andhavemetwithconsiderable political
opposition, theprocedure forpreparing andadopting these amendments hasbeenandwillbedifficult
andcomplex. Adding tothedifficulty andcomplexity ofthelegislative process isthefactthatthe
current government doesnothaveamajority ineither Chamber oftheDiet.
19. Secondly, Japan invokes, asarelevant "particular circumstance", theadverse effects ofthe
taxincreases onJapanese consumers andshochu producers. Under theproposed taxreform, thetax
onShochu Awillbeincreased by1.6times andonShochu Bby2.4times. Japan contends thata
2.4times increase, without staging, would beunprecedented inthehistory ofanydeveloped country.
Japan argues thatinorder tomitigate theadverse impact oftheliquor taxincreases onconsumers and
producers, itisonlynormal tospread these increases overtime. Japan recognizes thatthiswasnot
doneforthe1989liquor taxincreases, butsubmits thatthesituation wasdifferent then. Thetaxincreases
werelessdrastic andalsoaffected thecompeting saké. Inaddition, shochu producers received more
financial support inthecontext oftheimplementation ofthe1987 Panel Report.
20. Furthermore,JapanpointsoutthatinApril1997,therewillalreadybeaverysubstantiveincrease
intheconsumption tax,which wasdecided inNovember 1994, andthatitwould beunacceptable for
theliquor taxincreases andtheconsumption taxincrease tobecarried outsimultaneously. Japan also
points outthatlarge-scale increases intaxes normally takeplace inone-year intervals tomitigate theWT/DS8/15
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impact onconsumers. Thus, astheconsumption taxwilltakeeffect on1April 1997, theliquor tax
increases should normally become effective oneyearlater, on1April 1998. Since thiswould, however,
havebrought thefirststage oftheliquor taxamendments beyond the15-month "reasonable period
oftime", Japan hasproposed tobring forward thefirststage oftheimplementation to1October 1997
(i.e.11months aftertheDSBdecision). According toJapan, thisrepresents amajor effort onitspart,
andanindication thatJapan takes theArticle 21(3)(c) guideline of15months veryseriously. Inthis
context, Japan alsoargues thatbybringing forward thefirststage ofimplementation (from 1February
1998, i.e.15months aftertheDSBdecision, to1October 1997, i.e.11months aftertheDSBdecision),
anadvantage iscreated forimporters thatisequivalent tothedisadvantages arising fromthefactthat
theimplementation isnotfullyrealized within 15months.
21. Finally, Japan invokes, asarelevant "particular circumstance", theadministrative constraints
ontheexecution oftaxation. Theproposed changes inthetaxsystem willhavetobenotified and
explained to180,000 wholesalers andretailers inadvance andthisnotification alone willtakea
considerable amount oftime. Furthermore, Japan argues thatliquor distributors willneedtimetoadjust
theircomputer programmes andadvertising material.
22. Asanimportant factor underlying thearguments setoutabove, Japan invokes therigidity of
thedomestic process fortheadoption oftheannual budget. Under thisprocess, thegovernment decides,
afterintensive consultations withthegovernment party, onthecontents ofanytaxreform inmid-
December inorder tobeabletosubmit totheDietthedraftbudget andallproposals fortaxlegislation
bytheendofJanuary. During theoralhearing, Japan indicated thatifthistiming ismissed, thetax
legislation concerned canordinarily nolonger beamended forthefollowing fiscal year. TheDietis
unwilling toconsider drafttaxlegislation outside ofthistimeschedule.
23. Asmentionedabove,withregardtoShochuB,fullcompliancewiththeDSB'srecommendations
andrulings would, under thecurrent Japanese proposal fortaxreform, onlybeattained inOctober 2001,
i.e.afterfiveyears. Japan doesnotargue thatthis5-year period constitutes a"reasonable period of
time"withinthemeaningofArticle21(3)(c)oftheDSU.Tocompensateforthedelayedimplementation,
Japan has,therefore, offered theEuropean Communities, theUnited States andCanada anaccelerated
reduction ofthetariff ratesonalcoholic beverages asnegotiated inthecontext oftheUruguay Round.
TheEuropean Communities have accepted thisoffer buttheUnited States andCanada have not.
Furthermore, Japan argues withregard toShochu Bthatthetaxdifferential remaining intheperiod
between October 1998 andOctober 2001willnothaveadverse effects onimported whisky orbrandyWT/DS8/15
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inpractice, because thistaxdifferential willalready havebeensignificantly reduced from itscurrent
level. Japan suggests thatanynegative impact onimported whisky orbrandy willbefurther minimized
bythefactthatthemajority ofShochu Bisconsumed inalimited region inthesouth ofKyushu Island.
Thisargument isstrongly contested bytheUnited States which submits thatalltheinformation ithas
received from itsproducers ofalcoholic beverages points tothecontrary.
24. JapanarguesthatthereasonableperiodoftimeforimplementationoftheDSB'srecommendations
andrulings should notbeinfluenced bycircumstances surrounding theearlier dispute concerning the
Liquor TaxLawthatresulted inthe1987 Panel Report. According toJapan, therefore, thepresent
matter should beexamined initsowncontext, andinthelightofthe"particular circumstances" described
above. TheUnited States, ontheother hand, doesrefertothe1987Panel Report todemonstrate that
itispossible forJapan toimplement changes toitsLiquor TaxLawwithin aconsiderably shorter period
thanproposed byJapan inthiscase.
European Communities andCanada
25. Without taking aposition onthequestion whether ornot23months is,inthepresent case,
a"reasonable period oftime", theEuropean Communities statethatingeneral the"reasonable period
oftime" should be15months.
26. Canada, onthecontrary, takes theposition that23months andcertainly 5years arenot
"reasonable periods oftime". Itdoesnotconsider the"particular circumstances" advanced byJapan
toberelevant. Canada notes furthermore that"particular circumstances" arealways unique andshould
notbeconstrued ashaving precedential value forfuture cases. Finally, Canada notes thatJapan appears
tobesuggesting thatalonger period oftime(fiveyears) isrequired withrespect toShochu Bbecause
thetaxdifferential thatneeds tobeeliminated issomuch greater thanwithrespect toShochu A.This
istantamount toarguing, Canada observes, thatthegreater thedegree ofinconsistency withWTO
obligations, thegreater theperiod oftimeaMember should begranted tobring thatmeasure into
conformity withtheWTO Agreement .WT/DS8/15
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V. Award
27. Asstated inArticle 3(2)oftheDSU,thedispute settlement system oftheWTO isacentral
element inproviding security andpredictability tothemultilateral trading system. Therefore, allWTO
Members have astrong interest inprompt compliance with andfullimplementation ofthe
recommendations andrulings oftheDSB. Thisinterest isclearly reflected intheprovisions ofthe
DSU,andinparticular inArticle 21(3)(c), which stipulates thata"reasonable period oftime" for
implementation should notexceed 15months unless there are"particular circumstances" justifying
alonger orshorter period. Inthiscase,Iamnotpersuaded thatthe"particular circumstances" advanced
byJapan andtheUnited States justify adeparture fromthe15-month "guideline" either way. Iconclude,
therefore, thata"reasonable period oftime" within themeaning ofArticle 21(3)(c) oftheDSUfor
Japan toimplement therecommendations andrulings oftheDSBof1November 1996inJapan -Taxes
onAlcoholic Beverages is15months.
Signed intheoriginal, atGeneva, this13thdayofFebruary 1997 by:
________________________
Julio Lacarte-Muró