PHILIPPINES – TAXES ON DISTILLED SPIRITS
Document: Appellate Body Report
Date: 21 December 2011
Document codes: WT/DS396/AB/R; WT/DS403/AB/R; WT/DS396/AB/R; WT/DS396/AB/R
Complainant: U.S.
Respondent: Philippines
Third parties: Australia, China, Colombia, EU, India, Mexico, Thailand, Taiwan
Dispute stage: Appellate Body
Agreements cited: Art. III:2  GATT 1994

PHILIPPINES – TAXES ON DISTILLED SPIRITS

AB-2011-6

Reports of the Appellate Body

Note:

The Appellate Body is issuing these Reports in th e form of a single document constituting two separate
Appellate Body Reports: ; and WT/D S403/AB/R. The cover page, preliminary pages,
Sections I through VI and the Annexes are common to both Reports. The page header throughout the document
bears two document symbols, and WT /DS403/AB/R, with the following exceptions:
Section VII on pages EU-97 to EU-99, which bears the document symbol for and contains the Appellate Body's
findings and conclusions in the Appellate Body Report ; and Section VII on pages US-97 to
US-99, which bears the document symbol for and contains the Appellate Body's findings and conclusions in the
Appellate Body Report

APPELLATE BODY

Philippines, Appellant/Appellee
European Union, Other Appellant/Appellee
United States, Appellee

Australia, Third Participant
China, Third Participant
Colombia, Third Participant
India, Third Participant
Mexico, Third Participant
Separate Customs Territory of Taiwan, Penghu,
 Kinmen and Matsu, Third Participant
Thailand, Third Participant
 AB-2011-6

 Present:

 Van den Bossche, Presiding Member
 Hillman, Member
 Ramírez-Hernández, Member

I. Introduction
1. The Philippines and the European Union each appeals certain issues of law and legal
interpretations developed in the Panel Reports,
1 (the "Panel
Reports"). The Panel was established to cons ider complaints by the European Union 2 and the
United States3 regarding the consistency of the Philippines' excise tax regime applicable to distilled
spirits with Article III:2, first and second sentences, of the General Agreement on Tariffs and
Trade 1994 (the "GATT 1994").4
2. Pursuant to a joint request fro m the European Union and the United States, the Panel issued
its findings in the form of a single document containing two separate reports with common descriptive
and analytical sections but separate conclusions and recommendations for each complaining party,
each of which bears only the document symbol for that report. 5 The Panel Reports were circulated to
Members of the World Trade Organization (the "WTO") on 15 August 2011.

1WT/DS396/R (the "EU Panel Report"); WT/DS403/R (the "US Panel Report"), 15 August 2011.
2Request for the Establishment of a Panel by the European Union, WT/DS396/4.
3Request for the Establishment of a Panel by the United States, WT/DS403/4.
4At its meetings on 19 January and 20 April 2010, the Dispute Settlement Body (the "DSB")
established a single panel for both complaints in accordance with Articles 6 and 9 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (the "DSU"). (See WT/DS396/5, WT/DS403/5,
para. 1)
5Panel Reports, para. 8.1.

3. Before the Panel, the European Union and th e United States claimed that the Philippines has
acted inconsistently with Article III:2, first a nd second sentences, of the GATT 1994, in applying
different tax treatment to distilled spirits produced from the sap of the nipa, coconut, cassava, camote,
or buri palm, or from juice, syrup, or sugar of the ca ne ("designated raw materials"), and to distilled
spirits made from other raw materials ("non-designated raw materials").
6 For the reasons set out in its
Reports, the Panel found, in relation to the complain t by the European Union, that the Philippines has
acted inconsistently with its obligations under Article III:2, first sentence, of the GATT 1994. 7 More
specifically, the Panel found that:
… through its excise tax, the Philippines subjects imported distilled
spirits made from raw materials ot her than those designated in its
legislation to internal taxes in excess of those applied to like
domestic spirits made from the designa ted raw materials, and is thus
acting in a manner inconsistent with Article III:2, first sentence, of
the GATT 1994.8
4. The Panel found, in relation to the complaint by the United States, that the Philippines has
acted inconsistently with its obligations under Article III:2, fi rst and second sentences, of the
GATT 1994. More specifically, the Panel found that:
(a) through its excise tax, the Philippines subjects imported
distilled spirits made from raw materials other than those
designated in its legislation to internal taxes in excess of
those applied to like domestic spirits made from the
designated raw materials, and is thus acting in a manner
inconsistent with Article III:2, first sentence, of the
GATT 1994
9; and
(b) through its excise tax, the Philippines applies dissimilar
internal taxes on domestic distilled spirits made from
designated raw materials and to directly competitive or
substitutable imported distilled spirits made from other raw
materials in a manner so as to afford protection to the
Philippine domestic production of distilled spirits and is thus
acting in a manner inconsistent with Article III:2,
second sentence, of the GATT 1994.
10

6Panel Reports, para. 2.3.
7The Panel abstained from making findings with respect to the European Union's claim under
Article III:2, second sentence, of the GATT 1994, becaus e it considered that this claim was advanced as an
alternative claim to be addressed should the Panel not find that the measure at issue is inconsistent with the
first sentence of the same provision. (EU Panel Report, WT/DS396/R, para. 8.3)
9US Panel Report, WT/DS403/R, para. 8.2(a).
10US Panel Report, WT/DS403/R, para. 8.2(b).

5. On 23 September 2011, the Philippines notified th e Dispute Settlement Body (the "DSB") of
its intention to appeal certain issues of law covered in the Panel Re ports and certain legal
interpretations developed by the Panel, pursuant to Articles 16.4 and 17 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (the "DSU"), and filed a Notice of
Appeal11 and an appellant's submission 12 pursuant to Rules 20 and 21, respectively, of the Working
Procedures for Appellate Review13 (the "Working Procedures").
6. On 28 September 2011, the European Union notif ied the DSB of its intention to appeal
certain issues of law covered in the Panel Reports and certain legal interpre tations developed by the
Panel, pursuant to Articles 16.4 and 17 of th e DSU, and filed a Notice of Other Appeal 14 and an other
appellant's submission pursuant to Rule 23(1) and (3), respectively, of the Working Procedures .
On 11 October 2011, the European Union, the Ph ilippines, and the United States each filed an
appellee's submission. 15 On 14 October 2011, Australia and Me xico each filed a third participant's
submission16 and, on the same day, China, India, and the Separate Customs Territory of Taiwan,
Penghu, Kinmen and Matsu each notified its inte ntion to appear at the oral hearing as a
third participant.17 On 17 and 20 October 2011, Colombia and Thailand, respectively, notified its
intention to appear at the oral hearing as a third participant.18

11WT/DS396/7, WT/DS403/7 (attached as Annex I to these Reports).
12The Philippines provided the third participants with copies of its appellant's submission that did not
contain certain information that was considered business confidential information in the Panel proceedings
(pursuant to the Additional Working Procedures Concerni ng Business Confidential Information, adopted by the
Panel on 31 August 2010). This information was, however, included in the copies of the Philippines' appellant's
submission filed with the Appellate Body and served on the European Union and the United States. Following
an enquiry from the Appellate Body Secretariat on 14 October 2011, the Philippines provided, on
18 October 2011, copies of its appellant's submission containing the business confidential information to the
third participants. The Philippines reques ted the third participants to treat such information as confidential. In
response to questioning at the oral hearing in this appeal , the participants and third participants confirmed to the
Appellate Body that the information the Philippines had designated as business confidential in its appellant's
submission was governed by the confidentiality rules of Article 18.2 of the DSU.
13WT/AB/WP/6, 16 August 2010.
14WT/DS396/8, WT/DS403/8 (attached as Annex II to these Reports).
15Pursuant to Rules 22 and 23(4) of the Working Procedures.
16Pursuant to Rule 24(1) of the Working Procedures.
17Pursuant to Rule 24(2) of the Working Procedures.
18We note that Colombia, in its notification, expresse d its intention to attend the oral hearing pursuant
to Rule 24(2) of the Working Procedures. Colombia's notification was r eceived on 17 October 2011 and,
therefore, fell outside the 21-day time-limit stipulated in Rule 24(2) of the Working Procedures, which ended on
14 October 2011. Nevertheless, the Division hearing this appeal decided to accept Colombia's notification as a
notification made pursuant to Rule 24(4) of the Working Procedures.

7. The oral hearing in this appeal was held on 25 and 26 October 2011. The participants and
one of the third participants, Australia, made oral st atements. The participants and third participants
responded to questions posed by the Members of the Appellate Body Division hearing the appeal.
II. Arguments of the Participants and the Third Participants
A. Claims of Error by the Philippines – Appellant
8. The Philippines maintains that the text of, and jurisprudence on, Article III:2 of the
GATT 1994 make clear that this treaty provision does not prohibit the application of differential taxes
to products that are not "like" or "directly su bstitutable", both because of their different physical
characteristics and because their price is well be yond the means of the consumer. The Philippines
claims that the Panel made a number of legal erro rs relating to the interpre tation and application of
this provision. According to th e Philippines, the Panel's errors in this case are not a matter of failing
to weigh the evidence correctly, but that the Panel misinterpreted the relevance of the evidence, and in
certain instances ignored evidence, because it was applying the wrong legal standard.
9. In the view of the Philippines, the Panel treat ed this dispute as simply another Article III:2
trade dispute involving distilled spirits. In this respect, the Philippines argues, the Panel failed to
recognize important differences in this case, whic h have consequences for the interpretation and
application of Article III:2 in a manner that is fa ithful to its text and its object and purpose. The
Philippines explains that the challenged measure mak es no distinction based on the country of origin
of the products. The specific tax provided for under Section 141(a) of the Philippines' National
Internal Revenue Code of 1997 (t he "NIRC") applies to distilled sp irits produced from the designated
raw materials (provided that such materials are produced commercially in the country where they are
processed into distilled spirits), while distilled spir its produced from any other raw material are taxed
at the specific tax levels provided for under Secti on 141(b) of the NIRC. The Philippines points out
that the raw material base, not the country of origin, is the key to determining whether the lower tax of
Section 141(a), or the higher, tiered taxes of Section 141(b), apply.

On 20 October 2011, Thailand submitted its delegation list for the oral hearing to the Appellate Body
Secretariat and the participants and third participants in this dispute. Without prejudice to rulings the
Appellate Body may make in future appeals, we have interpreted Thailand's action as a notification expressing
its intention to attend the oral hearing pursuant to Rule 24(4) of the Working Procedures. While we wish to
emphasize that strict compliance with Rule 24(4) of the Working Procedures requires written notification to the
Secretariat that expresses an intention to appear at the oral hearing, we are sa tisfied that, in this case, the lack of
strict compliance with Rule 24(4) did not raise any due process concerns.

10. According to the Philippines, its tax measure does not alter the competitive opportunities of
imported distilled spirits in relation to like domestic distilled spirits in the Philippine market. Instead,
it achieves the fiscal goals of a sovereign government in a manner that allows consumers to consume
the same distilled spirits that they would cons ume even if no excise taxes were imposed. The
Philippines contends that Article III:2 of the GA TT 1994 does not prohibit such a measure. The
Philippines requests the Appellate Body to reverse va rious legal findings and conclusions of the Panel
under Article III:2 of the GATT 1994 and to apply Article III:2 in a manner that is consistent with its
text and its object and purpose.
1. Article III:2, First Sentence, of the GATT 1994
11. The Philippines claims on appeal that the Panel erred in its interpretation and application of
the term "like products" under Article III:2, first sentence, of the GATT 1994, and failed to apply the
appropriate standard for the interpretation of that term when assessing the subject products' physical
characteristics, consumer tastes and habits, and tari ff classification. The Philippines also claims that
the Panel erred in its assessment of the eviden ce under Article 11 of the DSU because it ignored
relevant expert evidence that im ported and domestic products were ph ysically dissimilar, disregarded
its own findings regarding the tariff classification of certain products, and had no evidentiary basis to
support its finding that the majority of consumers would view the imported and domestic products as
substitutable. The Philippines requests the Appella te Body to reverse th e Panel's finding under
Article III:2, first sentence, of the GATT 1994 for the following reasons.
12. The Philippines observes that "likeness" under Article III:2, first sentence, necessarily
requires that the products at issue compete in th e marketplace and have essentially the same physical
characteristics. Therefore, the "highest degree" of both physical similarity and competitiveness in the
relevant market is required in order fo r the products to be considered "like". 19 The Philippines claims
that the Panel applied the wrong standard of "likeness" under Article III:2, first sentence. To state, as
the Panel does, that the concept of "like products " is not limited to "identical products" does not
capture the Appellate Body's narrow definition of " like products" under Article III:2, first sentence.
The Philippines argues that the test that should have been applie d is whether the products are
"sufficiently close" in nature such that they could be deemed to fit within the narrow category of "like
products" within the meaning of Article III:2, first sentence, as interpreted by the Appellate Body.20

19Philippines' appellant's submission, para. 27.
20Philippines' appellant's submission, para. 29.

13. Regarding the products' properties, nature, and quality, the Philippines argues that the narrow
scope of the category of "like products" means that any significant physical difference, even if not
perceptible to the consumer, will be consider ed sufficient to disqualify a product from being
considered "like" another product. The physical di fferences between the products at issue begin with
the raw materials from which they are made, which r esult in other differences in physical properties
and qualities. The Panel in this case found that "sugar-based" and "non-suga r-based" distilled spirits
are "like" despite numerous physical differences betw een the products and, in particular, the additives
used to make "sugar-based" whisky, brandy, gin, and tequila. According to the Philippines, the
simple fact that "sugar-based" distilled spirits in the Philippines are physically different from their
"non-sugar-based" counterparts should have been view ed by the Panel as disqualifying these products
from being considered physically "like".
21
14. The Philippines contends that such error by the Panel occurred not only in relation to the
Panel's analysis of each imported "non-sugar-based" spirit and its domestic "sugar-based" counterpart,
but also in relation to the broader category of "non-sugar-based" distilled spirits compared with
"sugar-based" distilled spirits. This led the Panel to make "'the extraordinary finding' that
non-sugar-based whiskies were 'like' sugar-based brandies, etc."22 The Philippines contends that these
groups of products are so different that even th e complainants themselves did not claim that all
"non-sugar-based" distilled spirits are "like" "s ugar-based" distilled spirits for the purposes of
Article III:2, first sentence.23
15. The Philippines argues that the Panel applied th e wrong standard by relying on a "perceptible
differences" test from the perspective of the hypotheti cal consumer as the sole determinant of whether
the products are physically different or not. 24 According to the Philippines, the perception of the
consumer is relevant to the "likeness" criterion of consumer tastes and habits. Such a perception is
not related to the physical characteristics of the pr oduct, which are empirical, physical attributes. The
Philippines recalls that, in EC – Asbestos, the Appellate Body found that products with differences in
molecular structure, chemical composition, and fibr illation capacity, which are not detectable to the
consumer upon purchasing, were not considered phys ically "like". Moreover, the Appellate Body

21Philippines' appellant's submission, para. 39. The Panel found that "all distilled spirits produced in
the Philippines are made from designated raw materials" and that "most of the distilled spirits produced in the
Philippines are made from one particular designated ra w material: sugar cane molasses". (Panel Reports,
para. 2.17)
22Philippines' appellant's submission, para. 40 (referring to Panel Reports, paras. 7.39 and 7.77).
23Philippines' appellant's submission, para. 41 (referring to Panel Reports, paras. 7.4-7.6).
24Philippines' appellant's submission, para. 44.

held that physical characteristics d eserve a separate examination and should not be confused with any
of the other elements in the traditional likeness analysis.25
16. The Philippines thus contends that, having selected the wrong standard, the Panel found
physical similarity between "sugar-based" and "non -sugar-based" distilled spirits in spite of important
physical differences between these types of distilled spir its, such as the very different levels of certain
key "congeners"—chemical substa nces produced during fermentation that affect the taste and
aroma—and the use of additives in "sugar-based" dis tilled spirits to replicate the colour, odour, and
taste traditionally associated with certain "non-suga r-based" distilled spirits. The Philippines argues
that the Panel's improper analysis of "likeness" under Article III:2, first sentence, of the GATT 1994
manifests itself in the fact that the Panel did not take into account differences in quality between the
"sugar-based" and the "non-sugar-based" products.
17. The Philippines claims that the Panel erred in considering that the complainants' regulatory
regimes, which prohibit the marketing of whisky and brandy made from sugar cane molasses as
"whisky" and "brandy", were "irrelevant". 26 While it is true that the Philippine market is the relevant
market for the determination of "likeness" when considering the conditions of competition between
the foreign and domestic products at issue, the Pane l confused the analysis of competition with the
analysis of the products' physical characteristics. The complainants' regulatory regimes show that the
difference in raw materials is a legitimate and commonly applied basis for distinguishing between
distilled spirits. If a distilled spirit is made from something other than what is specified in the relevant
regulations, it may not be sold as a whisky, bra ndy, or other such regulated spirit within the
complainants' own markets. The Philippines conte nds that the domestic regulatory regimes of both
complainants are useful in identifying physical di fferences between the products that are commonly
recognized as important to that particular product's identity.
18. The Philippines also claims that the Panel fa iled to make an objective assessment of the
matter before it, in accordance with Article 11 of the DSU, because it disregarded expert evidence
demonstrating that "sugar-based" and "non-sugar-based " distilled spirits are different in terms of
physical characteristics and quality. In particular , the Panel disregarded critical portions of the
Philippines' evidence, and substituted its own judgement for that of the expert testimony presented by
the Philippines, when it found that there was no evidence that differences in the organoleptic
properties create a distinction between distilled sp irits made from designated raw materials and

25Philippines' appellant's submission, paras. 43 and 47 (referring to Appellate Body Report, EC –
Asbestos, paras. 111 and 114).
26Philippines' appellant's submission, para. 51.

distilled spirits made from non-designated raw materi als, and that the diff erences in chemical
composition that do exist were not of assistance in its analysis of "likeness".
27
19. The Philippines maintains that the expert eviden ce that it submitted to the Panel demonstrates
that "sugar-based" and "non-sugar-based" distilled sp irits have different organoleptic properties,
which result from differences in their chemical composition and congener content, and that this
evidence remained unrebutted throu ghout the Panel proceedings. The Philippines claims that each of
the Panel's statements and conclusi ons is directly contradicted by the expert evidence, and that, in
making these findings in relation to all the distilled sp irits under consideration, the Panel did not, and
could not, rely on contradictory expert evidence from the complainants, as none was submitted.
20. Regarding consumer tastes and hab its, the Philippines recalls that, in EC – Asbestos , the
Appellate Body noted that evidence in respect of end-uses and consumer tastes and habits was
particularly relevant "in cases where the evidence relating to properties establishes that the products at
issue are physically quite different".
28 According to the Appellate Body, in such cases, "a higher
burden is placed on complaining Members to esta blish that, despite the pronounced physical
differences, there is a competitive relationship between the products." 29 Therefore, where products
are physically different, a higher burden is imposed on the complainants to show direct competition
and substitutability. Moreover, the Philippines claims that, in order to give proper meaning to the
term "like" under Article III:2, first sentence, th e degree of competition between products must be
greater than that required for "directly compe titive or substitutable" products under Article III:2,
second sentence.
21. The Philippines thus contends that the Panel erred in finding that, in this case, the degree of
competition and substitutability among "sugar-based" a nd "non-sugar-based" distilled spirits satisfies
the higher standard of "likeness" under Article III:2, first sentence, while acknowledging that a large
proportion of consumers do not have access to, an d are not willing to purchase, "non-sugar-based"
distilled spirits instead of "sugar-based" distilled sp irits, and that the comp etition and substitutability
that exists is limited to exceptional "special occasion" purchases.30 The Philippines disagrees with the
Panel that a product that is not accessible to 98.2 pe r cent of the population, but may be accessible to
some unidentified miniscule segment of the population on special occasions, could be deemed to be

27Philippines' appellant's submission, paras. 140 and 141 (referring to Panel Reports, para. 7.40).
28Philippines' appellant's submission, para. 64 (quoting Appellate Body Report, EC – Asbestos ,
para. 118).
29Philippines' appellant's submission, para. 64 (quoting Appellate Body Report, EC – Asbestos ,
para. 118).
30Philippines' appellant's submission, para. 69.

engaged in the degree of competition required under Article III:2, first sentence, with a product that is
purchased as a routine consumption good and that is accessible to all. The Philippines relies on the
findings of the panels in Indonesia – Autos and Dominican Republic – Import and Sale of Cigarettes
to support its argument that products that do not comp ete in the same market are perceived differently
by consumers and cannot, therefore, be considered "like" within the meaning of Article III:2,
first sentence, of the GATT 1994. 31 According to the Philippines, the Panel in this dispute failed
properly to construe "likeness" in the context of that provision by failing to recognize this additional
element of differentiation in the Philippine market.
22. The Philippines further submits that di stribution channels for "sugar-based" and
"non-sugar-based" distilled spirits in the Philippine market are distinct, reflecting the different
consumer markets they serve. The Philippi nes relies on the findings of the panel in Chile – Alcoholic
Beverages, which found that, "if products have quite dis tinctive channels of distribution that could be
a negative indicator with respect to substitutability" and that "if the products were regularly presented
separately, it would be one piece of evidence that perhaps consumers did not group them together in
their perceptions".32 The Philippines submits that local sari-sari stores, which are frequented by all
except the most affluent of consumers, account fo r approximately 85 per cent of off-premise sales of
"sugar-based" distilled spirits, but do not carry "non-sugar-based" distilled spirits. 33 Moreover,
evidence submitted by the complainants shows th at "sugar-based" distilled spirits are sold
predominantly (as much as 90 per cent) through off-premise channels, while "non-sugar-based"
distilled spirits are sold predominantly (as much as 90 per cent) through on-premise channels.34
23. The Philippines claims, in addition, that the Pa nel failed to make an objective assessment of
the matter before it, in accordance with Article 11 of the DSU, because, in concluding that there was
no evidence of the existence of two separate mark ets in the Philippines, and that some consumers
from the majority market "may be able to purchase high-priced distilled spirits, at least on special
occasions", it disregarded critical evidence produced by the Philippines and ignored the fact that no
evidence had been presented to counte r that presented by the Philippines. 35 In particular, the
Philippines argues that the Panel ignored that: (i ) "non-sugar-based" distilled spirits are regularly
priced over Philippine pesos ("PHP") 150 a bottle; and (ii) 98.2 per cent of Philippine households

31Philippines' appellant's submission, paras. 72-74 (referring to Panel Report, Indonesia – Autos ,
paras. 14.174-14.177 and 14.181; and Panel Report, Dominican Republic – Cigarettes, para. 7.331).
32Philippines' appellant's submission, para. 75 (quoting Panel Report, Chile – Alcoholic Beverages ,
para. 7.59 (original emphasis)). (boldface added by the Philippines omitted)
33Philippines' appellant's submission, para. 76 and footnote 77 thereto.
34Philippines' appellant's submission, para. 76 (referring to 2010 International Wine and Spirits Record,
"Philippines – Index" (Panel Exhibits EU-15 and US-15)).
35Philippines' appellant's submission, para. 173 (quoting Panel Reports, paras. 7.59 and 7.119).

have a maximum of PHP 150 per week to spend on alc oholic beverages. Therefore, there are at least
two market segments in the Philippines, because only 1.8 per cent of the Filipino population can
afford "non-sugar-based" distilled spirits, whereas the rest of the population can afford only
"sugar-based" distilled spirits.
36
24. The Philippines argues that the Euromonitor International survey 37, submitted by the
complainants, shows that only three brands of im ported distilled spirits were priced below PHP 150,
and that none of these were priced lower than PHP 130, while the remainder (approximately
195 products) were priced far above this level, but that no evidence was presented showing that
imported distilled spirits are regularly priced below or even near the PHP 150 threshold. In respect of
market segmentation, the Philippines submits that no evidence was presented by the complainants to
show that the majority of the Filipino population could afford distilled spirits over PHP 150. The
Philippines argues that, while non-price-related factors (such as quality, taste, and social acceptability)
prevented the downward substitution of the products at issue, price-related factors were the most
significant reason why consumers could not engage in an upward substitution of the products, thus
creating a market segmentation of at least two groups. 38 Therefore, in find ing that there was "no
evidence of the existence of two separate distille d spirit markets in the Philippines that reflect
different levels of purchasing power" 39, the Panel simply rejected or ignored much of the evidence
submitted by the Philippines, in violation of Article 11 of the DSU.
25. Regarding tariff classification, the Philippines clai ms that the Panel erred in finding that the
fact that all distilled spirits at issue, irrespective of the raw materials from which they are made, fall
under the same four-digit Harmonized System ("HS") tariff heading (2208) provides an indication of
similarity. The Philippines relies on the findings of the Appellate Body in Japan – Alcoholic
Beverages II that, "[i]f sufficiently detailed, tariff classification can be a helpful sign of product
similarity", but that "tariff bindings that include a wide range of products are not a reliable criterion
for determining or confirming product 'likeness' under Article III:2".40 The Philippines argues that the
Panel's use of the four-digit tariff heading in this case was inappropriate, because the range of

36Philippines' appellant's submission, para. 174 (referr ing to Philippines' first written submission to the
Panel, paras. 224-229; and Philippines' responses to Panel Questions 35, 36, 72, and 89).
37Euromonitor International , "Consumer perceptions regarding substitutability in the Philippines
distilled spirits market" (August 2010) (Panel Exhibits EU-41 and US-41).
38Philippines' appellant's submission, para. 176 (referring to Euromonitor International survey, supra,
footnote 37, p. 19).
39Philippines' appellant's submission, para. 177 (quoting Panel Reports, para. 7.60). (boldface added by
the Philippines omitted)
40Philippines' appellant's submission, para. 80 (quoting Appellate Body Report, Japan – Alcoholic
Beverages II, pp. 21-22, DSR 1996:I, 97, at 114-115).

products that fall under HS heading 2208 is very broad; in any event, it is not sufficiently detailed to
draw any particular inferences as to whether the distilled spirits at issue are "like".41
26. The Philippines further claims that the Panel failed to make an objective assessment of the
matter before it, in accordance with Article 11 of the DSU, because it ignored significant and clear
evidence regarding the tariff classification of whisky and brandy when it arrived at the conclusion that
the evidence on tariff classification was inconclusive. Particularly in respect of whisky and brandy,
the Panel found that the HS classification at the six-digit level, and the accompanying explanatory
notes, take into account the raw material used for the production of the distilled spirit, so that whiskies
and brandies made from sugar cane molasses woul d not fall under the same HS subheading as
whiskies and brandies made from traditional raw materi als. The Philippines contends, therefore, that
the Panel's conclusion that, "at the six-digit level, the HS classification does not give … conclusive
guidance" is unsupported by the very facts that the Panel cited in its Reports.42
2. Article III:2, Second Sentence, of the GATT 1994
27. The Philippines claims that the Panel erred in finding that the Philippines has acted
inconsistently with Article III:2, second sentence, of the GATT 1994, because it applies dissimilar
internal taxes on domestic distilled spirits made from designated raw materials and "directly
competitive or substitutable" imported distilled spir its made from non-designated raw materials, "so
as to afford protection to domestic production" of distilled spirits in the Philippines. More
specifically, the Philippines claims that the Panel e rred in finding that domestic distilled spirits made
from designated raw materials and imported distilled spirits made fr om non-designated raw materials
are "directly competitive or substitutable" within th e meaning of Article III:2, second sentence, of the
GATT 1994. The Philippines also claims that the Pa nel erred in finding that the Philippines' excise
tax is applied "so as to afford protection to dom estic production" of distilled spirits within the
meaning of that provision.43
(a) Directly Competitive or Substitutable Products
28. The Philippines claims that the Panel erred in finding that domestic distilled spirits made from
designated raw materials and imported distilled sp irits made from non-designated raw materials are
"directly competitive or substitutable" within the meaning of Article III:2, second sentence, of the

41Philippines' appellant's submission, para. 81.
43The Philippines does not appeal the Panel's finding at paragraph 7.167 of the Panel Reports that
imported spirits and directly competitive or substitutable do mestic distilled spirits are not similarly taxed within
the meaning of Article III:2, second sentence, of the GATT 1994.

GATT 1994. The Philippines requests the Appellate Bo dy to reverse this finding for the following
reasons.
29. First, the Philippines argues that the Panel erred in finding that the relevant inquiry under
Article III:2, second sentence, is not the "degree of competition" between the products at issue but,
rather, the "nature or quality" of their competitive relationship.
44 Referring to the Appellate Body
reports in Korea – Alcoholic Beverages and US – Cotton Yarn, the Philippines submits that the degree
of competition between the products at issue is the "central" inquiry under Article III:2,
second sentence.45 In examining simply the "nature or quality" of competition, the Panel
insufficiently addressed the "degree of proximity" of competition between the products at issue.46 The
Philippines acknowledges that both quantitative and qua litative evidence are relevant in determining
the degree of competition between "non-sugar-b ased" and "sugar-based" distilled spirits under
Article III:2. However, the Philippines emphasizes th at the evidence that was before the Panel shows
"a great disparity in the accessibility of these produ cts, how [they] are perceived by the consumers,
and how they are treated by suppliers" in the market. 47 Therefore, had the Panel applied the correct
legal standard, it would have come to the conclusi on that there was "insufficient proximity in the
degree of competition" between the products at issu e to permit their characterization as "directly
competitive or substitutable".48
30. Second, the Philippines maintains that the Panel erred in finding "direct" competition between
domestic and imported distilled sp irits because "many [consumers] may be able to purchase
high-priced distilled spirits, at least on special occasions." 49 The Panel impermissibly lowered the
"direct competition" standard of Article III:2, wh ich requires "close proximity in the process of
purchasing a product, including its frequency, and the nature and frequency of purchasing another
product".50 The Philippines stresses that "special occ asion" purchases are, by nature, "exceptional",
likely requiring consumers to alter their usual consumption patterns.51 Recalling the Appellate Body's
interpretation that "directly competitive or substituta ble" products are those that offer an "alternative
way[] of satisfying a particular need or taste", the Philippines posits that two products that are not

44Philippines' appellant's submission, paras. 88 and 89 (quoting Panel Reports, para. 7.101).
45Philippines' appellant's submission, paras. 90 and 91 (referring to Appellate Body Report, Korea –
Alcoholic Beverages, paras. 129, 130, 133, and 134; and Appellate Body Report, US – Cotton Yarn , paras. 97
and 98).
46Philippines' appellant's submission, para. 93.
47Philippines' appellant's submission, para. 94.
48Philippines' appellant's submission, para. 95.
50Philippines' appellant's submission, para. 97.
51Philippines' appellant's submission, para. 98.

purchased with the same frequency, and that satisfy a dissimilar set of needs, cannot be considered
"directly" competitive.52
31. Third, the Philippines submits that the Panel in correctly considered that it was sufficient for a
small portion of the market to have "access" 53 to both domestic and importe d distilled spirits for them
to be "directly competitive or substitutable". 54 The Philippines agrees that access to both imported
and domestic distilled spirits is "a n important part" of the inquiry and constitutes a "threshold issue"
for whether further examination of the degree of competition is required. 55 However, access alone is
not sufficient to demonstrate that consumers in an affluent income bracket actually view those
products as directly competitive or substitutable. In equating "access" to "direct competition", the
Panel failed to give meaning to the term "dir ectly". Moreover, evidence showing a "vast and
consistent" price difference between domestic an d imported distilled spirits indicates a lack of
competition in that portion of the market, because it demonstrates that the pricing behaviour of
suppliers of imported distilled spir its is not constrained by the pr icing behaviour of suppliers of
domestic distilled spirits.56
32. Fourth, the Philippines contends that the Panel erred in finding direct competition between
domestic and imported distilled spirits on the basis of competition in a "negligible, unrepresentative
portion of the market". 57 For the Philippines, evidence of substitutability for the purposes of
Article III:2, second sentence, "must emanate from a segment of the population that is genuinely and
realistically representative of the whole ma rket in which the products are consumed". 58 T h e
Philippines emphasizes that 98.2 per cent of Filip ino households cannot afford imported distilled
spirits, and that the Panel err oneously found that these product s are "directly competitive or
substitutable" with domestic distilled spirits on th e basis of "some degree of substitutability" in
relation to 1.8 per cent of the market.59
33. Fifth, the Philippines submits that the Panel e rred in finding that instances of price overlap
between domestic and imported distilled spir its demonstrate that these products are " capable of being

52Philippines' appellant's submission, para. 99 (quoting Appellate Body Report, Korea – Alcoholic
Beverages, para. 115).
54Philippines' appellant's submission, para. 103.
55Philippines' appellant's submission, para. 104.
56Philippines' appellant's submission, para. 105.
57Philippines' appellant's submission, para. 118.
58Philippines' appellant's submission, para. 120.
59Philippines' appellant's submission, paras. 119.

directly competitive or substitutable in the future".
60 The Philippines dismisses this finding as
"speculative"61, and considers that the limited price overl ap falls short of demonstrating "actual
competition" between domestic and imported distille d spirits. The Philippines adds that an inquiry
into potential competition is only relevant to dete rmine "whether competition would otherwise occur
if the measures were not in place". 62 According to the Philippines, the "massive price differential"
between domestic and imported distilled spirits and the actual purchasing power of the "great
majority" of Filipinos demonstrate that these produ cts are not capable of being "directly competitive
or substitutable in the near future" in the absence of the excise tax.63 In addition, the Panel's reference
to the "future" is too indefinite and therefor e insufficient to support a finding of violation of
Article III:2, second sentence. The Philippines also ma intains that the Panel acted inconsistently with
its duties under Article 11 of the DSU in finding, without sufficient evidentiary basis, that the
products at issue are capable of competing in the future.
34. Finally, in addition to its claims of error in the application of Article III:2, second sentence, to
the facts of the present dispute, the Philippines cl aims that the Panel acted inconsistently with
Article 11 of the DSU in its assessment of the Euromonitor International64 and Abrenica & Ducanes65
studies, which evaluate the substitutability between domestic and imported distilled spirits in the
Philippine market. The Panel's conclusion that both studies showed "a significant degree of
competitiveness or substitutability"66 between domestic and imported distilled spirits in the Philippine
market is directly contradicted by the Abrenica & Ducanes study, which showed "negligible levels of
substitutability".67 In addition, the Panel mischaracterized the methodology of the Abrenica
& Ducanes study, which held the prices of other distilled spirits unchanged when the price of the
selected spirit increased. 68 The Euromonitor International survey is, in turn, an insufficient basis on
which to find substitutability, because it neither estim ated the cross-price elasticity, nor isolated the
effects of an increase in domestic prices on quantiti es of imported distilled spir its. Furthermore, the
sample used in the Euromonitor International survey represented only the top percentage of income

emphasis)).
61Philippines' appellant's submission, para. 108.
62Philippines' appellant's submission, para. 111.
63Philippines' appellant's submission, paras. 112 and 113.
64Supra, footnote 37.
65M.J. Abrenica and J. Ducanes, "On Substitutability between Imported and Local Distilled Spirits"
(University of Philippines School of Economics Foundation, 10 October 2010) (Panel Exhibit PH-49).
66Philippines' appellant's submission, para. 163 (quoting Panel Reports, paras. 7.62 and 7.113).
67Philippines' appellant's submission, para. 164.

distribution in the Philippines, and therefor e was not representative of the entire market. 69 T h e
Philippines adds that the Euromonitor International survey suggests that non-price-related factors,
such as consumer tastes and habits, prevented both the downwar d and upward substitution of the
products.70 According to the Philippines, the Panel unjustifiably disregarded these shortcomings in its
examination of the studies, and thereby failed to make an objective assessment of the matter as
required under Article 11 of the DSU.
(b) "So as to afford protection to domestic production"
35. The Philippines claims that the Panel erred in finding that the dissimilar taxes imposed on
imported distilled spirits and on directly compe titive or substitutable domes tic distilled spirits are
applied "so as to afford protection to domestic production" of distilled spirits. The Philippines
requests the Appellate Body to reverse this finding for the following reasons.
36. The Philippines argues that the Panel's conclusion that "the vast majority of [the] imported
spirits are subject to higher taxes" is not s upported by the evidence submitted to the Panel. 71 T h e
Panel's conclusion that " de facto the measure results in all dom estic distilled spirits enjoying the
favourable low tax, while the vast majority of the imported spirits are subject to higher taxes" 72 is
contradicted by the fact that approximately 50 per cent of Philippine distilled spirits production is
made from imported ethyl alcohol, which is subject to the lower tax rate.73
37. The Philippines adds that the Panel erroneously inferred protectionism from the high tax rates
applicable to some imported distilled spirits. In th e Philippines' view, such inference is unwarranted
in a case where 98.2 per cent of Filipino househol ds cannot afford imported distilled spirits. The
Panel erroneously dismissed the Philippines' argument on the basis of the reasoning articulated by the
Appellate Body in Korea – Alcoholic Beverages .74 While such reasoning may have been appropriate
in the context of the competitive conditions of th e Korean market, it does not preclude consideration
of the Philippines' argument concerning income ga ps in the present case. Moreover, in merely
"transferring the reasoning" applied by the Appellate Body in the context of the factual circumstances

69Philippines' appellant's submission, para. 169 (referring to Euromonitor International survey, supra,
footnote 37, pp. 7 and 13).
70Philippines' appellant's submission, para. 170 (referring to Euromonitor International survey, supra,
footnote 37, p. 19).
73Philippines' appellant's submission, para. 128 (referring to letter from the Republic of the Philippines
Department of Finance, Bureau of Internal Revenue, dated 3 February 2011 (Panel Exhibit PH-82); and
Philippines' response to Panel Question 68(a)).

of Korea – Alcoholic Beverages , the Panel fell short of the "case-by-case, comprehensive" analysis
that was required to assess whether there is protective application under Article III:2, second sentence,
in this dispute.
75
B. Arguments of the European Union – Appellee
38. The European Union takes issue with the Philippi nes' reference to its excise tax regime as a
measure that distinguishes between "sugar-based" distilled spirits and "non-sugar-based" distilled
spirits. In the European Union's view, this distinc tion is false and misleading, because Section 141(a)
of the NIRC covers not only distilled spirits made from sugar cane molasses, but also distilled spirits
produced from the sap of the nipa, coconut, cassava, camote, or buri palm. Indeed, the European
Union notes that some domestic distilled spirits ar e made from designated raw materials other than
sugar cane molasses.
39. The European Union argues that the Philippines overemphasizes the alleged neutrality of the
measure at issue, and disagrees with the contentions that the excise tax regime makes no distinction
between the products' countries of origin and that "any distilled spirit from any country in the world
produced from [sugar cane] is entitled to the lower specific tax." 76 The European Union notes that
several imported distilled spirits, albeit produced from sugar cane, do not enjoy the lower flat tax rate
for designated raw materials. 77 Moreover, Section 141(a) of the NIRC sets forth the additional
requirement that the raw materials be produced co mmercially in the country where they are processed
into distilled spirits. In the European Union's vi ew, this further condition implies that two products
that may be essentially identical might be treated differently solely on the basis of whether or not
climate or agronomic conditions allow for commer cial production of the relevant designated raw
material in the country of origin.
40. The European Union submits that the Philippines' assertion that the excise tax regime pursues
the aim of progressive taxation is "manifestly unfo unded" and conceals a protectionist intent, given
that the level of taxation does not depend on pr ices but, rather, on the raw materials from which

75Philippines' appellant's submission, paras. 133-135 (quoting Panel Reports, paras. 7.179 and 7.186, in
turn quoting Appellate Body Report, Japan – Alcoholic Beverages II, p. 29, DSR 1996:I, 97, at 120).
76European Union's appellee's submission, para. 10 (quoting Philippines' appellant's submission,
para. 10).
77European Union's appellee's submission, para. 12. The European Union mentions seven brands of
imported distilled spirits that are excluded from the lowe r tax rate under Section 141(a) of the NIRC, namely
"Havana Club Anejo Reserva", "Lemon Hart Jamaica Rum", "Lemon Hart White Rum", "Malibu Caribbean
White Rum w/ coco", "Malibu Rum", "Myers Rum", and "Myers Rum Planters Punch". ( Ibid., referring to
Republic of the Philippines Department of Finance, Bureau of Internal Revenue Regulation 23-2003
(Panel Exhibit PH-64), pp. 9, 11, and 12)

distilled spirits are produced. 78 The European Union contends that, if the Philippines had really
wanted to develop a progressive taxatio n system, it could have adopted a pure ad valorem system,
where all products would always be taxed according to their net retail price ("NRP").
41. The European Union also contests the Philippine s' argument that there is a "clear-cut
distinction" between high-priced imported distilled spirits and low-priced domestic distilled spirits 79,
and that price overlaps are "exceptions and aberrations". 80 The European Union agrees with the
Panel's findings that "there are a number of hi gh-priced domestic spirits, as well as less expensive
imports"81, and that the overlap in prices "is not exce ptional" and "occurs for both high-priced and
low-priced products".82 Moreover, the European Union emphasi zes that the measure at issue has a
profound impact even on the pre-tax pr ices of imported distilled spirits by, inter alia , preventing
producers of imported distilled spirits from enjoying the benefits of economies of scale.
1. Article III:2, First Sentence, of the GATT 1994
42. The European Union requests the Appellate Body to reject the Philippines' claim that the
Panel erred in interpreting and applying the con cept of "like products" within the meaning of
Article III:2, first sentence, of the GATT 1994.
43. With regard to physical characteristics, the European Union takes issue with the
Philippines' contention that the narrow scope of the te rm "like products" implies that "any significant
physical difference, even those that may not be perceptible to the consumer, will be considered
sufficient to disqualify a product from bei ng considered 'like' another product." 83 The European
Union argues that the Philippines' contention is based on the "factually wrong" premise that all
domestic products have similar characteristics and all imported distille d spirits have other
characteristics.84 In fact, apart from the raw materials used in the production of distilled spirits, the
Panel found no proof that all domestic distilled spirits have a similar chemical composition, or that
this composition would, in turn, be any different from that of all imported distilled spirits.

78European Union's appellee's submission, paras. 19 and 20.
79European Union's appellee's submission, para. 33.
80European Union's appellee's submission, para. 37 (quoting Philippines' second written submission to
the Panel, para. 56).
81European Union's appellee's submission, para. 35 (quoting Panel Reports, paras. 2.36, 7.51, 7.59,
and 7.118).
83European Union's appellee's submission, para. 45 (quoting Philippines' appellant's submission,
para. 30).
84European Union's appellee's submission, para. 47.

44. According to the European Union, the Philippi nes' assertion is also "legally flawed" and
based on an incorrect reading of relevant case law, in that it accords "undue" importance to physical
characteristics in the analysis of likeness.
85 The European Union remarks that the likeness analysis is
a "holistic exercise" in which physical characteri stics have to be examined together with other
criteria86, and in which "no criteri[on] is, on its own, determinative".87 Moreover, the European Union
argues that the relevant case law indicates that so me differences in physical characteristics are not per
se sufficient to render the products "un like". For instance, the panel in Japan – Alcoholic
Beverages II found that two of the distilled spirits at issue—vodka and shochu—were "like products"
since they shared " most physical characteristics", and stated that differences in name, traditional
origin, filtration, alcohol strength, and raw mate rials did not prevent a finding of "likeness". In
addition, that panel concluded that shochu and other distilled spirits at issue in that case were not "like
products" under Article III:2, first sente nce, "only insofar as there existed ' substantial noticeable
differences'" between them. 88 Similarly, the panel in Mexico – Taxes on Soft Drinks found that a
difference in the raw materials used to sweeten the products at issu e did not constitute a "substantial
noticeable difference", and accordingly concluded that the products at issue were "like".89
45. The European Union disagrees with the Phili ppines' assertion that the Panel erred in
considering as irrelevant for its analysis the Eu ropean Union's and the United States' regulations,
which allegedly prohibit the marketing of whisky and brandy made from the designated raw materials
as whisky or brandy in their respective markets. 90 The European Union takes the view that, in a
case-by-case analysis, which takes into account all releva nt factors, certain facts alleged by the parties
may be deemed irrelevant or of little relevance by a panel, and that the Philippines is merely
complaining about the weighing of evidence and the assessment of facts made by the Panel in this
case. Since the Philippines has not raised a specific claim of error under Article 11 of the DSU in this
respect, the European Union contends that the Appellate Body need not address the
Philippines' argument on this issue.
46. The European Union takes issue with the Philippines' claim that the Panel acted inconsistently
with Article 11 of the DSU because it disregarded portions of the expert evidence submitted by the

85European Union's appellee's submission, para. 50.
86European Union's appellee's submission, para. 51.
87European Union's appellee's submission, para. 52 (quoting Appellate Body Report, EC – Asbestos ,
para. 111).
88European Union's appellee's submission, para. 54 (quoting Panel Report, Japan – Alcoholic
Beverages II, para. 6.23). (emphasis added by the European Union)
89European Union's appellee's submission, para. 55 (quoting Panel Report, Mexico – Taxes on Soft
Drinks, para. 8.136).
90European Union's appellee's submission, para. 59 (referring to Philippines' appellant's submission,
para. 52).

Philippines with respect to the ch emical composition and the organoleptic properties of the products
at issue. The European Union contends that, although the Panel did not explicitly mention the expert
evidence in question, it did take it into account. In this respect, the European Union recalls that, in
Australia – Apples , the Appellate Body found that a panel th at does not expressly reproduce certain
statements may still act consistently with Article 11 when the panel's reasoning "reveals that it has
nevertheless assessed the signifi cance of the[se] statements". 91 Moreover, the Panel "went to great
lengths" to discuss the arguments of the Philippi nes on this point, and simply disagreed on the
relevance and weight of those elements.92
47. With regard to consumer tastes and habits, the European Union contests the Philippines' claim
that the Panel erred in disregarding the fact that 98.2 per cent of Filipino consumers are unable to
purchase high-priced imported distilled spirits, and ca n buy only low-priced domestic distilled spirits,
and that a large part of domestic distilled spirits are sold through sari-sari stores 93, whereas a
substantial part of imported distilled spirits are sold through larger off-premise outlets. The European
Union reiterates that the Philippines' distinction between high-priced imported distilled spirits and
low-priced domestic distilled spirits is "incorrect ", since both domestic and imported distilled spirits
cover a relatively wide spectrum of prices. 94 Moreover, the large overlap in the distribution channels
of domestic and imported distilled spirits is evidenced by the fact that many supermarkets, restaurants,
bars, pubs, and catering companies "offer both domestic and imported spirits side-by-side" 95, and
some sari-sari stores do sell some imported brands. 96 Finally, the European Union contends that the
Panel ultimately was not convinced that the figur es provided by the Philippines proved the existence
of two separate population groups with distinctive consumption patterns.97
48. The European Union also takes issue with th e Philippines' view that the Panel wrongly
considered, as part of its analysis of the compe titive relationship between the products at issue, the
fact that even customer s who cannot regularly afford high-pri ced distilled spirits can purchase them
"at least" on "special occasions". The European Un ion asserts that: (i) having already found that

91European Union's appellee's submission, para. 154 (quoting Appellate Body Report, Australia –
Apples, para. 275).
92European Union's appellee's submission, para. 150.
93We note that, before the Panel, the Philippines defined " sari-sari" stores as "small, neighborhood,
over-the-counter stores that carry basic grocery and ho usehold items". (Philippines' first written submission to
the Panel, para. 253)
94European Union's appellee's submission, para. 68.
95European Union's appellee's submission, para. 69 (referring to Panel Reports, para. 2.41).
96European Union's appellee's submission, para. 69 (referring to the Report of the Philippine Survey
and Research Center, "Sari-Sari Store Survey" (13 September 2010) A(QN)011510-120 (Panel Exhibit PH-55),
pp. 12-14).
97European Union's appellee's submission, para. 73 (referring to Panel Reports, paras. 2.31, 2.32
and 7.59).

there are significant price overlaps between dome stic and imported distilled spirits, the Panel's
mention of "special occasions" was made only " ad abundantiam "; (ii) the term "at least" clearly
indicates that the Panel found that, for many custom ers, the products are "usually" in competition and
that, only for those with lower income, these products may perhaps be in competition only on those
special occasions; and (iii) as noted by the Panel, the marketing campaigns run by producers of both
domestic and imported distilled spirits specifically associate consumption of their products with the
celebration of important events.
 98
49. The European Union contests the Philippines' a ssertion that the Panel acted inconsistently
with Article 11 of the DSU because it disregarded th e evidence on the current price of distilled spirits
and on the average income of the population. The European Union submits that the Panel duly took
into account the documents concerned and discussed th e arguments put forward by the Philippines.
Ultimately, according to the European Union, the Panel simply disagreed with the merits of the
Philippines' position, and thus it did not commit error under Article 11 of the DSU.
50. Lastly, with regard to tariff classificati on, the European Union disagrees with the
Philippines' claim that the Panel erred in its analysis when it referred to the four-digit HS heading for
distilled spirits, which, according to the Philippines, is not sufficiently specific. It also takes issue
with the Philippines' assertion that the Panel acted in consistently with Article 11 of the DSU when it
disregarded the fact that raw materials are crucia l in determining the six-digit HS subheadings of
some distilled spirits, which would prove that tho se distilled spirits, when made from different raw
materials, are "unlike". The European Union argu es that the Panel simply found that "a six-digit
heading was 'not conclusive'" and that the four-digit level could "provide an indication of
similarity".99 Thus, the Panel appreciated the tariff classification in the context of other facts and
evidence and did not give any unwarranted weight to this aspect. In addition, the European Union
argues that the evidence was not unequivocal. For instance, although the Philippines argued that a
Philippine whisky (being made from sugar cane) w ould not fall under HS subheading 2208.30, export
statistics show that, in recent years, there were exports of Philippine whiskies under that
HS subheading to several countries worldwide. 100 Finally, the Panel's conclusions on this issue are in
conformity with those reached in past disputes. 101 Therefore, the Europ ean Union concludes, the

98European Union's appellee's submission, para. 71.
99European Union's appellee's submission, para. 77 (quoting Panel Reports, para. 7.63). (emphasis
added by the European Union)
100European Union's appellee's submission, para. 78 (referring to Panel Exhibit EU-54, containing
tables on volume and value of Philippine exports of distilled spirits, 2000-2008).
101European Union's appellee's submission, para. 79 (referring to Appellate Body Report, Japan –
Alcoholic Beverages II, p. 23, DSR 1996:I, 97, at 115).

Panel properly applied the criterion of tariff classifi cation in its analysis under Article III:2, first
sentence, of the GATT 1994, and did not err under Article 11 of the DSU.
2. Article III:2, Second Sentence, of the GATT 1994
51. The European Union submits that the Panel di d not err in finding that the Philippines has
acted inconsistently with Article III:2, second sen tence, of the GATT 1994 by applying dissimilar
internal taxes on domestic distilled spirits made from designated raw materials and "directly
competitive or substitutable" imported distilled spir its made from non-designated raw materials, "so
as to afford protection to domestic production" of distilled spirits. More specifically, the European
Union argues that the Panel correctly held that domestic distilled spirits made from designated raw
materials and imported distilled spirits made from non-designated raw materials are "directly
competitive or substitutable" within the meaning of Article III:2, second sentence, of the GATT 1994.
The European Union also argues that the Panel corr ectly found that the Philippines' excise tax is
applied "so as to afford protection to domestic pr oduction" of distilled spirits within the meaning of
Article III:2, second sentence, of the GATT 1994.
(a) Directly Competitive or Substitutable Products
52. The European Union requests the Appellate B ody to dismiss the Philippines' appeal and
uphold the Panel's finding that domestic distilled sp irits made from designated raw materials and
imported distilled spirits made from non-designate d raw materials are "directly competitive or
substitutable" within the meaning of Article III:2, second sentence, of the GATT 1994.
53. First, the European Union dismisses as "purely terminological" 102 the Philippines' argument
that the Panel insufficiently a ddressed the "degree of competition" 103 between domestic and imported
distilled spirits in the Philippine market. In re jecting the Philippines' argument that Article III:2,
second sentence, requires "complete, absolute or ex act" substitutability, the Panel did not exclude the
degree of competition from its analysis. 104 Rather, the Panel simply stated that the issue was "not so
much" the degree of competition because it was n ecessary to take into account both current and
potential competition. 105 According to the European Union, th is interpretation is consistent with
Korea – Alcoholic Beverages , where the Appellate Body found that Article III:2, second sentence,
requires panels to take into account "latent demand, especially in markets where there are regulatory

102European Union's appellee's submission, para. 83.
103European Union's appellee's submission, para. 85. (emphasis omitted)
104European Union's appellee's submission, para. 84.
105European Union's appellee's submission, para. 85.

barriers to trade or to competition".
106 The Panel's interpretation of Article III:2, second sentence,
also finds support in US – Cotton Yarn , where the Appellate Body held that the term "competitive"
has "a wider connotation than 'actually competing' and includes also the notion of a potential to
compete".107 The European Union adds that the Panel's finding on the extent of competition between
domestic and imported distilled spirits in the Philippines is an issue of fact that is not amenable to
review on appeal, except under Article 11 of the DSU.
54. Second, the European Union argues that the Philippines misreads the Panel Reports when it
argues that the Panel found direct competition between the products at issue on the basis of "special
occasion" consumption. The Panel rejected the Ph ilippines' arguments regarding the existence of
two separate markets for distilled spirits based on price overlaps between imported and domestic
distilled spirits, and because there was no evidence of the existence of two separate population groups
in terms of consumption patterns and inco me. Therefore, the Panel dismissed the
Philippines' argument because it was "factually unfounded and unproven", and not because it
considered that partial competitive overlap was sufficient to establish the requisite level of
substitutability.
108 Moreover, the European Union stresses that Article III:2, second sentence, does
not require the same frequency in consumption, a nd that substitutability on "certain occasions" can be
relevant under that provision. For the European Un ion, if potential competition must be taken into
account, a fortiori, actual competition, even if only partial, should not be disregarded.
55. Third, the European Union challenges the Philippines' assertion that the Panel wrongly
assumed that "access" to imported distilled spirits by a narrow segment of the market is equivalent to
"direct competition". 109 The Panel's findings under Article III:2, second sentence, were based on
"different aspects of similarity" between the pr oducts, including their competitive relationship,
channels of distribution, properties, nature a nd quality, common end-uses and marketing, tariff
classification, and internal regulations. 110 The Panel simply reasoned that the Philippines' argument
concerning market segmentation implies that some part of the Filipino population has access to both
groups of distilled spirits. Thus, the Panel right ly concluded that potential competition cannot be
ruled out a priori. The European Union also submits that th e weight to be given to the price studies,
which allegedly demonstrate that producers of dom estic distilled spirits are not constrained by the

106European Union's appellee's submission, para. 86 (quoting Appellate Body Report, Korea –
Alcoholic Beverages, para. 115).
107European Union's appellee's submission, para. 89 (quoting Appellate Body Report, US – Cotton
Yarn, para. 96). (emphasis omitted)
108European Union's appellee's submission, para. 97.
109European Union's appellee's submission, para. 99.
110European Union's appellee's submission, para. 101.

pricing behaviour of producers of foreign distille d spirits, is a matter falling within the Panel's
discretion as trier of facts, and cannot be reviewed by the Appellate Body except under Article 11 of
the DSU.111
56. Fourth, the European Union disagrees with the Philippines that the Panel found the requisite
level of substitutability on the basis of direct competition only in a "negligible or unrepresentative"
portion of the market. The European Union reite rates that the Panel found no evidence that all
imported distilled spirits are high-priced and all domest ic distilled spirits are low-priced, and that the
Filipino population can be divided into two separ ate groups, in terms of consumption patterns and
income. Therefore, the Panel did not decide that competition exists only in a portion of the market.
Rather, in the European Union's view, the Panel assessed and made findings in relation to competition
in the whole Philippine market for distilled spirits.
57. Fifth, the European Union rejects the Philippines' allegation that the Panel's findings
concerning potential competition are "speculative". 112 The Philippines' allegation that the Panel
disregarded evidence to the effect that price overl aps between domestic and im ported distilled spirits
are "exceptional" concerns an issue of fact and, as such, should not be reviewed by the Appellate
Body.113 Nonetheless, the Panel's finding that dom estic and imported distilled spirits "are currently
competitive and substitutable" is supported by evid ence demonstrating overlap in the prices of both
high- and low-priced distilled spirits. 114 In addition, the Panel was al so required to take into account
potential competition, because current conditions of competition may be distorted by the effects of the
challenged measure. Therefore, the Panel correctly noted that instances of actual competition "are a
clear indication that the imported and domestic products at issue in this dispute are indeed capable of
being directly competitive or substitutable in the future." 115 The European Union adds that the Panel
acted consistently with its duties under Article 11 of the DSU in reaching its finding. According to
the European Union, instances of actual competiti on and studies demonstrating that consumers are
willing or might be willing to use imported and dom estic distilled spirits to satisfy the same needs
support the Panel's finding that there is also potential competition between these products.

111European Union's appellee's submission, para. 103 (referring to Appellate Body Report, US –
Upland Cotton, para. 441).
112European Union's appellee's submission, para. 105 (r eferring to Philippine's appellant's submission,
paras. 107-115).
113European Union's appellee's submission, para. 107.
114European Union's appellee's submission, para. 110 (referring to Panel Reports, para. 7.118 (original
emphasis)).

58. Finally, the European Union argues that the Pa nel did not act inconsistently with its duties
under Article 11 of the DSU in its assessment of th e economic studies presented by the parties. The
fact that the Euromonitor International survey is not an econometric study does not undermine its
probative value with respect to consumer preferences in the Philippines. To the contrary, the survey
is "very pertinent" to the extent that it shows that consumers regard local and imported distilled spirits
as "largely substitutable" and that they would react to price movements by switching between these
categories.
116 The European Union also stresse s that the sample used in the Euromonitor
International survey was adjusted and "cross-compared" w ith published demographic information to
allow closer alignment with the overall Filipino population. 117 The European Union adds that the
Panel correctly described the methodology of the Abrenica & Ducanes study, because that study did
not attempt to examine consumer response to a rise in prices of all domestic distilled spirits, or a
reduction in prices of all imported distilled spirits. In any event, it is not clear to the European Union
why an alleged imprecise description of the methodology employed in the Abrenica & Ducanes study
would amount to a violation of Article 11 of the DSU.
118 The European Union adds that the
Abrenica & Ducanes study estimates that, in a tax-ne utral environment, the market share of imported
distilled spirits would increase by between 13 and 24.5 per cent, thus lending support to the Panel's
conclusion regarding significant substitutability.119
(b) "So as to afford protection to domestic production"
59. The European Union argues that the Panel did not err in finding that the dissimilar taxes
imposed on imported distilled spirits and on direc tly competitive or substitutable domestic distilled
spirits are applied "so as to afford protection to domestic production" of distilled spirits. The
European Union requests the Appellate Body to dismi ss the Philippines' appeal in this respect, and to
uphold the Panel's finding.
60. The European Union rejects the Philippines' ar gument that the measure at issue has no
protective effect because a significant quantity of domestic distilled spirits is produced from imported
ethyl alcohol that is taxed at the lower rate. For the European Union, ethyl alcohol is not a distilled
spirit, but merely an input in the production of dis tilled spirits, and therefore is of no relevance to the

116European Union's appellee's submission, para. 172.
117European Union's appellee's submission, para. 173.
118European Union's appellee's submission, para. 177. According to the Europ ean Union, the authors
of the Abrenica & Ducanes study ( supra, footnote 65) expressed their person al opinion when characterizing a
cross-price elasticity ranging from -0.01 and 0.07 as "low ", but the Panel was entitled to consider that this
coefficient was not "insignificant or immaterial" given that the excise ta x "squeezed" imported spirits into a
"marginal" 2-3 per cent market share. (Ibid., para. 180)
119European Union's appellee's submission, paras. 181 and 182 (quoting Panel Reports, para. 7.55).

current proceedings. The European Union emphasizes that "[a] brandy or whisky or vodka produced
in the Philippines, by a Filipino company, an d sold in the Philippines, does not become an imported
spirit even if it were to be produced, in part or wholly, with imported ethyl alcohol."120
61. The European Union submits that the Panel correctly eschewed revisiting the question of
whether domestic and imported distilled spirits are "directly competitive or substitutable" in
determining whether the measure at issue is a pplied "so as to afford protection to domestic
production". The question of whether competition be tween domestic and impor ted distilled spirits
could exist pertains to the analysis of whether these products are "directly competitive or
substitutable" under Article III:2, second sentence. In contrast, the examination of whether the
measure is applied "so as to afford protection to domestic production" is a separate and different issue
that must be examined individually, and must focus on the structure and application of the measure at
issue, not on the competitive relationship between the products. For the European Union, the
Philippines' argument regarding market segmentation relates to competition in the Philippine distilled
spirits market, and not the structure and application of the measure at issue.
C. Arguments of the United States – Appellee
62. The United States takes issue with the Philippi nes' assertion that this dispute essentially
concerns the Philippines' fiscal policy objectives and its commitment to a policy of progressive
taxation, as this raises systemic issues regarding th e autonomy of WTO Members. The United States
takes no position on the fiscal priorities of the Phili ppine Government, and argues that the issue in
dispute is whether the excise tax regime discr iminates against imported products, in breach of
Article III:2 of the GATT 1994. Moreover, the United States contends that the Philippines' claim that
its excise tax regime is origin-neutral because it di stinguishes on the basis of raw materials constitutes
a "distorted" presentation of the measure at issue 121, and that the Philippines' distinction between
"sugar-based" and "non-sugar-based" distilled spirits pr ovides "no practical information" about the
products sold in its market. 122 The distinction drawn by the excise tax regime ensures that the lowest
tax rate is applied to all distilled spirits produced from designated raw materials in the Philippines,
and that imported distilled spirits made from non-designated raw materials face much higher taxes.

120European Union's appellee's submission, para. 124. (original emphasis)
122United States' appellee's submissi on, para. 4 (referring to Philippines' appellant's submission,
para. 5).

1. Article III:2, First Sentence, of the GATT 1994
63. The United States submits that the Panel corr ectly interpreted and applied Article III:2,
first sentence, of the GATT 1994 and that it con ducted an objective assessment of the matter, as
required by Article 11 of the DSU. It notes that p ast panels and the Appellate Body have employed a
case-by-case approach to determining whether produc ts are "like", which takes into account all
relevant factors. The United States argues that, while the Panel analyzed evidence under each factor
before reaching its conclusions, th e Philippines largely ignores the overall analysis of the Panel and
focuses entirely on physical differences between imported and domestic products and the alleged
inability of most Filipino consumers to purchase imported distilled spirits on a weekly basis.
64. With regard to physical characteristics, the United States disagrees with the Philippines' claim
that any "significant" physical differences betwee n domestic and imported dist illed spirits, even those
that may not be perceptible to the consumer, should be sufficient to prevent a finding of "likeness". In
the United States' view, the Philippines improperly r eads the term "like" to mean "identical" and
makes two fundamental errors. Fi rst, it overstates the importance of physical characteristics in the
analysis of "likeness". Second, it overstates the importance of certain physical differences and ignores
"key" physical similarities that consumers rely on when choosing brands of spirits.123
65. The United States further notes that the Philippines' arguments on physical characteristics
focus entirely on the physical differences that re sult from the use of different raw materials,
particularly congeners present in the chemical co mposition of the products at issue and flavourings
added to domestic distilled spirits. The United St ates submits that this emphasis on differences in
additives and congeners is "unduly narrow" for a proper assessment of physical characteristics. 124
First, some physical characteristics, such as physi ological effects, are similar across all types of
products, while, for other characteristics, both im ported products and domes tic products vary from
type to type. Second, domestic producers "take great pains" to make their distilled spirits similar to
imported distilled spirits of the same type, so much so that they are virtually indistinguishable on the
shelf for the consumer. 125 In this context, the United States agrees with the Panel's focus on the
characteristics of the final products as sold to consum ers, rather than on the raw materials used, and
asserts that this approach is consistent with that adopted by the panel in Mexico – Taxes on Soft
Drinks.126 Third, the Philippines' view is at odds with the panel's findings in Japan – Alcoholic

126United States' appellee's submission, para. 28 (referring to Panel Report, Mexico – Taxes on Soft
Drinks, paras. 8.30, 8.31, and 8.131).

Beverages II, where the distilled spirits that were found to be "like"—vodka and shochu—shared most
physical characteristics, were not necessarily made from the same raw materials, and presented
possible differences in alcoholic strength.127 In any event, the United Stat es stresses that, with respect
to organoleptic properties, there is no evidence that these differences among different types of
distilled spirits indicate two separate and identif iable product groups between Philippine domestic
distilled spirits and their imported counterparts.
66. The United States argues that, while physical ch aracteristics constitute an important criterion
for determining whether products are "like", they are not dispositive; rather, they are simply part of
the list of factors to be considered. According to the United States, the Philippines "entirely ignores"
other relevant evidence cited by the Panel—such as marketing and end-uses—that supports the
Panel's finding of "likeness".
67. The United States also contests the Philippines' claim that the Panel erred in considering as
irrelevant for its analysis of "likeness" the fact that, under the European Union's and the
United States' internal regulations, distilled spirits labelled and marketed as whisky and brandy must
be produced from specific raw materials. The United States stresses, and all parties agree, that the
"relevant market" for the determination of "likeness" is the Philippines. Accordingly, the Panel
correctly reviewed the Philippines' counterparts to the United States' and the European Union's
regulations, which permit the sale of products labe lled as brandy, whisky, and vodka, even when they
are made from raw materials not traditionally associated with those types of distilled spirits.128
68. The United States disagrees with the Philippines' claim that the Panel acted inconsistently
with Article 11 of the DSU by disregarding expert evidence submitted by the Philippines with regard
to the organoleptic properties and chemical com position of distilled spirits. The United States argues
that, although the Panel did not directly quote or reproduce the entirety of the expert evidence
proffered by the Philippines, it did summarize and c onsider it along with other relevant evidence, and
concluded that the expert evidence was not probative of whether the products are "like".
129
69. With respect to consumer tastes and hab its, the United States takes issue with the
Philippines' arguments that: (i) since most domest ic consumers do not have the economic means to

127United States' appellee's submission, para. 32 (referring to Panel Report, Japan – Alcoholic
Beverages II, para. 6.23).
128United States' appellee's submission, para. 38. The United States cites to evidence it submitted to the
Panel in Exhibits US-22 to US-25 and US-27, which contain, inter alia, Republic of the Philippines Department
of Trade, Bureau of Standards Administrative Orders Nos. 257, 258, 259, and 358.
129United States' appellee's submission, para. 104 (referring to Panel Reports, footnotes 397-400 to
para. 7.40).

purchase imported distilled spirits on a weekly basi s, the Panel erroneously found that there was
competition between domestic and imported distille d spirits; and (ii) purchases of imported distilled
spirits on "special occasions" are not sufficient ev idence of competition. The United States observes
that the Panel drew its conclusions on consumer ta stes and habits from a variety of factual elements,
including that the same outlets in the Philippines that sell imported distilled spirits also sell domestic
distilled spirits, the similarity in marketing campa igns of domestic and imported distilled spirits, and
the overlap in price among domestic and imported distilled spirits.
130
70. The United States submits that the Appellate Body report in Japan – Alcoholic Beverages II
does not support the Philippines' assertion that a cer tain quantity or volume of current competition is
necessary to find "likeness". In fact, the Appella te Body in that dispute did not suggest that
competition must be presently occurring in order fo r there to be a competitive relationship between
two products. Rather, it confirmed that the analys is of "likeness" will vary from case to case and
should not be interpreted inflexibly. 131 Moreover, the Philippines' approach would entail that
imported products could never be "like" domestic products if a measure entirely excluded them from
competition in a given market. Finally, the Philipp ines' reference to the financial constraints of
domestic consumers is based on the "false" premise that the distinguishing feature of domestic and
imported distilled spirits is price. Instead, as the Panel correctly found, the excise tax regime
distinguishes between distilled spirits based on the raw materials they are made from, and not on the
basis of price.
71. The United States also argues that there is no su pport for the Philippines' proposition that a
product consumed on special occasions cannot be in competition with a routinely purchased product.
In fact, relevant case law indicates that, since dis tilled spirits are consumer goods that are purchased
frequently, even a purchaser of lesser means can a fford to buy a more expensive bottle "at least
occasionally".132 Furthermore, the Panel noted that the Filipino population is not divided into
two separate income groups, but is rather distributed along a continuum of income brackets.
72. The United States objects to the Philippines' cont ention that the Panel erred under Article 11
of the DSU by disregarding the evidence proffered by the Philippines with r espect to the low income

130United States' appellee's submission, para. 40 (referring to Panel Reports, paras. 2.36, 2.41, 2.42,
7.51, and 7.59).
131United States' appellee's submission, para. 43 (referring to Appellate Body Report, Japan –
Alcoholic Beverages II, pp. 20-21, DSR 1996:I, 97, at 113-114).
132United States' appellee's submission, para. 47 (quoting Panel Report, Korea – Alcoholic Beverages ,
para. 10.74). The United States notes that the cas e law mentioned refers to "directly competitive or
substitutable" products under Article III:2, second sentence, of the GATT 1994. However, it argues that there is
nothing to suggest that the same reasoning cannot apply to the analysis of "likeness". (Ibid., para. 48)

of the vast majority of the Filipino population, wh ich allegedly showed the existence of two separate
distilled spirits markets. The United States stresse s that neither the complainants nor the Panel
contested the assertion that most Filipinos are low- income consumers, but adds that such evidence
does not necessarily lead to the conclusion that the market is fragmented. According to the
United States, the Panel's failure to draw th e conclusion suggested by the Philippines from the
evidence in question demonstrates that it considered other evidence more probative and relevant to the
issue before it.
73. Lastly, with respect to tariff classification, the United States contests the Philippines' claim
that the Panel erred in its analysis of this " likeness" criterion because the range of products falling
under the four-digit HS heading is not sufficiently detailed to draw any particular inferences on
whether the products are "like". The United States al so disagrees with the Philippines' contention that
the Panel erred under Article 11 of the DSU when it found that the six-digit HS subheadings were
inconclusive despite the fact that raw materials may be relevant for the six-digit level classification of
brandy and whisky. The United States stresses that the Appellate Body in Japan – Alcoholic
Beverages II stated that tariff classification can be relevant in determining likeness, but it does not
oblige panels to draw conclusions from it in all circumstances. 133 The United States contends that the
Panel simply reviewed evidence on four-digit HS classification and found some indications of
similarity, thereby making an appropriate application of the criterion to the specific facts of this
dispute. Moreover, the Panel thoroughly examined the six-digit HS subheadings and found that the
totality of the evidence on this point was inconclu sive, thereby fulfilling its duties under Article 11 of
the DSU.
2. Article III:2, Second Sentence, of the GATT 1994
74. The United States submits that the Panel did not err in finding that the Philippines has acted
inconsistently with the requirements of Article III:2, second sentence, of the GATT 1994 because the
Philippines applies dissimilar internal taxes on do mestic distilled spirits made from designated raw
materials and "directly competitive or substitutable" imported distilled spirits made from
non-designated raw materials, "so as to afford protec tion to domestic production" of distilled spirits.
More specifically, the United States argues that the Panel correctly held that domestic distilled spirits
made from designated raw materials and importe d distilled spirits made from non-designated raw
materials are "directly competitive or substitutable" within the meaning of that provision. The United
States also argues that the Panel correctly found that the Philippines' excise tax is applied "so as to

133United States' appellee's submission, para. 51 (referring to Appellate Body Report, Japan –
Alcoholic Beverages II, p. 21, DSR 1996:I, 97, at 114).

afford protection to domestic production" of distilled spirits within the meaning of Article III:2,
second sentence, of the GATT 1994.
(a) Directly Competitive or Substitutable Products
75. The United States argues that the Panel did not err in finding that domestic distilled spirits
made from designated raw materials and importe d distilled spirits made from non-designated raw
materials are "directly competitive or substitut able" within the meaning of Article III:2,
second sentence, of the GATT 1994. The United States requests the Appellate Body to uphold the
Panel's finding for the following reasons.
76. First, the United States argues that the Panel's analysis sufficiently addresses the "'degree' of
proximity" in competition between domestic and im ported distilled spirits, as required by the legal
standard of Article III:2, second sentence.
134 For the United States, the Philippines seeks to minimize
the significance of other types of evidence relied on by the Panel, such as evidence suggesting that
consumers may purchase imported distilled spirits on sp ecial occasions, the lack of differentiation in
marketing and labelling, and identity in channels of distribution.135 The Appellate Body's statement in
US – Cotton Yarn that "[l]ike products are necessarily in the highest degree of competitive
relationship in the marketplace" is not relevant, because it compares the term "like product" to the
term "directly competitive" in Article 6.2 of the Agreement on Textiles and Clothing .136 According to
the United States, the Panel's conclusion that th ere is a "significant degree of competitiveness or
substitutability" between domestic and imported distilled spirits in the Philippine market disproves the
Philippines' argument that the Panel did not evaluate the "degree of proximity" of competition.137
77. Second, the United States rejects the Philippin es' argument that the Panel found direct
competition because some consumers may be able to buy imported distilled spirits on "special
occasions". The United States contends that th ere is no "frequency" requirement for direct
competition under Article III:2. 138 The United States adds that Philippine producers present their
products as appropriate for special occasions. Acco rding to the United States, there is no evidence
that the "need or taste" that distilled spirits satisfy on special occasions, including relaxation and

135United States' appellee's submission, para. 66 (referring to Panel Reports, paras. 7.119, 7.123,
and 7.131).
136United States' appellee's submission, para. 68 (quoting Appellate Body Report, US – Cotton Yarn,
para. 97).

socialization, are different such that "special oc casion" products do not compete directly with other
products.
78. Third, the United States posits that the Pa nel did not err in assessing the competitive
relationship between domestic a nd imported distilled spirits on the basis of evidence demonstrating
actual competition "within a subset" of the Philippine market. 139 For the United States, the Panel's
findings simply acknowledge that, notwithstanding th e relatively low income of the average Filipino
consumer, a "subset" of the market may purchase imported distilled spirits even though they are
generally more expensive. This is only "logi cal" because "the existence of current competition
certainly does not show less likelihood of a competitive relationship." 140 The United States also
considers that the Philippines' challenge is directed at the weighing of the evidence by the Panel. For
the United States, the Panel was correct in observing that instances of "actual competition" are a clear
indication that the imported and domestic distilled spirits are " capable" of being directly competitive
or substitutable in the future.141
79. Fourth, the United States disagrees with the Ph ilippines that the Panel was required to assess
competition in a portion of the market that is representative of the "market as a whole". 142 I n t h e
United States' view, the Philippines takes out of context the Panel's statements concerning the
reliability of the methodological sample used in the cross-price elasticity studies. In addition, the
Panel expressly found that the Philippine market is not segmented in the manner suggested by the
Philippines, and that many consumers can purchase imported distilled spirits on special occasions.
143
For the United States, the Panel correctly held th at Article III:2, second sentence, "does not protect
just some instances or most instances, but rather, it protects all instances of direct competition".144
80. Fifth, the United States posits that the Panel co rrectly held that there is potential competition
between domestic and imported distilled spirits in the Philippine market. The United States maintains
that direct competition under Article III:2, second sentence, does not require "some minimum
threshold amount of actual competition", because tw o products may be "directly competitive or
substitutable" even if direct competition is only potential and is not occurring at the present time.
145

140United States' appellee's submission, para. 78. (original emphasis)
emphasis)
142United States' appellee's submission, para. 87 (quoting Philippines' appellant's submission,
para. 117).
143United States' appellee's submission, para. 88 (referring to Panel Reports, paras. 7.118 and 7.119).
emphasis)).
145United States' appellee's submission, paras. 83 and 84.

The assessment of potential competition is particularly important in situations like the present case,
where the challenged measure has the effect of "freezing consumer preferences" by imposing
significant costs on the purchase of imported distilled spirits.
146 The United States further submits
that the observed price overlaps for both lo w- and high-priced products undermine the
Philippines' allegation that the market is divided into two distinct segments. 147 According to the
United States, the Panel properly relied on eviden ce of similarity in pr oduct characteristics,
marketing, and end-uses in finding that domestic and imported distilled spirits have the potential to be
directly competitive or substitutable. 148 Therefore, the Panel did not exceed its discretion under
Article 11 of the DSU in reaching its finding.
81. Finally, the United States argues that the Panel did not act inconsistently with Article 11 of
the DSU, because it adequately examined th e economic studies on substitutability and drew
appropriate conclusions on the basis of that ev idence. The Panel's conclusion that there was a
significant degree of competitiveness or substitu tability between domestic and imported distilled
spirits in the Philippine market was based on a variety of evidence, including market studies,
similarity of marketing campaigns, labelling, and sales locations. 149 Moreover, the Panel "thoroughly
weighed" both the Euromonitor International and Abrenica & Ducanes studies, including concerns
with their methodologies. 150 The United States also notes th at the sample used in the Euromonitor
International survey was adjusted in a manner that allo wed for closer alignment with the overall
Filipino population, and that respondents indicated th at they would be more likely to purchase an
imported brand if the price differential were smaller. 151 Moreover, the Abrenica & Ducanes study
supports the Panel's findings on substitutability, because it does show substitutability in spite of
persistent price gaps between imported and domestic products, a nd other factors such as brand
loyalty.

146United States' appellee's submission, para. 85 (quoting Panel Reports, para. 7.106, in turn quoting
Appellate Body Report, Korea – Alcoholic Beverages, paras. 119 and 120; and Panel Report, Chile – Alcoholic
Beverages, para. 7.25).
148United States' appellee's submission, para. 137 (referring to Panel Reports, paras. 7.127, 7.129,
and 7.131).
149United States' appellee's submission, para. 118 (referring to Panel Reports, para. 7.51; and quoting
para. 7.61).
151United States' appellee's submission, paras. 121 and 122 (referring to Euromonitor International
survey, supra, footnote 37, pp. 6 and 30).

(b) "So as to afford protection to domestic production"
82. The United States argues that the Panel did not err in finding that the dissimilar taxes imposed
on imported distilled spirits and on directly competi tive or substitutable domes tic distilled spirits are
applied "so as to afford protection to domestic pr oduction" of distilled spirits. The United States
requests the Appellate Body to dismiss the Philippin es' appeal in this respect, and to uphold the
Panel's finding.
83. The United States submits that the Panel corr ectly focused on the "magnitude of the
difference in taxation between domestic and im ported goods, and also the design, structure and
application" of the measure at issue. 152 The Panel rightly observed that the design, architecture, and
structure of the measure are such that the designa ted raw materials from which a distilled spirit must
be made in order to enjoy the lower tax are all grow n in the Philippines, and that the vast majority of
imported distilled spirits are not made from designate d raw materials. Thus, the Panel was correct in
finding that "de facto the measure results in all domestic dis tilled spirits enjoying the favourable low
tax, while the vast majority of the impor ted spirits are subject to higher taxes." 153 The United States
stresses that the magnitude of the tax differentia l applied to imported pr oducts, which is ten to
forty times higher than taxes on domestic products, is sufficient to show that the measure protects
Philippine production of distilled spirits.
84. Furthermore, the United States argues that the Panel correctly focused on the measure itself,
which differentiates products according to their raw material base. The fact that Philippine producers
import ethyl alcohol as an input does not undermine the Panel's conclusion that the structure of the
measure favours Philippine producers of distilled spirits, which are the products at issue in the present
dispute, not ethyl alcohol. In addition, although it was not necessary for the Panel to inquire into the
motivation for the measure, the United States stress es that the Panel had before it statements from
Philippine Government officials stating that th e purpose of the measure was to protect domestic
production.
154
D. Claim of Error by the European Union – Other Appellant
85. The European Union claims that the Pane l erred in characterizing its claims under
Article III:2, second sentence, of the GATT 1994 as made in the "alternative" to its claims under the

emphasis)).
154United States' appellee's submission, paras. 97 and 98 (referring to, for example, a letter from the
Philippines Department of Trade and Industry, dated 11 May 2009 (Panel Exhibit US-11)).

first sentence of that provision. According to th e European Union, in failing to make findings in
relation to the European Union's claims under Ar ticle III:2, second sentence, of the GATT 1994, the
Panel acted inconsistently with Articles 7.1, 7.2, and 11 of the DSU, and exercised false judicial
economy, thereby acting inconsistent ly with Articles 3.7 and 21.1 of the DSU. Accordingly, the
European Union requests the Appellate Body to reve rse the Panel's characterization of its claim under
Article III:2, second sentence, as "alternative", to co mplete the legal analysis with respect to the
European Union's claims under that provision, and to find that the Philippines has acted inconsistently
with Article III:2, second sentence, of the GATT 1994.
86. Referring to the specific language used in its request for the establishment of a panel
155, its
first written submission to the Panel 156, and its responses to Panel questions 157, the European Union
maintains that it made "two separate and independent" claims under the first and second sentences of
Article III:2, which it characterized as "main" claims. 158 The European Union's statement that, the
Panel "would not necessarily need to analyse a breach of the second sentence" if it were to find a
breach of the first sentence of Article III:2, re ferred to the "consequential" nature of the
European Union's claims under these provisions, inso far as "directly competitive or substitutable"
products are a subset of "like products". 159 Thus, a finding of breach under Article III:2,
first sentence, would "almost automatically" lead to a finding of breach of the second sentence of the
same provision.160
87. According to the European Union, in faili ng to address its clai ms under Article III:2,
second sentence, of the GATT 1994, the Panel acted in consistently with Articles 7.1 and 7.2 of the
DSU, which requires panels to "respect their term s of reference and to address all the relevant
provisions of the WTO Agreements cited by the parties".161 In addition, the Panel acted inconsistently
with Article 11 of the DSU because it failed to make an objective assessment of the matter before it
and declined to make findings th at would have assisted the DSB in making the recommendations or

155European Union's other appellant's submission, paras. 8 and 9 (referring to Request for the
Establishment of a Panel by the European Union, WT/DS396/4, p. 3).
156European Union's other appellant's submission, paras. 10-18 (referring to European Union's
first written submission to the Panel, paras. 48-52 and 192).
157European Union's other appellant's submission, paras. 19-23 (referring to European Union's response
to Panel Question 18, paras. 11 and 12; and referring to European Union's response to Panel Question 64).
158European Union's other appellant's submission, para. 20. (original emphasis)
159European Union's other appellant's submission, para . 17 (referring to European Union's first written
160European Union's other appellant's submission, para. 17. The European Union also made a
"subordinate claim" that each type of imported and domestic distilled spir it (gin, brandy, rum, whisky, tequila
and tequila-flavoured sp irits) was "directly competitive or substitutabl e" within the meaning of Article III:2,
second sentence, of the GATT 1994. (European Union's response to Panel Question 18, para. 12)
161European Union's other appellant's submission, para. 31.

rulings required. 162 Finally, the European Union suggests that the Panel's analysis of the
United States' claim under Article III:2, second sentence, of the GATT 1994, which considers
arguments made by the European Union and is an inte gral part of the Panel Reports in this dispute,
provide the Appellate Body with sufficient "factual findings of the Panel and/or undisputed facts in
the record" to enable it to complete the legal analysis in relation to the European Union's claims under
Article III:2, second sentence, of the GATT 1994.163
E. Arguments of the Philippines – Appellee
88. The Philippines considers that the European Un ion's claim on appeal "does not contribute to
the substantive adjudication of the legal matter" before the Appellate Body in this dispute. 164 In light
of the Philippines' appeal of the Panel's findi ngs on the United States' substantive claim under
Article III:2, second sentence, of the GATT 1994, the Philippines contends that the merits of the
European Union's other appeal will be fully addresse d by the Appellate Body regardless of how the
Appellate Body considers the European Union's cl aim on appeal. Accordingly, the Philippines "does
not submit any particular arguments for or against" the European Union's other appeal.165
F. Arguments of the Third Participants
1. Australia
89. Australia agrees with the Philippines that the term "like" under Article III:2, first sentence, of
the GATT 1994 should be construed narro wly. However, in Australia's view, this does not mean that
any physical difference would necessarily disqualify a product from being considered "like" another
product. The panel in Japan – Alcoholic Beverages II identified the appropriate standard in that case
to be " [s]ubstantial noticeable differences in physical characteristics". 166 Moreover, assessing the
significance of differences in physical characteris tics between products should not be limited to
consideration of a single characteristic, but shoul d be an assessment based on all the physical
characteristics of the products at issue, such as, appearance, ingr edients, flavour, and smell.
According to Australia, the facts in this dispute indi cate that the raw materials used in the products do

162The European Union also suggests that, to the extent that the Panel's failure to address the European
Union's claim under Article III:2, second sentence, constituted an application of the principle of judicial
economy, the European Union submits that this would amount to "false application of that principle",
inconsistent with Articles 3.7 and 21.1 of the DSU. (European Union's other appellant's submission, para. 35)
163European Union's other appellant's submission, paras. 40-49 (quoting Appellate Body Report,
Australia – Salmon, para. 118).
164Philippines' appellee's submission, para. 2.
165Philippines' appellee's submission, para. 3.
166Australia's third participant's submission, para. 6 (quoting Panel Report, Japan – Alcoholic
Beverages II, para. 6.23). (emphasis added by Australia)

not materially alter consumer perception of the pro duct. Rather, consumer perception appears to be
affected by the appearance, taste, and smell of the product, as well as its marketing as a particular type
of spirit, such as, brandy, gin, etc.
90. With regard to the Philippines' appeal of the Panel's finding under Article III:2,
second sentence, of the GATT 1994, Australia notes that the panel in Japan – Alcoholic Beverages II
found that "the decisive criterion" in determin ing whether products are "directly competitive or
substitutable" "is whether they have common end uses, inter alia , as shown by elasticity of
substitution".
167 In this regard, the facts in this dispute indicate that domestically produced and
imported distilled spirits are marketed as the same "type" of spirit, often using similar packaging and
branding, and that the nature and content of the pr oducts' marketing strategies seem to indicate that
they are competing in a similar market segment.
91. Australia disagrees with the Philippines' cont ention that products purchased on "special
occasions" cannot directly compete with more fre quently purchased "everyday" products, and notes
that previous panels have found th at products with different NRPs can be "directly competitive" even
if the products are not purchased with the same frequency. 168 With regard to the
Philippines' contention that the Panel erred by relying on speculation as to potential future competitive
relationships between the products at issue, Australi a observes that previous panels have taken into
account evidence of both the existing market co mpetition as well as evidence of future potential
market competition between products.169
92. With regard to the relationship between the first and second sentences of Article III:2 of the
GATT 1994, Australia agrees with the Appellate Body's finding in Korea – Alcoholic Beverages that
"like products" are a subset of directly competitive or substitutable products and, therefore, all "like
products" are, by definition, directly competitive or substitutable. 170 Australia, however, disagrees
with the European Union's assertion that, if a panel ma kes a finding that there has been a violation of
Article III:2, first sentence, then this would "almost automatically lead to a finding of a breach of the

167Australia's third participant's submission, para. 12 (quoting Panel Report, Japan – Alcoholic
Beverages II, para. 6.22). The Appellate Body endorsed this view of the panel. (Appellate Body Report, Japan
– Alcoholic Beverages II, p. 25, DSR 1996:I, 97, at 117)
168Australia's third participant's submission, para. 14 (referring to Panel Report, Korea – Alcoholic
169Australia's third participant's submission, para . 15 (referring to, for example, Panel Report, Chile –
 Alcoholic Beverages, para. 7.47).
170Australia's third participant's submission, para. 16 (quoting Appellate Body Report, Korea –
Alcoholic Beverages, para. 118).

second sentence of the same provision". 171 In Australia's view, the panel would still need to give full
and separate consideration to all the elements of a claim under Article III:2, second sentence, as stated
by the Appellate Body in Japan – Alcoholic Beverages II.172
93. Australia observes that the Philip pines has made five separate allegations under Article 11 of
the DSU in respect of its claim that the Panel faile d to make an objective assessment of the facts. In
this regard, Australia notes that, from a systemic pe rspective, it would be of concern if claims under
Article 11 were, in effect, requiring the Appellate Body to "second-guess a panel's conclusions".173
2. Mexico
94. Mexico considers that the Panel's analysis of "likeness" was adequate with regard to its
finding that the imported and domestic distilled spir its at issue in this dispute are "like products"
within the meaning of Article III:2, first senten ce, of the GATT 1994. Mexico notes, however, that
the Panel's analysis was made in the context of th e facts of this dispute and in the context of the
Philippines' distilled spirits market in particular. According to Mexico, a "like product" analysis in
any other context has to take into accoun t the specific circumstances of each case. 174 Mexico cites, as
an example, tequila produced in Mexico, which is made from agave and is combined with up to
49 per cent of other sugars, and is protected by a r ecognized appellation of origin in many countries.
Mexico contends that such a situation could be d ecisive when analyzing the properties, nature, and
quality of the product as well as its end-uses and consumer tastes and habits in the context of a market
other than the one at issue in this dispute, or with regard to different provisions of the
WTO Agreement.175
95. With regard to the Philippines' appeal of the Panel's finding under Article III:2,
second sentence, of the GATT 1994, Mexico consider s that the Panel's analysis of "directly
competitive and substitutable products " was adequate, and submits that the Appellate Body should
confirm the Panel's conclusion that the Philippines has acted inconsistently with this provision.176

171Australia's third participant's submission, para. 17 (quoting European Union's other appellant's
submission, para. 17).
172Australia's third participant's submission, para. 19 (quoting Appellate Body Report, Japan –
Alcoholic Beverages II, p. 24, DSR 1996:I, 97, at 116).
173Australia's third participant's submission, para. 22.
174Mexico's third participant's submission, para. 10.
175Mexico's third participant's submission, para. 9.
176Mexico's third participant's submission, para. 14.

III. Issues Raised in This Appeal
96. The following issues are raised in this appeal:
 (a) whether the Panel erred in finding that the Philippines has acted inconsistently with
Article III:2, first sentence, of the GATT 1994 by applying to imported distilled
spirits made from raw materials other than those designated in its legislation internal
taxes in excess of those applied to " like" domestic distilled spirits made from
designated raw materials, and in particular:
(i) whether the Panel erred in finding that each type of imported distilled spirit at
issue in this dispute—gin, brandy, vodka, whisky, and tequila—made from
non-designated raw materials is "like" the same type of domestic distilled
spirit made from designated raw materials
177 within the meaning of
Article III:2, first sentence, of the GATT 1994;
(ii) whether the Panel erred in finding that all the distilled spirits at issue,
whether imported or domestic, and irrespective of the raw materials from
which they are made, are "like products" within the meaning of Article III:2,
first sentence, of the GATT 1994; and
(iii) whether the Panel, in finding that the products at issue are "like" within the
meaning of Article III:2, first sentence, of the GATT 1994, acted
inconsistently with its duties under Ar ticle 11 of the DSU in its assessment
of: (1) the products' physical characteristics; (2) the Philippine market for
distilled spirits; and (3) tariff classification;
 (b) whether the Panel erred in charact erizing the European Union's claim under
Article III:2, second sentence, of the GATT 1994 as made in the "alternative" to its
claim under the first sentence of Article III:2, and consequently acted inconsistently
with Articles 7.1, 7.2, and 11 of the DSU in abstaining from making findings in
relation to the European Union's claim under Article III:2, second sentence, of the
GATT 1994; and

177Domestic distilled spirits made from designated raw materials include also tequila-flavoured spirits.

 (c) whether the Panel erred in finding that the Philippines has acted inconsistently with
Article III:2, second sentence, of the GATT 1994 by applying dissimilar taxation to
imported distilled spirits made from non-d esignated raw materials and to "directly
competitive or substitutable" domestic dis tilled spirits made from designated raw
materials, so as to afford protection to domestic production, and in particular:
(i) whether the Panel erred in finding that all the distilled spirits at issue,
whether imported or domestic, and irrespective of the raw materials from
which they are made, are "directly co mpetitive or substitutable" products
within the meaning of Article III:2, second sentence, of the GATT 1994;
(ii) whether the Panel acted inconsistent ly with its duties under Article 11 of the
DSU in reaching its finding that the im ported and domestic distilled spirits at
issue, irrespective of the raw material from which they are made, are "directly
competitive or substitutable" products w ithin the meaning of Article III:2,
second sentence, of the GATT 1994; and
(iii) whether the Panel erred in finding that dissimilar taxation imposed by the
Philippines on imported distilled spirits and on "directly competitive or
substitutable" domestic distilled spirits is applied "so as to afford protection"
to Philippine domestic production of distilled spirits.
IV. Background
A. The Measure at Issue
97. The measure at issue in this dispute is the ex cise tax regime in force in the Philippines as it
applies to distilled spirits. The Pane l referred to it as the "excise tax". 178 Under the measure at issue,

178Panel Reports, para. 2.1.

taxes are collected on distilled spirits in accordance with the criteria set out in Section 141 of the
Philippines' National Internal Revenue Code of 1997 (the "NIRC"), as amended.
179
98. Under Section 141(a) of the NIRC, distilled spirits are subject to a specific flat tax rate if
two requirements are met: (i) the distilled sp irits are produced from one of the following raw
materials—sap of the nipa, coconut, cassava, camote, buri palm, or from juice, syrup, or sugar of the
cane (collectively referred to as "designated raw materials" 180); and (ii) the designated raw materials
are produced commercially in the country where they are processed into distilled spirits. As from
1 January 2011, the flat rate set out in Secti on 141(a) is 14.68 Philippine pesos ("PHP") per proof
litre ("ppl").181
99. Under Section 141(b) of the NIRC, all distille d spirits that do not meet either of the
requirements set forth above are subject to three di fferent tax rates that apply depending on the net
retail price ("NRP") of a 750 millilitre ("ml") bottle of the spirit. 182 As from 1 January 2011, distilled
spirits falling under Section 141(b) are subject to a tax of: (i) PHP 158.73 ppl 183, if their NRP is less
than PHP 250; (ii) PHP 317.44 ppl 184, if their NRP is between PHP 250 and PHP 675; or
(iii) PHP 634.90 ppl185, if their NRP is more than PHP 675.186

179Panel Reports, para. 2.2. Amendments to the NIRC and other relevant regulations to this dispute
include: Section 1 of Republic Act No. 9334; Republic Act No. 8240; Revenue Regulations No. 02-97
Governing Excise Taxation on Distilled Spirits, Wines and Fermented Liquors ; Revenue Regulations No. 17-99
Implementing Sections 141, 142, 143 and 145(A) and (C)(1), ( 2), (3) and (4) of the National Internal Revenue
Code of 1997; Revenue Regulations No. 9-2003 Amending Certain Provisions of Revenue Regulations No. 1-97
and Revenue Regulations No. 2-97 ; Revenue Regulations No. 23-2003 Implementing the Revised Tax
Classification of New Brands of Alc ohol Products and Variants Thereof ; Revenue Regulations No. 12-2004
Providing for the Revised Tax Rates on Alcohol and Tobacco Products ; and Revenue Regulations No. 3-2006
Prescribing the Implementing Guidelines on the Revised Tax Rates on Alcohol and Tobacco Products . (Panel
Reports, para. 2.1)
180Panel Reports, para. 2.3.
181Equivalent to approximately US$0.34 ppl. All the tax rates under Section 141 of the NIRC are set in
"proof litres". Since distilled spirits have different alcohol contents (proof) and bottle volumes, the specific
excise tax applicable to a particular spirit will vary depe nding on these factors. Under Philippine law, a "proof
litre" is defined as a "liquor containing one-half (½) of its volume of alcohol of a specific gravity of seven
thousand nine hundred and thirty-nine ten thousandths (0.7939) at fifteen degrees centigrade (15°C)". (See
Republic Act 9334, p. 3, submitted as Panel Exhibits EU-2, US-2, and PH-4. See also European Union's
first written submission to the Panel, footnote 18 to para. 15) The "proof" of an alcoholic beverage is equal to
twice its alcohol content by volume.
182Panel Reports, para. 2.4.
183Equivalent to approximately US$3.68 ppl.
184Equivalent to approximately US$7.36 ppl.
185Equivalent to approximately US$14.72 ppl.

100. According to the evidence before the Panel, all distilled spirits produced in the Philippines are
made from designated raw materials—more precisel y, from one designated raw material: sugar
cane—and based on ethyl alcohol processed either in the Philippines or in other countries where sugar
cane is produced commercially. Accordingly, all dist illed spirits produced domestically are subject to
the flat tax rate under Section 141(a) (PHP 14.68 ppl). In contrast, the vast majority of distilled spirits
imported into the Philippines are processed from raw materials other than those designated, and are
therefore subject to one of the three tax rates set out in Section 141(b) (PHP 158.73 ppl,
PHP 317.44 ppl, or PHP 634.90 ppl, depending on their NRP).
101. The classification and applicable tax of brands of distilled spirits is generally indicated in
annexes to relevant acts and regulations, and is overseen by the Philippines' Bureau of Internal
Revenue ("BIR"). Once a specific brand has been classified as falling under Section 141(a) or
Section 141(b), a reclassification of that brand may not occur except through an Act of Congress.
However, if a taxpayer considers that the classifi cation has not been made correctly, that taxpayer
may request a ruling from the Commissioner of Intern al Revenue and, in case of an adverse decision,
seek review by the Secretary of Finance.187
B. The Products at Issue
102. All products at issue in the present dispute are distilled spirits, and in particular the following
types: gin, brandy, rum, vodka, whisky, tequila, and tequila-flavoured spirits. Distilled spirits are
defined as concentrated forms of potable al cohol obtained through the process of distillation. 188
Combined, ethyl alcohol and water account for more than 99 per cent of the content of all distilled
spirits. The average alcohol content ranges from 25 to 40 per cent by volume (or 50 to 80 proof).
Spirits of the same type tend to have similar alcohol content.189 The distillation process starts with the
fermentation of feedstock—that is, any raw material that contains natural sugar or other carbohydrates
that can be converted into sugar, such as, sugar can e molasses, sugar beet, roots, juice of grapes, or
mash of grains or cereals. Different chemical compounds, called "congeners", are formed during the
process of fermentation. These congeners confer th e typical organoleptic properties—flavour, aroma,

186In order to illustrate how the Philippines' excise tax system operates concretely, the Panel provided
the following two examples: (i) under Section 141(a) of the NIRC, a 750 ml bottle of 80 per cent proof whisky
made from a designated raw material would be subject to a tax of PHP 8.81; and (ii) under Section 141(b) of
the NIRC, a 750 ml bottle of 86 per cent proof whisky made from a non-designated raw material and sold at an
NRP of between PHP 250 and PHP 675 would be subject to a tax of PHP 204.75. (Panel Reports, footnote 33 to
para. 2.5)
187Panel Reports, paras. 2.15 and 2.16.
188Panel Reports, para. 2.22.
189Panel Reports, para. 2.22 (referring to European Union's first written submission to the Panel,
para. 84).

and colour—upon a specific distilled spirit. Levels and combinations of various congeners differ
according to the type of spirit. The typical organol eptic properties of certain distilled spirits—such as
brandy, rum, whisky, or tequila—depend on the raw materials used in their production, as well as on
post-distillation processes such as ageing, blending, filtering, diluting with water, and incorporating
additional flavourings. For other types of distille d spirits—such as gin and vodka—the ethyl alcohol
is normally stripped of its congeners so as to obtain a neutral spirit.
103. It was not disputed before the Panel that all di stilled spirits, irrespective of their origin or of
the raw materials used in their production, have the same end-uses in the Philippines, which the Panel
described as "thirst quenching, socializa tion, relaxation, pleasant intoxication".
190 They can be drunk
straight or with ice, diluted with soft drinks or fruit juices or used in the preparation of cocktails. In
the Philippines, premium distilled spirits are largel y consumed in restaurants, bars, pubs, clubs, and
discotheques, whereas less expensive distilled spirits are mostly consumed in private homes.191
104. The Panel found that the vast majority of the distilled spirits imported into the Philippines are
produced by distilling different raw materials, none of which is a "designated raw material" under
Section 141(a) of the NIRC, with the exception of rum, which is processed from the fermentation of
sugar cane. More specifically, gin is produced "by redistilling a high proof neutral spirit with juniper
berries and other botanicals" 192; brandy is produced "from the fermentation of grapes" or "the
distillation of wine or fortified wine" 193; vodka is a "neutral spirit" that can be produced "from the
distillation of many different products, such as wh eat, beets, corn, rye, po tatoes, grapes or sugar
cane"194; whisky is produced "from the distilla tion of a mash of cereals or grains" 195; and tequila is
"traditionally produced in Mexico from the fermentation of the agave plant".196
105. In contrast, all the distilled spirits produced in the Philippines are made from sugar cane, one
of the "designated raw materials" under Section 141( a). The ethyl alcohol distilled from sugar cane
molasses is normally stripped of its natural congene rs so as to obtain a neutral spirit. Subsequently,
flavouring, essences, and other ingredients are adde d to the neutral spirit in order to give it the
organoleptic properties typically associated with the specific distilled spirit concerned. The only
exception is rum, whose production process, as outlin ed above, is identical in the Philippines and

190Panel Reports, para. 2.38 (quoting European Union's first written submission to the Panel, para. 64).
191Panel Reports, para. 2.40 (referring to Phili ppines' first written submission to the Panel,
paras. 263-266).
192Panel Reports, para. 2.55.
193Panel Reports, para. 2.62.
194Panel Reports, para. 2.75.
195Panel Reports, para. 2.81.
196Panel Reports, para. 2.87.

elsewhere. For this reason, the parties agree, and the Panel found, that rum produced in the
Philippines and imported rum are "like products".197
106. All the distilled spirits relevant to this di spute fall under heading 2208 of the Harmonized
Commodity Description and Coding System of the World Customs Organization ("HS"). This
four-digit heading refers to "undenatured ethyl alcohol of an alcoholic strength by volume of less than
80% vol; spirits, liqueurs and other spirituous beverages".
198 At the six-digit level, the HS classifies
distilled spirits under different subheadings:

107. The content of the six-digit HS subheadings in question is clarified in the Explanatory Note
accompanying the HS ("HSEN") to HS heading 2208 as follows:
[Heading 2208] includes, inter alia:
(1) Spirits obtained by distilling grape wine or grape marc
(Cognac, Armagnac, brandy, grappa, pisco, singani, etc.).
(2) Whiskies and other spirits obtained by distilling fermented
mash of cereal grains (barley, oats, rye, wheat, corn, etc.).

197Panel Reports, para. 2.69 (referring to European Union's first written submission to the Panel,
para. 97; United States' first written submission to the Panel, para. 30; and Philippines' first written submission
to the Panel, para. 171). While the Panel noted that the parties agree that all rums at issue in the present dispute
are "like products", it ob served that some brands of imported rum, albeit made from sugar cane—one of the
designated raw materials—are subject to the higher excise tax rates provided for in Section 141(b) of the NIRC.
(Ibid., para. 2.74)
198Panel Reports, para. 2.49. (footnote omitted)

(3) Spirits obtained exclusively by distilling fermented products
of the sugar cane (sugar-cane juice, sugar-cane syrup,
sugar-cane molasses), e.g., rum, tafia, cachaça.
(4) Spirituous beverages known as gin or Geneva, containing the
aromatic principles of juniper berries.
(5) Vodka obtained by distilling fermented mash of agricultural
origin (e.g., cereals, potatoes) and sometimes further treated
with activated charcoal or carbon.
199
108. Based on the HSEN to HS heading 2208, brandy and whisky are classified at the
HS six-digit level depending on the raw materials from which they are made. Brandy is one of the
"[s]pirits obtained by distilling grape wine or grape marc" (HSEN to subheading 2208.20), while
whisky is defined as a "spirit[] obtained by dis tilling fermented mash of cereal grains" (HSEN to
subheading 2208.30). Rum is defined in HS subhe ading 2208.40 and in the relevant HSEN as a
"[s]pirit[] obtained by distilling fermented s ugarcane products" and, specifically, sugar cane
molasses.200 Vodka is described as a spirit obtained by distilling "fermented mash of agricultural
origin", with "cereals" and "potatoes" indicated as exam ples (HSEN to subheading 2208.50), thus not
excluding vodka made from other raw materials. Gin is described as a spirituous beverage
"containing the aromatic principles of juniper berries" , but with no reference to its raw material base
(HSEN to subheading 2208.60). There is no six-digit HS subheading for "tequila" or
"tequila-flavoured spirits".
V. Article III:2, First Sentence, of the GATT 1994
109. We begin with the Philippines' appeal of the Panel's findings that imported distilled spirits
made from non-designated raw materials and domes tic distilled spirits made from designated raw
materials are "like products" within the meaning of Article III:2, first sentence, of the GATT 1994 and
that, as a consequence, by subjecting importe d distilled spirits made from non-designated raw
materials to internal taxes in excess of those applie d to "like" domestic distilled spirits made from
designated raw materials, the Philippines acts in a manner inconsistent with Article III:2,
first sentence, of the GATT 1994.

199Panel Reports, para. 2.53 (referring to Harmonized Commodity Description and Coding System,
Explanatory Notes, 4th edn (WCO, 2007), p. IV-2208-1 (Panel Exhibit PH-46)).
200Panel Reports, para. 7.67.

110. Specifically, the Philippines challenges the Panel' s findings that: (i) all distilled spirits at
issue in this dispute are "like products", whether imported or domestic, and irrespective of the raw
materials from which they are made; and (ii) each type of imported distilled spirit at issue in this
dispute made from non-designated raw materials is "lik e" the same type of domestic distilled spirit
made from designated raw materials.
111. We address first the Philippines' appeal of th e Panel's finding that each type of imported
distilled spirit at issue in this dispute made from non- designated raw materials is "like" the same type
of domestic distilled spirit made from designated ra w materials. In so doing, we review the
Panel's findings on the specific factors it examined in its analysis of "likeness" under Article III:2,
first sentence, of the GATT 1994. Second, we consid er the Panel's finding that all the distilled spirits
at issue in the present dispute, whether imported or domestic, and irrespective of the raw materials
from which they are made, are "like products" within the meaning of Article III:2, first sentence, of
the GATT 1994.201
A. The Panel's Finding that Each Type of Imported Distilled Spirit Made from
Non-Designated Raw Materials is "Like" th e Same Type of Domestic Distilled Spirit
Made from Designated Raw Materials
112. The Panel found that each of the types of imported distilled spirit at issue in this dispute made
from non-designated raw materials—namely, gin, br andy, vodka, whisky, and tequila—is "like" the
same type of domestic distilled spirit made from designated raw materials. 202 In other words, the
Panel found that within each different type of dis tilled spirit there is "likeness", within the meaning of
Article III:2 of the GATT 1994, between importe d distilled spirits made from non-designated raw
materials and domestic distilled spirits made from designated raw materials.
113. The Panel addressed the "likeness" requirement of Article III:2, first sentence, of the
GATT 1994 by considering evidence with respect to: (i) the products' properties, nature, and quality,
that is, their physical characteristics; (ii) end-uses in the Philippines; (iii) Philippine
consumers' tastes and habits; (iv) tariff classification; and (v) relevant Philippine internal regulations.
No claims are raised on appeal concerning the Panel's finding that all distilled spirits at issue in this
dispute share the same end-uses in the Philippines, namely "thirst quenching, socialization, relaxation,
pleasant intoxication".203

201Panel Reports, para. 7.77.
202Panel Reports, para. 7.85. The Panel observed that all parties agreed that both domestic and
imported rums were made from the same raw material (sugar cane) and were "like products". (Ibid., para. 7.79)
203Panel Reports, para. 7.48 (quoting European Union's first written submission to the Panel, para. 64).

1. The Products' Physical Characteristics
114. We begin by considering the Philippines' claims in respect of the Panel's assessment of the
products' physical characteristics. First, we address the Philippines' claim that the Panel erred in its
interpretation of the term "like … products" in Article III:2 of the GATT 1994 with respect to the
products' physical characteristics. Second, we addr ess the relevance of the ra w material base in the
determination of whether two products are "like" w ithin the meaning of Article III:2. Third, we
address the Philippines' claim that, by applying a "p erceptible differences test", the Panel applied the
wrong standard to assess the similarity of physical ch aracteristics and thus acted inconsistently with
Article III:2, first sentence, of the GATT 1994. Finally, we address the Philippines' claim that the
Panel acted inconsistently with Article 11 of th e DSU in its assessment of the products' physical
characteristics.
 Interpretation of the Term "Like Products" with Respect to the Products' Physical
Characteristics
115. The Philippines claims that the Panel's statemen t that the concept of "like products" is not
limited to "identical products" is inconsistent with the Appellate Body's narrow definition of "like
products" under Article III:2, first sentence, of th e GATT 1994. The Philippines argues that the test
that should have been applied is whether the products are "sufficiently close" in nature that they can
be deemed to fit within the narrow category of "like" within the meaning of Article III:2, as
interpreted by the Appellate Body.
204 According to the Philippines, the narrow scope of the category
of "like products" means that any significant phys ical difference will be considered sufficient to
disqualify a product from being considered "like" another product.205
116. The European Union and the United States disagr ee with the Philippines' contention that the
narrow scope of the term "like products" implies that any significant physical difference will be
sufficient to disqualify a product from bei ng considered "like" another product. 206 The European
Union and the United States argue that the Phili ppines overstates the importance of physical
characteristics, particularly the differences in chemi cal composition, in the analysis of "likeness" in
relation to other factors.207

205Philippines' appellant's submission, para. 30.
206European Union's appellee's submission, paras. 45 and 52; United States' appellee's submission,
para. 25.
207European Union's appellee's submission, para. 45; United States' appellee's submission, para. 30.

117. Article III:2, first sentence, of the GATT 1994 states:
The products of the territory of any Member imported into the
territory of any other Member 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.
118. The Panel recalled that, in Japan – Alcoholic Beverages II, the Appellate Body found that the
definition of "like products" under Article III:2, first sentence, must be construed narrowly. The Panel
understood this statement by the Appellate Body as meaning that likeness under the first sentence of
Article III:2, while narrow, is not limited to products that are identical.
208 The Panel reasoned that,
"had this sentence intended to cover only identical products, the agreement would have used the word
'identical', instead of using the expression 'like products'" and noted that "[l]ikewise the Appellate
Body, in describing like products, has never indicated that the first sentence covers only identical
products".209 In keeping with the case-by-case approach a dopted by the Appellate Body in previous
disputes, the Panel stated that it would consider whether the products at issue in this dispute are "like",
within the meaning of Article III:2, first senten ce, of the GATT 1994, by examining all relevant
factors210, including: the products' physical characteris tics; their end-uses in the Philippines;
Philippine consumers' tastes and habits; the tariff cla ssification of the products; and relevant internal
regulations in the Philippines.
119. While in the determination of "likeness" a panel may logically start from the physical
characteristics of the products, none of the criteria that a panel considers necessarily has an overarching
role in the determination of "likeness" under Arti cle III:2 of the GATT 1994. A panel examines these
criteria in order to make a determination about the nature and extent of a competitive relationship
between and among the products.
211

208Panel Reports, para. 7.32.
209Panel Reports, para. 7.32.
210The 1970 Report of the Working Party on Border Tax Adjustments identified the following criteria for
determining, on a case-by-case basis, whether a product is "similar": the product's end-uses in a given market;
consumers' tastes and habits, which change from country to country; the product's properties, nature and
quality. (Report of the Working Party on Border Tax Adjustments, BISD 18S/97, para. 18.). Subsequent panels
and the Appellate Body found that other criteria, such as tariff classification, may also assist a panel in evaluating
whether products are "like" within the meaning of Ar ticle III:2, first sentence, of the GATT 1994. See,
GATT Panel Report, Japan – Alcoholic Beverages I , para. 5.6; and Appellate Body Report, Japan – Alcoholic
Beverages II, pp. 21-22, DSR 1996:I, 97, at 114-115.
211In EC – Asbestos the Appellate Body found that "a determination of 'likeness' under Article III:4 is,
fundamentally, a determination about the nature and extent of a competitive relationship between and among
products". (Appellate Body Report, EC – Asbestos, para. 99)

120. We understand that products that have very sim ilar physical characteristics may not be "like",
within the meaning of Article III:2, if their comp etitiveness or substitutability is low, while products
that present certain physical differences may still be c onsidered "like" if such physical differences
have a limited impact on the competitive relationship between and among the products.
121. In this respect, we do not consider, as the Philippines argues, that the Panel committed an
error of interpretation when it found that "liken ess under the first sentence of Article III:2 is not
limited to products that are identical".
212 This statement by the Panel may provide only a partial view
of what is entailed in a determination of "likeness" under Article III:2 of the GATT 1994. However, it
is consistent with the notion that, while physical ch aracteristics are one of the relevant criteria in the
determination of "likeness" under Article III:2, even products that present certain differences may still
be considered "like" if the nature and extent of their competitive relationship justifies such a
determination.
122. For the reasons explained above, we disagree w ith the Philippines' arguments that the narrow
scope of the category of "like products" means that any significant physical difference will necessarily
be considered sufficient to disqualify a produc t from being considered "like" another product 213 and
that, in this case, "the simple fact that sugar-based spirits in the Philippines are physically different
from their non-sugar-based counterparts should have been viewed by the Panel as disqualifying these
products from being considered physically 'like'".214
 Relevance of the Raw Material Base in the Determination of "Likeness"
123. Turning to the Panel's assessment of the physi cal characteristics of the distilled spirits at
issue, the Philippines claims that, because of diffe rences in chemical composition, which affect the
distilled spirits' taste, flavour and aroma, dis tilled spirits made from designated raw materials and
distilled spirits made from non-designated ra w materials are not physically similar. 215 The Panel
found that for each type of distilled spirit—gin, brandy, vodka, whisky, tequ ila and tequila-flavoured
spirits—there is similarity in physical characteris tics between imported distilled spirits and domestic
Philippine distilled spirits, irrespective of the raw materials from which they are made. 216 The Panel
emphasized the fact that the production process for each type of distilled spirit made from designated
raw materials in the Philippines is designed to ensu re, as far as possible, that the final Philippine

212Panel Reports, para. 7.32.
213Philippines' appellant's submission, para. 30.
214Philippines' appellant's submission, para. 39.
215Philippines' appellant's submission, para. 31.
216Panel Reports, para. 7.80.

product has similar organoleptic properties (colour, fl avour and aroma) as the same type of imported
distilled spirit made from non-designated raw materials.217
124. The Panel considered that a difference in raw materials used in the production would only be
relevant to the extent that it resulted in final pr oducts that are not similar. The Panel followed the
approach of the panel in Mexico – Taxes on Soft Drinks , which had found that soft drinks and syrups
sweetened with cane sugar, and soft drinks and syrups sweetened with non-cane sugar sweeteners
(high-fructose corn syrup and beet sugar), are " like products" in spite of the differences in raw
materials. Thus, the Panel focused on the physical characteristics of distilled spirits as final products,
and not on those of the raw materials or production processes used to make the final products.218
125. We consider that, in spite of differences in th e raw materials used to make the products, if
these differences do not affect the final products, these products can still be found to be "like" within
the meaning of Article III:2 of the GATT 1994. 219 Article III:2, first sentence, refers to "like
products", not to their raw material base. If di fferences in raw materials leave fundamentally
unchanged the competitive relationship among the fina l products, the existence of these differences
would not necessarily negate a finding of "likeness" under Article III:2. As we have explained above,
the determination of what are "like products" unde r Article III:2 is not focused exclusively on the
physical characteristics of the products, but is co ncerned with the nature and the extent of the
competitive relationship between and among the products . We consider, therefore, that as long as the
differences among the products, including a difference in the raw material base, leave fundamentally
unchanged the competitive relationship among the fina l products, the existence of these differences
does not prevent a finding of "likeness" if, by consideri ng all factors, the panel is able to come to the
conclusion that the competitive relationship among th e products is such as to justify a finding of
"likeness" under Article III:2.
126. As noted above, in finding physical similaritie s between the products at issue, the Panel
attached particular importance to the fact that th e production process for each type of distilled spirit
made from designated raw materials in the Philippines is designed to ensure, as far as possible, that
the final product has organoleptic properties similar to those of the same type of imported distilled

217Panel Reports, para. 7.80.
218Panel Reports, para. 7.37 (referring to Panel Report, Mexico – Taxes on Soft Drinks, para. 8.131).
219The panel in Japan – Alcoholic Beverages II found that "the term 'like products' [in Article III:2]
suggests that for two products to fall under this categor y they must share, apart from commonality of end-uses,
essentially the same physical characteristics" (Panel Report, Japan – Alcoholic Beverages II , para. 6.22
(emphasis added)). The GATT panel in Japan – Alcoholic Beverages I found that the fact that vodka and
shochu were made of similar raw materials was an indication of the fact that they were "like products".
(GATT Panel Report, Japan – Alcoholic Beverages I, para. 5.7)

spirit made from non-designated raw materials.
220 To achieve this result, the ethyl alcohol produced
from sugar cane molasses is stripped of its congeners to produce a neutral spirit. Special additives are
added to the neutral spirit in order to ensure, as much as possible, that the resulting distilled spirit has
the colour, odour, and taste traditionally associated with gin, brandy, vodka, whisky, or tequila.221
127. The Panel, in considering consumer percepti ons, noted that the names "gin", "brandy",
"vodka", "whisky", "tequila" or "tequila-flavoured spirit" are used for domestic Philippine distilled
spirits, even though these are made from designated raw materials, such as sugar cane. The Panel also
noted that the raw material base is not mentioned on the labels of the bottles in which the domestic
distilled spirits are sold. Moreover, the Panel ob served that "labels of domestic Philippine distilled
spirits made from the designated raw materials tend to mimic or replicate the names of products and
designs of the similar imported spirits made from other raw materials".222
128. The Philippines claims that domestic distilled sp irits made from designated raw materials and
imported distilled spirits made from non-designat ed raw materials are not "like products".
Nevertheless, every effort is made, from the produc tion process to the sale of domestic distilled spirits
made from designated raw materials, to ensure that they replicate as closely as possible the
corresponding type of imported distilled spirit ma de from non-designated raw materials. While the
Panel addressed presentation and labelling under consum ers' tastes and habits, we observe that, as
distilled spirits are sold in labelled bottles, their pr esentation and labelling are also concerned with the
physical characteristics of the product and not only with the perceptions of the consumer. The fact
that domestic Philippine distilled spirits made fr om designated raw materials closely replicate
imported distilled spirits made from non-designated ra w materials supports the Panel's overall finding
that, within each type, these are "like products". Even where certain differences remain, domestic
distilled spirits made from designated raw material s are presented to consumers so as to be
indistinguishable from imported distilled spirits made from non-designated raw materials. This
suggests, in our view, that even where the products are made from different raw materials and may, as
a consequence, present some physical differences that are not completely eliminated in the production
process, they can be in a sufficien tly close competitive relationship to be considered "like products"
within the meaning of Article III:2, first sentence, of the GATT 1994.

220Panel Reports, para. 7.80.
221Panel Reports, para. 2.25.
222Panel Reports, para. 7.61.

 Application of the "Perceptible Differences T est" to Assess the Similarity of Physical
Characteristics
129. The Panel found that the differences in chemical composition of distilled spirits shown by the
gas chromatography results did not assist it in its "likeness" analysis because the differences in
chemical composition between distilled spirits made from the same raw materials were in most cases
greater than those between distilled spirits made from different raw materials. This led the Panel to
conclude that differences in chemical composition di d not show a distinction between distilled spirits
made from designated raw materials and t hose made from non-designated raw materials. 223 For each
type of distilled spirit —gin, brandy, vodka, whis ky, tequila and tequila-fla voured spirits—the Panel
found that there was no evidence of "perceptible differences" between the physical qualities and
characteristics of the imported spirit and those of the domestic Philippine spirit, nor between the
physical qualities and characteristics of the spirit made from the designated raw materials and those of
the spirit made from other raw materials.224
130. The Philippines argues that the Panel applie d the wrong standard because it relied on a
"perceptible differences test" from the perspectiv e of the hypothetical consumer as the sole
determinant of whether the products are physically different or not. 225 The Philippines claims that, in
a "likeness" analysis, the perception of the consumer is not related to the physical characteristics of
the product, which are empirical, physical attribut es. Rather, according to the Philippines, the
perception of the consumer is relevant to the crite rion of consumer tastes and habits. The Philippines
thus contends that, having selected the wrong sta ndard, the Panel found physical similarity between
"sugar-based" and "non-sugar-based" distilled spirits in spite of "numerous physical differences"
between these types of distilled spir its, such as the very different levels of certain key congeners and
the use of additives in "sugar-based" distilled spirits.226
131. We observe that the criteria to establish "likeness" under Article III:2, first sentence, of the
GATT 1994 are not exhaustive and are not set forth in Article III:2, nor in any other provision of the
covered agreements. Rather, these criteria are t ools available to panels for organizing and assessing
the evidence relating to the competitive relations hip between and among the products in order to
establish "likeness" under Article III:2, first sentence. While distinct, these criteria are not mutually

223Panel Reports, para. 7.40.
224Panel Reports, paras. 7.42, 7.43, 7.45, 7.46, and 7.47.
225Philippines' appellant's submission, para. 44.
226Philippines' appellant's submission, para. 38.

exclusive.
227 Certain evidence, such as that relating to the perceptibility of differences, may well fall
under more than one criterion.228
132. By finding that there was no evidence of "perceptible differences" in the physical
characteristics of the products, the Panel appears to have focused on how the products are perceived
by users in its analysis of the products' physical characteristics. While consumer perception of
products is highly relevant to th e overall determination of "likeness" under Article III:2, we believe
that this element may reach beyond the products' properties, nature, and qua lities, which concern the
objective physical characteristics of the products. Indeed, consumer perception of products may be
more concerned with consumers' tastes and habits than with physical characteristics.
133. However, in light of the above, while the Panel refers to "perceptible" differences only in the
context of the physical characteristics of the produc ts, we do not consider that the Panel committed an
error in its analysis of the products' physical charact eristics by finding that, within each type, there is
physical similarity between imported and domestic distilled spirits, irrespective of whether they are
made from designated raw materials or from non-designated raw materials.229
 Article 11 of the DSU
134. As noted above, the Philippines claims, in addition, that the Pa nel acted inconsistently with
Article 11 of the DSU, because it disregarded cr itical portions of the Philippines' evidence and
substituted its own judgement for that of the ex pert testimony presented by the Philippines.
Specifically, the Philippines argues that the Panel acted inconsistently with Article 11 of the
DSU when it found that there was no evidence that differences in organoleptic properties create a
distinction between distilled spirits made from desi gnated raw materials and distilled spirits made
from non-designated raw materials, and when it found that the differences in chemical composition
that do exist were not of assistance in its analysis of "likeness".230
135. Before turning to the issues raised by the Phili ppines on appeal, we recall that Article 11 of
the DSU requires a panel to "make an objective asse ssment of the matter before it, including an
objective assessment of the facts of the case". According to the Appellate Body, Article 11 of the
DSU requires a panel to "consider all the evidence presented to it, assess its credibility, determine its

228For instance, in EC – Asbestos , the Appellate Body considered health risks under a "physical
characteristics" criterion as well as under the criterion of "consumers' ta stes and habits". (Appellate Body
Report, EC – Asbestos, paras. 114 and 120).
229Panel Reports, para. 7.75.
230Philippines' appellant's submission, paras. 140 and 141 (referring to Panel Reports, para. 7.40).

weight, and ensure that its factual findings have a proper basis in that evidence." 231 Within these
parameters, "it is generally within the discretion of the panel to decide which evidence it chooses to
utilize in making findings" 232, and a panel "is not required to discuss, in its report, each and every
piece of evidence." 233 The failure by a panel to reproduce certain material evidence in its report
would not be inconsistent with Article 11 if th e panel's reasoning reveals that it has nevertheless
assessed the significance of this evidence.
136. Panels "are not required to accord to factual evidence of the parties the same meaning and
weight as do the parties." 234 In this regard, the Appellate Body will not "interfere lightly" with a
panel's fact-finding authority, and will not "base a finding of inconsistency under Article 11 simply on
the conclusion that [it] might have reached a different factual finding". 235 Instead, for a claim under
Article 11 to succeed, the Appellate Body must be sa tisfied that the panel has exceeded its authority
as the initial trier of facts. 236 As the initial trier of facts, a pa nel must provide "reasoned and adequate
explanations and coherent reasoning" 237, base its finding on a sufficient evidentiary basis 238, and treat
evidence with "even-handedness".239
137. The Philippines presented to the Panel gas chro matography results as well as an expert
study240 (the "expert study") showing that "sugar-b ased" and "non-sugar-based" distilled spirits have
distinct chemical compositions. This evidence show s, for example, that brandies and whiskies made
from grape and grain respectively have generally a higher congener content than brandies and
whiskies made from sugar cane molasses. The expert study also contains an expert opinion of the
differences in taste and aroma that result from the differences in chemical composition.
138. We note that the differences in congener c ontent are one of several factors the Panel
examined in its assessment of the physical characteristics of the products at issue. The Panel did not
consider that these chemical differences created a distinction between distilled spirits made from
designated and distilled spirits made from non-d esignated raw materials, because even greater
differences in congener content exist among di stilled spirits made from non-designated raw

231Appellate Body Report, Brazil – Retreaded Tyres , para. 185 (referring to Appellate Body Report,
EC – Hormones, paras. 132 and 133).
233Appellate Body Report, Brazil – Retreaded Tyres, para. 202.
235Appellate Body Report, US – Wheat Gluten, para. 151.
236Appellate Body Report, US – Wheat Gluten, para. 151.
237Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), footnote 618 to para. 293.
238See Appellate Body Report, US – Carbon Steel, para. 148.
239Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 292.
240T. Allen, "Tasting and Congener Content Analys is of 31 Distilled Spirits" (30 September 2010)
(Panel Exhibit PH-30 (BCI)).

materials.
241 The Panel thus addressed the differences in congener content among "sugar-based" and
"non-sugar-based" distilled spirits, although it reached di fferent conclusions than the expert consulted
by the Philippines. In light of the above, we consider that, as the trier of fact s, the Panel acted within
the bounds of its discretion in attributing less wei ght than the Philippines di d to the differences in
congener content in the analysis of the physical characteristics of the products.
139. As noted above, the expert study submitted by the Philippines also maintains that the
differences in congener content result in important differences in the organoleptic properties of
brandies, whiskies, gins, and vodkas made from sugar cane as compared to those made from
non-designated raw materials. The Panel, however , having reviewed the evidence concerning the
production process of distilled spirits made fr om designated raw materials and the gas
chromatography results, noted in paragraph 2.26 of its Reports that "there is no evidence to suggest
that a non-expert consumer would be able to dis tinguish between imported and domestic spirits of the
same type based only on the different raw mate rials used in their respective production".
Furthermore, in paragraphs 7. 39 and 7.40, having once again cons idered the production process of
distilled spirits made from designated raw materials, and the fact that these closely replicate those
made from non-designated raw materials, the Panel c oncluded that, in respect of colour, flavour, and
aroma, there is no difference between these two categories of distilled spirits.
140. In light of the importance that the Philippines attached to the expert study on the congener
content and organoleptic properties of distilled spirits , the Panel could have cited it directly and given
it more prominence. However, the Panel did refe r to the gas chromatography results on which the
expert opinion is based. 242 On the basis of these gas chromat ography results, and of the evidence
concerning the production process of distilled spirits made from designated raw materials, the Panel
reached the conclusion that there are no differences in the organolep tic properties of distilled spirits
made from designated raw materials and distilled sp irits made from non-designated raw materials.
Therefore, we do not consider that the Panel's treatment of the expert study amounts, in the
circumstances of this dispute, to disregarding or failing to engage with significant evidence that was
relevant to the Philippines' case.
141. In light of the above, we conclude that the Pane l did not disregard or fail to engage with the
evidence submitted by the Philippines concerning c ongener content and organoleptic properties of
distilled spirits, but that it acted within its discretion as the trier of facts in weighing the evidence. We

241Panel Reports, para. 7.40.

therefore consider that the Panel did not fail to ma ke an objective assessment of the facts within the
meaning of Article 11 of the DSU.
2. Consumers' Tastes and Habits
142. We now turn to the Philippines' challenge of the Panel's findings on consumers' tastes and
habits. First, we address the Philippines' claim th at the Panel erred in finding that the degree of
competition or substitutability of the products at issue supported its overall finding of "likeness" under
Article III:2, first sentence, of the GATT 1994. Second, we address the Philippines' claim that
differences in distribution channels reflect the diffe rent consumer markets that distilled spirits made
from designated raw materials and distilled spirits made from non-designated raw materials serve.
Third, we address the Philippines' claim that, in its assessment of the Philippine market for distilled
spirits, the Panel acted inconsistently with Article 11 of the DSU.
143. The Philippines contends that, in respect of c onsumers' tastes and habits, the Panel erred in
finding that the degree of competition a nd substitutability among domestically produced
"sugar-based" and imported "non-sugar-based" distille d spirits satisfies the higher standard of
"likeness" under Article III:2, first sentence. The Philippines argues that the Panel acknowledged that
a large proportion of consumers do not have access to high-priced "non-sugar-based" distilled spirits
and that the competition and substitutability that exists between the two categories is limited to
exceptional "special occasion" purchases.243
144. The European Union responds that the Philippin es' distinction between high-priced imported
distilled spirits and low-priced domestic distilled spirits is "incorrect", since both domestic and
imported distilled spirits cover a relatively wide spectrum of prices. 244 The United States observes
that the Panel drew its conclusions on consumer ta stes and habits from a variety of factual elements,
including that the same outlets in the Philippines that sell imported distilled spirits also sell domestic
distilled spirits, the similarity in marketing campa igns of domestic and imported distilled spirits, and
the overlap in price among domestic and imported distilled spirits.245
145. The Panel found that the evidence submitted by the parties suggest a significant degree of
competitiveness or substitutability for dis tilled spirits in the Philippine market. 246 The Panel based

243Philippines' appellant's submission, paras. 69-70.
244European Union's appellee's submission, para. 68.
245United States' appellee's submission, para. 40 (referring to Panel Reports, paras. 2.36, 2.41, 2.42,
7.51, and 7.59).
246Panel Reports, para. 7.62. (emphasis added)

this finding on an analysis of two studies
247 (the "substitutability studi es") submitted by the parties
regarding consumer perceptions in the Philippine distilled spirits market, and on the analysis of the
Philippine market for distilled spirits.
146. The Panel considered that both substitutability studies suggest that a simultaneous increase in
the price of domestic Philippine distilled spirits and decrease in the price of imported distilled spirits,
such as that which would result from an equalization in the respective levels of the excise tax, could
result in the substitution of the consumption of domes tic distilled spirits for imported distilled spirits
in the Philippine market. 248 Regarding the Philippine distilled sp irits market, the Panel noted that:
(i) a large proportion of the Philippine population has a limited ability to purchase distilled spirits
beyond certain price levels; (ii) there are a num ber of high-priced domestic Philippine distilled
spirits, as well as less expensive imports; and ( iii) many consumers may be able to purchase
high-priced distilled spirits, at least on special occasions.249
147. With respect to each type of distilled spirit at issue, the Panel further found that
manufacturers' marketing campaigns, which make no distinction between distilled spirits made from
designated and non-designated raw materials, su ggest a "closer similarity" than the "general
similarity" it had already found between all dis tilled spirits relevant in the present dispute. 250
Moreover, the Panel considered that the labels of domestic Philippine distilled spirits made from
designated raw materials do not suggest to the consumer that these products are different from
imported distilled spirits made from non-designated raw materials.251
148. We observe that both the analysis of "likeness" under Article III:2, first sentence, of the
GATT 1994, and the analysis of direct competiti veness and substitutability under Article III:2,
second sentence, require consideration of the competitive relationship between imported and domestic
products. However, "likeness" is a narrower category than "directly competitive and substitutable".
Thus, the degree of competition and substitutability th at is required under Article III:2, first sentence,
must be higher than that under Article III:2, sec ond sentence. On this point, we recall that, in
Canada – Periodicals, the Appellate Body considered that a relationship of "imperfect
substitutability" would still be c onsistent with the notion of "directly competitive or substitutable
products", under the second sentence of Article III:2 of the GATT 1994, and that "[a] case of perfect

247Euromonitor International survey, supra, footnote 37, submitted by the European Union and the
United States; and Abrenica & Ducanes, supra, footnote 65, submitted by the Philippines.
248Panel Reports, para. 7.57.
249Panel Reports, para. 7.59.
250Panel Reports, para. 7.82.
251Panel Reports, para. 7.82.

substitutability would fall within Article III:2, first sentence". 252 In Korea – Alcoholic Beverages, the
Appellate Body observed that "'like products' are a subset of directly competitive or substitutable
products", so that "perfectly s ubstitutable products fall within Ar ticle III:2, first sentence", while
"imperfectly substitutable products can be assessed under Article III:2, second sentence".253
149. We do not understand the statements by the Appellate Body in Canada – Periodicals and in
Korea – Alcoholic Beverages to mean that only products that are perfectly substitutable can fall within
the scope of Article III:2, first sentence. This would be too narrow an interpretation and would reduce
the scope of the first sentence essentially to identical products. Rather, we consider that, under the
first sentence, products that are close to being pe rfectly substitutable can be "like products", whereas
products that compete to a lesser degree would fall within the scope of the second sentence.
150. The Panel found that the degree of substitutability within the types of distilled spirits is higher
than for all distilled spirits, because domestic distilled spirits of a particular type made from
designated raw materials are marketed, presented, and labelled so as to resemble as closely as possible
imported distilled spirits of the same type made from non-designated raw materials. 254 We have
already found, in our discussion of the products' physical characteristics, that the fact that each type of
domestic distilled spirit made from designated raw materials is produced and presented in a manner so
as to replicate as closely as possible the same type of imported distilled spirit made from
non-designated raw materials, supports the conclusion that there is a closer competitive relationship
within each type of distilled spirit th an there is among all distilled spirits. 255 We consider this to be
so, regardless of whether aspects of this replica tion process pertain to the physical characteristics of
the products, or appeal to the tastes and habits of the consumers through labelling and packaging.
Thus, in respect of consumers' tastes and habits , we understand the Panel to have found that the
competitive relationship between each type of do mestic distilled spirit made from designated raw
materials and the same type of imported distilled spirit made from non-designated raw materials is
that of products that are close to being perfectly substitutable.
151. The Philippines further contends that di stribution channels for "sugar-based" and
"non-sugar-based" spirits in the Philippine market are distinct, reflecting the different consumer

252Appellate Body Report, Canada – Periodicals, p. 28, DSR 1997:I, 449, at 473.
253Appellate Body Report, Korea – Alcoholic Beverages , para. 118. See also Appellate Body Report,
Canada – Periodicals, p. 19, DSR 1997:I, 449, at 464-465.
254Panel Reports, para. 7.82.
255Supra, section V.A.1.

markets they serve. The Philippines submits that local sari-sari stores (small local stores)
256, which
are frequented by all except the most affluent of consumers, account for approximately 85 per cent of
off-premise sales of "sugar-based" spirits, but do not carry "non-sugar-based" spirits. 257 Moreover,
the Philippines argues that evidence submitted by the European Union and the United States shows
that "sugar-based" spirits are sold predomin antly through off-pre mise channels, while
"non-sugar-based" spirits are sold predominantly through on-premise ch annels such as bars,
restaurants, and hotels.258
152. The Panel addressed distribution channels under Article III:2, second sentence, of the
GATT 1994. In that context, the Panel f ound that some establishments (especially sari-sari stores)
that offer domestic Philippine distilled spirits do not carry imported distilled spirits, but that all outlets
where imported distilled spirits are sold, either for consumption on-premise or off-premise, also offer
domestic Philippine distilled spirits. The Panel cons idered this to be "an indication of similarity
between the products at issue."259
153. Sari-sari stores, which represent an important distribution channel for domestic distilled
spirits made from designated raw materials, do not distribute imported distilled spirits made from
non-designated raw materials. However, most ot her on-premise and off-premise outlets carry both
domestic and imported distilled spirits. In our vi ew, the fact that domestic and imported distilled
spirits in the Philippines do not share all channels of distribution does not establish that the degree of
substitutability is such that they are not "like products" within the meaning of Article III:2,
first sentence, of the GATT 1994. In particular, the fact that one channel of distribution is used only
for domestic spirits (sari-sari stores) is not sufficient to establish that the products are not "like".
260
154. In light of all the above, we do not consider that the Panel committed an error to the extent it
found that the degree of competition or substituta bility between imported distilled spirits of a

256Before the Panel, the Philippines defined " sari-sari" stores as "small, neighborhood,
over-the-counter stores that carry basic grocery and ho usehold items". (Philippines' first written submission to
the Panel, para. 253)
257Philippines' appellant's submission, para. 76 and footnote 77 thereto.
258Philippines' appellant's submission, para. 76.
259Panel Reports, para. 7.123.
260The panel in Korea – Taxes on Alcoholic Beverages found that "[c]onsiderab le evidence of overlap
in channels of distribution and points of sale … is supportive of a finding that the identified imported and
domestic products are directly competitive or substitutable". (Panel Report, Korea – Taxes on Alcoholic
Beverages, para. 10.86) Similarly, the panel in Chile – Alcoholic Beverages found that "the consistent practice
of putting these products on adjoining shelf space in similar outlets is one piece of evidence supporting a finding
of substitutability", but that "if the products we re regularly presented separately, it would be one piece of
evidence that perhaps consumers did not group them together in their perceptions". (Panel Report, Chile –
Alcoholic Beverages, paras. 7.57 and 7.59 (original emphasis))

particular type, made from non-designated raw materi als, and domestic distilled spirits of the same
type, made from designated raw materials, supports its overall finding that these products are "like"
within the meaning of Article III:2, first sentence, of the GATT 1994.
155. The Philippines claims, in addition, that, in its analysis of consumers' tastes and habits under
Article III:2, first sentence 261, and of competition under the second sentence 262, the Panel acted
inconsistently with Article 11 of the DSU. The Ph ilippines contends that, in concluding that there
was no evidence of the existence of two separate mark ets in the Philippines, and that some consumers
from the majority market "may be able to purchase high-priced distilled spirits, at least on special
occasions", the Panel disregarded critical evidence produced by the Philippines and ignored the fact
that no evidence had been presented to counter that presented by the Philippines.263
156. The Philippines contends that the evidence it submitted to the Panel demonstrates that
imported "non-sugar-based" spirits are priced regularly above PHP 150 per bottle and that, therefore,
only 1.8 per cent of its population can afford imported distilled spirits.264 The European Union argued
before the Panel that the group of consumers able to afford imported distilled spirits represents
15 per cent of the population, amounting to 13.7 million people. 265 In weighing the evidence, the
Panel found that "a large proportion of the Philip pine population has a limited ability to purchase
distilled spirits beyond certain price levels", but that the market is not divided into two segments, as
there are lower-priced imported distilled spirits that compete with domestic distilled spirits, as well as
high-priced domestic spirits that compete with im ported distilled spirits. The Panel concluded that,
"in terms of income, the population in the Philippine s does not appear to be divided into two separate
groups, but is rather distributed along a continuum of income brackets". 266 In doing so, the Panel did
take into account the evidence subm itted by the Philippines regarding the pricing of spirits and the
income levels of its population, as well as some contrasting evidence presented by the European
Union and the United States. Based on that evidence, the Panel reached conclusions that differ from
those of the Philippines, both under Article III:2, first sentence, and Article III:2, second sentence.
157. We have recalled, above, that a panel enjoys a margin of discretion in assessing the value of,
and the weight to be ascribed to, the evidence before it, and that panels "are not required to accord to

261Panel Reports, para. 7.59.
262Panel Reports, para. 7.119.
263Philippines' appellant's submission, para. 173 (quoting Panel Reports, paras. 7.59 and 7.119).
264Philippines' appellant's submission, para. 174.
265Panel Reports, footnote 528 to para. 7.120.
266Panel Reports, para. 7.59.

factual evidence of the parties the same meaning and weight as do the parties."
267 In light of the
above, it is our view that the Panel did consider and review the evidence submitted by the Philippines
concerning its distilled spirits market and, in particul ar, evidence of the price levels of distilled spirits
and the expendable income of the population. Altho ugh the Panel attributed different weight to this
evidence than that advocated by the Philippines, it did so, in our view, within its discretion as the trier
of facts.
3. Tariff Classification
158. We turn next to the criterion of tariff classifica tion. First, we address the Philippines' claim
that the Panel erred in finding that HS heading 2208 provides an indication of similarity between
domestic distilled spirits made from designated raw materials and imported distilled spirits made from
non-designated raw materials. Second, we addre ss the Philippines' claim that the Panel acted
inconsistently with Article 11 of the DSU in its assessment of the HS six-digit subheadings for brandy
and whisky.
159. The Panel considered the fact that all distilled sp irits at issue in this dispute, irrespective of
the raw materials from which they are made, fa ll under HS heading 2208, as an indication of
similarity.268 The Panel also found that the HS six-digit subheadings for gin and vodka (2208.50 and
2208.60, respectively) make no dis tinction between distilled spirits on the basis of the raw materials
from which they are made, and that no HS si x-digit subheadings exist for tequila and
tequila-flavoured spirits. In contrast, the HS six-digit subheading for brandy (2208.20) "covers
'brandy' as a '[Spirit] obtained by distilling grape wine or grape marc'" 269 and the HS six-digit
subheading for whisky (2208.30) "covers 'Whiskies', as spirits made from a 'mash of cereal grains'".270
Accordingly, the Panel considered that, at the six-digit level, the HS classification did not provide
"conclusive guidance".271
160. The Philippines claims that the Panel erred in cons idering the fact that all distilled spirits at
issue, irrespective of the raw materials from whic h they are made, fall under the same four-digit
HS heading (2208), as an indication of similarity. The Philippines argues that the Panel's reliance on

267Appellate Body Report, Australia – Salmon, para. 267. In US – Wheat Gluten , the Appellate Body
also stated that "in view of the di stinction between the respective roles of the Appellate Body and panels … we
will not interfere lightly with the panel's exercise of its discretion". (Appellate Body Report, US – Wheat Gluten,
para. 151)
268Panel Reports, para. 7.63.
269Panel Reports, para. 7.66.
270Panel Reports, para. 7.69.
271Panel Reports, para. 7.71.

the four-digit tariff heading in th is case was inappropriate, because the range of products that fall
under heading 2208 is very broad. This tariff he ading is not sufficiently detailed to draw any
particular inferences as to whether the distilled spirits at issue are "like".272
161. In Japan – Alcoholic Beverages II, the Appellate Body stated that tariff classification can be a
helpful sign of similarity only if it is sufficiently detailed. 273 We do not consider that
HS heading 2208, which groups together all dis tilled spirits, as well as other liquors and unflavoured
neutral spirits for human consumption or for indust rial purposes, constitutes a tariff classification that
is sufficiently detailed to provide an indication of "likeness", within types of distilled spirits, between
domestic distilled spirits made from designated mate rials and imported distilled spirits made from
non-designated materials.274
162. Turning to the Panel's finding in respect of the HS six-digit subheadings, the
Philippines claims that the Panel failed to make an objective assessment of the matter before it, as
required by Article 11 of the DSU, because it ignor ed significant and clear evidence regarding the
tariff classification of whisky and brandy when it arrived at the conclusion that the evidence on tariff
classification was inconclusive.275 Particularly in respect of whisky and brandy, the Panel found that
the HS classification at the six-digit level, and the accompanying explanatory notes (HSENs), take
into account the raw material used for the production of a particular distilled spirit, so that whisky and
brandy made from sugar cane molasses would not fall under the same HS subheading as whisky and
brandy made from traditional raw materials.
163. We observe that the six-digit HS subheading for brandy refers to spirits obtained by distilling
grape wine or grape marc. The six-digit HS subhead ing for whisky contains no reference to the raw
material from which this spirit is produced. Howeve r, the HSENs to the six-digit HS codes for both
brandy and whisky specify the material from which th e spirit is distilled, namely, grape wine or grape
marc for brandy and mash of cereal grains for whisky. 276 This, in our view, provides an indication
that tariff classification would not suggest that do mestic brandies and whiskies made from designated

272Philippines' appellant's submission, para. 81.
273Appellate Body Report, Japan – Alcoholic Beverages II, p. 21, DSR 1996:1, 97, at 114.
274We observe that the HS heading 2208 refers to "u ndenatured ethyl alcohol of an alcoholic strength
by volume of less than 80%; spirits, liqueurs and other spirituous beverages". Gin, brandy, rum, vodka,
whisky, tequila and tequila-flavoured spirits are all covered by HS heading 2208, but also covered are chocolate,
vanilla, milk, and honey liqueurs or "crèmes" as well as unflavoured neutral spirits for human consumption or
for industrial purposes of less than 80 per cent volume. (Panel Reports, paras. 2.51-2.53 (referring to, inter alia,
the HSEN to heading 2208 (Panel Exhibit PH-46)))
275Philippines' appellant's submission, para. 159.
276Panel Reports, paras. 2.51-2.53 (referring to, inter alia , the HSEN to heading 2208 (Panel
Exhibit PH-46)).

raw materials are "like" imported brandies and wh iskies made from non-designated raw materials.
Accordingly, we do not agree with the Panel' s conclusion that at the six-digit level the
HS classification provides no "conclusive guidance" as to the similarity of brandies and whiskies
made from designated and non-designated raw materials.
164. We observe, however, that tariff classification is only one of the criteria that the Panel
reviewed in its analysis of "likeness" under Article III:2 of the GATT 1994. We have already agreed
with the Panel's conclusions that the criteria of products' physical characteristics and consumers' tastes
and habits do support a finding that the products at issue are "like" within the meaning of Article III:2.
Moreover, we recall that the Panel's finding that th e end-uses of the products at issue are similar was
not appealed. Thus, the fact that the Panel overlooked the significance of HS six-digit level
classification for brandy and whisky does not, in our view, undermine its overall finding that the
products at issue are "like". Therefore, we do not consid er that this is an error that rises to the level of
a failure by the Panel to comply with its duties under Article 11 of the DSU.
165. In light of the above, we do not consider that the Panel committed an error under Article 11 of
the DSU, as the Philippines contends, in respect of the six-digit HS subheadings.
4. Regulatory Regimes
166. The Philippines claims that the Panel erred in c onsidering that the regulatory regimes in force
in the European Union and in the United States, wh ich prohibit the marketing of whisky and brandy
made from sugar cane molasses as "whisky" and "brandy", are "irrelevant". 277 The Philippines
contends that the domestic regulatory regimes of bot h complainants are useful in identifying physical
differences between the products that are commonly recognized as important to that particular
product's identity.
167. In our view, the fact that, in the European Un ion and in the United States, whisky and brandy
made from sugar cane molasses cannot be marketed a nd sold as "brandy" and "whisky" may be an
indication that consumers in those countries woul d perceive these products as having quite distinct
physical properties. In contrast, in the Philippi nes, not only can domestically distilled spirits made
from designated raw materials be marketed and sold as "brandy" and "whisky", but also, as we have
already considered above, every effort is made in the production, marketing, and sale of brandy or
whisky made from designated raw materials to ensu re that they replicate as closely as possible
imported brandy or whisky made from non-designated raw materials.

277Philippines' appellant's submission, para. 51.

168. The determination of "likeness" under Article III:2, first sentence, of the GATT 1994 should
be made on a case-by-case basis. If two spirits are considered to be "like products" in a given market,
this does not necessarily mean that they would be co nsidered "like products" in another market. It is
thus conceivable that brandy and whisky made from designated raw materials and those made from
non-designated raw materials may be consider ed as "like products" by consumers in the
Philippine market, but that they may not be cons idered as "like products" by consumers in another
market. As we have explained above, we consider that, in order to establish whether two products are
"like" within the meaning of Article III:2 of the GATT 1994, a panel needs to examine the nature and
the extent of the competitive relationship be tween and among products, which will depend on the
market where these products compete.
169. We are, therefore, of the view that the Pa nel did not err in considering as relevant the
regulatory framework of the Philippines, rather than that of the European Union or the United States,
in its analysis of the competitive relationship between each type of domestic distilled spirit made from
designated raw materials and the same type of imported distilled spirit made from non-designated raw
materials in the market where the products compete, that is, the Philippine market.
5. Conclusions
170. As we have explained above, the determ ination of "likeness" under Article III:2,
first sentence, of the GATT 1994 is, fundamentally, a determination about the nature and extent of a
competitive relationship between and among importe d and domestic products. The Panel reviewed
the products' physical characteristics, end-uses, a nd consumers' tastes and habits, as well as tariff
classification and relevant Philippine internal regula tions, and concluded that an analysis of these
factors shows that each type of imported dis tilled spirit at issue in this dispute made from
non-designated raw materials is "like" the same type of domestic distilled spirit made from designated
raw materials, within the meaning of Article III:2, first sentence, of the GATT 1994.
171. We are of the view that, overall, the Panel di d not commit an error in the interpretation and
application of Article III:2, first sentence, of th e GATT 1994. In particular, we consider that the
Panel's analyses of the products' physical characteris tics and of consumers' tastes and habits supports
the overall conclusion that distilled spirits of a pa rticular type made from designated raw materials
and distilled spirits of the same type made fro m non-designated raw materials are "like products"
within the meaning of Article III:2 of the GATT 1994. This finding is, in our view, further supported
by the Panel's finding on end-uses, which the Ph ilippines does not challenge on appeal. The Panel
found that specific types of distilled spirits share the same end-uses, that is, "thirst quenching,

socialization, relaxation, pleasant intoxication", irre spective of the raw materials from which they are
made.
278
172. In light of the above, we uphold the Panel's finding, in paragraph 7.85 of the Panel Reports,
that each type of imported distilled spirit at issue in this dispute—gin, brandy, vodka, whisky, and
tequila—made from non-designated raw materials is "lik e" the same type of domestic distilled spirit
made from designated raw materials, within the m eaning of Article III:2, first sentence, of the
GATT 1994.
173. Moreover, for the reasons explained above, we consider that the Panel did not act
inconsistently with Article 11 of the DSU in its evaluations of the products' physical characteristics, of
the Philippine market for distilled spirits, and of tariff classification.
174. As a consequence, we also uphold the Panel's finding, in paragraphs 7.90 and 8.2 of the Panel
Reports, that, by imposing on each type of imported distilled spirit at issue in this dispute—gin,
brandy, rum, vodka, whisky, and tequila—made from non- designated raw materials, internal taxes in
excess of those applied to "like" domestic distilled spirits of the same types, made from designated
raw materials, the Philippines has acted inconsiste ntly with Article III:2, first sentence, of the
GATT 1994.279
B. The Panel's Finding that All Distilled Spirits at Issue in This Dispute, whether
Imported or Domestic and Irrespective of Their Raw Material Base, are "Like
Products"
175. We now turn to the Panel's finding at paragraph 7. 77 of its Reports that "the distilled spirits at
issue in the present dispute, whether imported or do mestic, and irrespective of the raw materials from
which they are made, are like products within the meaning of the first sentence of Article III:2 of the
GATT 1994".280
176. The Philippines contends that the Panel' s error in assessing the products' physical
characteristics also led it to make the "extraordinary " finding that all distilled spirits at issue in this
dispute are "like products", such that "n on-sugar-based" whiskies are "like" "sugar-based"
brandies, etc.281 The Philippines adds that these types of products are so different that the

278Panel Reports, para. 7.81.
280Panel Reports, para. 7.77.
281Philippines' appellant's submission, para. 40.

complainants themselves did not claim that all "non-sugar-based" distilled spirits are "like" all
"sugar-based" distilled spirits for the purposes of Article III:2 of the GATT 1994.282
177. It is not immediately clear from paragraph 7.77 of the Panel Reports, when read in isolation,
whether the Panel actually concluded that all distilled spirits at issue in this dispute are "like
products", irrespective of their raw material base and their origin or type (brandy, whisky, rum, gin,
vodka, tequila, tequila-flavoured spirits), or whether it simply stated that the distilled spirits at issue in
this dispute may be "like products", irrespective of raw material base and origin. We observe,
however, that before reaching its conclusion in para graph 7.77, the Panel stated, in the two preceding
paragraphs, that all distilled spirits at issue in this dispute are similar in respect of physical
characteristics and end-uses, and that factors such as marketing campaigns, the significant degree of
competition or substitutability, tariff classification, and domestic regulations suggest similarity
between all distilled spirits at issue in this dispute, irr espective of their raw material base and origin.
Moreover, in paragraph 7.78, the Panel stated that, "in addition" to its conclusion in paragraph 7.77, it
would then turn "to each type of spirit (gin, bran dy, rum, vodka, whisky, tequila and tequila-flavoured
spirits), in order to consider whether those spir its, imported or domestic and irrespective of the raw
materials from which they are distilled, are 'like products'". These statements by the Panel may be
read as suggesting that the conclusion in paragraph 7.77 was in fact that all distilled spirits at issue in
this dispute are "like products" within the meaning of Article III:2, first sentence, of the GATT 1994.
178. In addition, we note that the Panel later stat ed that, under Article III:2, second sentence, it
considered the issue of "direct competitiveness or substitutability" as if arguendo it had found that the
products at issue were not like.
283 As we consider further below, the Panel addressed, under
Article III:2, second sentence, whether all distilled spirits at issue in this dispute are directly
competitive or substitutable products on an arguendo basis. This suggests that, under Article III:2,
first sentence, the Panel did find that all distilled spirits at issue in this dispute are "like products".
Had this not been the case, there would have been no need for the Panel to consider arguendo the
issue of whether all distilled spirits at issue are directly competitive or substitutable under
Article III:2, second sentence.
179. To the extent that the Panel found, in paragraph 7.77 of its Reports, that all distilled spirits at
issue in this dispute, regardless of the different types, are "like products" within the meaning of
Article III:2, first sentence, of the GATT 1994, we disagree with this finding by the Panel.

282Philippines' appellant's submission, para. 41.
283Panel Reports, para. 7.99.

180. The Panel's own findings suggest that the degree of physical similarity and competition
among all distilled spirits at issue in this dispute is not such as to fulfil the narrow definition of
"likeness" in Article III:2, first sentence, of the GATT 1994. We observe that, in paragraph 7.40 of its
Reports, the Panel stated that it had found "evidence th at each of the different types of distilled spirits
has specific organoleptic properties". It clearly follo ws from this that, in the Panel's view, all distilled
spirits do not have the same organoleptic properties.
284
181. Moreover, in respect of consumers' tastes and habits, the Panel found that the evidence
suggested a significant degree of competitiveness or substitu tability for distilled spirits in the
Philippine market.285 To the extent that this finding by the Panel refers to all distilled spirits in the
Philippine market, we do not consider that a significant degree of competitiveness or substitutability
would support a finding of "likeness" under Article III :2, first sentence, of the GATT 1994. We have
considered above that, based on the findings of the Appellate Body in Canada – Periodicals286 and in
Korea – Alcoholic Beverages 287, under Article III:2, first sentence, products that are close to being
perfectly substitutable can be "like products", wher eas products that compete to a lesser degree would
fall within the scope of the second sentence of Article III:2. This, in our view, suggests that a finding
of "likeness" under the first sentence requires a degree of competition that is higher than merely
significant.
182. Finally, we disagree with the Panel's finding that, the fact that all distilled spirits at issue in
this dispute, irrespective of the raw materials fro m which they are made, fall under HS heading 2208,
provides an indication of similarity. 288 We recall that, in Japan – Alcoholic Beverages II , the
Appellate Body stated that tariff classification ca n be a helpful sign of similarity only if it is
sufficiently detailed. 289 As already noted above, we do not consider that HS heading 2208, which
groups together all distilled spirits , as well as other liquors and unflavoured neutral spirits for human
consumption or for industrial purposes, constitute s a sufficiently detailed tariff classification to
support a finding that all distilled spirits at issue in this dispute are "like" within the meaning of
Article III:2, first sentence, of the GATT 1994.

284For example, with respect to colour, the Panel fo und that all gins and all vodkas have a clear
(transparent) colour, while all whiskies have a "similar golden" colour, and all brandies have a colour that "goes
from golden to mahogany." (Panel Reports, paras. 2.55, 2.62, 2.75, and 2.81)
285Panel Reports, para. 7.62.
286Appellate Body Report, Canada – Periodicals, p. 28, DSR 1997:I, 449, at 473.
287Appellate Body Report, Korea – Alcoholic Beverages, para. 118.
288Panel Reports, para. 7.63.
289Appellate Body Report, Japan – Alcoholic Beverages II, p. 21, DSR 1996:1, 97, at 114.

183. In light of the above, we do not consider that th e Panel's conclusions on the products' physical
characteristics, consumers' tastes and habits, and tariff classification support a finding that all distilled
spirits at issue in this dispute are "like products" wi thin the meaning of Article III:2, first sentence, of
the GATT 1994. Therefore, to the extent that pa ragraph 7.77 of the Panel Reports stands for the
proposition that all distilled spirits at issue in this dispute ar e "like products", regardless of types, we
reverse this finding by the Panel.
VI. Article III:2, Second Sentence, of the GATT 1994
184. In this section, we address both the Philippines' appeal and the European Union's other appeal
regarding Article III:2, second sentence, of the GATT 1994. We begin with the other appeal of the
European Union.
A. European Union's Other Appeal
185. The European Union claims that the Panel erred in characterizing its claim under Article III:2,
second sentence, of the GATT 1994 as made in the "alternative"290 to its claim under the first sentence
of Article III:2. According to th e European Union, by failing to address its claim under Article III:2,
second sentence, the Panel acted inconsistently with Articles 7.1, 7.2, and 11 of the DSU. 291
Moreover, to the extent that the Panel's failu re to address the European Union's claim under
Article III:2, second sentence, constituted application of the principle of judicial economy, the
European Union submits that the Panel exercised "f alse" judicial economy in violation of Articles 3.7
and 21.1 of the DSU.
292 The European Union requests the Appe llate Body: to reverse the Panel's
characterization of its claim under the second senten ce of Article III:2 as "alternative" to its claim
under the first sentence thereof; to complete the le gal analysis; and to find that the Philippines has
acted inconsistently with Article III:2, second sentence, of the GATT 1994.293
186. The Philippines does not contest the specific claim raised by the European Union in its other
appeal. The Philippines essentially considers that th e merits of the claim raised by the European
Union in its other appeal will be fully addressed by the Appellate Body in any case, because the
Philippines has appealed the finding of inconsistenc y made by the Panel in response to the United
States' claim under Article III:2, second sentence, of the GATT 1994.294

290Panel Reports, paras. 7.1, 7.5, 7.17, 7.92, 7.93, 7.95; and EU Panel Report, para. 8.3.
291European Union's other appellant's submission, para. 29.
292European Union's other appellant's submission, para. 35.
293European Union's other appellant's submission, para. 50.
294Philippines' appellee's submission, para. 3.

187. The European Union's request for the establis hment of a panel describes the specific claims
raised by the European Union under Article III:2 of the GATT 1994 in the following terms:
[T]he Philippines has acted inconsiste ntly with the first sentence of
Article III:2 of the GATT 1994, by making distilled spirits imported
from other WTO Members, including the [European Union], subject,
directly or indirectly, to internal taxes or other internal charges in
excess of those applied, directly or indirectly, to like domestic
products. Moreover, separately and in combination with the
first sentence of Article III:2, by applying internal taxes or other
internal charges to imported and/or domestic products in a manner
contrary to the principles set forth in paragraph 1 of Article III of the
GATT 1994, the Philippines has acted inconsistently with the
second sentence of Article III:2 of the GATT 1994.
295 (emphasis
added)
188. We consider that the European Union's pane l request clearly indicates that the European
Union made separate and independent claims under th e first and second sentences of Article III:2, of
the GATT 1994. We further note that, in response to questioning by the Panel, the European Union
specified the products at issue in each of its claims under the first and second sentences of
Article III:2 and stated:
In essence, the [European Union's] main claims are as follows:
- Under Article III:2, first sentence, of the GATT [1994]:
(i) the EU claims that for each type of spirit (e.g. gin, vodka,
whisky, rum, brandy, tequila etc.) the products distilled from
the designated raw materials are "like" those distilled from
the non-designated raw materials. Thus, by way of example,
a whisky produced from the designated raw materials
(e.g. sugar-cane) is like a whisky produced from other raw
materials (e.g. malt). …
- Under Article III:2, second sentence, of the GATT [1994]:
(i) the EU submits that al l distilled spirits falling under
heading HS2208 are "directly competitive and substitutable",
irrespective of the raw materials they are distilled from. In
other words, by way of example, the EU claims that imported
gin is directly competitive and substitutable with
Filipino vodka, that imported brandy is directly competitive

295WT/DS396/4, p. 3.

and substitutable with domestic whisky, etc.296 (emphasis and
footnote omitted)
189. In our view, this response by the European Union demonstrates that its claims under the
first and second sentences of Article III:2 were not only separate and independent, but also involved
distinct product groupings . Before the Panel, the European Union claimed that the Philippines had
acted inconsistently with Article III:2, first sentence, of the GATT 1994 by applying to each type of
imported distilled spirit made from non-designated ra w materials (gin, brandy, rum, whisky, vodka,
tequila) internal taxes in excess of those applied to "like" domestic distilled spirits of the same type
made from designated raw materials. In addition, the European Union claimed that the Philippines
had acted inconsistently with Article III:2, second sentence, of the GATT 1994 by applying dissimilar
taxes to all imported distilled spirits at issue made from non-designated raw materials and to all
"directly competitive or substitutable" domestic dis tilled spirits made from designated raw materials,
so as to afford protection to domestic production.297
190. The Panel's incorrect characterization of the European Union's claim under the
second sentence of Article III:2 may stem, in part , from the European Union's statement in its
first written submission that, "if the Panel were to establish that the Philippines violates Article III:2,
first sentence, it would not necessarily need to an alyse a breach of the second sentence of the same
provision: such a breach would inevitably be covered."298 This statement is legally incorrect, because
the second sentence of Article III:2 requi res the European Union to establish separately: (i) that
imported and domestic distilled spirits are "directly competitive or substitutable"; (ii) that such
directly competitive or substitutable products are " not similarly taxed"; and (iii) that dissimilar
taxation of the directly competitive or substitutable products is applied "so as to afford protection to
domestic production". 299 Moreover, because the European Union's claims under the first and
second sentences of Article III:2 involved distinct product groupings, a finding that each type of

296European Union's response to Panel Question 18, para. 11. The European Union did "not take a
definitive position on 'likeness' between different types of spirits … [and] does not exclude that two or more
different types of spirits could be held 'like'." Yet, the European Union did not consider it necessary for the
Panel to engage in such analysis, because it would be "long and complex". (Ibid.)
297The European Union also made a "subordinate cl aim" that each type of imported and domestic
distilled spirit (gin, brandy, rum, whisky, vodka, tequila) were "directly competitive or substitutable" within the
meaning of Article III:2, second sentence, of the GATT 1994. (European Union's response to Panel Question 18,
para. 12)
Having found that all the distilled spirits at issue, whether imported or domestic, and irrespective of the
raw material from which they are made, are "directly competitive or substitutable" under Article III:2,
second sentence, of the GATT 1994, the Panel did not a ddress the European Union's "subordinate claim" (Panel
Reports, para. 7.138), and its failure to do so has not been appealed by the European Union.
298European Union's first written submission to the Panel, para. 52. (footnote omitted)
299See Appellate Body Report, Japan – Alcoholic Beverages II , p. 24, DSR 1996:1, 97 at 116.
(emphasis omitted)

imported distilled spirit (gin, brandy, rum, whisky, v odka, tequila) is "like" the same type of domestic
distilled spirit under the first sentence do es not establish, without more, that all the imported and
domestic distilled spirits at issue are "directly competitive or subs titutable" under the second sentence
of Article III:2 of the GATT 1994.
191. Thus, we consider that the European Union' s claim under the second sentence of Article III:2
could not have been properly understood as having been made in the "alternative", that is, to be
addressed only if the Panel were to reject the Eur opean Union's claim under the first sentence of that
provision.
300 Accordingly, we reverse the Panel's findings, in paragraphs 7.1, 7.5, 7.17, 7.92, 7.93,
7.95, and 8.3 of the EU Panel Report, that the European Union's cl aim under Article III:2,
second sentence, of the GATT 1994 was made in the "a lternative" to its claim under the first sentence
of that provision.
192. Having erroneously concluded that the Eu ropean Union's claim under Article III:2,
second sentence, was made in the "alternative", the Panel examined the consistency of the Philippines'
excise tax with the second sentence of Article III:2 only with respect to the United States' claim under
that provision, though it took into account "all the arguments and evidence on record, including those
submitted by the European Union and third parties".
301 In failing to examine the European Union's
claim under Article III:2, second sentence, the Panel failed to conduct an objective assessment of the
matter before it, as required by Article 11 of the DSU, in relation to that specific claim of the
European Union. Moreover, the Panel found that the Philippines had acted inconsistently with the
second sentence of Article III:2, and made recomme ndations that the Philippines bring itself into
conformity with its obligations under that provisi on, only in its Report addressing the complaint by
the United States (DS403).
302 In erroneously abstaining from making findings under Article III:2,
second sentence, and in failing to make recomme ndations that the Philippines bring itself into
conformity with that provision in its Report addressing the complaint by the European Union
(DS396), the Panel failed to "make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided fo r in the covered agreements" in the dispute in
DS396, as required under Article 11 of the DSU.
303 For these reasons, we find that the Panel acted
inconsistently with its obligati ons under Article 11 of the DSU, in paragraph 8.3 of the EU Panel

300Without prejudice to the Eu ropean Union's right under Article 17.6 of the DSU to appeal any issues
of law covered in the Panel Reports and legal interpreta tions developed by the Panel, we consider that this
matter could have been raised at the interim review stage of the panel proceedings.
301Panel Reports, para. 7.95.
302US Panel Report, paras. 8.2(b) and 8.4.
303EU Panel Report, para. 8.3.

Report, in failing to examine, and in abstaining from making findings in relation to, the European
Union's separate and independent claim under Article III:2, second sentence, of the GATT 1994.
193. We must now determine whether there are "suffi cient factual findings in the panel report or
undisputed facts in the panel record" 304 to enable us to complete the legal analysis in relation to the
European Union's separate and independent cl aim under Article III:2, second sentence, of the
GATT 1994. We note here and discuss below that th e findings made by the Panel under Article III:2,
second sentence, of the GATT 1994 provide a sufficient b asis for us to complete the legal analysis in
relation to the European Union's claim under that provision.305
B. Philippines' Appeal
194. We examine next the issues raised in the Phili ppines' appeal regarding the Panel's findings
under Article III:2, second sentence, of the GATT 19 94, which contains a general prohibition against
"internal taxes or other internal charges" app lied to "imported or domes tic products in a manner
contrary to the principles set forth in paragraph 1". Article III:1 of the GATT 1994, in turn, provides
that internal taxes and other internal charges "s hould not be applied to imported or domestic products
so as to afford protection to domestic production". The Ad Note to Article III:2 clarifies the
conditions under which a measure c onforming to the first sentence of Article III:2 will be nonetheless
inconsistent with the second sentence of that provision as follows:
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.
195. As noted earlier, the Appellate Body has explained that three separate issues must be
addressed when assessing the consistency of an internal tax measure with Article III:2,
second sentence, of the GATT 1994. First, wh ether the imported and domestic products are " directly
competitive or substitutable "; second, whether such directly competitive or substitutable imported
and domestic products are "not similarly taxed"; and third, whether dissimilar taxation of the directly

304Appellate Body Report, US – Section 211 Appropriations Act, para. 343 (referring to Appellate Body
Report, Australia – Salmon, para. 118).
305Panel Reports, paras. 7.95-7.188.

competitive or substitutable imported products is " applied … so as to afford protection to domestic
production".
306
196. The Philippines appeals the Panel's assessment of two elements of the three-part test of
Article III:2, second sentence, of the GATT 1994. First, the Philippines claims that the Panel erred in
finding that all distilled spirits at issue in this di spute, whether imported or domestic, and irrespective
of the raw material from which they are made, ar e "directly competitive or substitutable" products
within the meaning of Article III:2, second sentence. 307 Second, the Philippines claims that the Panel
erred in finding that dissimilar taxation of the im ported and domestic distilled spirits at issue is
applied "so as to afford protection" to Philippi ne production of distilled spirits under Article III:2,
second sentence.308 The Philippines does not appeal the Panel's finding that imported distilled spirits
made from non-designated raw materials and direc tly competitive or substitutable domestic distilled
spirits made from designated raw materials are not "similarly taxed" within the meaning of
Article III:2, second sentence, of the GATT 1994.309
1. Directly Competitive or Substitutable Products
197. In examining whether the imported and domestic distilled spirits at issue are "directly
competitive or substitutable" in the Philippine market, the Panel initially noted that the substitutability
studies submitted by the parties suggest "a significan t degree of competitiveness or substitutability" in
the Philippines between the distilled spirits at issue. 310 The Panel then rejected the
Philippines' argument that the price gap between imported and domestic distilled spirits, combined
with the income disparity in the Philippines, demonstrates the existe nce of two distinct segments in
the Philippine distilled spirits market. The Panel reasoned that the overlap in prices both for high- and
low-priced brands of imported and domestic distilled spirits suggests th at the Philippine market is not
segmented.311 Moreover, in terms of purchasing power, ma ny Filipino consumers "may be able to
purchase high-priced distilled spirits, at least on special occasions". 312 The Panel added that the
Philippines' argument concerning market segmentation implies that "at least a narrow segment of the
market has access to both groups of spirits".
313 For the Panel, such in stances of actual competition

306Appellate Body Report, Japan – Alcoholic Beverages II , p. 24, DSR 1996:1, 97, at 116. (original
emphasis)
307Panel Reports, para. 7.138.
308Panel Reports, para. 7.187.
309Panel Reports, para. 7.167.
310Panel Reports, para. 7.113 (referring to Euromonitor International survey, supra, footnote 37, and
Abrenica & Ducanes, supra, footnote 65).
311Panel Reports, para. 7.118.
312Panel Reports, para. 7.119.
313Panel Reports, para. 7.120.

indicate that imported and domestic distilled spirits are " capable of being directly competitive or
substitutable in the future".314
198. On this basis, the Panel concluded that there is "a direct competitive relationship" between
domestic and imported distilled spir its made from different raw materials in the Philippine market. 315
This factor, combined with other similar ities in terms of channels of distribution 316, the
products' physical characteristics 317, end-uses and marketing 318, tariff classification 319, and internal
regulations320 suggest that the imported and domestic distille d spirits at issue, ir respective of the raw
materials from which they are made, are "directly co mpetitive or substitutable" within the meaning of
Article III:2, second sentence, of the GATT 1994.321
199. On appeal, the Philippines challenges the Panel's assessment of the competitive relationship
between imported and domestic distilled spirits in the Philippine market. The Philippines does not
challenge the other factors taken into account by the Panel in its determination that imported and
domestic distilled spirits are "directly competitive or substitutable", such as similarity in channels of
distribution, physical characteristics, end-uses a nd marketing, tariff classification, and internal
regulations.322
200. The Philippines claims that the Panel made in essence three errors in its assessment of the
competitive relationship between imported and domest ic distilled spirits in the Philippine market.
First, the Philippines argues that the Panel insu fficiently addressed the "degree of competition"
between imported and domestic distilled spirits in the Philippine market. Second, the Philippines
maintains that the Panel erroneously found direct competition or substitutability between imported
and domestic spirits on the basis of a "non-representa tive" segment of the Philippine market having
"access" to distilled spirits "at least on special occasi ons". Third, the Philippines posits that the Panel
incorrectly held that there is potential competition between imported and domes tic distilled spirits in
the Philippines. In addition, the Philippines argues th at the Panel acted inconsistently with its duties
under Article 11 of the DSU in its assessment of the two studies that purported to evaluate the degree

314Panel Reports, para. 7.121. (original emphasis)
315Panel Reports, para. 7.137.
316Panel Reports, para. 7.123.
317Panel Reports, para. 7.127.
318Panel Reports, paras. 7.129 and 7.131.
319Panel Reports, paras. 7.133 and 7.134.
320Panel Reports, para. 7.135.
321Panel Reports, para. 7.138.
322Panel Reports, paras. 7.122-7.135.

of substitutability between domestic and imported distilled spirits in the Philippine market. We
address each of these arguments in turn.
(a) "Degree" of Competition
201. The Philippines argues that the Panel applied an in correct standard in finding that the analysis
under the second sentence of Article III:2 of the GATT 1994 should focus on the "nature" and
"quality" of competition, but not on the "degr ee of competition" between domestic and imported
distilled spirits in the Philippines.
323 Referring to the Appellate Body reports in Korea – Alcoholic
Beverages and US – Cotton Yarn , the Philippines stresses that th e degree of competition between
imported and domestic products is the "central " inquiry under Article III:2, second sentence. 324
According to the Philippines, had the Panel applied the correct sta ndard, it would have come to the
conclusion that there is "insufficient proximity" in the degree of competition between the products at
issue to permit their characterization as "directly competitive or substitutable".325
202. Both the European Union and the United States respond that the Panel correctly focused its
analysis on the degree of competition between imported and domestic distilled spirits in the Philippine
market. For the European Union, the Phili ppines' argument is "purely terminological". 326 In stating
that the issue was "not so much" the degree of competition, the Panel simply rejected the
Philippines' argument that Article III:2, second sente nce, requires "complete, absolute or exact"
substitutability.327 For the United States, the Philippines se eks to minimize the significance of other
types of evidence upon which the Panel relied, such as the lack of differentiation between imported
and domestic distilled spirits in labelling and marketing. 328 Moreover, the Panel's conclusion that
there is a "significant degree of competitiveness or substitutability" between domestic and imported
distilled spirits in the Philippine market disprov es the Philippines' argument that the Panel did not
evaluate the "degree of proximity" of competition.329

323Philippines' appellant's submission, para. 88.
324Philippines' appellant's submission, paras. 90 and 91 (referring to Appellate Body Report, Korea –
Alcoholic Beverages, paras. 129, 130, 133, and 134; and Appellate Body Report, US – Cotton Yarn , paras. 97
and 98).
325Philippines' appellant's submission, para. 95.
326European Union's appellee's submission, para. 83.
327European Union's appellee's submission, para. 84. (emphasis omitted)
omitted)).

203. The Philippines' allegation of error is directed at the following statement by the Panel:
The question before us under Article III of the GATT 1994 is not so
much what the "degree of competition" between the products at issue
is, but what is the "nature" or "quality" of their "competitive
relationship".
330
204. Although the statement challenged by the Philippines, read in isolation, could be viewed as
de-emphasizing the role played by this particular fa ctor in the Panel's assessment, a careful review of
the Panel's analysis indicates that the Panel appr opriately ascertained the extent of the competitive
relationship between imported and domestic distilled spirits in the Philippine market. At the outset of
its analysis, the Panel articulated the standard that it would apply to determine whether the products at
issue were "directly competitive or substitutable" in the following terms:
We start by looking at the direct competitive relationship between the
relevant products, i.e. the extent to which consumers are willing to
use the different products to satis fy the same, or similar, needs
("consumers' tastes and habits"). We will focus our analysis on how
those products relate to each other in the market. Although at some
level all products may be said to be "at least indirectly competitive,"
given that consumers have limited disposable income for competing
needs, the second sentence of Article III:2 only regulates situations
where products compete directly.
331 (footnote omitted)
205. We consider that the standard articulated by the Panel appropriately framed the analysis as
one aimed at determining whether competition betw een imported and domestic distilled spirits in the
Philippines is sufficiently direct so that these products could be properly characterized as "directly
competitive or substitutable". In so doing, the Pane l followed the guidance provided by the Appellate
Body in Korea – Alcoholic Beverages , in which the Appellate Body held that imported and domestic
products are "directly competitive or substitutable" when they are "in competition" in the
marketplace.332 The Appellate Body held further that the term "directly" suggests "a degree of
proximity in the competitive relationship be tween the domestic and the imported products." 333 The
requisite degree of competition is met where the imported and domestic products are characterized by
a high, but imperfect, degree of substitutability. 334 As the Appellate Body found, this will be the case

330Panel Reports, para. 7.101.
331Panel Reports, para. 7.104.
332Appellate Body Report, Korea – Alcoholic Beverages, para. 114.
333Appellate Body Report, Korea – Alcoholic Beverages, para. 116.
334Appellate Body Report, Korea – Alcoholic Beverages, para. 118; Appellate Body Report, Canada –
Periodicals, p. 28, DSR 1997:I, 449, at 473. See also Appellate Body Report, US – Cotton Yarn, footnote 68 to
para. 97.

where the imported and domestic products are "int erchangeable" or offer "alternative ways of
satisfying a particular need or taste".
335
206. Moreover, in applying the standard it articulated to the facts before it, the Panel reviewed the
substitutability studies 336, which purport to evaluate the degr ee of substitutability between imported
and domestic distilled spirits in the Philippine ma rket. The Panel found that the substitutability
studies indicate that there is " a significant degree of comp etitiveness or substitutability " in the
Philippine market between the imported and domestic distilled spirits at issue. 337 For the Panel, these
studies, combined with instances of price competition for both high- and low-priced brands of
imported and domestic distilled spirits 338, potential for consumption of high-priced spirits on "special
occasions"339, instances of actual competition in a narro w segment of the Philippine consumer
market340, and potential competition between imported and domestic distilled spirits in the
Philippine market341 sufficiently demonstrate that there is "a direct competitive relationship between
domestic and imported distilled spirits" in the Philippines. 342 For the Panel, such a direct competitive
relationship, combined with similarities between im ported and domestic distil led spirits in terms of
their properties, nature and quality 343, end-uses and marketing 344, tariff classification345, and domestic
Philippine regulation of distilled spirits 346 sufficiently evidences that these products are "directly
competitive or substitutable" within the mean ing of Article III:2, second sentence, of the
GATT 1994.347
207. In our view, the Panel's analysis sufficiently demonstrates that it appropriately assessed the
degree of competition between imported and domestic distilled spirits in the Philippine market. We
note, in this respect, that the Panel expressly derive d, from its statement that the "question before us
… is not so much what the 'degree of competition' between the products at issue is, but what is the
'nature' or 'quality' of their 'competitive relationship'" 348, the conclusion that it " should not place too

335Appellate Body Report, Korea – Alcoholic Beverages, para. 115.
336Euromonitor International survey, supra, footnote 37; Abrenica & Ducanes, supra, footnote 65.
337Panel Reports, para. 7.113 (referring to Euromonitor International survey, supra, footnote 37, p. 19;
and Abrenica & Ducanes, supra, footnote 65). (emphasis added)
338Panel Reports, para. 7.118.
339Panel Reports, para. 7.119.
340Panel Reports, para. 7.120.
341Panel Reports, para. 7.121.
342Panel Reports, para. 7.137.
343Panel Reports, para. 7.127.
344Panel Reports, para. 7.131.
345Panel Reports, paras. 7.133 and 7.134.
346Panel Reports, para. 7.135.
347Panel Reports, para. 7.137.
348Panel Reports, para. 7.101 (quoting Appellate Body Report, Korea – Alcoholic Beverages ,
paras. 128-134).

much emphasis on quantitative analyses ".349 Thus, the Panel's reference to the "degree of
competition" in the statement challenged by the Philippines related exclusively to a quantitative
assessment of the competitive relationship between domestic and imported distilled spirits in the
marketplace. In de-emphasizing the role played by quantitative analyses of substitutability, the Panel
followed the guidance provided by the Appellate Body in previous cases. In Korea – Alcoholic
Beverages, the Appellate Body expressly found that a particular degree of competition need not be
shown in quantitative terms 350, and cautioned panels against placi ng undue reliance on "quantitative
analyses of the competitive relationship", because cross- price elasticity is not "the decisive criterion"
in determining whether two products are directly competitive or substitutable.351
208. For these reasons, we do not agree with the Ph ilippines that the Panel insufficiently assessed
the degree of competition between domestic and imported distilled spirits in the Philippine
marketplace. Rather, the Panel a ppropriately sought to determine the degree or extent to which
domestic and imported distilled spirits are in direct competition in the Philippine market.
(b) Market Segmentation
209. The second set of issues raised by the Philippi nes' appeal of the Panel's assessment of
competition relates to the Panel's rejection of its argument that imported and domestic distilled spirits
are not "directly competitive or substitutable" in th e Philippines because they are sold in two separate
and distinct market segments.
210. Before the Panel, the Philippines argued that ther e is a "huge gap" in its market between the
prices of "sugar-based" and "non-sugar-based" distille d spirits. Such a general gap in prices,
compounded by the income disparity in the Philippi ne market, prevents most consumers in the
Philippines from purchasing "non-sugar-based" distilled spirits, thus suggesting the existence of two
market segments: one for domestic, low-priced di stilled spirits made from designated raw materials,
and another for imported, high-priced distilled spirits made from non-designated raw materials. 352
211. Although the Panel recognized that the prices of imported brands of distilled spirits, even
before taxes, tend to be higher than the correspondi ng domestic brands of distilled spirits, the Panel
considered that the evidence shows overlap in the prices of imported and domestic distilled spirits

349Panel Reports, para. 7.105. (emphasis added)
350Appellate Body Report, Korea – Alcoholic Beverages, paras. 130 and 131.
351Appellate Body Report, Korea – Alcoholic Beverages, para. 134. (emphasis omitted)
352Panel Reports, para. 7.114.

which is "not exceptional" and occurs for both high- and low-priced products.
353 For the Panel, such
price overlaps suggest that the Philippine market is not segmented, and that in some cases there is
price competition between imported and domestic products.354
212. With regard to the purchasing power of Philippine consumers, the Panel found that, while "a
large proportion" of Philippine consumers may not have access to high-priced distilled spirits, "many
others may be able to purchase high-priced di stilled spirits, at least on special occasions." 355
Moreover, for the Panel, the Philippines' argument that distilled spirits made from non-designated raw
materials are only available to a "narrow segment" of the population implies that at least that segment
of the market has access to both groups of spirits. 356 This was sufficient for the Panel to find a direct
competitive relationship between imported and domestic distilled spirits in the Philippines because:
Article III of GATT 1994 does not protect just some instances or
most instances, but rather, it protects all instances of direct
competition. It follows that the competitive relationship does not
need to occur throughout the whole market for a panel to find that a
measure is inconsistent with the second sentence of Article III. We
thus conclude that, even if the Ph ilippine distilled spirits market were
segmented, actual direct competition exists within at least a segment
of that market.
357 (original emphasis; footnote omitted)
213. On appeal, the Philippines argues that these findi ngs do not provide a sufficient basis for the
Panel to conclude that imported distilled spir its made from non-designated raw materials and
domestic distilled spirits made from designated raw materials are "directly competitive or
substitutable" in the Philippine market. The Ph ilippines essentially argues th at the Panel erred in
finding direct competition on the basis of a "non -representative" segment of its population having
"access" to both types of spirits "at least on special occasions".
214. Both the European Union and th e United States argue that the Panel correctly rejected the
Philippines' argument that its distilled spirits market is divided into two distinct segments on the basis
of evidence suggesting instances of price overlap between imported and domestic distilled spirits, and
of evidence suggesting that, in terms of income , the Philippine population is distributed along a
"continuum of income brackets".358

353Panel Reports, para. 7.118.
354Panel Reports, para. 7.118.
355Panel Reports, para. 7.119.
356Panel Reports, para. 7.120.
357Panel Reports, para. 7.120.
358European Union's appellee's submission, para. 96; United States' appellee's submission, para. 88

215. At the outset, we note that the Panel rejected the Philippines' argument that imported and
domestic distilled spirits are in two distinct market segments in the Philippines primarily on the basis
of evidence demonstrating overlaps in the prices of imported and domestic distilled spirits, both for
high- and low-priced products. 359 We consider that price is very relevant in assessing whether
imported and domestic products stand in a sufficiently direct competitive relationship in a given
market. This is because evidence of price competition indicates that the imported product exercises
competitive constraints on the domestic product, and vice versa. In this respect, we agree with the
Philippines that evidence of major price different ials could demonstrate that the imported and
domestic products are in completely separate market s. However, in this case, the Panel made a
factual finding that there is overlap in the pri ces of imported and domestic distilled spirits in the
Philippines, and that such overlap is not "exceptiona l" but rather occurs for both high- and low-priced
products.
360 The Philippines does not challenge this fact ual finding on appeal, but rather argues that
existing price overlaps do not show a sufficiently direct degree of competition. In our view, such
instances of price overlap both for high- and low-pr iced distilled spirits sufficiently support the
Panel's conclusion that "the market is not segment ed and that in some cases imported and domestic
products compete with respect to price."
361
216. Turning to the purchasing power of the Filipino population, the Panel found that, "in terms of
income, the population in the Philippines does not ap pear to be divided into two separate groups, but
is rather distributed along a continuum of income brackets." 362 For the Panel, th is suggested that,
even though a "large proportion" of Philippine consumers do not have "access" to high-priced distilled
spirits, many others "may be able to purchase high-priced distilled spirits, at least on special
occasions."363
217. The Philippines argues that the Panel's referenc e to "special occasion" purchases was in error,
because the term "directly competitive or substituta ble" products in Article III:2, second sentence,
requires identity in the "nature and frequency" 364 of the consumers' purchasing behaviour. According
to the Philippines, "[i]f a proposed alternative cannot be purchased with the same frequency as the

359Panel Reports, para. 7.118.
360Panel Reports, para. 7.118.
361Panel Reports, para. 7.118. See, for example, Panel Reports, paras. 2.66, 2.67, 2.72, and 2.73.
362Panel Reports, para. 7.59.
363Panel Reports, para. 7.119.
364Philippines' appellant's submission, para. 97.

original product and is not purchased according to the same set of needs and wants, the products
cannot be considered to be 'directly' competitive."
365
218. We do not agree with the Philippines that Article III:2, second sentence, of the GATT 1994
requires identity in the "nature and frequency" of the consumer's purchasing behaviour. If that were
the case, the competitive relationship between the imported and domestic produc ts in a given market
would only be assessed with reference to current consumer preferences. However, as the Appellate
Body expressly held in Korea – Alcoholic Beverages , "the requisite relationship may exist between
products that are not, at a given moment, considered by consumers to be substitutes but which are,
nonetheless, capable of being substituted for one another." 366 Therefore, requiring identity in
frequency and nature of consumers' purchase decisi ons, as suggested by the Philippines, would not
sufficiently account for latent demand for imported distilled spirits in the Philippine market.
219. Moreover, in determining whether imported a nd domestic distilled spir its offer "alternative
ways of satisfying a particular need or taste" 367 in the Philippines, the Panel was required to examine
both "latent and extant demand"368 for imported distilled spirits in the Philippine market. Viewed in
this light, we read the Panel's statement that many consumers may be able to purchase high-priced
distilled spirits "at least on special occasions" merely as providing additional support to its conclusion
that there is at least some extant demand for imported distilled spirits in the Philippine market.
220. Moreover, the Philippines argues that the Pane l incorrectly found direct competition on the
basis of a "narrow segment" of the population havi ng "access" to imported distilled spirits. We are
not persuaded. To begin with, we note that the Panel did not accept that the Philippine market is
divided into two distinct segments in terms of purchasing power, but rather, is distributed "along a
continuum of income brackets".
369 In the passage challenged by th e Philippines, the Panel engaged
with the Philippines' argument concerning segmenta tion in the Philippines' distilled spirits market
simply on an arguendo basis. It reasoned that, even assuming that the Philippine market were
segmented, at least one segment of the market has "access" to both domestic and imported distilled
spirits.370 In our view, it was reasonable for the Panel to draw, from the Philippines' argument that
imported distilled spirits are only available to a "nar row segment" of its population, the inference that
there is actual competition between imported and domest ic distilled spirits at least in the segment of

365Philippines' appellant's submission, para. 99.
366Appellate Body Report, Korea – Alcoholic Beverages, para. 114. (original emphasis)
367Appellate Body Report, Korea – Alcoholic Beverages, para. 115.
368Appellate Body Report, Korea – Alcoholic Beverages, para. 116. (emphasis added)
369Panel Reports, para. 7.59.
370Panel Reports, para. 7.120.

the market that the Philippines admitted has access to both imported and domestic distilled spirits.
Moreover, we note that the Panel buttressed this conc lusion with statements from domestic Philippine
companies that their products face competition from imported distilled spirits, and that their
marketing strategies convey an image of their produc ts as drinks that compete with imported distilled
spirits.371
221. More importantly, we do not agree with the Philippines that Article III:2, second sentence,
requires that competition be assessed in relation to th e market segment that is most representative of
the "market as a whole".372 To the contrary, the Panel was correct in concluding that Article III of the
GATT 1994 "does not protect just some instances or most instances, but rather, it protects all
instances of direct competition." 373 This reading is consistent with the Appellate Body's finding that
the object and purpose of the GATT 1994, as reflect ed in Article III, is "requiring equality of
competitive relationships and protecting expect ations of equal competitive relationships". 374
Moreover, current demand for imported spirits in th e Philippine market is a function of actual retail
prices, which could be distorted by the excise tax system and other related effects, such as higher
distribution costs, and lower volumes and economies of scale.
375 In this regard, we recall that under
the excise tax system imported distilled spirits are subject to taxes that are 10 to 40 times higher than
those applied to domestic distilled spirits. Theref ore, current consumer demand for imported distilled
spirits in the Philippines is likely to be understated by the effects of the excise tax system.
222. For these reasons, it was reasonable for the Pane l to conclude that actual competition in a
segment of the market further supports its conclusi on that imported and domest ic distilled spirits are
capable of being substituted in the Philippines. Th is inference, together with other quantitative and
qualitative elements relied on by the Panel, such as the substitutability studies376 and instances of price

371Panel Reports, footnote 528 to para. 7.120 (referri ng to European Union's first written submission to
the Panel, paras. 127-136; and Panel Exhibits EU-22, EU-25, EU-29, EU-43, EU-58, EU-59, EU-60, EU-63,
EU-64, EU-65, and EU-87). These exhibits essentially consist of pr intouts of Philippine distilled spirit
producers' websites, Philippine dis tilled spirits' press advertisements, a nd excerpts from Philippine distilled
spirit producers' annual reports.
372Philippines' appellant's submission, para. 117.
(original emphasis)
374Appellate Body Report, Korea – Alcoholic Beverages, para. 120.
375See Appellate Body Report, Korea – Alcoholic Beverages , paras. 122 and 123. See also Panel
376Panel Reports, paras. 7.112 (referring to Euromonitor International survey, supra, footnote 37, p. 19;
and Abrenica & Ducanes, supra, footnote 65) and 7.113.

competition
377, provide support for its finding that there is "a direct competitive relationship between
domestic and imported distilled spirits" in the Philippines.378
(c) Potential Competition
223. The Philippines further claims that the Panel erred in its application of Article III:2,
second sentence, of the GATT 1994 in finding that instances of actual competition indicated potential
competition between imported and domestic distilled spirits in the Philippine market. The Philippines
argues that "aberrational and exceptional" instances of price overlap between imported and domestic
distilled spirits fall short of establishing both act ual and potential competition in the marketplace. 379
The Philippines adds that the inquiry into potential competition is limited to determining "whether
competition would otherwise occur if the measures were not in place". 380 The "massive [pre-tax]
price differential" between domestic and imported dis tilled spirits demonstrates that the lack of direct
competition or substitution in the Philippine market ca nnot be attributed to the excise tax at issue. 381
Furthermore, the Philippines maintains that the Pane l acted inconsistently with Article 11 of the DSU
in finding that the products at issue are capable of competing in the future without a sufficient
evidentiary basis.382
224. Both the European Union and th e United States respond that the Panel correctly concluded
that there is potential competition between domestic and imported distilled spirits in the Philippine
market. The European Union emphasizes that the Philippines does not challenge the Panel's factual
finding that price overlap is not "exceptional". 383 For its part, the United States argues that direct
competition under Article III:2 does not require "some minimum threshold amount of actual
competition"384, because two products may be "directly competitive or substitutable" even if direct
competition is only potential and is not occurring at the present time.385 Both the European Union and
the United States also argue that the Panel did not exceed its discretion under Article 11 of the DSU in
reaching its findings concerning potential competition.
225. The Philippines' challenge is directed at the following statement by the Panel:

377Panel Reports, para. 7.118.
378Panel Reports, para. 7.137.
379Philippines' appellant's submission, paras. 109 and 110.
382Philippines' appellant's submission, paras. 185 and 186.
383European Union's appellee's submission, para. 107.

In our view, an Article III analys is should not depend on predicting
income distribution patterns, but rather on whether there is evidence
that consumers are willing, or may be willing, to use the different
products to satisfy the same or sim ilar needs. In this respect, the
instances of actual competition … are a clear indication that the
imported and domestic products at is sue in this dispute are indeed
capable of being directly competitive or substitutable in the future.
386
(original emphasis)
226. We do not agree with the Philippines that this st atement is in error. As noted earlier, the
Philippines does not appeal the Panel's finding that there are overlaps in the prices of imported and
domestic distilled spirits, both for high- and low-priced products. 387 We have also agreed with the
Panel that such price overlaps support the Panel's finding that "in some cases imported and domestic
products compete with respect to price." 388 In our view, such instances of actual competition are also
highly probative in relation to potential competition, particularly in this case where imported distilled
spirits are subject to excise taxes that are 10 to 40 times higher than those applicable to domestic
distilled spirits. Therefore, the excise tax system c ould have the effect of "creating and even freezing
preferences for domestic goods" in the Philippines. 389 For this reason, instances of current
substitution are likely to underestimate latent demand for imported spirits as a result of distortive
effects introduced by the excise tax at issue. Th is is particularly the case for "experience goods" such
as distilled spirits, which consumers "tend to purchase because they are familiar with them and with
which consumers experiment only reluctantly".390
227. In addition, we do not agree with the Philippi nes that an analysis of potential competition
under Article III:2, second sentence, is limited to an assessment of whether competition would
otherwise occur if the challe nged taxation were not in place. 391 In our view, such a "but for" test
reflects an overly restrictive interpretation of the term "directly competitive or substitutable" products,
one which assumes that internal taxation is the only factor restricting potential substitutability. On the
contrary, as noted by the Appellate Body, "consumer demand may be influenced by measures other
than internal taxation", such as "earlier protec tionist taxation, previous import prohibitions or
quantitative restrictions".392

386Panel Reports, para. 7.121.
387Panel Reports, para. 7.118.
388Panel Reports, para. 7.118.
389Appellate Body Report, Korea – Alcoholic Beverages , para. 120 (quoting Panel Report, Japan –
Alcoholic Beverages II, para. 6.28).
390Appellate Body Report, Korea – Alcoholic Beverages, para. 123.
391Philippines' appellant's submission, para. 111.
392Appellate Body Report, Korea – Alcoholic Beverages, para. 123.

228. Accordingly, we do not consider that the Pane l erred in drawing from instances of current
price competition the inference that domestic and imported distilled spirits are capable of being
substituted in the Philippine market. Latent demand for imported distilled spirits in the Philippines is
likely to be underestimated by the effects of the excise tax at issue both on consumer perception and
on price levels for imported distilled spirits.
229. In addition to its claim that the Panel erred in its application of Article III:2, second sentence,
to the facts of this case, the Philippines also claims that the Panel acted inconsistently with Article 11
of the DSU in finding that importe d and domestic distilled spirits are " capable of being directly
competitive or substitutable in the future"
393 without a sufficient evidentiary basis. We recall that the
Appellate Body has emphasized th at a claim that a panel failed to comply with its duties under
Article 11 of the DSU "must stand by itself and s hould not be made merely as a subsidiary argument
or claim in support of a claim that the panel fa iled to apply correctly a provision of the covered
agreements."394 The Philippines advances, in support of its claims of violation under Article 11 of the
DSU, essentially the same arguments that it puts forwar d in support of its claims that the Panel erred
in its application of Article III:2, second sentence, of the GATT 1994. We have found that the Panel
did not err in deriving from instances of actual competition a conclusion with respect to potential
competition between imported and domestic distilled sp irits in the Philippines market. Therefore, in
the absence of additional elements demonstrating that the Panel acted inconsistently with Article 11 of
the DSU in reaching this finding, we do not agree th at the Panel committed error under that provision.
Accordingly, we dismiss the Philippines' claim that the Panel acted inconsistently with its duties
under Article 11 of the DSU in finding that imported and domestic distilled spirits are " capable of
being directly competitive or substitutable in the future".395
(d) Substitutability Studies – Article 11 of the DSU
230. Finally, the Philippines claims that the Panel failed to conduct an objective assessment of the
facts in its examination of the studies that aimed at evaluating the substitutability between domestic
and imported distilled spirits in the Philippine market.396
231. According to the Philippines, the Panel's conclusion that both substitutability studies show "a
significant degree of competitiveness or substituta bility" between domestic and imported distilled

393Panel Reports, para. 7.121. (original emphasis)
394Appellate Body Report, Chile – Price Band System (Article 21.5 – Argentina) , para. 238. See also
Appellate Body Report, US – Steel Safeguards, para. 498.
395Panel Reports, para. 7.121. (original emphasis)
396Philippines' appellant's submission, para. 162.

spirits in the Philippine market is directly cont radicted by one of those studies (the Abrenica
& Ducanes study), which finds "neglig ible" levels of substitutability.397 The Philippines adds that the
Euromonitor International survey is an insufficient basis for a finding of substitu tability, because it
does not estimate the cross-price elasticity coefficien t, does not isolate the effects of an increase in
domestic prices on volumes of imported spirits, and is based on a sample that is not representative of
the entire market.
398 The Philippines adds that the Panel inaccurately described the methodology of
the Abrenica & Ducanes study, because it erroneously observed that this study was based on scenarios
where the prices of imported and domestic distilled spirits changed simultaneously.399
232. The European Union responds that the Abre nica & Ducanes study estimated that in a
tax-neutral environment the market share of im ported distilled spirits would increase by between
13 and 24.5 per cent, thus lending support to the Panel's conclusion on substitutability. 400 T h e
Euromonitor International survey also supports the Panel's conclu sion with respect to substitutability,
because it shows, on the basis of a representative sa mple, that consumers regard local and imported
products as "largely substitutable" and that they would react to price movements by switching
between those categories. 401 The European Union adds that the Panel correctly described the
methodology of the Abrenica & Ducanes study, becau se that study did not attempt to examine
consumer response to a rise in prices of all domest ic spirits, or a reduction in prices of all imported
spirits.402
233. Similarly, the United States posits that the Pa nel adequately examined the substitutability
studies, and drew appropriate conclusions on the basi s of that evidence. The Panel's conclusion that
there is a "significant degree of competitiveness or substitutability" between domestic and imported
distilled spirits in the Philippine market was based on a variety of evidence, including the
substitutability studies, similarity of marke ting campaigns, labelling, and sales locations. 403 T h e
United States notes that both studies found that, wh ile small, there is substitutability in spite of
persistent price gaps between imported and domestic products and other factors such as brand loyalty.

397Philippines' appellant's submission, paras. 163 and 164 (quoting Panel Reports, paras. 7.62
and 7.113).
398Philippines' appellant's submission, paras. 165 and 169.
399Philippines' appellant's submission, paras. 166 and 167 (quoting Panel Reports, para. 7.56).
400European Union's appellee's submission, paras. 181 (quoting Panel Reports, para. 7.55) and 182.
401European Union's appellee's submission, para. 172.
402European Union's appellee's submission, para. 176.

According to the United States, the Philippines in essence disagrees with the weight accorded by the
Panel to the substitutability studies.
404
234. For its part, the Panel observed that, while the Euromonitor International survey did not
attempt to estimate the cross-price elasticity for imported and domestic distilled spirits in the
Philippines
405, the Abrenica & Ducanes study estimates it to range between -0.01 and 0.07, which the
authors consider "low", therefore demonstrating th at "local and imported brands [of distilled spirits]
are non-substitutable".406 The Panel then observed that both studies were based on scenarios where
prices of imported and domestic distilled spirits ch ange simultaneously. According to the Panel, the
studies' conclusions with respect to substitutability would have been clearer had the studies attempted
to "isolate the effects of an increase in the pri ce of domestic spirits on the quantities consumed of
imported spirits".407 Nonetheless, the Panel concluded that:
… the studies support the proposition that there is a significant
degree of competitiveness or substitutability in the
Philippines' market between the distilled spirits at issue in the present
dispute. This refers both to dis tilled spirits as a general category, as
well as to specific types of distille d spirits such as gin, brandy, vodka
and whisky.408 (footnote omitted)
235. We recall that Article 11 of the DSU requires a panel to "consider all the evidence presented
to it, assess its credibility, determine its weight, and ensure that its factual findings have a proper basis
in that evidence." 409 Within these parameters, "it is generally within the discretion of the panel to
decide which evidence it chooses to utilize in making findings" 410, and panels "are not required to
accord to factual evidence of the parties the same meaning and weight as do the parties." 411 For a
claim under Article 11 to succeed, the Appellate Body must be satisfied that the panel has exceeded
its authority as initial trier of facts, which requires it to provide "reasoned a nd adequate explanations

405Panel Reports, para. 7.112 (referring to Euromonitor International survey, supra, footnote 37, p. 5).
406Panel Reports, para. 7.112 (referring to Abrenica & Ducanes, supra, footnote 65, pp. 2, 11, 12,
and 20).
407Panel Reports, para. 7.112.
408Panel Reports, para. 7.113.
409Appellate Body Report, Brazil – Retreaded Tyres , para. 185 (referring to Appellate Body Report,
EC – Hormones, paras. 132 and 133).

and coherent reasoning"412, base its finding on a sufficient evidentiary basis413, and treat evidence with
"even-handedness".414
236. Against these parameters, we turn to the speci fic issues raised by the Philippines on appeal.
We begin with the Philippines' argument that th e Panel failed to conduct an objective assessment of
the matter before it because the Abrenica & Ducanes study directly contradicts the Panel's finding that
"the studies support the proposition that there is a significant degree of competitiveness or
substitutability" between domestic and imported distilled spirits in the Philippine market.
415 We agree
with the Philippines that the Panel could have better explained how the Abrenica & Ducanes study
could be viewed as evidence of a "significant degree" of substitutability, particularly in light of the
study's conclusion that substitutability between imported and domestic distilled spirits in the
Philippine market, estimated to range between -0.01 and 0.07, was "low". 416 However, we consider
that the weight and significance to be attributed to that estimated cross-price elasticity coefficient is a
matter falling within the Panel's discretion as initial trie r of facts. We recall that, under the excise tax
system, imported distilled spirits are subject to taxation that is 10 to 40 times higher than that
applicable to domestic distilled spirits. Therefore, th e excise tax could have the effect of creating or
even freezing consumer preferences for domestic dist illed spirits in the Philippine market. Viewed in
this light, even a "low" cross-price elasticity of between -0.01 and 0.07 could be found "significant",
particularly at the higher end of that range. In this respect, we agree with the panel in Chile –
Alcoholic Beverages that a low coefficient of cross-price elasticity is not "fatal" to a claim of direct
competitiveness or substitutability because "the econometric measurement of the degree of
substitution may not … always adequately reflect the ex tent of substitution" by virtue of the effects of
the internal taxation on consumer preferences and the foreign suppliers' pricing behaviour.417
237. Moreover, despite its conclusion that the cross-price elasticity between domestic and
imported distilled spirits in the Philippines is "low ", the Abrenica & Ducanes study in fact also
concluded that the market share of imported di stilled spirits in the Philippines would increase by
between 13 and 24.5 per cent in a tax-neutral environment. 418 The assessment of the significance of
such market share increa ses in terms of the degree of comp etition between domestic and imported

412Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), footnote 618 to para. 293.
413See Appellate Body Report, US – Carbon Steel, para. 148.
414Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 292.
415Panel Reports, para. 7.113.
416A coefficient of cross-price elasticity of -0.01 means that the choice probability for the imported
spirit would decline by 1 per cent due to a 10 per cent increase in the price of domestic spirits. Conversely, the
choice probability for the imported spirit would increase by 7 per cent as a result of a 10 per cent increase in the
price of domestic spirits. (See Abrenica & Ducanes, supra, footnote 65, p. 12)
417Panel Report, Chile – Alcoholic Beverages, paras. 7.69 and 7.70.
418Panel Reports, para. 7.55 (referring to Abrenica & Ducanes, supra, footnote 65, p. 14).

distilled spirits in the Philippines is similarl y a matter falling within the purview of the
Panel's fact-finding authority under Article 11 of the DSU.
238. We are also not persuaded by th e Philippines' argument that the Euromonitor International
survey did not provide a sufficient basis to rebut the Abrenica & Ducanes study's conclusion that the
cross-price elasticity between imported and domestic di stilled spirits in the Philippines was "low". In
our view, the fact that the Euromonitor International survey did not attempt to estimate the
cross-price elasticity or to isolate the effects of increases in domestic spirits' prices on the volume of
imported spirits does not undermine the Panel's ass essment of its probative value with respect to
substitutability in the Philippine market. Moreover, it was for the Panel to determine the credibility of
the results of the study, in light of the Philippines' objections concerning the sample upon which it is
based. In our view, the Panel's finding that there is a "significant degree" of substitutability between
imported and domestic distilled spirits in th e Philippine market is borne out by the Euromonitor
International survey conclusion that:
[o]n average, at an import price decrease of 25% and domestic
increase of 50%, consumers were 4.9% more willing to purchase
imports and 4.0% less likely to purchase domestics"; "On average, at
an import price decrease of 40% to 60% and domestic increase of
100% to 200%, consumers were 10.1% more willing to purchase
imports and 6.5% less likely to purchase domestics"; and, "If price
were no issue, on average, consumers were 43% more likely [to]
purchase local brands and 86% more likely to purchase imported
ones.
419 (footnote omitted)
239. Thus, we consider that the Philippines' challenge is directed at the Panel's weighing of the
evidence contained in the Euromonitor International survey and in the Abrenica & Ducanes study.
Article 11 of the DSU required the Panel to "consider all the evidence presented to it, assess its
credibility, determine its weight, and ensure that its factual findings have a proper basis in that
evidence".
420 Within these parameters, the Panel did not exceed the bounds of its discretion simply by
according to the evidence contained in the two studies a weight that is different than that attributed by
the Philippines.421
240. Turning to the Philippines' argument concerning the Panel's alleged mischaracterization of the
methodology upon which the Abrenica & Ducanes study was based, it is not clear why the Panel's

419Panel Reports, para. 7.54 (quoting Euromonitor International survey, supra, footnote 37, pp. 30
and 33).
420Appellate Body Report, Brazil – Retreaded Tyres , para. 185 (referring to Appellate Body Report,
EC – Hormones, paras. 132 and 133).
421See Appellate Body Report, Australia – Salmon, para. 267.

allegedly inaccurate description of such methodol ogy as one based on simultaneous changes in the
prices of both imported and domestic spirits would amount to a violation of its duties under Article 11
of the DSU. The Appellate Body has held that " not every error in the appreciation of a particular
piece of evidence will rise to the level of a failu re by the Panel to comply with its duties under
Article 11 of the DSU." 422 According to the Appellate Body, this will only be the case where such
error "undermine[s] the objectivity of the Panel's assessment". 423 In this case, the Philippines has not
demonstrated that the Panel's alleged mischaracter ization of the methodology used in the Abrenica
& Ducanes study calls into question the objectivity of the Panel's assessment of the substitutability
studies. In any event, the Philippines seems correct in arguing that, in the first part of the Abrenica
& Ducanes study, consumer preferences were in itially assessed in a scenario where prices of the
selected brand increased, while prices for all other brands remained unchanged. However, in the
second part of the study, changes in the market share for imported distilled spirits were estimated
under three tax-neutral scenarios (uniform excise tax, ad valorem tax, and no tax) in which prices of
imported brands would fall, while those of their local counterparts simultaneously would increase.424
241. Accordingly, we do not consider that the Pane l acted inconsistently with its duties under
Article 11 of the DSU in its examination of the Euromonitor International survey and of the
Abrenica & Ducanes study.
(e) Conclusion
242. In light of all of the above, we consider that the Panel did not err in its assessment of the
competitive relationship between the imported a nd domestic distilled spirits at issue in the
Philippine market. In our view, studies showing a significant degree of substitutability in the
Philippine market between imported and domestic di stilled spirits, as well as instances of price
competition and evidence of actual and potential competition between imported and domestic distilled
spirits in the Philippine market, sufficiently support the Panel's conclusion that there is "a direct
competitive relationship [in the Philippines] betw een domestic and imported distilled spirits, made
from different raw materials".
425 This factor, combined with the other elements upon which the Panel
relied, such as overlap in the channels of distribution 426, and similarities in the products' physical
characteristics427, end-uses, and marketing428, sufficiently support the Panel's finding that all imported

422Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 1318.
423Appellate Body Report, EC and certain member States – Large Civil Aircraft, para. 1318.
424See Panel Reports, para. 7.55 (referring to Abrenica & Ducanes, supra, footnote 65, p. 13).
425Panel Reports, para. 7.137.
426Panel Reports, para. 7.123.
427Panel Reports, para. 7.127.

and domestic distilled spirits at issue are "directly competitive or substitutable" within the meaning of
Article III:2, second sentence, of the GATT 1994.
243. Accordingly, we uphold the Panel's finding, at paragraph 7. 138 of the Panel Reports, that all
the distilled spirits at issue in the present dispute, whether imported or domestic, and irrespective of
the raw materials from which they are made, are "d irectly competitive or substitutable" within the
meaning of Article III:2, second sentence, of the GATT 1994.
2. "So As to Afford Protection to Domestic Production"
244. We now turn to the Philippines' claim th at the Panel erred in finding that the
Philippines' excise tax is applied in a manner "s o as to afford protection to domestic production"
within the meaning of Article III:2, second sentence, of the GATT 1994.
245. We recall that, in reviewing the "design, architect ure and structure" of the measure at issue,
the Panel observed that all designated raw materials listed in Section 141(a) of the NIRC are grown in
the Philippines and " all domestic distilled spirits are produced from designated raw materials", thus
being subject to the lower flat tax rate of PHP 14.68 ppl. 429 By contrast, the vast majority of imported
distilled spirits are not made from designated raw mate rials and are therefore subject to the higher tax
rates provided for in Section 141(b), varying from PHP 158.73 to PHP 634.90 ppl. For the Panel, this
meant that " de facto the measure results in all domestic di stilled spirits enjoying the favourable low
tax, while the vast majority of the imported sp irits" are subject to taxes between 10 and 40 times
higher.
430
246. The Panel rejected the Philippines' argument th at the measure at issue has no impact on
competitive conditions in its market by virtue of th e low purchasing power of the vast majority of the
Philippine population and of the pre-tax price differences between domestic and imported distilled
spirits. The Panel observed that, in Korea – Alcoholic Beverages, the Appellate Body rejected a "very
similar argument" and found that, since the products at issue "ha[d] already been found to be directly
competitive or substitutable", such argument was "misplaced at this stage of the analysis". 431 T h e
Appellate Body in that dispute further stated that "Article III is not concerned with trade volumes" and

428Panel Reports, paras. 7.129 and 7.131.
429Panel Reports, para. 7.182. (original emphasis)
430Panel Reports, paras. 7.182 and 7.183.
431Panel Reports, para. 7.185 (quoting Appellate Body Report, Korea – Alcoholic Beverages ,
para. 152).

therefore "[i]t is … not incumbent on a complaining party to prove that tax measures are capable of
producing any particular trade effect."432
247. In light of the above considerations, the Panel concluded that:
… the design, architecture, and structure of the measure,
including the magnitude of the tax differential applicable to
imported and domestic products, reveal the protective nature
of the measure. … [T]he dissimilar taxation imposed by the
Philippine excise tax on imported distilled spirits and on
directly competitive or substitutable domestic spirits is applied
"so as to afford protection" to Philippine domestic production
of distilled spirits.
433
248. The Philippines claims that the Panel's finding is in error for two reasons. First, the facts
"simply do not support" the Panel's conclusion that "the vast majority of imported spirits are subject to
higher taxes" 434 because approximately 50 per cent of the domestic production of distilled spirits is
made from imported ethyl alcohol, a "significant quantit y" of which is, in turn, subject to the lower
flat tax rate under Section 141(a) of the NIRC. 435 Second, the Philippines submits that the Panel
erroneously rejected its argument that the excise tax could have no protectionist intent given that the
vast majority of Philippine households cannot affo rd imported distilled spirits. In particular, by
merely "transferring the reasoning"436 applied by the Appellate Body to the facts in Korea – Alcoholic
Beverages and dismissing the Philippines' argument "for the same reasons" 437, the Panel engaged in a
"legally deficient" inquiry 438 and fell short of the case-by-case, "comprehensive and objective
analysis" that is required under Article III:2, second sentence, of the GATT 1994.439
249. The European Union and the United States respond that the Panel was correct in finding that
the excise tax is applied "so as to afford protec tion to domestic production". In particular, the
European Union stresses that ethyl alcohol is merely an input used in the production of distilled spirits

432Panel Reports, para. 7.185 (quoting Appellate Body Report, Korea – Alcoholic Beverages ,
para. 153).
433Panel Reports, para. 7.187.
435Philippines' appellant's submission, para. 128 (referring to Letter from the Commissioner of the
Philippines Bureau of Internal Revenue, dated 3 February 2011, to the President of Distilled Spirits Association
of the Philippines (Panel Exhibit PH-82; and Philippines' response to Panel Question 68(a)).
436Philippines' appellant's submission, para. 134.
437Panel Reports, para. 7.186.
438Philippines' appellant's submission, para. 132.
439Philippines' appellant's submission, paras. 133 (quoting Panel Reports, para. 7.179, in turn quoting
Appellate Body Report, Japan – Alcoholic Beverages II , p. 29, DSR 1996:1, 97, at 120; and referring to
Appellate Body Report, Korea – Alcoholic Beverages, para. 137).

and is therefore of no relevance to the current dispute.
440 It further submits that, at this stage of its
analysis, the Panel rightly refrained from re-a ddressing the question of whether domestic and
imported spirits are "directly competitive or substitutable". 441 The United States argues that the Panel
correctly focused on the "magnitude of the diffe rence in taxation, … the design, structure and
application" of the measure at issue. 442 Likewise, the Panel appropriately focussed on the final
products at issue, rather than on inputs used by domestic producers. 443 The United States maintains
further that it was not necessary for the Panel to i nquire into the motivations for the measure, and
emphasizes that the Philippines does not dispute the fact that imported distilled spirits are subject to
higher taxes than all domestic distilled spirits.444
250. We recall that, in Japan – Alcoholic Beverages II, the Appellate Body stated that the question
of whether dissimilar taxation affords protection is no t one of intent, but rather of application of the
measure at issue. This requires a "comprehensi ve and objective analysis of the structure and
application of the measure in question on domestic as compared to imported products". 445 T h e
Appellate Body observed that, "[a]lthough it is true that the aim of a measure may not be easily
ascertained, nevertheless its protective application can most often be discerned from the design, the
architecture, and the revealing structure of a measure."
446 The Appellate Body further stated that
dissimilar taxation must be more than de minimis, and that in certain cases "[t]he very magnitude of
the dissimilar taxation … may be evidence of such a protective application." 447 In Korea – Alcoholic
Beverages, the Appellate Body added that the protective application of dissimilar taxation can only be
determined "on a case-by-case basis, taking account of all relevant facts".448
251. Against this background, we now turn to the specific issues raised by this part of the
Philippines' appeal. The Philippines claims that the Panel erred in fi nding that the "vast majority of
imported spirits are subject to higher taxes" because approximately 50 per cent of domestic
production is made from imported ethyl alcohol, which is taxed at the lower rate.449

440European Union's appellee's submission, paras. 122 and 123.
441European Union's appellee's submission, paras. 128-130.
445Appellate Body Report, Japan – Alcoholic Beverages II , p. 29, DSR 1996:1, 97, at 120. See also
Appellate Body Report, Korea – Alcoholic Beverages, para. 149.
446Appellate Body Report, Japan – Alcoholic Beverages II, p. 29, DSR 1996:1, 97, at 120.
447Appellate Body Report, Japan – Alcoholic Beverages II, p. 29, DSR 1996:1, 97, at 120.
448Appellate Body Report, Korea – Alcoholic Beverages, para. 137.
449Philippines' appellant's submission, para. 128.

252. We do not find merit in the Philippines' argument in this respect. In our view, the question
before the Panel at this stage of its analysis was whether the design, architecture, and structure of the
excise tax indicates that such measure affords protec tion to the Philippine production of the "directly
competitive or substitutable" distilled spirits at issue in this dispute. Ethyl alcohol, as such, does not
fall within the category of the "directly competitive or substitutable" distilled spirits at issue, but,
rather, is an input used in the production of these di stilled spirits. Therefore, the fact that imported
ethyl alcohol is subject to taxation similar to that imposed on domestic distilled spirits had no bearing
on the Panel's assessment of whether the excise ta x affords protection to domestic production of the
directly competitive or substitutable distilled spirits at issue.
253. We now turn to the Philippines' claim that th e Panel fell short of the required "case-by-case,
comprehensive analysis" when it dismissed its argument that the excise tax could not afford protection
to domestic production because of the competitive conditions in the Philippine market, where the
majority of the population cannot afford imported distilled spirits.450
254. We agree with the Philippines that, read in isolation, the portion of the Panel's reasoning at
which the Philippines' claim is directed was too cursory. Had the Panel found that the excise tax
regime affords protection to domestic production sole ly by referring to the reasoning articulated by
the Appellate Body in Korea – Alcoholic Beverages , it would have fallen short of a comprehensive
and objective analysis of the case at hand.
255. However, the Panel's analysis of whether the measure at issue is applied so as to afford
protection to Philippine production was not as limited as the Philippines suggests. Indeed, the Panel
reviewed "the design, architecture and structure" of the measure in some detail and observed that,
while "[a]ll designated raw materials are grown in the Philippines and all domestic distilled spirits are
produced from designated raw materials", the vast majority of imported distilled spirits "are not made
from designated raw materials". 451 It therefore concluded that, de facto , the application of the
measure resulted in all domestic spirits enjoying the lower flat tax rate, while the vast majority of
imported spirits are subject to higher taxes. 452 The Panel stressed further that the more burdensome
tax treatment applied to imported spirits can be quantified in the order of "10 to 40 times that
applicable to all domestic spirits", thus maki ng the difference in taxation "nominally large". 453 In our
view, these findings by the Panel, taken as a whole, constitute an adequate analysis of the specific

450Philippines' appellant's submission, para. 135.
451Panel Reports, para. 7.182. (original emphases)
452Panel Reports, para. 7.182.
453Panel Reports, para. 7.183.

facts of this dispute, as they relate to the Eu ropean Union's and the United States' claims under
Article III:2, second sentence, of the GATT 1994.
256. Having made the findings above, the Panel went on to dismiss the Philippines' argument
regarding the lack of protective application on the b asis of market segmentation. We agree with the
Panel that the assessment of whether the excise ta x could affect the competitive relationship between
domestic and imported distilled spirits in the Philippi ne market pertains to the prong of analysis
directed at determining whether the products ar e "directly competitive or substitutable". Having
addressed—and rejected—the Philippines' arguments concerning pre-tax price differentials when
determining whether the products at issue are "directly competitive or substitutable" in the
Philippine market, it was not necessary for the Panel to revisit this argument in its assessment of
whether the dissimilar taxation of such products afforded protection to domestic production.
Moreover, the passage of the Appellate Body report in Korea – Alcoholic Beverages quoted by the
Panel explained that a finding that a tax measure affords protection to domestic production does not
depend upon showing "some identifiable trade effect".
454 Thus, the question of whether or not the
excise tax negatively impacts trade in imported distille d spirits is not determinative of the question of
whether the measure affords protection to domestic production.
257. In light of the above, we do not consider that th e Panel erred in its app lication of the term "so
as to afford protection to domestic production" wh en it found, in paragraph 7.187 of the Panel
Reports, that "the design, architecture, and structur e of the measure, including the magnitude of the
tax differential applicable to im ported and domestic products, reveal the protective nature of the
measure."455 Accordingly, we uphold the Panel's finding, in para graph 7.187 of the Panel Reports,
that dissimilar taxation imposed by the Philippi ne excise tax on imported distilled spirits and on
directly competitive or substitutable domestic spirits is applied "so as to afford protection" to
Philippine production of distilled spirits.
C. Conclusion
258. For all the foregoing reasons, we uphold the Panel's finding, in paragraph 7.188 of its
Reports, that the Philippines has acted inconsisten tly with Article III:2, second sentence, of the
GATT 1994 by applying dissimilar internal taxation to all imported distilled spirits made from
non-designated raw materials and to all directly co mpetitive or substitutable do mestic distilled spirits

454Panel Reports, para. 7.185 (quoting Appellate Body Report, Korea – Alcoholic Beverages ,
para. 153).
455Panel Reports, para. 7.187.

made from designated raw materials, so as to affo rd protection to Philippi ne production of distilled
spirits.
259. Consequently, we uphold the Panel's finding, in paragraphs 7.188 and 8.2(b) of the US Panel
Report, that the Philippines has acted inconsiste ntly with Article III:2, second sentence, of the
GATT 1994 by applying dissimilar internal taxes to all imported spirits made from non-designated
raw materials and to all directly competitive or su bstitutable domestic distilled spirits made from
designated raw materials, so as to afford protection to Philippine production of distilled spirits.
260. Having reversed the Panel's finding at paragraph 8.3 of the EU Panel Report that the
European Union's claim under the second sentence of Ar ticle III:2 was made in the "alternative" to its
claim under the first sentence thereof, we complete the legal analysis on the basis of factual findings
made by the Panel in the context of the complaints by the European Union and the United States, and
on the basis of the legal findings that the Pa nel made under Article III:2, second sentence, in
addressing the complaint by the United States, as upheld in this appeal. We consequently find, in
relation to the European Union's claim, that the Ph ilippines has acted inconsistently with Article III:2,
second sentence, of the GATT 1994 by applying dissimila r internal taxation to all imported spirits
made from non-designated raw materials and to al l directly competitive or substitutable domestic
distilled spirits made from designated raw material s, so as to afford protection to Philippine
production of distilled spirits.

 Page EU-97

VII. Findings and Conclusions in the Appellate Body Report WT/DS396/AB/R
261. In the appeal of the Panel Report, (complaint by the
European Union, WT/DS396/R) (the "EU Panel Report"), for the reasons set out in this Report, the
Appellate Body:
(a) with respect to Article III:2, first sentence, of the GATT 1994:
(i) upholds the Panel's finding, in paragr aph 7.85 of the EU Panel Report, that
each type of imported distilled spirit at issue in this dispute—gin, brandy,
vodka, whisky, and tequila—made from non-designated raw materials is
"like" the same type of domestic di stilled spirit made from designated raw
materials, within the meaning of Ar ticle III:2, first sentence, of the
GATT 1994;
(ii) finds that the Panel did not act inc onsistently with Article 11 of the DSU in
its evaluations of the products' physical characteristics, of the Philippine
market for distilled spirits, and of tariff classification;
(iii) upholds, as a consequence, the Panel's finding, in paragraphs 7.90 and 8.2 of
the EU Panel Report, that the Philippi nes has acted inconsistently with
Article III:2, first sentence, of the GATT 1994 by imposing on each type of
imported distilled spirit at issue in th is dispute—gin, brandy, rum, vodka,
whisky, and tequila—internal taxes in excess of those applied to "like"
domestic distilled spirits of the sa me type made from designated raw
materials; and
(iv) reverses the Panel's finding, in para graph 7.77 of the EU Panel Report, to the
extent that it stands for the proposition that all distilled spirits at issue in this
dispute are "like products", regardless of types, within the meaning of
Article III:2, first sentence, of the GATT 1994;
(b) with respect to Article III:2, second sentence, of the GATT 1994:
(i) reverses the Panel's findings, in paragr aphs 7.1, 7.5, 7.17, 7.92, 7.93, 7.95,
and 8.3 of the EU Panel Report, that the European Union's claim under
Article III:2, second sentence, of the GATT 1994 was made in the
"alternative" to its claim under the first sentence of that provision;

Page EU-98

(ii) finds that the Panel acted inconsiste ntly with its duties under Article 11 of the
DSU, in paragraph 8.3 of the EU Panel Report, by failing to examine, and
abstaining from making findings in relation to, the European Union's separate
and independent claim under Article III:2, second sentence, of the
GATT 1994;
(iii) upholds the Panel's finding, in paragr aph 7.138 of the EU Panel Report, that
all imported distilled spirits made fro m non-designated raw materials and all
domestic distilled spirits made from designated raw materials at issue in this
dispute are "directly competitive or substitutable" within the meaning of
Article III:2, second sentence, of the GATT 1994, and finds that the Panel did
not act inconsistently with Article 11 of the DSU in reaching this finding;
(iv) upholds the Panel's finding, in paragr aph 7.187 of the EU Panel Report, that
dissimilar taxation imposed by the Philippine excise tax on imported distilled
spirits and on directly competitive or su bstitutable domestic spirits is applied
"so as to afford protection" to Philippine production of distilled spirits; and
(v) on this basis, completes the legal analysis in relation to the European Union's
separate and independent claim under Article III:2, second sentence, and
finds that the Philippines has acted inconsistently with Article III:2,
second sentence, of the GATT 1994, by a pplying dissimilar internal taxation
to imported distilled spirits and to directly competitive or substitutable
domestic distilled spirits, so as to affo rd protection to Philippine production
of distilled spirits.
262. The Appellate Body recommends that the DSB re quest the Philippines to bring its measures,
found in this Report and in the EU Panel Report, as m odified by this Report, to be inconsistent with
the GATT 1994, into conformity with its obligations under that Agreement.

 Page US-97

VII. Findings and Conclusions in the Appellate Body Report WT/DS403/AB/R
261. In the appeal of the Panel Report, (complaint by the
United States , WT/DS403/R) (the "US Panel Report"), for the reasons set out in this Report, the
Appellate Body:
(a) with respect to Article III:2, first sentence, of the GATT 1994:
(i) upholds the Panel's finding, in paragr aph 7.85 of the US Panel Report, that
each type of imported distilled spirit at issue in this dispute—gin, brandy,
vodka, whisky, and tequila—made from non-designated raw materials is
"like" the same type of domestic di stilled spirit made from designated raw
materials, within the meaning of Ar ticle III:2, first sentence, of the
GATT 1994;
(ii) finds that the Panel did not act inc onsistently with Article 11 of the DSU in
its evaluations of the products' physical characteristics, of the Philippine
market for distilled spirits, and of tariff classification;
(iii) upholds, as a consequence, the Panel's finding, in paragraphs 7.90 and 8.2(a)
of the US Panel Report, that the Philippines has acted inconsistently with
Article III:2, first sentence, of the GATT 1994 by imposing on each type of
imported distilled spirit at issue in th is dispute—gin, brandy, rum, vodka,
whisky, and tequila—internal taxes in excess of those applied to "like"
domestic distilled spirits of the sa me type made from designated raw
materials; and
(iv) reverses the Panel's finding, in para graph 7.77 of the US Panel Report, to the
extent that it stands for the proposition that all distilled spirits at issue in this
dispute are "like products", regardless of types, within the meaning of
Article III:2, first sentence, of the GATT 1994;
(b) with respect to Article III:2, second sentence, of the GATT 1994:
(i) upholds the Panel's finding, in paragra ph 7.138 of the US Panel Report, that
all imported distilled spirits made fro m non-designated raw materials and all
domestic distilled spirits made from designated raw materials are "directly
competitive or substitutable" within the meaning of Article III:2,

Page US-98

second sentence, of the GATT 1994, and finds that the Panel did not act
inconsistently with Article 11 of the DSU in reaching this finding;
(ii) upholds the Panel's finding, in paragr aph 7.187 of the US Panel Report, that
dissimilar taxation imposed by the Philippine excise tax on imported distilled
spirits and on directly competitive or su bstitutable domestic spirits is applied
"so as to afford protection" to Philippine production of distilled spirits; and
(iii) upholds, as a consequence, the Panel's finding in paragraphs 7.188 and 8.2(b)
of the US Panel Report, that the Philippines has acted inconsistently with
Article III:2, second sentence, of the GATT 1994 by applying dissimilar
internal taxation to all imported di stilled spirits made from non-designated
raw materials and to all directly competitive or substitutable domestic
distilled spirits made from designated raw materials, so as to afford
protection to Philippine production of distilled spirits.
262. The Appellate Body recommends that the DSB request the Philippines to bring its measures,
found in this Report and in the US Panel Report, as m odified by this Report, to be inconsistent with
the GATT 1994, into conformity with its obligations under that Agreement.

ANNEX I

27 September 2011

 (11-4674)
 Original: English

Notification of an Appeal by the Philippines
under Article 16.4 and Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU),
and under Rule 20(1) of the Working Procedures for Appellate Review

 The following notification, dated 23 Septembe r 2011, from the Delegation of the Republic of
the Philippines, is being circulated to Members.

As set out in this notice of appeal, and pursuant to Article 17.13 of the DSU, the Philippines requests
that the Appellate Body reverse or modify various legal findings and conclusions of the Panel, that
result from the errors identified below.
2. Pursuant to Rule 20(2)(d)(iii) of the Working Procedures for Appellate Review , this notice of
appeal includes an indicative list of the paragraphs of the Panel Report containing the alleged errors,
without prejudice to the Philippines' ability to refe r to other paragraphs of the Panel Report in the
context of its appeal.
I. APPEAL OF THE PANEL'S FINDINGS OF A VIOLATION OF ARTICLE III:2,
FIRST SENTENCE OF THE GATT 1994
3. The Panel erred in its interpretation and a pplication of the term "like products" under
Article III:2, first sentence of the GATT 1994 and failed to apply the appropriate standard when
assessing the products' physical characteristics, cons umer tastes and habits, and the products' tariff
classifications.

4. The Panel's errors of law and legal application include:
(a) The Panel failed to apply the correct standard when examining the physical
characteristics of the products in question, and the manner in which they compete in
the Philippine market.

(b) The Panel failed to apply the correct st andard when assessing consumers' tastes and
habits in the Philippine market.

(c) The Panel failed to apply the appropriate standard when examining whether the tariff
classification of non-sugar-based spirits and sugar-based spirits indicated "likeness."

5. As a result of these errors, the Philippines requests that the Appellate Body reverse the Panel's
findings in paragraphs 7.39, 7.40, 7.42, 7.43, 7.45, 7.46, 7.47, 7.59, 7.60, 7.62, 7.63, 7.71, 7.74, 7.76,
7.77, 7.80, 7.82, 7.83, 7.85, 7.90, 8.2 (with respect to the claims of the European Union) and 8.2(a)
(with respect to the claims of the United States) of the Panel Report.
II. APPEAL OF THE PANEL'S FINDINGS OF A VIOLATION OF ARTICLE III:2,
SECOND SENTENCE OF THE GATT 1994
6. The Panel erred in its interpretation and app lication of the term "directly competitive or
substitutable" within the meaning of Article III: 2, second sentence of the GATT 1994, as well as the
term "so as to afford protection". The Panel conse quently also failed to a pply the correct standard
when assessing competition in the Philippine market.
7. The Panel's errors of law and legal application include:
(a) The Panel failed to properly interpret and apply the term "directly" when it found that
competition existed in the market due to the possibility that some consumer could
purchase non-sugar-based spirits on "special occasions."

(b) The Panel failed to apply the correct sta ndard when it found that it was sufficient for
a certain market segment to have access to both types of products.

(c) The Panel failed to apply the correct standard when it found that potential
competition existed in the Philippine market.

(d) The Panel misinterpreted the applicati on of the term "directly competitive or
substitutable" by finding that some degr ee of substitutability in a non-representative
sample of the market in question was sufficient to show direct competition.

(e) The Panel erred in its interpretation of th e treaty term "so as to afford protection to
domestic production", and misapplied this provision in the instant case.

8. As a result of these errors, the Philippines requests that the Appellate Body reverse the Panel's
findings in paragraphs 7.118, 7.119, 7.120, 7.121, 7. 137, 7.138, 7.187, 7.188, and 8.2(b) (with respect
to the claims of the United States) of the Panel Report.

III. APPEAL OF THE PANEL'S FAILURE TO MAKE AN OBJECTIVE ASSESSMENT
OF THE MATTER AS REQUIRED BY ARTICLE 11 OF THE DSU
9. The Panel acted inconsistently with Article 11 of the DSU by failing to conduct an objective
assessment of the matter when examining the eviden ce relating to physical characteristics of the
products at issue, their tariff classification, the r esult of the econometric study and the Euromonitor
International study and the segmentation of the market.
10. The Panel's errors of law and legal application under Article 11 include:
(a) The Panel erroneously substituted its own j udgment for that of the experts in relation
to the organoleptic properties of the products and the congener results.

(b) The Panel erred when it found that the evidence on tariff classification was
inconclusive.

(c) The Panel misinterpreted the results of the econometric study and the Euromonitor
International survey, and substituted its ow n judgment for that of the experts in
violation of Article 11.

(d) The Panel erred when it found that the Ph ilippine market is not segmented and that
"many consumers may be able to purchase high-priced spirits" on "special
occasions".

(e) The Panel erred when it concluded that th ere is evidence that the products are capable
of being directly competitive or substitutable in the near future.

11. As a result of these errors, the Philippines requests that the Appellate Body reverse the Panel's
findings in paragraphs 7.39, 7.40, 7.42, 7.43, 7.45, 7.46, 7.56, 7.57, 7.59, 7.60, 7.62, 7.76, 7.77, 7.80,
7.82, 7.90, 7.113, 7.119, 7.121, 7.127, 7.137, 7.138, 7.188, 8.2 (with respect to the claims of the
European Union) and 8.2(a) and (b) (with respect to the claims of the United States) of the Panel
Report.

ANNEX II

30 September 2011

 (11-4741)
 Original: English

Notification of an Other Appeal by the European Union
under Article 16.4 and Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU),
and under Rule 23(1) of the Working Procedures for Appellate Review

 The following notification, dated 28 Septem ber 2011, from the Delegation of the European
Union, is being circulated to Members.

Pursuant to Articles 16.4 and 17 of the DSU, the European Union hereby notifies to the
Dispute Settlement Body its decision to appeal to the Appellate Body certain issues of law covered
and certain legal interpretations developed by the Panel in Philippines — Taxes on Distilled Spirits
(WT/DS396, WT/DS403) ("Panel Report"). Pursuant to Rule 23(1) of the Working Procedures for
Appellate Review , the European Union simultaneously files this Notice of Other Appeal with the
Appellate Body Secretariat.

For the reasons further elaborated in its subm issions to the Appellate Body, the European
Union appeals, and requests the Appellate Body to reverse, modify or declare moot and of no legal
effect the findings and conclusions of the Panel, with respect to the following errors of law and legal
interpretations contained in the Panel Report, and to complete the analysis
1:

I. MISCHARACTERISATION OF THE EUROPEAN UNION CLAIM UNDER
ARTICLE III:2, SECOND SENTENCE, OF THE GATT

The Panel erred in its interpreta tion and application of Article 7, paragraphs 1 and 2, of the
DSU, and/or failed to make an objective assessment pursuant to Article 11 of the DSU, and/or falsely
exercised judicial economy, thereby violating Articles 3.7 and 21.1 of the DSU, when it wrongly
characterised the claim put forward by the Europ ean Union under Article III:2, second sentence, of
the GATT as "alternative" 2, and consequently failed to make any findings in relation to it. 3 T h e
European Union requests the Appellate Body to complete the analysis.

1Pursuant to Rule 20(2)(d)(iii) of the Working Procedures for Appellate Review this Notice of Appeal
includes an indicative list of the paragraphs of the Panel Report containing the alleged errors, without prejudice
to the ability of the European Union to refer to other paragraphs of the Panel Report in the context of its appeal.
2Panel Report, paras. 7.1, 7.5, 7.17, 7.92, 7.93, 7.95 and 8.3.
3Panel Report, paras. 7.95 and 8.3.