JAPAN - TAXES ON ALCOHOLIC BEVERAGES
Document: Mutually Acceptable Solution on Modalities for Implementation
Date: 30 July 1997
Document codes: WT/DS8/17; WT/DS10/17; WT/DS11/15
Complainant: EU
Respondent: Japan
Dispute stage: Appellate Body
Agreements cited: Art. III:2  GATT 1994

JAPAN - TAXES ON ALCOHOLIC BEVERAGES

Mutually Acceptable Solution on Modalities for Implementation

The following communication, dated 15 July 1997, from the Permanent Mission of Japan and
the Permanent Delegation of the European Commission, together with enclosures, is circulated to
Members at the request of both delegations.

Please find attached the mutually acceptable solution between the EC and Japan, in the form
of an exchange of letters, regarding the modalities for the implementation by Japan of the conclusions
and recommendations adopted by the Dispute Settlement Body in the dispute "". We would be grateful if you could circulate this to WTO Members.

Enclosure 1: Letter from Minister of Finance, Tokyo, to Sir Leon Brittan, dated

I have been making utmost efforts at domestic coordination in relation to the liquor tax issue
so that Japan, as a responsible Member of the WTO, would fully implement the recommendations of
the Panel and the Appellate Body. I now hasten to inform you that, as a result, the Tax Council of the
ruling Liberal Democratic Party has today reached a conclusion on the liquor tax reform and the
Outline of Tax Amendments containing this conclusion will be announced on 18 December.

As for the tax rate on whisky, we shall reduce it to¥ 409,000 per kilolitre (40 degrees of
alcohol content), about 58 per cent less than the current rate through two stages of reduction on 1
October 1997 and 1 October 1998, namely within two fiscal years. We shall also increase the tax rate
on shochu and liqueurs to the level of the current tax rate on spirits: the tax rate on shochu will be
increased, in principle, within the same two stages as whisky to¥ 248,100 per kilolitre (25 degrees of
alcohol content) and; the tax rate on liqueurs will be increased on 1 October 1997 up to¥ 119,088
per kilolitre (12 degrees of alcohol content). Taken all together, they would bring about an identical
taxation on shochu, spirits and liqueurs in terms of tax rate per degree of alcohol content, and would
result in the reduction of the tax differential between shochu and whisky to a veritable de minimis level
of 1.03 times in terms of tax rates per degree of alcohol content. (See appendix.) However, as for
shochu B, the tax rate adjustment will be completed with an additional three-year transitional period,

to end on 1 October 2001, in view of the effects on both consumers and producers of this
extraordinary increase in the tax rate by as much as 2.4 times.

We will now follow required domestic procedures and will submit a draft amendment of the
Liquor Tax Law which clearly stipulates the schedule I have just mentioned to the next ordinary
session of the Diet to be convened in late January 1997, and will do our utmost to pass the draft
amendment as quickly as possible.

I am confident that the implementation of this amendment will settle this issue between Japan
and the EU.

APPENDIX
The Liquor Tax Rates
(Per kilolitre)

Categories Degree of Current rates Proposed amendments
alcohol content
1 Oct. 1997-30 | 1 Oct. 1998- 30 1 Oct. 2001-
Sept. 1998 Sept. 2001

(¥6,228) (¥8,076) (¥9,924)
Shochu A 25 degrees ¥ 155,700 ¥201,900 ¥248, 100 >
(4,084) (6,028) (¥7,976) | (9,924)
Shochu B 25 degrees ¥ 102,100 ¥ 150,700 ¥199,400 | ¥248,100

(24,558) (¥13,775) (¥ 10,225)
Whiskies 40 degrees ¥982,300 ¥551,000 ¥409,000 >
(¥9,927) (¥9,924)
Spirits 37 degrees ¥367,300 ¥367,188 > >
(¥8,217) (¥9,924)
Liqueurs 12 degrees ¥98,600 ¥119,088 > >

Note: The rates in brackets are tax rates per kilolitre per degree of alcohol.

Enclosure 2: Letter from Minister_of Finance, Tokyo, to Sir Leon Brittan, dated
18 December 1996

Further to my letter dated 16 December informing you of the amendment of the Liquor Tax
Law, I am now writing with reference to the matter of tariff reduction of whisky and brandy which
was discussed together with the amendment of the Liquor Tax Law in the consultations held in
Singapore between the Government of Japan and the European Commission in response to the
adoption of the reports issued by the Panel and the Appellate Body of the WTO. I hasten to inform
you of the decision we have made today.

As for the tariff rates on whisky and brandy during the period from 1 October 1998 until
31 March 2002, we will take an autonomous measure to apply to the following items (1) the reduced
tariff rates from the bound rates by the size indicated below (2):

(1) Bound rates

2208.20-200 brandy (other)
1 April 1998 1 April 1999 1 April 2000 1 April
2001
¥ 273.00/1. ¥ 227.50/1. ¥ 182.00/1. ¥ 136.50/1.
2208 .30-032 whisky (other)
1 April 1998 1 April 1999 1 April 2000 1 April
¥- 205.80/1. ¥ 171.50/1. ¥ 137.20/1. ¥ 102.90/1.
(2) Size of reduction
¥ 48.70 per litre from the bound rates
from 1 October 1998 to 31 March 2001
¥ 24.35 per litre from the bound rates

from 1 April 2001 to 31 March 2002

In order that the above-mentioned reductions will take effect from 1 October 1998, we will
proceed to the required domestic procedures, and will submit a draft amendment of the relevant laws
such as Custom Tariff Law to the Diet and will do our utmost to pass the draft amendment through the
Diet.

I am confident that our recent measures including this amendment will entirely settle this
liquor tax issue between Japan and the EU.

Enclosure 3: Letter from Sir Leon Brittan, Vice-President of the EC, to Minister for Foreign
Affairs of Japan, dated 31 January 1997

The European Community has now completed its examination of the revised liquor tax

scheme that the Government of Japan proposes to implement as a response to the findings and
conclusions of the WTO Panel Report on "" as modified by the
report of the Appellate Body adopted by the Dispute Settlement Body on 1 November 1996. This
scheme and its implementation schedule were set out in respect of key alcoholic strengths for main
market segments in the letter from Minister Mitsuzuka to me of 16 December 1996. Explanations
received from the Japanese Government in subsequent contacts between our officials have clarified
details of the scheme, notably the fact that the tax to be levied on liquors between certain ranges of
alcoholic strength is not fixed per degree of alcohol but will instead be levied by means of a flat rate
per litre of liquor. Annex 1 gives details of the revised tax system for each category of liquor.

The European Community has also examined the proposed reduced tariff rates from the bound
rates set out in the letter from Minister Mitsuzuka to me of 18 December 1996 as compensation for the
longer implementation period for the new taxation scheme for shochu B. Annex 2 gives details of
these tariff rates.

The European Community hereby confirms that, on the basis of the above elements and the
integral application of the additional measures outlined below, the Japanese proposals resolve the
dispute on liquor tax between the European Community and Japan.

If the proposals are not implemented fully, the European Community reserves its rights to
resort to dispute settlement under the WTO Agreements.

The additional measures are to be applied as follows:

- The European Community will receive at least comparable tariff concessions to those
which Japan may grant to the United States or Canada as a result of ongoing
negotiations with these countries on compensation. In addition, in the case that Japan
grants additional concessions to other complainants as a result of a decision by the
WTO arbitrator, comparable concessions will be granted to the European
Community.

- At the request of either party, consultations on the implementation or effects of any
aspect of the revised tax scheme will be held expeditiously with a view to reaching a
satisfactory solution. It is understood in this context that any discriminatory effects on
European Community liquors resulting from the revised tax scheme will be corrected
through appropriate adjustments to the tax structure within a reasonable time-period to
remove such discriminatory effects. The European Community also reserves its
rights to address such issues, if necessary, in the context of WTO dispute settlement.

- The current definitions of products will not be amended in such a way as to have
adverse effects on EC exports. These definitions are those referred to in the WTO
Panel report as well as those given to the European Commission in the course of the
Commission's evaluation of the revised scheme (notably those referring to "mixed
drinks") and will be the ones valid for the amended liquor tax law which Japan
proposes to implement from 1 October 1997.

Furthermore it is jointly understood that acceptance by the European Community of the
Japanese proposals to settle the dispute shall not be interpreted as in any was prejudging the position of
the European Community in the WTO with regard to the definition of "de minimis" differentials, the
reasonable time-period for implementation or the compatibility of those parts of the revised liquor tax

establishing flat rates per litre of liquor with the WTO ruling.
I would be grateful if you would confirm that the implementation of the above elements and

measures, which constitute the means to resolve the dispute on liquor tax between the European
Community and Japan, will be carried out in accordance with the provisions of this letter.

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Figures for the Tax Per Degree of Alcohol for Each Category of Alcohol

at Different Alcoholic Strengths (At | Intervals)

strengths Brandy

1
1
2

(18,876) (13,599)

1
7
10
1
12
13
14
15
16
17
18
19
20
2
2
23
24
25

26

27