Document: WORLD TRADE WT/DS8/15 WT/DS10/15 WT/DS11/13 ORGANIZATION 14 February 1997 (97-0558) Japan - Taxes on Alcoholic Beverages Arbitration under Article 21(3)(c) of the Understanding on Rules and Procedures Governing the Settlement of Disputes Award of the Arbitrator Julio Lacarte-Muró
Date: 14 February 1997
Document codes: WT/DS8/15; WT/DS10/15; WT/DS11/13
Complainant: EU
Respondent: Japan
Dispute stage: Appellate Body
Agreements cited: Art. III:2  GATT 1994

Japan - Taxes on Alcoholic Beverages
Arbitration
under Article 21(3)(c) of the
Understanding on Rules and Procedures
Governing the Settlement of Disputes
Award of the Arbitrator
Julio Lacarte-Muró

I. Introduction
1. On 1 November 1996, the Dispute Settlement Body (the "DSB") adopted (WT/DSB/M/25)
the Appellate Body Report and the Panel Report, as modified by the Appellate Body Report, in
Japan - Taxes on Alcoholic Beverages (, and ). As required
by Article 21(3) of the Understanding on Rules and Procedures Governing the Settlement of Disputes
(the "DSU"), Japan informed the DSB on 20 November 1996 of its intentions in respect of the
implementation of the DSB's recommendations and rulings (WT/DSB/M/26). Japan indicated that
it would not be able to implement immediately but only within a "reasonable period of time". Japan
did not propose to the DSB a "reasonable period of time" for the latter's approval as provided for under
Article 21(3)(a) of the DSU. It indicated that it would initiate negotiations with the European
Communities, the United States and Canada, the other parties to the dispute, on what constitutes "a
reasonable period of time". These negotiations did not succeed, and no mutual agreement within the
meaning of Article 21(3)(b) of the DSU was reached. The negotiations with the European Communities
did, however, lead to an agreement on an accelerated reduction of the tariff rates on whisky and brandy
as compensation for delayed implementation, but this agreement does not prejudge their position on
the issue of a "reasonable period of time".
2. In the absence of an agreement under Article 21(3)(b) of the DSU, the United States requested
on 24 December 1996, that the "reasonable period of time" should be determined through binding
arbitration as is provided for by Article 21(3)(c). After Japan and the United States failed to agree
on the appointment of an arbitrator within the ten days envisaged by the note to Article 21(3)(c), the
United States requested on 7 January 1997 that the Director-General appoint an arbitrator. Following
consultations with the United States and Japan, the Director-General appointed me as arbitrator on
17 January 1997.
3. At an organizational meeting on 20 January 1997, it was agreed that all the original parties
to the dispute could participate in the arbitration process, notwithstanding that only the United States
had requested binding arbitration. It was further agreed that, in the circumstances of this case, the
90-day period provided for by Article 21(3)(c) of the DSU, which started on 1 November 1996, would
not provide sufficient time for a full review of the matter. Accordingly, the parties agreed to extend
the deadline for the arbitrator's award by two weeks, to expire on 14 February 1997. The parties
gave written assurances that the arbitrator's award would nevertheless be accepted by them as "binding
arbitration" within the meaning of Article 21(3)(c).

4. Written submissions were received from Japan and the United States on 27 January 1997.
I requested certain additional information from Japan on 28 January 1997. Japan replied to this request
promptly, on 30 January 1997.
5. Havingreached a politicalconsensusonthe necessary liquortax amendments in mid-December
1996 after consultations with the government party (the Liberal Democratic Party) and with the interest
groups concerned, the Government of Japan formally adopted its proposal for a Law to Amend a Portion
of the Liquor Tax Law (Law No. 6, 1953) and submitted it to the Diet for approval on 31 January
1997, i.e. the deadline for proposals for new tax legislation. Throughout these arbitration proceedings,
the Government of Japan has insisted that it would ordinarily be almost impossible to amend the draft
legislation now before the Diet.
6. An oral hearingwas held on 3 February 1997, and was attended byall four partiesto the dispute.
II. The Proposed Implementing Legislation
7. In the proposal currently before the Diet, the Government of Japan proposes to implement
the recommendations and rulings of the DSB in Japan - Taxes on Alcoholic Beverages in three steps.
In the first step, on 1 October 1997, Japan would reduce the tax rates on brown spirits (whisky, etc.),
and increase the tax rates on Shochu A and Shochu B. The applicable rates would remain respectively
greater and less than those levied on white spirits (vodka, etc.), i.e. the rate towards which all other
rates are to converge. Liqueurs would be taxed at the same rates as white spirits. In the second step,
on 1 October 1998, the rate of tax imposed on Shochu A would become equal to that levied on white
spirits and liqueurs. The tax onbrownspirits(whisky, etc.) wouldbe furtherreduced, butwouldremain
greater than that imposed on white spirits and liqueurs (i.e. 3% higher). The tax on Shochu B would
be further increased, remaining less than that imposed on white spirits and liqueurs. In the third step,
on 1 October 2001, Japan would increase the tax rate on Shochu B to the level imposed on white spirits
and liqueurs.
8. The proposed amendments to the Liquor Tax Law would implement the recommendations and
rulings of the DSB within 23 months of 1 November 1996, except insofar as they apply to Shochu B.

With regard to Shochu B, the increase of the tax would be implemented in three stages1 and full
compliance with the DSB's recommendations and rulings would be attained by 1 October 2001, i.e.
within five years.
III. The Legal Framework
9. As a general and fundamental obligation imposed on all WTO Members, Article XVI:4 of
the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement") requires
that each Member shall ensure the conformity of its laws, regulations and administrative procedures
with its obligations as provided in the WTO Agreement. To preserve the rights and obligations of
Members under the WTO Agreement, the WTO provides for a dispute settlement system that is set
out in the DSU.
10. As basic principles of WTO dispute settlement, Article 3(3) of the DSU stipulates that:
The prompt settlement of situations in which a Member considers that any benefits accruing
to it directly or indirectly under the covered agreements are being impaired by measures taken
by another Member is essential to the effective functioning of the WTO and the maintenance
of a proper balance between the rights and obligations of Members.
and Article 3(7) of the DSU states that:
In the absence of a mutually agreed solution, the first objective of the dispute settlement
mechanism is usually to secure the withdrawal of the measures concerned if these are found
to be inconsistent with the provisions of the covered agreements.
11. Article 21(1) of the DSU stipulates that "prompt compliance with recommendations and rulings
of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all Members"
(emphasis added). Thisobligationisfurther elaborated inArticle21(3) of the DSU, where itisstipulated
that "if it is impracticable to comply immediately with the recommendations and rulings, the Member
concerned shall have a reasonable period of time in which to do so" (emphasis added). When
this "reasonable period of time" is determined through binding arbitration as provided for under
1On 1 October 1997, the tax on Shochu B would be increased from 102,100 Yen/kilolitre of alcohol to 150,700 Yen/kilolitre,
on 1 October 1998 to 199,400 Yen/kilolitre and finally on 1 October 2001 to 248,100 Yen/kilolitre.

Article 21(3)(c) of the DSU, this provision states that a "guideline" for the arbitrator should be that
the "reasonable period of time" should not exceed 15 months from the date of the adoption of a panel
or Appellate Body Report. Article 21(3)(c) of the DSU also stipulates, however, that the "reasonable
period of time" may be shorter or longer than 15 months, depending upon the "particular circumstances".
The term, "particular circumstances", is not defined in the DSU.
IV. Arguments of the Parties
United States
12. With regard to what constitutes the "particular circumstances" which need to be taken into
account when determining the "reasonable period of time" for the purpose of Article 21(3)(c) of the
DSU, the United States argues that only the following are relevant:
(a) the type (legislation, regulation, decree, etc.) and technical complexity (e.g. making
a simple change in a tariff rate, as compared to making more complex changes like
the development of a new scientific standard) of the measures that the Member must
draft, adopt and implement; and
(b) the minimum period of time in which the Member can achieve implementation, assuming
that the Member acts in good faith.
13. According to the United States, the question of "particular circumstances" does not, therefore,
imply a policy judgement, but rather a technical inquiry into the domestic legislative or regulatory
system in the Member country concerned. Domestic political, economic and social considerations
should not be taken into account. The United States asserts that hardship of an economic and/or social
nature and political tension are inevitable whenever a government proposes to end its protection of
a domestic industry. The United States argues that if such considerations are taken into account, this
would threaten the integrity of the WTO dispute settlement system. The question for the arbitrator
is what is the shortest period of time in which implementation can practicably take place, not whether
a longer period of time would make implementation less burdensome and painful for the implementing
Member.

14. Applying these general considerations in this particular case, the United States argues that it
would be reasonable to determine that Japan can implement the necessary tax changes in April 1997,
i.e. five months from the adoption of the DSB's recommendations and rulings. The United States
suggests this period because:
(a) it falls within the one to six-month period that Japan allegedly claimed it generally
needed to change indirect taxes;
(b) itis more thanadequate toachieve the simpleamendment to the LiquorTax Law needed
to change tax rates on alcoholic beverages;
(c) the Diet normally enacts fiscal measures in March each year; and
(d) it is the beginning of Japan's fiscal year when tax changes are routinely implemented.
15. The United States also points out that Japan has demonstrated in the past that it is capable of
implementing changes to its Liquor Tax Law in a short period of time. The amendment to the Liquor
Tax Law passed on 10 April 1984 came into effect 20 days later, and the legislation which was adopted
in implementation of the 1987 GATT panel on Japan - Customs Duties, Taxes and Labelling Practices
on Imported Wines and Alcoholic Beverages2 and which involved more sweeping reforms, was
implemented in just over three months following the passage of the bill.
16. More generally, the United States asserts that WTO Members have a strong interest in
establishing an example of prompt compliance with, and full implementation of, the DSB's
recommendations and rulings. Although it would be hypothetically possible to reach an immediate
settlement that would partially offset some of the commercial losses associated with the deficiencies
in Japan's proposed implementation, the United States maintains that such a settlement would not address
the competitive harm produced by a continuing national treatment violation. The United States also
suggests that the failure of Japan, as one of the world's leading trading nations, to comply fully and
in a timely manner with the DSB's recommendations and rulings would be damaging to the credibility
of the WTO dispute settlementsystem. The United States believes thatallowingfor a 5-year "reasonable
period of time" would have a devastating impact on the dispute settlement system.
2BISD 34S/83, adopted on 10 November 1987.

Japan
17. Japan agrees that, in general, the "reasonable period of time" should be determined in light
of the DSU's general objective of prompt compliance, but it notes that the DSU is also very clear in
allowingfor flexibility. Japan stressesthatalthoughArticle21(3)(c) of theDSU indicatesthat15 months
is a guideline for the arbitrator to award for implementation, this period of time can be extended if
"particular circumstances" exist. Japan considers that nowhere in the DSU are there any provisions
which prescribe the scope of the "particular circumstances" to be considered and argues that each and
every circumstance relevant to each individual case should be carefully examined. Japan considers
that in the present case, a 23-month period for implementation is a "reasonable period of time" because
there are a number of "particular circumstances" justifying such a period.
18. First,Japan invokes,as a relevant"particularcircumstance", the limitedpowersof the executive
branch over taxation and the need for formal legislation adopted by the Diet in order to implement
the recommendations and rulings of the DSB. Since the proposed amendments involve drastic increases
in the taxes on shochu and are, therefore, very unpopular and have met with considerable political
opposition, the procedure for preparing and adopting these amendments has been and will be difficult
and complex. Adding to the difficulty and complexity of the legislative process is the fact that the
current government does not have a majority in either Chamber of the Diet.
19. Secondly, Japan invokes, as a relevant "particular circumstance", the adverse effects of the
tax increases on Japanese consumers and shochu producers. Under the proposed tax reform, the tax
on Shochu A will be increased by 1.6 times and on Shochu B by 2.4 times. Japan contends that a
2.4 times increase, without staging, would be unprecedented in the history of any developed country.
Japan argues that in order to mitigate the adverse impact of the liquor tax increases on consumers and
producers, it is only normal to spread these increases over time. Japan recognizes that this was not
done for the 1989liquortax increases, but submitsthatthe situationwas different then. The tax increases
were less drastic and also affected the competing saké. In addition, shochu producers received more
financial support in the context of the implementation of the 1987 Panel Report.
20. Furthermore, Japan points out that in April 1997, there will already be a very substantive increase
in the consumption tax, which was decided in November 1994, and that it would be unacceptable for
the liquor tax increases and the consumption tax increase to be carried out simultaneously. Japan also
points out that large-scale increases in taxes normally take place in one-year intervals to mitigate the

impact on consumers. Thus, as the consumption tax will take effect on 1 April 1997, the liquor tax
increases should normally become effective one year later, on 1 April 1998. Since this would, however,
have brought the first stage of the liquor tax amendments beyond the 15-month "reasonable period
of time", Japan has proposed to bring forward the first stage of the implementation to 1 October 1997
(i.e. 11 months after the DSB decision). According to Japan, this represents a major effort on its part,
and an indication that Japan takes the Article 21(3)(c) guideline of 15 months very seriously. In this
context, Japan also argues that by bringing forward the first stage of implementation (from 1 February
1998, i.e. 15 months after the DSB decision, to 1 October 1997, i.e. 11 months after the DSB decision),
an advantage is created for importers that is equivalent to the disadvantages arising from the fact that
the implementation is not fully realized within 15 months.
21. Finally, Japan invokes, as a relevant "particular circumstance", the administrative constraints
on the execution of taxation. The proposed changes in the tax system will have to be notified and
explained to 180,000 wholesalers and retailers in advance and this notification alone will take a
considerableamount of time. Furthermore, Japan argues that liquordistributors will need time to adjust
their computer programmes and advertising material.
22. As an important factor underlying the arguments set out above, Japan invokes the rigidity of
the domestic processfor the adoptionof the annual budget. Under this process, the government decides,
after intensive consultations with the government party, on the contents of any tax reform in mid-
December in order to be able to submit to the Diet the draft budget and all proposals for tax legislation
by the end of January. During the oral hearing, Japan indicated that if this timing is missed, the tax
legislation concerned can ordinarily no longer be amended for the following fiscal year. The Diet is
unwilling to consider draft tax legislation outside of this time schedule.
23. As mentioned above, with regard to Shochu B, full compliance with the DSB's recommendations
and rulingswould,underthe current Japanese proposalfor tax reform, onlybe attainedinOctober 2001,
i.e. after five years. Japan does not argue that this 5-year period constitutes a "reasonable period of
time" within the meaning of Article 21(3)(c) of the DSU. To compensate for the delayed implementation,
Japan has, therefore, offered the European Communities, the United States and Canada an accelerated
reduction of the tariff rates on alcoholic beverages as negotiated in the context of the Uruguay Round.
The European Communities have accepted this offer but the United States and Canada have not.
Furthermore, Japan argues with regard to Shochu B that the tax differential remaining in the period
between October 1998 and October 2001 will not have adverse effects on imported whisky or brandy

in practice, because this tax differential will already have been significantly reduced from its current
level. Japan suggests that any negative impact on imported whisky or brandy will be further minimized
by the fact that the majority of Shochu B is consumed in a limited region in the south of Kyushu Island.
This argument is strongly contested by the United States which submits that all the information it has
received from its producers of alcoholic beverages points to the contrary.
24. Japan argues that the reasonable period of time for implementation of the DSB's recommendations
and rulings should not be influenced by circumstances surrounding the earlier dispute concerning the
Liquor Tax Law that resulted in the 1987 Panel Report. According to Japan, therefore, the present
matter shouldbe examined initsowncontext,and inthe lightof the "particularcircumstances" described
above. The United States, on the other hand, does refer to the 1987 Panel Report to demonstrate that
it is possible for Japan to implement changes to its Liquor Tax Law within a considerably shorter period
than proposed by Japan in this case.
European Communities and Canada
25. Without taking a position on the question whether or not 23 months is, in the present case,
a "reasonable period of time", the European Communities state that in general the "reasonable period
of time" should be 15 months.
26. Canada, on the contrary, takes the position that 23 months and certainly 5 years are not
"reasonable periods of time". It does not consider the "particular circumstances" advanced by Japan
to be relevant. Canada notes furthermore that "particular circumstances" are always unique and should
not be construed as having precedential value for future cases. Finally, Canada notes that Japan appears
to be suggesting that a longer period of time (five years) is required with respect to Shochu B because
the tax differential that needs to be eliminated is so much greater than with respect to Shochu A. This
is tantamount to arguing, Canada observes, that the greater the degree of inconsistency with WTO
obligations, the greater the period of time a Member should be granted to bring that measure into
conformity with the WTO Agreement.

V. Award
27. As stated in Article 3(2) of the DSU, the dispute settlement system of the WTO is a central
element in providing security and predictability to the multilateral trading system. Therefore, all WTO
Members have a strong interest in prompt compliance with and full implementation of the
recommendations and rulings of the DSB. This interest is clearly reflected in the provisions of the
DSU, and in particular in Article 21(3)(c), which stipulates that a "reasonable period of time" for
implementation should not exceed 15 months unless there are "particular circumstances" justifying
a longer or shorter period. In this case, I am not persuaded that the "particular circumstances" advanced
byJapan and the UnitedStates justifya departure from the 15-month "guideline" eitherway. I conclude,
therefore, that a "reasonable period of time" within the meaning of Article 21(3)(c) of the DSU for
Japan to implement the recommendations and rulings of the DSB of 1 November 1996 in Japan - Taxes
on Alcoholic Beverages is 15 months.
Signed in the original, at Geneva, this 13th day of February 1997 by:
Julio Lacarte-Muró