DOMINICAN REPUBLIC – MEASURES AFFECTING THE IMPORTATION AND INTERNAL SALE OF CIGARETTES
Document: Report of the Panel
Date: 26 November 2004
Document codes: WT/DS302/R
Complainant: Honduras
Respondent: Dominican
Third parties: Chile, China, EU, El Salvador, Guatemala, Nicaragua, U.S.
Dispute stage: Appellate Body
Agreements cited: Art. III:2, III:4, X:3(a), X:1, II:1, XI:1, XV  GATT 1994

DOMINICAN REPUBLIC – MEASURES AFFECTING
THE IMPORTATION AND INTERNAL
SALE OF CIGARETTES

 Report of the Panel

I. INTRODUCTION
1.1 On 8 October 2003, Honduras requested consu ltations with the Dominican Republic pursuant
to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
(DSU) and Article XXII:1 of the General Agr eement on Tariffs and Trade 1994 (the GATT 1994)
concerning certain measures by the Dominican Repub lic affecting the importation and internal sale of
cigarettes. The request was circulated to Members on 13 October 2003.1
1.2 Consultations were held on 4 November 2003, but did not lead to a mutually satisfactory
resolution of this matter.
1.3 On 8 December 2003, Honduras requested the Di spute Settlement Body ("DSB") to establish
a Panel pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of the GATT 1994. 2 O n
9 January 2004, the DSB established the Panel with the following terms of reference:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Honduras in document , the matter referred by Honduras to the DSB
in that document, and to make such fi ndings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
3
1.4 On 17 February 2004, the parties agreed to the following composition of the Panel:
 Chairman: Mr. Elbio R OSSELLI
 Members: Mr. Tae-Yul C HO
 Mr. Cristian E SPINOSA CAÑIZARES 4

1.5 Chile, China, El Salvador, the European Comm unities, Guatemala, Nicaragua and the United
States reserved their respective right to participate in the Panel proceedings as third parties.
5
1.6 The Panel met with the two parties on 11 May a nd continued on 12 May 2004 after the third
parties' meeting. The Panel met again with the parties on 29 and 30 June 2004.
1.7 Chile, China, El Salvador, the European Co mmunities, Guatemala, and Nicaragua presented
third-party submissions before the first substantive meeting of the Panel. These countries, as well as
the United States, made oral statements during the firs t substantive meeting of the Panel. El Salvador
and Nicaragua made joint submissions and a joint oral statement at the first substantive meeting.
1.8 Pursuant to the terms of Paragraph 8 of the 1996 Agreement between the International
Monetary Fund (IMF) and the World Trade Organiza tion, the Panel, on 17 May 2004, requested the
IMF to provide information on how the "Comisión Cambiaria a las Importaciones" (previously called
"Comisión de Cambio" and originally introduced by the Monetary Board of the Dominican Republic's
Central Bank on 24 January 1991) is being implemented by the Dominican Republic. The Panel also
requested the IMF to provide its views on whether the "Comisión Cambiaria a las Importaciones" , as
applied by the Dominican Republic, is considered to be an "exchange control" or "exchange

1 Request for Consultations by Honduras, (Dominican Republic – Import and Sale of Cigarettes) , 13 October 2003,

2 Request for the Establishment of a Panel by Honduras, Dominican Republic – Importation and
Internal Sale of Cigarettes, 8 December 2003,WT/DS302/5.
3 Constitution of the Panel Established at the Request of Honduras, Dominican Republic – Importation
and Internal Sale of Cigarettes, 18 February 2004, WT/DS302/6, para. 2.
4 Ibid., para. 3.
5 Ibid., para. 4.

restriction" under the Articles of Agreement of th e International Monetary Fund. On 25 June 2004
the IMF sent its response to the Panel.
6 The letter from the IMF was circulated to Parties and the
Panel invited Parties to make comments. Honduras made some comments and the Dominican
Republic did not submit any comments.
1.9 The Panel gave the parties a draft version of the descriptive part of the Report for their
comments on 9 August 2004. The Panel issued its interim report to the parties on 21 September 2004.
The Panel issued its final report to the parties on 20 October 2004.
II. FACTUAL ASPECTS
2.1 The specific measures at issue in the present case are the following:
2.2 The imposition by the Dominican Republic of a transitional surcharge on all imports,
described as a "transitional surcha rge for economic stabilisation" ( recargo transitorio de
estabilización económica), in accordance with Decrees 646-03 and 693-03. 7 The surcharge currently
amounts to 2 per cent of the c.i.f. value of the imported goods.
2.3 The imposition by the Dominican Republic of a foreign exchange fee on all imports
(comisión de cambio ), in accordance with the Seventeenth Resolution of the Dominican Republic
Central Bank's Monetary Board dated 24 January 1991 as amended, inter alia, by the First Resolution
of 27 September 2001, the First Resolution of 20 August 2002, and the First Resolution of
22 October 2003. The current level of the fee is 10 per cent calculated on the value of the imports at
the selling exchange rate for foreign currency. The surcharge applies to both bound and unbound
tariff items.
2.4 The requirement by the Dominican Republic that tax stamps be affixed to cigarette packets in
the territory of the Dominican Republic, pursuant to Article 37 of Decree 79-03 – Regulation on the
Código Tributario de la República Dominicana)8 and Articles 1 and 2 of Decree 130-02.9
2.5 The rules and the administrative practice u sed by the Dominican Republic in order to
determine the tax base for the purpose of applying the Selective Consumption Tax ( Impuesto
Selectivo al Consumo ) to cigarettes, in accordance with Article 367 of its Tax Code ( Código
Tributario de la República Dominicana )10, Article 3 of Decree 79-03 a nd Article I of General
Rule 02-96.11 More specifically, Honduras identifies three t ypes of situations in this regard: (i) the
regulations used to establish the value of imported cigarettes, in order to determine the tax base for the
Selective Consumption Tax (SCT); (ii) the determ ination of the tax base for imported cigarettes in
specific cases; and, (iii) the lack of publication of the surveys conducted by the Dominican Republic
Central Bank that are used to determine the value of cigarettes for the purpose of applying the SCT.

6 Letter dated 25 June 2004 addressed to Chairman of the Panel, from the General Counsel of the
International Monetary Fund, in response to Panel request for information (See Annex D).
7 The text of Decree 646-03, dated 30 June 2003, and Decree 693-03, dated 16 July 2003, of the
Dominican Republic was submitted by Honduras, as Exhibit HOND-2.
8 The text of Decree 79-03 of the Dominican Republic, dated 4 February 2003, approving the
Regulations on the implementation of Section IV of the Tax Code ( Reglamento para la Aplicación del Título IV
del Código Tributario de la República Dominicana , the Regulation), was submitted by Honduras, as Exhibit
HOND-4.
9 The text of Decree 130-02 of the Dominican Republic, dated 11 February 2002, was submitted by
Honduras, as Exhibit HOND-5.
10 Portions of the text of the Dominican Republic Tax Code, Law 11-92 ( Código Tributario de la
República Dominicana, as modified by Law 147-00) were submitted by Honduras, as Exhibit HOND-6.
11 The text of General Rule 02-96 of the Dominican Republic, dated 1 June 1996, was submitted by
Honduras, as Exhibit HOND-7.

2.6 The requirement by the Dominican Republic that importers of cigarettes post a bond to ensure
payment of taxes, pursuant to Article 376 of the Tax Code and Article 14 of Decree 79-03.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
3.1 Honduras requested the Panel to find that:
• the surcharge on imported goods is inconsistent with Article II:1(b), second sentence, and
consequently, likewise with Article II:1(a) of the GATT;
• the foreign exchange fee is inconsistent with Article II:1(b), second sentence and
consequently, likewise with Article II:1(a) of the GATT;
• the requirement to affix a stamp on imported ci garettes in the territory of the Dominican
Republic and under the supervision of the local tax authorities, in a manner that accords to
imported cigarettes treatment less favourable than that accorded to domestic cigarettes, is
inconsistent with Article III:4 of the GATT;
• the application of the Selective Consumption Tax to certain imported cigarettes is inconsistent
with Article III:2 of the GATT;
• the manner in which the Dominican Republic de termines the value of imported cigarettes for
the purpose of applying the Selective Consumption Tax is inconsistent w ith Article X:3(a) of
the GATT;
• the failure to publish the surv eys conducted by the Central Bank, on which the Selective
Consumption Tax on cigarettes is supposed to be based, is inconsistent with Article X:1 of the
GATT; and,
• the requirement that importers of cigarettes post a bond is inconsistent with Article X1:1 or,
in the alternative, with Article III:4 of the GATT.
3.2 Honduras requests the Panel to recommend, in acco rdance with Article 19.1 of the DSU, that
the DSB request the Dominican Republic to bring the measures at issue into conformity with the
GATT.
3.3 The Dominican Republic rejected all the foregoing claims made by Honduras and requested
the following from the Panel based on reasons give n by the Dominican Republic during the whole
Panel proceedings:
• to dismiss the claim that the determination of the tax base of the Selective Consumption Tax
levied on imported cigarettes is inconsistent with Article III:2 of the GATT.
• to dismiss the claim that the manner in which the Dominican Republic administers its
provisions governing the Selective Consum ption Tax (SCT) is inconsistent with
Article X:3(a) of the GATT.
• to dismiss the claim that the surveys that iden tify the retail selling price to be used as the tax
base for the SCT is inconsistent with Article X:1 of the GATT.
• to dismiss the claim that the requirement to affi x a tax stamp in the territory of the Dominican
Republic is inconsistent with Article III:4 of the GATT. Nevertheless, should the Panel find
that this requirement is inconsistent with Ar ticle III:4, the Dominican Republic requests that

the Panel find that the requirement is justified by the general exception in Article XX(d) of
the GATT.
• to dismiss the claim that the requirement that importers of cigarettes post a bond is
inconsistent with Article XI of the GATT or, in the alternative, with Article III:4 of the
GATT. Nevertheless, should the Panel find that th is requirement is inconsistent with either
Article XI or Article III:4, the Dominican Re public requests that the Panel find that the
requirement is justified by the general exception in Article XX(d) of the GATT.
• to dismiss the claim that the transitional surcha rge on imports is inconsistent with Article II:1
of the GATT.
• to dismiss the claim that the transitional foreign exchange fee is inconsistent with Article II:1
of the GATT or find that it is an exchange measure justified by Article XV:9(a) of the GATT.
IV. ARGUMENTS OF THE PARTIES
A. F
IRST WRITTEN SUBMISSION OF HONDURAS
1. The measures at issue
(a) The surcharge imposed on imports
4.1 The Dominican Republic imposes a surcharg e on all goods that is described as the
"transitional surcharge for economic stablisation" (" surcharge"). The surcharge amounts to 2 per cent
of the c.i.f. value of all goods imported into the Dominican Republic. It is imposed on imports, upon
their importation, concurrently with and in additi on to, the ordinary customs duties. The surcharge
applies to both bound and unbound items.
(b) The foreign exchange fee imposed on imports
4.2 The Dominican Republic imposes a foreign exchange fee on all imports at the same time as
the surcharge and the ordinary customs duties are imposed, namely, upon importation. Given its
name, the fee is ostensibly intended to address "for eign exchange" matters related to the payment of
imports in a foreign currency. However, the si ngle criterion which determines the amount of the
"foreign exchange fee" is the "value of imports at the selling rate of foreign exchange". The foreign
exchange fee, originally introduced in 1991, has been amended several times. The most recent
modification which increased the foreign exchange f ee to 10 per cent was made effective by the First
Resolution of the Monetary Board of the Domini can Republic dated 22 October 2003. The foreign
exchange fee applies to both bound and unbound items.
(c) The requirement to affix a stamp on cigarettes in the territory of the Dominican Republic
4.3 The Dominican Republic requires that a stamp be affixed on all cigarette packets in the
territory of the Dominican Republic. This requi rement applies both to domestic and imported
cigarette packets. For domestic cigarettes, the stamp may be affixed during the production process
before the cellophane wrap is applied. In other words, domestic producers may affix the stamp on the
cigarette packets at their own premises. However, the effect of this requirement for imported
cigarettes is that the stamp can only be placed on th e cellophane of each cigarette packet after it is
imported into the Dominican Republic, but prior to its sale. Foreign producers are not allowed to
affix the stamp on their own premises abroad. Instead, the Dominican Republic requires that
imported cigarette packets be placed in a bonded warehouse or a warehouse under the control of the
Directorate General of Internal Taxes ( Dirección General de Impuestos Internos , DGII) in the
territory of the Dominican Republic. The stamp th en has to be affixed on the imported cigarette

packets in these warehouses in the presence of ta x inspectors. This requirement and their
administrative procedures are established by Ar ticle 37 of Decree 79-03 and Articles 1 and 2 of
Decree 130-02.
(d) The application of the Selective Consumption Tax for certain imported cigarettes
4.4 The Dominican Republic establishes a Selective Consumption Tax on certain products, such
as tobacco products. In order to apply the tax ra te to certain imported cigarettes, the Dominican
Republic determines the value of these products b ased on the retail selling price of the so-called
"nearest similar product". According to Article 367 (b) of the Tax Code, the determination of the
value of domestic cigarettes for the purpose of the ta x must be based on the retail selling price of each
brand, as provided in the survey. By contrast, the tax base for import ed cigarettes is the value of the
"nearest similar product on the domest ic market". There are no regulations in the Tax Code which
establish the criteria and procedures that should be used to determine the "n earest similar product on
the domestic market".
4.5 Furthermore, Article 3 of Regulation 79-03 reaffirms that the tax base for both domestic and
imported cigarettes is the retail selling price as dete rmined by the average market price in accordance
with the survey. However, not all imported cigare ttes are included in the survey and therefore, for
these products, the Dominican Republic uses the pr ice of the "nearest similar product". The
Dominican Republic has not published the criteria that it uses to determine the "nearest similar
product".
4.6 On the other hand, the General Rule 02-96 specifies that the tax base for the Selective
Consumption Tax for domestic goods sh all be determined on the basis of the price to the retailer of
the product. Pursuant to this provision, th e tax base for tobacco products, including domestic
cigarettes, is determined by increasing by 20 per cent the listed price of the cigarettes. The survey is
not used to establish the tax base for these domestic products.
4.7 Honduras exports to the Dominican Republic cigarettes of the brands Viceroy and Belmont.
For the purpose of applying the Selective Consumption Tax to Viceroy cigarettes, the Dominican
Republic bases the value of the imported product on what it considers to be the nearest similar product
in the domestic market. In this regard, the Domini can Republic disregards the retail selling price of
Viceroy as the relevant factor in determining the ta x base for applying the Selective Consumption
Tax. The Dominican Republic does not consider Líder cigarettes as the nearest similar product to
Viceroy cigarettes, even though they both sell for the sa me retail selling price. The result is that
Viceroy cigarettes are deemed to be selling at a retail price higher than the actual selling price and
therefore, are required to pay taxes based on this higher amount.
(e) The administration of the law for determining the tax base for cigarettes
4.8 Article 367(b) of the Tax Code, Article 3 of th e Regulation 79-03 and Article I of the General
Norm 02 96 are the relevant laws governing the ap plication of the Selective Consumption Tax on
cigarettes, particularly with r espect to the determination of th e "nearest similar product". The
determination of what is the n earest similar product is required fo r the imposition of the Selective
Consumption Tax on imported cigarettes. As noted above, the tax base for imported cigarettes is
determined by the value of the nearest similar product. However, the relevant laws do not contain any
criteria to determine what is th e "nearest similar product" in th e Dominican Republic's market.
Therefore, the Dominican Republic has wide scope to determine what is the "nearest similar product"
to certain brands of imported cigarettes, such as Viceroy.

(f) The lack of publication of the survey on which the Selective Consumption Tax is to be based
4.9 As noted above, Article 367(b) of the Tax C ode and Article 3 of the Regulation 79-03 both
require that the Central Bank of the Dominican Repub lic conducts a survey in order to determine the
retail selling price to be used as the tax base for the application of the Selective Consumption Tax.
4.10 The survey, which is supposed to reflect aver age prices, should be the primary source for the
determination of the retail selling price for cigarettes. Therefore, the information contained in the
survey is of critical importance to traders for the following reasons:
4.11 The retail selling price as determined by the survey should be used as the tax base for
domestic cigarettes. This amount s hould subsequently be used to de termine the tax base of imported
cigarettes which have not yet been included in the survey.
4.12 In addition, as imported goods may also be incl uded in the survey, the prices listed in the
survey would be the primary source for determini ng the tax base for the Selective Consumption Tax
to be applied for these products.
4.13 However, the Dominican Republic has failed to publish, or otherwise make available to
importers, any of these surveys. As a result, traders are not apprised of the basis upon which their
products will be taxed.
(g) The bond requirement for importers of cigarettes
4.14 Article 376 of the Tax Code requires that domest ic producers of alcohol and tobacco products
post a bond. Even though Article 376 of the Tax Code requires that only domestic producers post a
bond, Article 14 of Regulation 79-03 subsequently introduced a bond requirement for importers of
cigarettes.
4.15 There is a bond requirement for both domestic producers and importers. The purpose of this
bond requirement is ostensibly to ensure that the Selective Consumption Tax is paid. However, the
timing of when the Selective Consumption Tax must be settled with the gove rnment differs between
importers and domestic producers. An importer mu st liquidate and pay the Selective Consumption
Tax together with the corresponding customs duties at the moment that the products enter into the
Dominican Republic. However, domestic producers must settle the Selective Consumption Tax on
the 20
th day following the month in which the actual sale (or transfer) occurred.
4.16 It would appear that the bond is a security in th e event that the tax obligation is not properly
discharged by the domestic producer on the 20 th day in the month following the month in which the
actual sale (or transfer) occurred. However, as noted above, importers are required to pay the full
amount of the Selective Consumption Tax upon the importation of the product. Therefore, with
respect to the importers, there is no potential Se lective Consumption Tax liability that the bond
requirement would secure as the tax obligation has already been discharged.
4.17 In addition, the bond requiremen t is a fixed amount of RD$ 5 million that must be posted by
each importer and each domestic producer. In contr ast, the Selective Consumption Tax is dependent
upon variable factors such as monthly volumes of sales and changes in the retail selling price
according to market factors. Therefore, there is no direct relationship between the amount required to
be guaranteed (i.e. the fixed amount of the bond) an d the actual amount giving rise to the tax. These
two amounts are not commensurate.

2. Legal arguments:
(a) The surcharge is inconsistent with Article II:1(b) of the GATT
(i) The surcharge is a duty or charge other than an ordinary customs duty
4.18 The surcharge applies to both bound and unb ound items. In the Dominican Republic's
Schedule of Concessions, cigarettes which fall under th e 4-digit tariff heading 2402 have a bound rate
of 40 per cent. As the surcharge applies to the bou nd item of cigarettes, the surcharge falls within the
scope of Article II:1(b), second sentence, of the GATT.
4.19 Article 2 of Decree 646-03 refers to two differe nt and distinct types of amounts that are
payable: (i) the surcharge, and (ii) the customs dut y payable. The term "customs duty payable" on its
face comprises the obligation to pay all duties, including "ordinary customs duties". The obligation to
pay the surcharge – while this term is not specifical ly defined – arises concurrently with the customs
duty payable. It follows that the obligation to pay the surcharge is an obligation separate from that of
the obligation to pay the "customs duty", including or dinary customs duties. In other words, it is an
"other" duty or charge within the meaning of Ar ticle II:1(b), second sentence. The term "other"
means "existing besides or distinct from that or those already specified or implied; further,
additional". The placement of the term "transitio nal surcharge" beside the term "customs duty
payable" indicates that it is a distinct type of charge or duty. The surcharge is a "duty or charge" other
than an "ordinary customs duty" within the meaning of Article II:1(b), second sentence, of the GATT.
(ii) The surcharge is imposed on, or in connection with, importation
4.20 The surcharge is "…levied on the c.i.f value of [all] goods included in the Harmonized
Commodity Description and Coding System and which fall under the regime of customs clearance for
consumption" (emphasis added in the submission). It is only products that are imported that would
fall under "the regime of customs clearance for cons umption". Therefore, the surcharge is imposed
on, or in connection with, the importation of all goods.
(iii) The Dominican Republic did not record the surc harge in its Schedule of Concessions and the
surcharge is therefore inconsistent with Article II:1(b), second sentence, in the light of the
Understanding on Article II:1(b)
4.21 According to the Understanding on the Interp retation of Article II:1(b) of the General
Agreement on Tariffs and Trade 1994, as of 15 Apr il 1994, all WTO Members had to record all
charges and duties in their respective Schedules of Concessions. The Dominican Republic did not
record this surcharge. Indeed, as the surcharge did not exist as of 15 April 1994, it was not possible
for it to be recorded in the Dominican Republic's Schedule of Concessions.
(iv) The surcharge is in excess of the duties or charges imposed as of 15 April 1994
4.22 Article II:1(b), second sentence, read together with the Understanding, prohibits Members
after 15 April 1994 from imposing "other duties or ch arges" in excess of the binding in the "other
duties and charges" column of the Schedule. As the Dominican Republic did not record the surcharge
as an "other duty or charge" in its Schedule of Concessions, any surcharge that it now introduces must
be "in excess of" those set out and provided in its Schedule. It follows from the above that the
2 per cent surcharge is in excess of, and therefor e is inconsistent with, the Dominican Republic's
obligations under Article II:1(b), second sentence, of the GATT. Honduras submits that as the
surcharge is inconsistent with the specific obliga tion set out in Article II:1(b), second sentence, it is
consequently inconsistent with the general prohibition set out in Article II:1(a) of the GATT.

(b) The foreign exchange fee is inconsistent with Article II:1(b) of the GATT
(i) The foreign exchange fee is a duty or charge other than an ordinary customs duty
4.23 As noted above, the Dominican Republic imposes a foreign exchange fee on all imports at the
same time as it imposes the ordinary customs duties, namely, upon importation. The "ordinary
customs duties" are levied upon the entry of goods in to a customs territory. The foreign exchange fee
applies to both bound and unbound items. In th e Dominican Republic's Schedule of Concessions,
cigarettes which fall under the 4-digit tariff heading 2402 have a bound rate of 40 per cent. As the
foreign exchange fee applies to the bound item of ci garettes, the foreign exchange fee falls within the
scope of Article II:1(b), second sentence, of the GATT. As a result, the foreign exchange fee is a duty
or charge "other" than an ordinary customs duty. Article II:1(b) applies to "other duties or charges" of
any kind, whether they take the form of an "exchang e action" or a "trade action". For the purpose of
making a finding under Article II:1(b), therefore, the Panel need not decide whether the fee is an
"exchange action" or a "trade action" within the meaning of Article XV:4 of the GATT.
(ii) The foreign exchange fee is imposed on, or in connection with, importation
4.24 The First Resolution of 22 October 2003 states cl early that the foreign exchange fee referred
to in (amended) Paragraph 12 of the Seventeenth Resolution adopted by the Board on 24 January
1991 is a "foreign exchange fee on imports" (emphasis added). Furthermore, the foreign exchange fee
is collected by Customs at the time of importation, and is "computed on the value of the imports". As
it is applied on the value of imports and at the time of importation, the foreign exchange fee clearly is
a duty or charge other than "ordinary customs duti es" imposed on, or in connection with, importation,
within the meaning of Article II:1(b), second sentence.
(iii) The Dominican Republic did not record the foreign exchange fee in its Schedule of
Concessions and the fee is therefore inconsistent with Article II:1(b), second sentence, in the
light of the Understanding on the Interpretation of Article II:1(b) of the GATT
4.25 The Understanding requires that all duties or ch arges, other than ordinary customs duties,
must be recorded in a Member's Schedule of Concessions. Article II:1(b), second sentence, read
together with the Understanding, prohibits Memb ers after 15 April 1994 from imposing "duties or
charges" other than those that were recorded in the "other duties or charges" column of that Member's
Schedule. Honduras notes that the foreign exchange fee was never recorded as an "other duty or
charge" in the Dominican Republic's Schedule of Concessions. Therefore, Honduras submits that the
foreign exchange fee is inconsistent with Artic le II:1(b), second sentence, in the light of the
Understanding on Article II:1(b).
(iv) The current foreign exchange fee is in excess of th e duties or charges imposed as of 15
April 1994
4.26 If the Panel were to find that the imposition of the foreign exchange fee is WTO-consistent
notwithstanding the Dominican Republic's failure to record it as an "other duty or charge" in its
Schedule of Concessions, Honduras submits that it is nevertheless "in excess of" the rate applied as of
15 April 1994. The legislation establishing the fore ign exchange fee was enacted in 1991; it provided
that the fee would be levied at a rate of 2.5 per cent. Therefore, Honduras notes that the rate of
2.5 per cent that was applied before 15 April 1994 is lower than the rate of 10 per cent that is
currently applied. The foreign exchange fee is in consistent with Article II:1(b), second sentence, of
the GATT because it is imposed in excess of the Do minican Republic's recorded bindings in the
"other duties or charges" column in its Schedul e of Concessions. Honduras submits that the foreign
exchange fee is inconsistent with Article II: 1(a) and, based on the principle underlying the
relationship between Article II:1(a) and Article II:1(b), second sentence, it is consequently
inconsistent with Article II:1(a).

(c) The requirement to affix a stamp in the territo ry of the Dominican Republic is inconsistent
with Article III:4 of the GATT
4.27 The Appellate Body has stated that, in order to establish a violation of Article III:4, three
elements must be satisfied: "…that the imported and domestic products at issue are 'like products';
that the measure at issue is a 'law, regulation, or requirement affecting their internal sale, offering for
sale, purchase, transportation, distribution, or u se'; and that the imported products are accorded 'less
favourable' treatment than that accorded to like domestic products".12 These three elements are met.
(i) Imported and domestic cigarettes are "like products" within the meaning of Article III:4
4.28 Based on the four criteria stated in the GATT Working Party Report on Border Tax
Adjustments13, as followed by the Appellate Body in EC –Asbestos14, Honduras submits that imported
cigarettes and domestic cigarettes of all brands ar e like products. In general, both imported and
domestic cigarettes have the same physical proper ties (i.e. tobacco) and similar presentation; they
have the same end-use (i.e. they are smoked); th ey are interchangeable for consumers (e.g. many
consumers do switch from one brand to another); and; they are classified under the same tariff
heading.
(ii) The requirement of affixing a stamp on cigarette packets in the territory of the Dominican
Republic is a requirement that affects the internal sale of imported cigarettes
4.29 The requirement to affix a stamp on both im ported and domestic cigarettes is found in
Article 37 of the Regulation and Articles 1 and 2 of Decree 130-02. The fulfilment of this
requirement is a prerequisite for withdrawing the cigarettes from the warehouse in order that they may
be distributed and sold in the Dominican Republic a nd, therefore, affects the internal sale of imported
cigarettes.
(iii) The requirement of affixing a stamp in the territory of the Dominican Republic accords
treatment less favourable to imported cigarettes than that accorded to domestic cigarettes
4.30 The requirement of affixing a stamp in the territory of the Dominican Republic applies to both
domestic and imported cigarettes and is, as such, a fo rmally identical requirement. Nevertheless, it
has been recognised in GATT jurisprudence that "… there may be cases where application of formally
identical legal provisions would in practice accord less favourable treatment to imported products and
a contracting party might thus have to apply differe nt legal provisions to im ported products to ensure
that the treatment accorded them is in fact no less favourable…" 15 In the case at hand, the identical
requirement of affixing the stamp in the Domini can Republic imposes the following additional steps
and costs for importers of cigarettes. As the stamp must be affixed in the territory of the Dominican
Republic, imported cigarettes must undergo additional step s in order to comply with this requirement.
For domestic cigarettes, no additional steps are requ ired to so comply; the stamp may be affixed
during the production process prior to the final packag ing of the product. In contrast, as shown
below, in the case of imported cigarettes the affi xing of the stamp requires a separate process after
cigarettes have been produced and packed in the e xporting country. This additional process requires
the re-opening of boxes and cartons, the affixation of the stamps on the cigarette
packets (over the cellophane), and the repackaging of cartons and boxes.

12 Appellate Body Report, Korea – Various Measures on Beef, para. 133.
13 Report of the GATT Working Party on Border Tax Adjustments , adopted on 2 December 1970,
BISD 18S/97, L/3464, para. 18.
14 Appellate Body Report, EC –Asbestos, paras. 101-103.
15 GATT Panel Report, US – Section 337, para. 5.11. See also, GATT Panel Report, Canada –
Provincial Liquor Boards (US), paras. 5.30–5.31.

4.31 First, the importer must reopen the boxes and th en reopen the cigarette cartons in order to
remove the cigarette packets so that the stamp may be affixed on the cigarette packets. The sheets of
stamps have to be individually cut and then indivi dually glued onto the packets. Subsequently, the
cigarette packets have to be replaced in the car tons and then replaced in the boxes. All these
additional steps require the importer to hire additional labour to carry out these tasks in the Dominican
Republic. Honduras submitted photographs which provi de graphic evidence of the burdensome steps
that the importer has to undertake to comply with this requirement. Domestic producers, on the other
hand, do not have to carry out all these additional steps.
4.32 In addition, the fact that the stamp on imported cigarettes is placed over the cellophane
aesthetically detracts from the overall presentation of the final product. Cigarettes manufactured in
the Dominican Republic are allowed to have the st amp added to the packets before the cellophane
wrap is applied and during the production process. As a result, imported cigarettes cannot be as
attractively packaged as domestic cigarettes.
4.33 The costs to the importer of affixing the stamp in the territory of the Dominican Republic
amount to US$0.9 per thousand cigarettes; that is 9.70 per cent of the c.i.f. average price. Honduras
does not have access to the costs incurred by a domes tic producer in the Dominican Republic to affix
the stamp in the course of the production process. However, a report from Price Waterhouse Coopers
demonstrates that the cost for a cigarette producer in Honduras for affixing the stamp during the

Production
Affixing the stamp
by a machine in
the production
line

Packaging
DOMESTIC
GOODS
IMPORTED
GOODS

1. Production
6. Affixing the
 stamp manually
 with glue

2. Packaging
3. Unpackaging
 from boxes
8. Re-packaging
 into boxes
5. Cutting sheets
 of stamps
4. Unpackaging
 from cigarettes
 cartons
7. Re-packaging
 into cartons

overall production process is US$0.01 pe r thousand cigarettes; that is 0.1 per cent of the c.i.f. average
cost. It is reasonable to assume that these costs in terms of percentage would be the same for a
domestic producer in the Dominican Republic.
4.34 In the light of the foregoing analysis, Honduras submits that the requirement to affix the
stamp in the Dominican Republic modifies the conditions of competition for imported cigarettes in
the Dominican Republic to their detriment, and thus treats imported cigarettes less favourably.
Therefore, Honduras submits that the measure at issue is inconsistent with Article III:4 of the GATT.
(d) The application of the Selective Consump tion Tax for certain imported cigarettes is
inconsistent with Article III:2 of the GATT
4.35 Based on the methodology set out by the Appellate Body regarding the analysis of a claim
under Article III:2, first sentence, Honduras submits th at the measure at issue is inconsistent with
Article III:2 of the GATT for the reasons set out below.
(i) Domestic and imported cigarettes are "like produc ts" within the meaning of Article III:2, first
sentence
4.36 The Appellate Body has stated that it agrees "with the practice under the GATT 1947 of
determining whether imported and domestic products are 'like' on a case-by-case basis". 16 Honduras
has established above that imported and domestic ciga rettes are "like products". If the Panel were to
find that domestic and imported cigarettes were not like products, Honduras submits that domestic
and imported cigarettes are nevertheless directly competitive or substitutable and are not similarly
taxed in accordance with Article III:2 and Note Ad Article III:2 of the GATT.
(ii) Certain imported cigarettes are subject to in ternal taxes in excess of those applied to like
domestic products
4.37 The Dominican Republic treats like products wh ich sell for the same retail selling price
differently. In other words, the Dominican Repub lic establishes the tax base for certain imported
cigarettes such as Viceroy on the basis of what it determines to be the retail selling price of the
"nearest similar product", whereas it determines th e tax base for its domestic cigarettes such as Líder
and Marlboro on their actual retail selling prices. This di fference in approach in determining the tax
base has led to various complaints being filed with the courts in the Dominican Republic.
4.38 The difference in approach has resulted in lo wer-priced imported cigarettes being taxed at a
rate higher than their actual selling price. In practical terms, this means that cigarettes like Viceroy
which sell for RD$18 are taxed at a higher rate than the like domestic products, which sell for the
same retail selling price.
4.39 Honduras provides the following table to illustrate the retail selling price of the relevant
products:

16 Appellate Body Report, Japan – Alcoholic Beverages II, p. 20.

Brand Retail Selling Price Selective Consumption
Tax paid
 per cent Actual Tax
burden
Kent RD$ 22.00 RD$ 6.54 29.73 per cent
Marlboro RD$ 26.00 RD$ 7.73 29.73 per cent
Belmont RD$ 20.00 RD$ 6.13 30.65 per cent
Nacional RD$ 24.00 RD$ 7.36 30.65 per cent
Viceroy RD$ 18.00 RD$ 6.54 36.33 per cent
Líder RD$ 18.00 RD$ 5.34 29.66 per cent
 (Information applicable during the period of 17 March – 1 August 2003.)
4.40 From this table, it can be noted that the retail selling prices for Viceroy and Líder are the
same, but they are not taxed on the same basis.
4.41 Due to this difference in taxation, the Sel ective Consumption Tax applied to Honduras's
Viceroy cigarettes is in excess of the Selective Cons umption Tax applied to its like domestic product,
Líder. Viceroy cigarettes have a higher tax burden of 36.33 per cent as compared to the tax burden of
29.66 per cent for Líder. The measure at issue is therefore inconsistent with Article III:2, first
sentence, of the GATT.
(e) The failure to establish and/or apply transp arent and generally applicable criteria for
determining the value of imported cigarettes is inconsistent with Article X:3(a) of the GATT
4.42 The applicable provision is Article X:3(a) of the GATT. This provision applies to the
measures falling under the scope of Article X:1 of the GATT.
(i) The law governing the Selective Consumption Tax falls under Article X:1 of the GATT
4.43 Article 367 (b) of the Tax Code, Article 3 of th e Regulation and Article I of the General Rule
02-96 are "laws, regulations… of general applica tion… pertaining to… taxes or other charges".
Therefore, these measures fall under the scope of Article X:1 of the GATT.
(ii) The administration of the Selective Consum ption Tax is not conducted in a reasonable
manner
4.44 The Dominican Republic administers the provisions governing the Selective Consumption
Tax in a manner that is not reasonable; in particul ar, with respect to determination of the "nearest
similar product on the domestic market". Honduras submits that there is no adequate reason for the
Dominican Republic to disregard the actual retail selling price of Líder when determining the tax base
for Viceroy. As stated above, both Viceroy and Líder have the same retail selling price. The
Dominican Republic, however, relies on the price of Kent or Marlboro to determine the "nearest
similar" product to Viceroy in the Dominican Republic's market.
4.45 This unreasonable administration of the criteria to determine the "nearest similar product" to
Viceroy is inconsistent with Article X:3(a) of the GATT.
4.46 The determination of "nearest similar product" as one with a higher retail selling price leads
to the imposition of the Selective Consumption Tax on certain imported cigarettes in excess of like
domestic cigarettes. Therefore, this unreasonable administration of the laws and regulations governing
the Selective Consumption Tax, particularly the manner in which the "nearest similar product" is
determined, has an impact on the competitiveness of imported cigarettes.

(f) The failure to publish the surveys that are used to determine the Selective Consumption Tax is
inconsistent with Article X:1 of the GATT
(i) The surveys to be used to de termine the rates for the Selective Consumption Tax fall under
Article X:1
4.47 Article 3 of Regulation 79-03 confirms that the tax base for both domestic and imported
cigarettes is the retail selling price as determined by the average market price in accordance with the
survey. The surveys conducted by the Dominican Republic's Central Bank are part of the regulations
or administrative rulings of general application pertaining to the determination of the Selective
Consumption Tax. Therefore, the survey is a component of the legislation on the Selective
Consumption Tax, covered by Article X:1 of the GATT.
(ii) The surveys to be used to determine the Selective Consumption Tax have not been published
4.48 However, the survey has not been made publicly available. According to Article X:1, the
survey should have been published promptly in su ch a manner as to enable governments and traders
to become acquainted with them. A WTO Panel ha s stated that: "[i]ndeed, Article X:1 requires the
prompt publication of trade-related regul ation 'so as to enable governments and traders to become
acquainted with them.'"
17
4.49 However, the Dominican Republic has not pu blished the survey in order to enable
governments and traders to become acquainted with their content. Therefore, the Dominican
Republic has acted inconsistently with Article X:1.
(g) The requirement to post a bond is inconsistent with Article XI:1 of the GATT, or, in the
alternative, if the bond requirement is determined to be an internal measure, is inconsistent
with Article III:4 of the GATT
4.50 The applicable provision is Article XI:1 of the GATT. However, alternatively, if the bond
requirement were considered to be an internal meas ure, then the provisions of Article III:4, which is
cited above, would apply.
(i) The requirement to post a bond as stated in th e applicable law is a restriction inconsistent
with Article XI:1
4.51 In the light of Article 14 of the Regulation, importation would not be allowed unless the bond
requirement is complied with. Therefore, the bo nd requirement constitutes a restriction imposed on
the importation of cigarettes into the Dominican Republic. In GATT/WTO jurisprudence, Panels
have interpreted Article XI:1 as a comprehensive ba n of all types of limitations on the importation of
products other than duties, taxes and charges. The requirement has the effect of restricting imports
when the bond is not provided, in a manner inconsistent with Article XI:1.
(ii) If, in the alternative, the requirement to post the bond is an internal measure, it accords less
favourable treatment to imported cigarettes than that accorded to like domestic cigarettes,
and is therefore inconsistent with Article III:4
4.52 If the Panel were to consider that the requireme nt to post a bond is an internal measure, it
should find that it is inconsistent with Article III:4 of the GATT because it accords less favourable
treatment to imported cigarettes than that accorded to like domestic cigarettes. As stated above,
domestic producers have the obligation to pay the am ount of the tax on the 20th day of the month
following the month in which the original sale (or tran sfer) was made. In this situation, it appears that

17 Panel Report, Argentina – Hides and Leather, para. 11.68 (italics in text).

the bond is a security in the event that the tax obligation is not properly discharged. However,
importers have to pay the full amount of the Sel ective Consumption Tax upon the importation of the
product. Therefore, with respect to the importers, there is no Selective Consumption Tax liability that
the bond requirement would secure. In addition, the bond requirement is a fixed amount of
RD$ 5 million that must be posted by each importer a nd domestic producer. In contrast, the Selective
Consumption Tax is dependent upon variable factors such as monthly volumes of sales and variations
in the retail selling price according to market factors. Therefore, there is no direct relationship
between the amount required to be guaranteed (i .e. the fixed amount of the bond) and the actual
amount giving rise to the tax. These two amounts are not commensurate. This discrepancy is
illustrated by the fact that, as of December 2003, an importer that accounted for, say, 4 per cent of the
market would have had to pay RD$4.1 million a month for the Selective Consumption Tax, whereas it
would have had to post the bond for RD$5 million. By the same token, a domestic producer which
accounted for, say, 88 per cent of the market woul d have had to pay RD$91.5 million a month for the
Selective Consumption Tax, whereas it would have had to post the bond for RD$5 million.
4.53 In the alternative, Honduras submits that the me asure at issue for these reasons is inconsistent
with Article III:4 of the GATT.
B. F
IRST WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC
1. Introduction
4.54 The claims raised by Honduras target six measure s, which can be classified in one of the
following categories: (1) dead measures 18, (2) measures applied to enfor ce internal tax laws, and (3)
transitional measures on imports.
4.55 The first category, i.e. dead measures, includ es (a) the determination of the tax base of the
ad valorem Selective Consumption Tax (SCT) for cigarettes, and (b) the publication of the surveys of
average retail prices of cigarettes. Both measures were eliminated even before the Panel proceedings
commenced (on the day the Panel was established). Honduras's claims are moot.
4.56 The second category of measures, i.e. measures ap plied to enforce internal tax laws, includes
(a) the requirement to affix tax stamps on cigarett es in the territory of the Dominican Republic, and
(b) the requirement to post a bond to guarantee co mpliance with the tax laws of the Dominican
Republic. These measures apply equally to importe rs and to domestic producers. They do not
discriminate against imported products, and are not a pplied so as to afford protection to domestic
production.
4.57 The third category of measures, i.e. tran sitional measures on imports, includes (a) a
transitional surcharge on imports, a nd (b) a transitional foreign excha nge fee. Honduras's claims that
the surcharge and the exchange fee are inconsistent with the obligations of the Dominican Republic
are disproved by the recorded level of other duti es or charges in the Schedule of Concessions XXIII –
Dominican Republic.
2. Legal arguments
(a) Dead measures
4.58 Honduras's three claims concerning the Selec tive Consumption Tax for imported cigarettes
target measures that the Dominican Republic eliminat ed on the same day this Panel was established.
The claims are therefore moot and should be dismissed.

18 "Dead measures" was the terminol ogy used throughout these proceedings by the parties to refer to
measures no longer in existence, either because they had expired or had been withdrawn.

(i) Selective Consumption Tax
4.59 Honduras's claims under Articles III:2 and X:3(a) of the GATT concerning the SCT are based
on the former – and now outdated – provisions of Article 367 of th e Dominican Republic Tax Code.
Law 3-04 of 9 January 2004 (published on 14 Janua ry 2004) amended Articles 367 and 375 of the
Tax Code.19 Articles 367 and 375 of the Tax Code, as amended, establish a specific and identical tax
base and tax rate for the SCT for imported and domestic cigarettes – i.e. RD$0.48 per cigarette.20 The
Panel should dismiss Honduras's claims, as they are based on measures that no longer exist.
(ii) Survey of average retail prices
4.60 Honduras claims that the Dominican Republic acts inconsistently with Article X:1 of the
GATT because it has not published the Central Bank surveys that identify the retail price to be used as
the tax base for the SCT.21 However, the surveys were removed from Article 367 of the Tax Code by
Law 3-04 of 9 January 2004. Honduras's claim concerning the surveys is therefore moot.
Consequently, the Panel should dismiss this claim.
(b) Measures applied to guarantee compliance with internal tax laws
(i) The stamp requirement for imported and domestic cigarettes
4.61 There is nothing discriminatory about the stamp requirement specified in Article 37 of Decree
79-03 of 4 February 2003 and Article 2 of Decree 130-02 of 11 February 2002. The requirement to
affix stamps to cigarette packets, whether imported or produced domestically, in the territory of the
Dominican Republic and in the presence of official s from the DGII is a legitimate exercise of the
Dominican Republic's sovereign right to enforce its internal tax laws. Honduras has not presented
evidence to establish a prima facie case that the stamp requirement is inconsistent with Article III:4 of
the GATT.
The stamp requirement is consistent with Article III:4 of the GATT

4.62 Contrary to Honduras's arguments, the requirement to affix stamps does not accord less
favourable treatment to imported cigarettes nor is it applied so as to afford protection to the domestic
producer.
4.63 The requirement in Article 37 of Decree 79-03 and Articles 1 and 2 of Decree 130-02 to affix
tax stamps in the territory of the Dominican Republic is provided for and applied equally to importers
and domestic producers. According to Article 37 of Decree 79-03, both the domestic producer and
the importer of cigarettes are required to affix tax stamps in the presence and under the supervision of
the DGII inspector, whose job is to ensure that each packet of cigarettes that enters the stream of
commerce has paid its corresponding tax. The inspec tors are neither more lenient nor more stringent
on either the domestic producer or the importer. There is no evidence in this case of either de jure or
de facto discriminatory treatment on the part of the Dominican Republic.
4.64 The conditions of competition that Honduras complains about have not been "modified" by
the Dominican Republic. Rather, they are the result of inherent differences in the normal conditions
under which imported products compete with domestic products. The inherent differences that exist
between imported and domestic products mean that there can never be a perfect equality in the

19 The text of Law 3-04, dated 9 January 2004, published in the Official Journal of the Dominican
Republic on 14 January 2004, was submitted by the Dominican Republic as part of Exhibit DR-1.
20 The tax base of the SCT for cigarettes is provided for by Article 367(c) of the Tax Code, as amended
by Law 3-04. The tax rate of the SCT for cigarettes is pr ovided for by Article 375, Para. V, of the Tax Code, as
amended by Law 3-04.
21 First written submission of Honduras, 16 March 2004, paras. 108, 110.

conditions of competition in the market place between importers and domestic producers.
Article III:4 requires Members to refrain from modi fying or upsetting those conditions of competition
to the detriment of importers in a manner that a ffords protection to the domestic producers. It does
not require that Members modify the conditions of competition so as to compensate for inherent
differences between imported and domestic products a nd ensure perfect equality in the conditions of
competition. The essence of Honduras's argument is that any cost associated with the performance of
legitimate regulations must be borne by the State.
4.65 The examination of whether a measure involves "less favourable treatment" of imported
products within the meaning of Article III:4 of the GATT 1994 "must be grounded in close scrutiny of
the 'fundamental thrust and effect of the measure itself'".
22 The thrust of the me asure is to enforce the
tax laws of the Dominican Republic and avoid the endemic problem of trade in smuggled cigarettes,
which has been estimated to lead to US$25-30 billion in total lost tax revenue by governments around
the world annually.23
4.66 The additional costs that Honduras points to in its first written submission are costs associated
with compliance with non-discriminatory internal measures. Also, many of the "additional steps" that
Honduras refers to are either avoidable or are steps that domestic producers also have to perform. In
any event, the effect that the measure has on im porters is negligible. Imports by the Honduran
cigarette producer British American Tobacco (BAT) into the Dominican Republic increased by more
than 80 per cent in value in 2003, compared with the previous year, from US$454,497 to
US$818,307.
24
4.67 The Appellate Body and Panels have held co nsistently that the general principle in
Article III:1 informs the other paragraphs of Ar ticle III, including paragraph 4, and guides its
interpretation.25 The Panel must determine, therefore, on the basis of the evidence submitted by the
complainant, whether the measure has "protective a pplication", i.e. is it applied so as to afford
protection to domestic producers.26
4.68 In this case, an examination of the design, architecture, and revealing structure of the
requirement to affix a stamp in the territory of th e Dominican Republic reveals that the measure is not
applied so as to afford protection. 27 That conclusion is borne out by the following relevant facts and
circumstances, which must be given full consideration:
(a) The tax stamp is a legitimate, interna tionally-recognized method to prevent and
stymie trade in smuggled cigarettes and the resulting loss of tax revenue.
(b) The exact same requirement to affix the tax stamps in the territory of the Dominican
Republic is imposed on both domestic producers and importers.28
(c) The effective enforcement of the tax stamp legislation requires the presence of
inspectors from the DGII at the producti on facilities of domestic producers and the
facilities of importers of cigarettes at the time the stamps are affixed.29

22 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 215.
23 Framework Convention Alliance, "The FCTC a nd Tobacco Smuggling: NGO Briefing for the
International Conference on Illicit Tr ade in Tobacco", New York, 30 July – 1 August 2002, submitted by the
Dominican Republic as Exhibit DR-4.
24 Statistics regarding imports made by the firm British American Tobacco (BAT) – República
Dominicana, January – December 2003, submitted by the Dominican Republic as Exhibit DR-5.
25 Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 205; Appellate Body Report, EC –
Asbestos, paras. 93, 98; Panel Report, Canada – Periodicals, para. 5.37.
26 Appellate Body Report, Japan – Alcoholic Beverages II, p. 18.
27 Cf., Ibid., p. 29.
28 Decree 130-02, supra note 9, Articles 1 and 2.
29 See Decree 79-03, supra note 8, Article 37.

(d) The Dominican Republic has neither the ri ght nor the resources to relocate DGII
officials to foreign countries to enforce th e laws of the Dominican Republic abroad
and outside of its jurisdiction.
(e) The costs of complying with legitimate a nd non-discriminatory laws and regulations
in the territory of the State enforcing su ch laws are inherent in the conduct of
international trade. The cost to the importer of Honduran cigarettes BAT of
complying with the Dominican Republic tax regulation is estimated at US$65,641.30
(f) There is concrete evidence in the Dominican Republic that allowing tax stamps to be
shipped and affixed abroad results in forgery of such tax stamps and smuggling of the
products in question.
31
(g) The alleged associated cost of complying with the stamp requirement is a minimal
expense that does not have a protective or discriminatory effect on the competitive
conditions of importers of cigarettes in the Dominican Republic.
(h) The tax stamp has no protective effect in practice, as demonstrated by the significant
increase in imports of cigarettes by BAT from Honduras and elsewhere into the
Dominican Republic (more than 80 per cent in value in 2003, compared with the
previous year, from US$454,497 to US$818,307).
(i) The Dominican Republic has the inherent a nd fundamental sovereign right to enforce
its laws within its own territory.
(j) The Dominican Republic has the inherent a nd fundamental sovereign right to set the
level of enforcement that it deems appropriate.
32
4.69 Accepting Honduras's claim against the stamp requirement would leave the Dominican
Republic with one of the following options: (a) se nd DGII inspectors to foreign countries to control
the affixation of stamps in foreign producers' plants ; or (b) lower its enforcement standard and allow
foreign producers to affix stamps abroad without the supervision of the DGII.
4.70 The Dominican Republic cannot presume to ha ve jurisdiction to prescribe nor enforce
Decrees 79-03 and 130-02 outside of its territory. A state cannot take measures or exercise its power
in any form on the territory of another state by wa y of enforcement of nationa l laws, except by virtue
of a permissive rule to the contrary.33
4.71 On the other hand, the Dominican Republic does not have the resources necessary to send
DGII inspectors to Honduras (the annual cost to the Dominican Republic of flying one DGII inspector
to Tegucigalpa every day to supervise that ac tivity would be approximately US$151,680, or
US$168,980 in the case of San Pedro Sula) 34, or to any city of a WTO Member where production for
export to the Dominican Republic takes place -in accor dance with Article I of the GATT- to ensure
that the stamps are affixed to the cigarette packets in accordance with Decrees 79-03 and 130-02.

30 Calculation by the Dominican Republic, based on official statistics of imports of BAT from Honduras
for 2003 and on Honduras's own estimate of costs in para. 82 of its first written submission.
31 See information submitted by the Dominican Republic as Exhibit DR-8.
32 Appellate Body Report, Korea – Various Measures on Beef, para. 176.
33 See S.S. Lotus (France v. Turkey) , P.C.I.J Ser. A No. 10; Ian Brownlie, Principles of Public
International Law, Fifth Edition, Oxford University Press, 1998, p. 310.
34 See Exhibit DR-7.

4.72 The remaining regulatory "option" that would be theoretically available to the Dominican
Republic would be to allow foreign producers to affi x stamps abroad without the supervision of the
DGII. As experience has shown, that would mean that the Dominican Republic would have to lower
its desired level of enforcement. The Appellate Bo dy has recognized, however, that "[i]t is not open
to doubt that Members of the WTO have the ri ght to determine for themselves the level of
enforcement of their WTO-consistent laws and regulations".
35
(ii) The bond requirement for domestic and imported cigarettes
4.73 The bond requirement is a non-discriminatory internal measure. It is neither a restriction on
importation subject to Article XI:1 nor discriminatory under Article III:4 of the GATT.
4.74 The Panel in US – Certain EC Products recognized the right of Members to require bonds as
an "enforcement mechanism" that guarantees the performance of internal regulations.36
The bond requirement is outside the scope of Article XI:1 of the GATT
4.75 Contrary to Honduras's claim, the requirement to post a bond is not a restriction imposed on
the importation of cigarettes into the territory of the Dominican Republic, and it is therefore outside
the scope of Article XI:1. Rather, the bond requirem ent is an internal measu re applied in accordance
with Article III:4.
4.76 Article XI:1 applies to measures that impose a prohibition or restriction "on the importation"
of a product. Article III covers measures that are applied to both impor ted and domestic products
equally. Honduras acknowledges that the bond is app lied identically to importers and to domestic
producers of cigarettes. Article 14 of Decree 79-03 explicitly notes that under the Dominican
Republic's regulations both domestic producers and importers of ciga rettes must post a bond of RD$5
million.
37 The fact that the bond is not enforced at the time or point of importation in the case of
imported cigarettes is further evidence that the bond requirement is not a measure "on the
importation" of a product. It is, therefore, an inte rnal measure within the scope of Article III:4, not
Article XI:1.
The bond requirement is consistent with Article III:4 of the GATT
4.77 There is no explanation of how, in the view of Honduras, the bond modifies the conditions of
competition in the Dominican Republic to the detrimen t of imported cigarettes. There is also no
indication of how the bond is applie d to imported or to domestic cigare ttes so as to afford protection
to domestic production.
4.78 Contrary to Honduras's assertion, the bond does secure compliance by importers of their tax
obligations, including the SCT. The fact that the importer is required to pay the SCT upon
importation does not mean that no tax liability can arise after cigarettes have cleared customs.
4.79 It is often the case that the SCT originally assessed at the time of importation is insufficient to
cover the tax liability of the importer. The Tax Auth ority of the Dominican Republic retains the right
to conduct that reassessment and adjustment w ithin a maximum of three years after the initial
payment of the relevant tax. 38 This right to reassess tax liquidation applies to importers and domestic
producers equally.

35 Appellate Body Report, Korea – Various Measures on Beef, para. 176.
36 Panel Report, US –Certain EC Products, para. 6.43.
37 First written submission of Honduras, 16 March 2004, para. 4.
38 Law 11-92, supra note 10, Article 21; Law 3489, Article 118, submitted by the Dominican Republic
as Exhibit DR-11.

4.80 Moreover, although Article 376 of the Tax Code a ppears to refer only to the SCT, in practice
the Tax Authority of the Dominican Republic treats the bond as a guarantee of compliance with other
internal tax obligations incumbent on the domestic producer and the importer of cigarettes.
39
4.81 The assertion by Honduras that there is no tax lia bility for importers that the bond can secure
is in any case legally irrelevant for purposes of an examination under Article III:4. Furthermore, even
if the timing of the payment of the SCT was legally relevant, which it is not, the issue is outside the
terms of reference of the Panel.
4.82 Honduras has also not explained how a specific am ount that applies equally to importers and
to domestic producers accords treatment less favourable to importers than to domestic producers. The
absence of a so-called "direct relationship" between the amount of the bond and the underlying
obligation it guarantees applies equally to domestic producers and to importers. Honduras appears to
suggest that any bond for a specific amount th at guarantees payment of a variable amount is
inconsistent with Article III:4 of the GATT.
4.83 Finally, the bond requirement is not applied by the Dominican Republic "so as to afford
protection" to domestic producers of cigarettes. Th e design, architecture, and revealing structure of
the bond requirement in Article 14 of Decree 79-03 conf irms that the measure is not protectionist in
scope, application, or effect.
(iii) The requirement to affix stamps in the t erritory of the Dominican Republic and the
requirement to post a bond are justified by Article XX(d) of the GATT
4.84 Should the Panel find the Dominican Republic 's stamp and/or bond requirements are
inconsistent with other provisions of the GA TT, it should nevertheless find these measures are
justified because they are necessary to secure compli ance with laws or regulations that are not GATT
inconsistent in accordance with Article XX(d) a nd they are not applied in a manner that would
constitute a means of arbitrary or unjustifiabl e discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade, in accordance with the chapeau of
Article XX.40
The requirement to affix stamps in the territo ry of the Dominican Republic is justified by
Article XX(d) of the GATT
4.85 The Dominican Republic's stamp requirement sa tisfies the requirements of Article XX(d) of
the GATT.
4.86 First, the stamp requirement secures compliance with other Dominican Republic tax laws and
regulations; particularly, the Dominican Republic Ta x Code, including but not limited to the SCT for
cigarettes. The stamp requirement is specifically under the supervision of the DGII, who is charged
with securing compliance with the Dominican Republic Tax Code. The stamp requirement also helps
prevent cigarette smuggling, which is a widespread problem intimately linked to tax compliance.
4.87 Second, the Dominican Republic Tax Code is consistent with the GATT; and Honduras has
not challenged the GATT-consistency of the Tax Code. Moreover, the SCT on cigarettes, as amended
by Law 3-04 of 9 January 2004, is consistent with the GATT 41, and this measure is not at issue in this
case.

39 Letter from the Director General of Internal Taxes, dated 12 April 2004, submitted by the Dominican
Republic as Exhibit DR-12.
40 Appellate Body Report, US – Gasoline, p. 22.
41 Law 3-04, supra note 19.

4.88 Third, the stamp requirement is "necessary" to secure compliance with the Dominican
Republic Tax Code and prevent ciga rette smuggling. A measure need not be "indispensable" or "of
absolute necessity" to be "necessary" w ithin the meaning of Article XX(d).
42 The contribution made
by the measure to law enforcement, the importance of the common values at issue, and the impact on
imports or exports must all be considered. 43 The greater the contributio n to these factors, the more
likely a measure is to be "necessary".44
4.89 The stamp requirement contributes greatly to law enforcement because it allows Dominican
Republic tax authorities to monitor the placement of stamps on cigarette cartons to ensure compliance
with the Dominican Republic Tax Code and preven t cigarette smuggling. A WTO panel recognized
that tax evasion could be addressed through prev ention techniques, not solely through repressive
enforcement strategies.45
4.90 There is also international agreement that tax stamps are necessary to prevent cigarette
smuggling. The International Conference on Illicit Tobacco Trade (ICITT) has identified tax stamps
as a method of labelling that is necessary to constrain distribution of contraband. 46 The World Health
Organization has also stressed the importance of marking cigarette packets.47
4.91 Without strict enforcement of its tax laws, the Dominican Republic would face more serious
problems of smuggling and tax evasion. Evidence shows that where tax stamps for alcohol are
permitted to be affixed abroad, there is a greater risk of smuggling and tax evasion, including through
forgery of tax stamps.48
4.92 In addition, the slight impact that the measu re has on imported cigare ttes further supports the
conclusion that the stamp requirement is "necessary" to secure compliance with the tax laws of the
Dominican Republic. This slight impact is evidenced by the US$65,641 per year estimated cost to the
importer of Honduran cigarettes BAT of affixing tax stamps to cigarettes imported from Honduras,
and the 80 per cent increase of imports by BAT into the Dominican Republic in 2003, compared with
the previous year.49 Moreover, any additional impact on imports arises from the inherent differences
between imports and domestically manufactured goods.
4.93 The Dominican Republic has no reasonable altern atives to prevent tax evasion and cigarette
smuggling that would meet the level of enforcement set by the Dominican Republic. The Dominican
Republic has the right to determine the level of enforcement of its WTO consistent laws and
regulations
50, and it has done so in a manner that is iden tical for imported and domestically produced
cigarettes. Moreover, it is impractical for the Dominican Republic to send its tax authorities abroad to
monitor the affixation of stamps.
4.94 Thus, the stamp requirement is "necessary" within the meaning of Article XX(d) of the
GATT.

42 Appellate Body Report, Korea – Various Measures on Beef, para. 161.
43 Ibid., para. 164.
44 Ibid., para. 163.
45 Panel Report, Argentina – Hides and Leather, para. 11.305.
46 International Conference on Illicit Tobacco Trade, Chairp erson's Executive Summary,
30 July-1 August 2002, submitted by the Dominican Republic as Exhibit DR-9.
47 WHO Framework Convention on Tobacco Control (21 May 2003), Article 15:2, submitted by the
Dominican Republic as Exhibit DR-17.
48 See information submitted by the Dominican Republic as Exhibit DR-8.
49 Statistics regarding imports by the firm British American Tobacco – República Dominicana , supra
note 24.
50 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

The stamp requirement also satisfies the chapeau of Article XX
4.95 First, the stamp requirement is not applied in a manner that discriminates between countries
where the same conditions prevail. Di scrimination within the meaning of the chapeau does not refer
to the same standard of discrimination under ot her provisions of the GATT, including Article III 51, so
the Panel must examine discrimination under the chapeau independently from its examination under
Article III:4. There is no evidence that the st amp requirement is applied in a manner that
discriminates between different countries supplying cigarettes to the Dominican Republic, or between
importers and domestic producers of cigarettes, as all cigarette producers are required to affix stamps
in the territory of the Dominican Republic.
4.96 Second, any alleged discrimination is neither arbitrary nor unjustifiable. For discrimination to
be arbitrary, the measure must be applied inconsiste ntly at the will or discretion of a legal authority 52,
or its application must result in a denial of basic fairness and due process. 53 The stamp requirement
does not meet this definition of arbitrary. The manne r in which the measure is to be applied is clearly
stipulated in the text, so it is transparent and does not deny basic fairness and due process.
4.97 For discrimination to be unjustifiable, it mu st be not reasonable, not defensible, not
unavoidable, or coercive. 54 The stamp requirement does not meet this definition of unjustifiable
because any discrimination in its application between importers and domestic producers of cigarettes
arises from the inherent differences between imports and domestically produced goods.
4.98 Third, the stamp requirement is not applied in a manner that constitutes a disguised restriction
on international trade. A disguised restriction on international trade includes both concealed and
unconcealed measures, as well as disguised discrimina tion. The analysis in determining whether the
application of a measure constitutes arbitrary or unju stifiable discrimination also factors into whether
such application is a disguised restriction on international trade. 55 The intention of a measure to
pursue trade-restrictive objectives is also relevant. 56 The stamp requirement does not satisfy this
definition. It is neither concealed nor unannounced. Moreover, it is not arbitrary or unjustifiable as it
has not affected trade flows. Finally, the design, architecture, and revealing structure of the stamp
requirement show no intent to pursue trade-restrictive objectives.
4.99 As the stamp requirement satisfies bot h Article XX(d) of the GATT and the chapeau of
Article XX, it is justified by Article XX(d).
The requirement to post a bond is justified by Article XX(d) of the GATT
4.100 Should the Panel find that the Dominican Republic's requirement to post a bond is
inconsistent with Article XI:1 or Article III:4 of the GATT, it should also find that the requirement is
justified by the general exception provided for in Ar ticle XX(d) of the GATT, since that requirement
(a) falls within the scope of paragraph (d) of Article XX of the GATT, and (b) satisfies the chapeau of
Article XX.
4.101 The Dominican Republic's bond requirement is "n ecessary" within the meaning of that term
as interpreted by WTO jurisprudence. First, it is undeniable that bonds are effective instruments to
prevent tax evasion. Second, tax compliance and the prevention of tax evasion are extremely

51 Appellate Body Report, US –Shrimp, para. 150.
52 The New Shorter Oxford English Dictionary , Fourth Edition, Oxford Univer sity Press, 1993, Vol. I,
p. 107.
53 Appellate Body Report, US – Shrimp, paras. 177-184.
54 The New Shorter Oxford English Dictionary , supra note 52, Vol. I, p. 1,466, and Vol. II, p. 3,493.
Panel Report, Argentina – Hides and Leather, paras. 11.324-11.325, 11.330.
55 Panel Report, EC – Asbestos, paras. 8.234-8.235, 8.237.
56 Ibid., para. 8.236.

important global interests and sovereign rights for any state. Third, the bond requirement impacts
importers and domestic producers equally, as it is fixed at RD$5 million for all importers and
domestic producers of cigarettes. Therefore, this requirement remains "necessary" within the meaning
of Article XX(d) of the GATT. Also, as is the case with the tax stamp requirement, the bond
requirement has not had any discernable impact on the imports of cigarettes by BAT in the Dominican
Republic, which have increased significantly in the last year.
4.102 The purpose of the bond requirement is to secure the payment of tax obligations arising from
the Tax Code – i.e. it is a state measure intended to prevent tax evasion. The bond guarantees the full
payment of the tax liability in cases where ther e has been an under-payment at the time of
importation. Moreover, the Directorate General of Internal Taxes (DGII) relies on the bond under
Article 376 to secure compliance with other internal ta xes that are not paid before the products clear
customs.
57
4.103 Tax authorities cannot solely rely on repressive tax enforcement strategies, but must direct
efforts toward preventing tax evasion in the first place. 58 The Dominican Republic's bond
requirement is precisely the type of measure that is indispensable for avoiding tax evasion.
Furthermore, there is international consensus th at bonds are necessary to prevent the smuggling of
cigarettes.
4.104 The fiscal laws and regulations of the Domini can Republic, including those relating to the
SCT, are consistent with the provisions of the GATT.
The requirement to post a bond also satisfies the chapeau of Article XX
4.105 The requirement to post a bond is not applied in a discriminatory manner within the meaning
of the chapeau of Article XX. However, should the Panel find that the bond is applied in a
discriminatory manner, it should also find that such discrimination is neither arbitrary nor
unjustifiable. Also, the requirement is not applied in a manner that constitutes a disguised restriction
on international trade.
4.106 First, there is no evidence that the bond requirement discriminates between different countries
supplying cigarettes to the Dominican Republic, or between importers a nd domestic producers of
cigarettes. Moreover, the application of this re quirement has not resulted in discrimination against
importers of cigarettes, as the volume of ciga rette imports from Honduras has actually increased
significantly.
4.107 Second, the Dominican Republic Tax Code has been published, and therefore the Dominican
Republic's bond requirement is transparent. There is no denial of basic fairness or due process in the
administration of this bond requirement. Moreover, there is no authority in the Tax Code for any
government administrator to waive th is bond requirement at his or her will or discretion, nor has this
bond requirement been waived for any importer or domestic producer of cigarettes. Thus, there has
been no arbitrary discrimination in the application of its bond requirement to imported cigarettes.
4.108 Third, there is no imposition of an additiona l tax burden on importers in this case. The
amount of the bond, the commercial cost of posting the bond, and the main obligation that the bond
guarantees, are all identical for both importers and dom estic producers. In any event, to the extent
there is any "discrimination" resulting from the fact that importers must post this bond at the border,
such discrimination is foreseen and permitted by the GATT, as it is the result of the additional steps
inherent in enforcing internal measures at the border. 59 There is, therefore, no unjustifiable

57 Letter from the Director General of Internal Taxes, supra note 39.
58 Ibid.
59 See Note Ad Article III of the GATT.

discrimination in the application of the Do minican Republic's bond requirement to imported
cigarettes.
4.109 Finally, the application of the Dominican Repub lic's requirement that importers and domestic
manufacturers of tobacco products post a bond is not a "disguised restriction on international trade".
The bond requirement is not concealed or unannounced . It is published and available for all to see in
Article 376 of the Tax Code and Article 14 of Re gulation 79-03. It is not discriminatory, and
therefore it is not a disguised restriction. Also, the design, architecture, and revealing structure of the
Dominican Republic's bond requirement show no prot ective application or intent to pursue trade-
restrictive objectives.
4.110 In conclusion, the Dominican Republic's require ment to post a bond is a measure that is
necessary to secure compliance with the Dominican Republic Tax Code, which itself is consistent
with the GATT. This requirement is not applied in a manner that constitutes either arbitrary or
unjustifiable discrimination between countries where the same conditions prevail, or a disguised
restriction on international trade. Consequently, even if the Panel finds that this requirement is
inconsistent with Article XI:1 or Article III:4 of the GATT, it must nevertheless find that this
requirement is justified by Article XX(d) of the GATT.
(c) Temporary measures imposed on imports
(i) The transitional surcharge is consistent with Article II:1 of the GATT
4.111 Decree 646-03 of 30 June 2003, is no longer in fo rce. It has been replaced by Law 2-04 of
4 January 2004 – enacted before the Panel was established – which establishes a transitional surcharge
of 2 per cent on imports.
60 (The Dominican Republic will rebut Honduras's claim against the
transitional surcharge as if it had addressed Law 2-04 of 4 January 2004 instead of Decree 646-03 of
30 June 2003. Nevertheless, the Dominican Republic does not waive its right to argue that Law 2-04
of 4 January 2004 is not within the terms of reference of the Panel.)
Honduras erroneously interprets Article II:1(a) of the GATT
4.112 Honduras misinterprets Article II:1(a) of the GATT. Article II:1(a) only prohibits less
favourable treatment than provided for by each Me mber's Schedule, and as each Schedule records
both ordinary customs duties and ODCs, the trans itional surcharge cannot be inconsistent with
Article II:1(a) solely by virtue of being a levy in addition to ordinary customs duties.
4.113 As Honduras's argument for inconsistency with Ar ticle II:1(a) derives from and is dependent
on its claim that the transitional surcharge is inc onsistent with Article II:1(b), second sentence, the
Dominican Republic need not separately rebut Honduras' s claim that this measure is inconsistent with
Article II:1(a).
The Dominican Republic properly recorded ODCs in its Schedule of Concessions
4.114 Contrary to Honduras's contentions, the Do minican Republic did properly record ODCs
applied to cigarettes as of 15 April 1994 in its Schedule. The Dominican Republic's Schedule XXIII
lists an ODC level of 30 per cent for tariff heading 2402. 61 Since the total level of ODCs currently

60 The text of Law 2-04, dated 6 January 2004, published in the Official Journal of the Dominican
Republic on 14 January 2004, was submitted by the Dominican Republic as part of Exhibit DR-1.
61 Preparatory Committee for the World Trade Organization, "Additions to Schedules Annexed to the
Marrakesh Protocol to the GATT 1994, Schedule XXIII – Dominican Republic", G/SP/3, 12 October 1994,
submitted by the Dominican Republic as Exhibit DR-19.

imposed by the Dominican Republic on cigarettes, in cluding the transitional surcharge, is less than
30 per cent, the transitional surcharge is consistent with Article II:1(b), second sentence.
(ii) The Dominican Republic has the right to maintain the Foreign Exchange Fee
The transitional Foreign Exchange Fee is justified by Article XV:9(a) of the GATT

4.115 The Dominican Republic has the right under Ar ticle XV:9(a) of the GATT to impose the
foreign exchange fee established by the decision of the Monetary Board of 22 October 2003. Where a
Member implements exchange restrictions or ex change controls that are consistent with the
International Monetary Fund Articles, those excha nge measures cannot be the basis for a finding of
violation of the GATT.
4.116 The transitional foreign exchange fee is an exch ange restriction within the jurisdiction of the
IMF, not a charge on imports within the jurisdiction of the GATT. It is provided for in a regulation of
the Dominican Republic monetary authorities, not a regulation of the trade or customs authorities, and
it applies to exchange transactions, not to import transactions as such. An exchange charge can
legitimately be levied only on imports, as a means of implementing a multiple exchange rate system;
if so, that does not alter the fact that the nature of the charge is an exchange charge, and not an import
charge.
4.117 The practice of the GATT 1947, following the agreed standards of the IMF, was to determine
whether a measure was an exchange measure not on th e basis of the purpose or effect of the measure
in question, but by applying the formal criter ion of whether the measure involved a direct
governmental limitation on the availability or use of exchange as such. The fo reign exchange fee is
an exchange measure because it is a direct governme ntal limitation on the availability or use of
exchange as such. It would also qualify as an "e xchange control" in the sense of Article XV:9(a),
since it effectively and legitimately requires all payments to be channe lled through the banking
system.
4.118 The foreign exchange fee is being used by the Dominican Republic "in accordance with" the
Articles of Agreement of the IMF, as provided in Article XV:9(a). The IMF was aware of the
Dominican Republic's non-unified exchange rate and approved its retention until the end of
December 2003. On 11 February 2004, the IMF Ex ecutive Board completed its first review of the
Dominican Republic's performance under the 29 Au gust 2003 stand-by arrangement, and approved
the Dominican Republic's request to waive the no n-observance of structural performance criteria
regarding, inter alia , the unification of the foreign exchange market, the continuous performance
criteria concerning accumulation of external arrears, exchange rate restrictions, and multiple currency
practices.62
The transitional Foreign Exchange Fee is consistent with Article II:1 of the GATT
4.119 Even if the Panel finds that the transitional fo reign exchange fee is not an exchange measure
justified by Article XV:9(a), the claim that it is inco nsistent with Article II:1 must still fail because it
is within the level of ODCs recorded in the Dominican Republic's Schedule. 63 Through its
rectification of 14 September 1994, the Dominican Re public recorded in its Schedule XXIII the list of
ODCs "applied by the Dominican Republic as of April 1994". According to that Schedule, a
30 per cent level of ODCs applied to cigarettes as of April 1994.
64 No Member, including Honduras,

62 International Monetary Fund Press Release No. 04/23, 11 February 2004, text at
http://www.imf.org/external/np/sec/pr/2004/pr0423.htm (visited on 12 April 2004), submitted by the Dominican
Republic as Exhibit DR-27.
63 Additions to Schedules, Schedule XXIII – Dominican Republic, G/SP/3, supra note 61.
64 Ibid.

notified any objection to the list of ODCs recorded by the Dominican Republic. Since the total level
of ODCs currently imposed by the Dominican Repub lic on cigarettes, including the foreign exchange
fee, is less than 30 per cent, the transitional fore ign exchange fee must be found in conformity with
Article II:1(b), second sentence.
4.120 The Dominican Republic has rebutted Honduras's cl aim that the transitional foreign exchange
fee is inconsistent with Article II:1(b), second sente nce. Therefore, Honduras' s claim that the foreign
exchange fee is "consequently" inconsistent with Article II:1(a) must also be dismissed.
3. Conclusion
4.121 For the reasons stated above, the Dominican Republic requests the Panel to dismiss the claims
made by Honduras in its first written submission of 16 March 2004. In particular, the Dominican
Republic requests that the Panel:
(a) Dismiss the claim that the determination of the tax base of the Selective Consumption
Tax levied on imported cigarettes is inconsistent with Articles III:2 of the GATT.
(b) Dismiss the claim that the manner in whic h the Dominican Republic administers its
provisions governing the SCT is inconsistent with Article X:3(a) of the GATT.
(c) Dismiss the claim that the surveys that iden tify the retail selling price to be used as
the tax base for the SCT are inconsistent with Article X:1 of the GATT.
(d) Dismiss the claim that the requirement to affix a tax stamp in the territory of the
Dominican Republic is inconsistent with Article III:4 of the GATT. Nevertheless,
should the Panel find that this requirement is inconsistent with Article III:4, the
Dominican Republic requests that the Panel find that the requirement is justified by
the general exception in Article XX(d) of the GATT.
(e) Dismiss the claim that the requirement th at importers of cigarettes post a bond is
inconsistent with Article XI of the GATT or , in the alternative, with Article III:4 of
the GATT. Nevertheless, should the Panel fi nd that this requirement is inconsistent
with either Article XI or Article III:4, the Dominican Republic requests that the Panel
find that the requirement is justified by th e general exception in Article XX(d) of the
GATT.
(f) Dismiss the claim that the transitional surc harge on imports is inconsistent with
Article II:1 of the GATT.
(g) Dismiss the claim that the transitional foreign exchange fee is inconsistent with
Article II:1 of the GATT or find that it is an exchange measure justified by
Article XV:9(a) of the GATT.
C. ORAL STATEMENT OF HONDURAS AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
4.122 This dispute is not just about cigarettes. Its outcome could have broa der implications on all
products, not just cigarettes.
4.123 Honduras submitted that the transitional surcharge is inconsistent with Article II:1(b), and
consequently with Article II:1(a) of the GATT. In response, the Dominican Republic alleges that its
Schedule of Concessions "…lists an ODC level of 30 per cent for tariff heading 2402...", concluding
that "...as the properly recorded level of ODCs imposed on cigarettes as of 15 April 1994 is
30 per cent, and the total level of ODCs currently imposed by the Dominican Republic on cigarettes,

including the transitional surcharge, is less than 30 per cent, the transitional surcharge is consistent
with Article II:1(b), second sentence". In support of this allegation, the Dominican Republic presents
WTO Doc. No. G/SP/3. This document and Law 11-92 of the Dominican Republic (in force as of 15
April 1994) confirm that what the Dominican Re public had inscribed in Doc. No. G/SP/3, under
"other duties or charges" was the Selective Cons umption Tax, an internal tax levied on selected
products, both domestic and imported.
4.124 However, even if the recordin g of the Selective Consumption Tax engendered legal effects,
then the Dominican Republic has always acted and con tinues to act inconsistently with Article II:1(b)
of the GATT because (i) the Selective Consumption Tax is imposed on selected products, and the
transitional surcharge is imposed on all products; (ii) the rates oste nsibly "bound" in the Dominican
Republic's Schedule of Concessions indicate that the rates specified therein are to be applied on an ad
valorem basis, meaning on 100 per cent of the value of the product. On the other hand, the
Dominican Republic had applied the Selective Cons umption Tax on 100 per cent of the tax base,
inflated by 20 per cent, rendering the effective ad valorem rate imposed higher than the rates
ostensibly "bound". Furthermore, in the case of ci garettes, the rate applied was 50 per cent, which is
higher than the 30 per cent ostensibly bound in the Dominican Republic's Schedule of Concessions;
(iii) the current specific tax applied on cigarettes -RD$0.48 per cigarette- is much higher than the
ostensibly bound rate of 30 per cent ad valorem.
4.125 According to the Understanding on the Interpre tation of Article II:1(b) of the GATT, the
"nature and level of any 'other duties or charges' … shall be recorded in the Schedules of concessions
annexed to GATT 1994 against the tariff items to which they apply". The nature of the " Impuesto
Selectivo" is not the same as that of the transitional su rcharge. Therefore, the Dominican Republic
had not recorded the transitional surcharge as "o ther duties or charges" in its Schedule of
Concessions. The Dominican Republic could not have recorded the transitional surcharge in its
Schedule of Concessions, as what could have been r ecorded was "other duti es or charges… imposed
on [15 April 1994]" in the context of Article II:1(b) , second sentence, of the GATT. The transitional
surcharge was first imposed on 30 June 2003. Even if the recording of the " Impuesto Selectivo" as
"other duties or charges" in the Dominican Republic 's Schedule of Concessions were to be deemed as
a proper recording of the transitional surcharge, th e transitional surcharge would nevertheless still be
inconsistent with Article II:1(b) of the GATT to th e extent that it is imposed on products not included
in the "Lista de productos …que pagan el Impuesto Selectivo en Aduanas".
4.126 Should the Panel find that the transitional surc harge is inconsistent with the second sentence
of Article II:1(b) of the GATT, it should also find that the transitional surcharge is likewise
inconsistent with Article II:1(a) of the GATT.
4.127 The foreign exchange fee is inconsistent w ith the second sentence of Article II:1(b), and
consequently also inconsistent with Article II:1(a) of the GATT. In response, the Dominican Republic
contends that the claim of inc onsistency with "…Article II:1 must still fail because [the foreign
exchange fee] is within the level of [other duti es or charges] recorded in the Dominican Republic's
Schedule". As already stated, the Domi nican Republic had recorded only the " Impuesto Selectivo "
under its "other duties or charges" in its Schedule of Concessions. It did not record the foreign
exchange fee. Even assuming that the recording of the " Impuesto Selectivo " as "other duties or
charges" in the Dominican Republic's Schedule of Concessions were to be deemed as a proper
recording of the foreign exchange fee, the fo reign exchange fee would nevertheless still be
inconsistent with the second sentence of Article II:1(b) of the GATT (i) to the extent that the foreign
exchange fee is imposed on products not included in the " Lista de productos importados que pagan el
Impuesto Selectivo en Aduanas" and (ii) to the extent that the rate currently being applied, 10 per cent,
is higher than the rate applied as of 15 April 1994 –1.5 per cent.
4.128 The Dominican Republic contends that the foreign exchange fee is justified under
Article XV:9(a) of the GATT. However, the foreign exchange fee is an import charge because (i) the

operative act giving rise to the foreign exchange fee is importation, (ii) the amount of the fee is
calculated based on the transaction value of the me rchandise imported. It is not an "exchange
restriction" even in the context of the IMF's de finition, because it is not a "direct… limitation on the
availability or use of exchange as such". The fe e merely increases the costs of imports, but foreign
exchange is still unrestrictedly available to pay for imports. The Dominican Republic has likewise
failed to substantiate its assertion that the foreign exchange fee is a "multiple currency practice" in
accordance with the Articles of Agreement of the IMF. Even if the foreign exchange fee were an
exchange restriction or a multiple currency prac tice, the Dominican Republic has failed to establish
that the IMF has approved the same, in accordance with Sections 2 and 3 of Article VIII of the
Agreement.
4.129 Honduras claimed that the requirement under Ar ticle 2 of Decree 130-02 and Article 37 of
Decree 79-03 that the tax stamp on cigarette packets be affixed in the territory of the Dominican
Republic in the presence of tax authorities, in co mbination with the prac tice of allowing domestic
producers to purchase tax stamps in advance, is inconsistent with Article III:4 of the GATT as it
accords to imported cigarettes treatment less favourable than that accorded to domestic cigarettes.
Domestic producers of cigarettes have the privilege of being able to purchase tax stamps in advance
and affix those stamps to cigarette packets in the course of the production process. After one
continuous production process, domestic cigarettes are ready for sale in the domestic market.
4.130 On the other hand, because the Dominican Re public does not allow the purchase of tax
stamps in advance for affixation on imported ci garettes, upon importation and even after customs
clearance, and notwithstanding the payment of all customs duties and other charges in connection
with importation and the Selective Consumption Tax and other internal taxes imposed at the border,
imported cigarettes still could not be sold in the domestic market. Upon importation and even after
customs clearance, imported cigarettes have to be pro cessed further before they could be sold in the
domestic market.
4.131 Imported cigarettes first have to be transferred to a warehouse or other facility. This requires
a prior investment in that warehouse or other facility . Then the imported cigarettes have to be further
processed, which requires additional investments in manpower and costs of materials used in
repackaging the cigarettes, as well as additional in ventory days, which entails additional financing
costs. Production includes each and every pro cess required to render a product capable of being
introduced into the market. Introduction of a product into any market means not only rendering the
product as such available, but packaging that produc t in a manner suitable to consumer preferences,
taking into consideration conditions of competition. Thus, an entity wanting to engage in the business
of selling cigarettes in the Dominican Republic has two options: (i) to buy from a domestic producer
or (ii) to import. If that entity were to purchase from a domestic producer, it could sell the domestic
cigarettes immediately after purchase. On the other ha nd, if that entity were to import cigarettes, it
cannot sell the imported cigarettes immediately even after customs clearance. At its own cost and
expense, (i) it must make a prior investment in warehouses or similar facilities (ii) hire manpower and
(iii) go through the process of unpacking, affixing stam ps and repacking, all of which is essentially an
additional production process. Therefore, there is a built-in disincentive against importing cigarettes,
as compared to buying from domestic producers. Consequently, the requirement that tax stamps be
affixed in the territory of the Dominican Republic in the presence of the tax authorities distorts
conditions of competition between imported cigarett es in relation to domestic cigarettes, to the
disadvantage of imported cigarettes.
4.132 Conditions of competition are likewise distorted to the disadvantage of imported cigarettes at
the point of sale to the ultimate consumer. The tax stamps of domestic cigarettes are uniformly affixed
by machine as part of the production process of domestic cigarettes underneath the cellophane
wrapping of the individual cigarette packets. On the other hand, because of the requirement that the
tax stamps be affixed in the territory of the Domi nican Republic in the presence of tax authorities, tax
stamps are affixed manually on the cellophane wra pping of individual cigarette packets to minimize

costs. Necessarily, the affixation is not uniform, and the risk of technical and other imperfections is
enhanced. For purposes of the final presentation to the ultimate consumer therefore, imported
cigarettes are rendered less appealing than domestic cigarettes.
4.133 That the requirement that the tax stamps be a ffixed in the territory of the Dominican Republic
in the presence of tax authorities is applied equall y to both imported and domestic cigarettes is
irrelevant in this instance as formal equality is the factor that precisely results in less favourable
treatment to imported cigarettes as compared to domes tic cigarettes. As Guatemala and the European
Communities have referred to, less favourable treatme nt can arise both from formally different and
formally identical treatment of imports and like domestic products. The Dominican Republic likewise
contends that the additional costs incurred by importers are "negligible", implying the need for a trade
effects test. However, it must be recalled that the GATT protects expectations of equal competitive
opportunities, not trade volumes. Since the a dditional process and the additional costs affect
competitive opportunities, the degree of onerousness is not material.
4.134 That Honduras has not submitted evidence to demonstrate that the requirement of affixing the
stamp in the Dominican Republic is a measure im plemented "so as to afford protection to the
domestic industry" is not material for establishi ng a violation of Article III:4 as confirmed by
Appellate Body jurisprudence.
65 Therefore, as Honduras has established that there is "less favourable
treatment", Honduras has likewise established that the measure at issue is implemented "so as to
afford protection to the domestic industry".
4.135 The Dominican Republic contends that the requi rement that tax stamps be affixed in the
territory of the Dominican Republic in the presence of tax authorities is justified under Article XX(d)
of the GATT. However, the Dominican Republic has not discharged the burden of establishing that
the requirement at issue is justified under that pr ovision. The Dominican Republic states that the
requirement that stamps be affixed in its territory is a measure necessary to secure compliance with
"other Dominican Republic tax laws and regulatio ns; particularly, the Dominican Republic's Tax
Code, including but not limited to the [Selective Co nsumption Tax] for cigarettes". Even assuming
that this is correct, the fact is that, prior to customs clearance, imported cigarettes are within the
custody and control of the Dominican Republic au thorities and customs clearance cannot be obtained
without the payment of all (i) customs duties and ch arges and (ii) the Selective Consumption Tax and
all other internal taxes imposed at the border. Thus , the affixation of the tax stamp in the presence of
the tax authorities after all of these duties, charges an d internal taxes imposed at the border have been
paid is not necessary to ensure that they will be paid. In short, the requirement at issue is not
necessary to enforce the tax laws of the Dominican Republic.
4.136 The Dominican Republic contradicts itself when it states that the "stamp requirement exists as
a state measure to prevent tax evasion". As the stam ps are affixed on domestic cigarettes prior to the
payment of the Selective Consumption Ta x (which may be paid up to the 20
th day of the month
following that in which the sale is made) then the stamp cannot be a mark that the applicable taxes
have been collected. In any event, even assuming that the requirement at issue is closer to the pole of
"indispensable", as distinguished from the pole of "making a contribution to", there are other less-
trade restrictive alternatives available, such as allowing affixing tax stamps outside the territory of the
Dominican Republic or resort to pre-shipment in spection and certification at the expense of the
importer.
4.137 If the defence of the Dominican Republic were to be upheld, then any Member could require
that tax stamps be affixed on any product in its terr itory in the presence of tax authorities. Domestic
industry would be able to affix those stamps in the course of the production process. That same
opportunity will not be available to imported produc ts. Importers would ha ve to make additional
investments and incur additional expenses. Thus, any Member could always accord less favourable

65 Appellate Body Report, EC – Asbestos, para. 100.

treatment to imported products, as compared to do mestic products, by requ iring the affixation of
stamps in its territory and in the presence of its tax authorities.
4.138 The requirement to post a bond as a condition for the importation of cigarettes into the
Dominican Republic is inconsistent with Article XI:1 of the GATT. Based on the distinction cited by
the Dominican Republic between measures that fall unde r the scope of Article XI:1 and measures that
fall under the scope of Article III, the requirement to post a bond is a condition for importation related
to "the opportunities for importation itself". It applies prior to the entry of both domestic and
imported cigarettes into the domestic market. Th erefore, the requirement to post a bond does not
affect "the competitive opportunities on the domestic ma rket", and therefore, Article XI:1 applies, not
Article III. The bond requirement operates as a "restriction" in the context of Article XI:1.
4.139 Even assuming that the Panel were to consider the bond requirement as an internal measure
falling under Article III of the GATT, the bond requir ement is inconsistent with Article III:4 of the
GATT. For both imported and domestic cigarettes, the bond requirement is an accessory obligation
related to the payment of the Selective Consumpti on Tax. In respect of imported cigarettes, the
Selective Consumption Tax is collected in its en tirety upon importation. On the other hand, for
domestic cigarettes, the Selective Cons umption Tax may be paid up to the 20
th day of the month
following that in which the sale is made. Therefore, for domestic producers, there is a tax liability the
non-payment of which the bond properly secures. However, for imported cigarettes, since the
Selective Consumption Tax accrues and is immediatel y paid upon importation, there is no similar tax
liability. Furthermore, domestic producers can coll ect the Selective Consumption Tax in advance as
part of the purchase price paid by buyers. Th is accords domestic producers the opportunity to earn
interest income on the Selective Consumption Tax fo r a period of 20-50 days. On the other hand,
importers have to pay the Selectiv e Consumption Tax in advance. Th is entails either financing costs
or opportunity costs.
4.140 An entity wanting to engage in the business of selling cigarettes in the Dominican Republic
has two options: (i) to buy from a domestic producer or (ii) to import. If that entity were to purchase
from a domestic producer, it need not post a bond. On the other hand, if that entity were to import
cigarettes, it has to post a bond and incur additional co sts. Therefore, there is a built-in disincentive
against importing cigarettes, as compared to buying from domestic producers.
4.141 The Dominican Republic argues that the bond requi rement is justified under Article XX(d) of
the GATT. The Dominican Republic has not discharged the burden of establishing that the
requirement at issue is justified under that provision. The bond requirement is not necessary to secure
the payment of the Selective Consumption Tax for im ported cigarettes as that tax is paid in full prior
to customs clearance.
4.142 The Dominican Republic states that the bond re quirement is a measure necessary to secure
compliance with "other Dominican Republic tax la ws and regulations; particularly, the Dominican
Republic Tax Code, including but not limited to th e [Selective Consumption Tax] on cigarettes". The
Dominican Republic attempts to link the bond requi rement with the circumstances provided for in
Article 81 of the Tax Code, on the basis of which, the Tax Administration may impose "precautionary
measures" on goods where there is a risk of non-paym ent of tax obligations as a result of the possible
disappearance of those goods. In the case of import ed products, prior to customs clearance, the
products are in the custody and complete control of the customs authorities. Customs clearance is
given only after payment of (i) customs duties and other charges in connec tion with importation and
(ii) the Selective Consumption Tax and other internal taxes imposed at the border. Thus, if imported
products "disappear" before customs clearance, the disappearance would be before importation, and
the tax liabilities would not accrue. Furthermore, the customs authorities could be held accountable
for the disappearance.

4.143 Honduras presented specific arguments in support of its claims relating to the Selective
Consumption Tax. The Dominican Republic did no t present any substantive arguments in specific
rebuttal of any of the arguments presented by Hondu ras in support of these claims. Instead, the sole
defence presented by the Dominican Republic is that the claims of Honduras "are based on an
outdated version of Article 367 of the Tax Code…", and that "all three claims target measures that the
Dominican Republic eliminated on the same day this Panel was established". The Dominican
Republic then concludes that the Panel should di smiss the claims of Honduras as "they are based on
measures that no longer exist". Law 3-04 was si gned by the President of the Dominican Republic on
9 January 2004, and was published in the Official Gazette on 14 January 2004. Through its assertion
that "all three claims…" of Honduras in relati on to the Selective Consumption Tax "… target
measures that the Dominican Republic eliminated on the same day this Panel was established", the
Dominican Republic seeks to convey that Law 3-04, published on 14 January 2004, came into force
as of 9 January 2004.
4.144 In any event, under the Constitution and the Civil Code of the Dominican Republic, laws take
effect only after publication, and not earlier than the lapse of the periods specified in the Civil Code to
be considered known in each part of the territory of the Dominican Republic.
4.145 Thus, Law 3-04 was not in force as of 9 January 2004, prior to its publication on
14 January 2004, and prior to the lapse of the peri ods provided by law for it to be considered known
in each part of the territory of the Dominican Republ ic. As of 8 December 2003, when the request for
the establishment of a Panel was made, the operative provisions of Article 367 of the Tax Code and
related provisions that constitute the basis for th e claims of Honduras were in force and were in
existence. The Panel is therefore competent to ex amine measures existing as of that date. There are
cogent policy reasons for upholding the competence of Panels to examine the WTO consistency of
measures that are withdrawn after the request for the establishment of a Panel is made. If withdrawal
of a measure after the request for the establishment of a Panel is made were deemed to be a ground for
dismissal of a claim based on the pr e-existing measure, then all that the defendant has to do each time
is to withdraw the measure after the Panel requ est is made, and once the case is dismissed, the
defendant can again re-introduce the pre-existing me asure. And this could go on indefinitely. Under
these circumstances, the dispute settlement system would cease to provide security and predictability
to the multilateral trading system. In any event, as of the date of the establishment of the Panel on
9 January 2004, the measure in existence consiste d of, among others, Article s 367 and 375 of the Tax
Code, as amended, but excluding the amendments introduced by Law 3-04 of 14 January 2004.
4.146 Finally, it would appear that the Dominican Republic treats payments on tax stamps for
domestic cigarettes as an advance payment of the Se lective Consumption Tax. On the other hand,
when an importer pays for tax stamps the receipt issued indicates: "[Impuesto] adicional sobre
cigarillos". Thus, for domestic cigarettes, the effective cost of tax stamps is zero, as it is credited as
part of the payment for the Selective Consumption Tax. For imported cigarettes, the cost of the
stamps is in addition to the Selective Consumption Tax. Therefore, the Selective Consumption Tax as
applied to imported cigarettes is higher than that applied to domestic cigarettes, and is therefore
inconsistent with Article III:2 of the GATT.
D.
ORAL STATEMENT OF THE DOMINICAN REPUBLIC AT THE FIRST SUBSTANTIVE MEETING OF THE
PANEL
4.147 Honduras's objection to the way in which the tax base of the Selective Consumption Tax on
imported cigarettes is determined and to certain as pects of the survey of average prices conducted by
the Central Bank of the Dominican Republic relies ma inly on Article 367(b) of the Tax Code of the
Dominican Republic, and additionally on Article 37 of Decree 79-03 and General Rule 02-96.
However, Article 367(b) of the Tax Code was amended by Law 3-04 of 9 January 2004. 66 The new

66 Law 3-04, supra note 19.

tax base and the amount of the Selective Consumption Tax bear no relationship, likeness or similarity
to the measures that Honduras is challenging. Th e new Article 367 of the Tax Code does not fall
within the terms of reference of this Panel. Th e Dominican Republic would therefore ask the Panel,
as a preliminary matter, to reject Honduras's complaint with respect to these two measures.
4.148 Honduras objects to the bond requirement on the basis of Article XI and, alternatively, on the
basis of Article III:4 of the GATT.
4.149 The bond is an internal measure that does not ev en fall within the scope of that provision.
According to WTO jurisprudence, measures that apply both to imported products and to like domestic
products are considered to be internal meas ures subject to the requirements of Article III. 67 If a
measure leads to the same result for both products, it is an internal measure, regardless of whether it is
applied at the border or once the product has cleared customs. 68 In the case of cigarettes, the
obligation to post a bond applies to both the domes tic product and the imported product, without any
distinction or discrimination whatsoever. Consequently, it is an internal measure. It is not an import
measure. The bond does not regulate the importation of cigarettes, but guarantees the tax interests of
the State, regardless of the origin of the product.69
4.150 The fact that the bond is not even required at the border is additional proof that it is an
internal measure and not a restriction on the impor tation of cigarettes. The bond is required by the
Directorate General of Internal Taxes (DGII), and not the customs authorities. It does not have to be
posted for every importation.
4.151 Honduras acknowledges that the amount of the bond -RD$5 million (approximately
US$100,000)- is the same for importers as for domestic producers. 70 The only difference that
Honduras mentions between the situation of the impor ter and that of the domestic producer is the
moment at which the importer must pay the Selective Consumption Tax. This circumstance has
nothing to do with the bond.
4.152 Contrary to Honduras's assertion, the bond do es fulfil the purpose of ensuring compliance
with the tax obligations associated with the sale of imported cigarettes.
4.153 It often happens that the payment made by the importer upon importation of the goods does
not cover the totality of taxes due, including the Se lective Consumption Tax. Many are the cases in
which, upon reassessing the tax es, the competent authority finds that the payment made upon
importation falls short of the tax obligation. In such cases, the Value Control Department of the
Directorate General of Customs must ensure that the tax payer pays the missing amount and complies
fully with its tax obligation. The bond helps to ensure that the taxpayer does not evade this tax
obligation.
4.154 There is yet another reason why Honduras's erroneous argument that the bond serves no
purpose fails to convince. As can be seen from the copy of the certification issued by the Director
General of DGII, which the Dominican Republic h as submitted to the Panel, the bond for imported
cigarettes fulfils the double purpose of preventing th e incursion of unregulated importers into the
market and "guaranteeing the collection of other inte rnal taxes ... such as income tax, the tax on the
transfer of industrialized goods and services (ITBIS) and official and employee salary deductions".
71

67 First written submission of the Dominican Republic, 13 April 2004, paras. 73 and 74.
68 Panel Report, EC – Asbestos, paras. 8.91-8.99.
69 First written submission of the Dominican Republic, 13 April 2004, para 76.
70 First written submission of Honduras, 16 March 2004, para. 4.
71 Letter from the Director General of Internal Taxes, supra note 39.

4.155 The only other argument adduced by Honduras against the bond is that its amount is fixed
while the amount of the tax is variable. In other words, Honduras considers that a bond whose
amount is not a percentage of the tax obligation to which it corresponds is a measure which results in
less favourable treatment for imported products. The fact that the amount of the bond is fixed does
not imply less favourable treatment for imported cigarettes. Honduras fails to demonstrate that there
is discrimination against imported cigarettes in the case of the bond.
4.156 The Appellate Body has stated that Article III:4 is a specific expression of the overarching
"general principle" set forth in Article III:1.
72 In addition to altering the conditions of competition to
the detriment of the imported product, the measure in question must be applied so as to afford
protection to domestic production.73
4.157 The bond is not applied so as to afford protection to domestic production. The Directorate
General of Internal Taxes, which is the authorit y responsible for enforcing the bond, has no discretion
regarding its application. The amount of the bond is the same, and it is enfo rced in exactly the same
way. The cost for the importer and for the domestic producer is also identical. Both obtain the bond
from insurance companies or banking institutions accr edited in the country, which fix their charges
according to the laws of the market.
4.158 Honduras's arguments in support of its objection to the stamp requirement must be rejected.
Honduras's line of reasoning leaves the importing country no choice but to forego its desired level of
enforcement of tax laws or take the measures necessar y to apply its laws extraterritorially, regardless
of the cost to the government, and regardless of what public international law has to say on the
subject.
4.159 The stamp is an internationally recognized inst rument for controlling tobacco imports, and its
purpose is to prevent the smuggling of cigarettes and the resulting tax evasion.
4.160 GATT and WTO jurisprudence recognize that there can be de facto discrimination when the
law accords identical treatment to domestic and imported products. 74 However, differences in the
conditions of competition in cases in which treatment is identical do not necessarily mean that there is
de facto discrimination. In order to establish whether there is such discrimination, it is necessary to
determine whether the identical treatment fulfils a legitimate objective, or whether its sole purpose is
to protect domestic production. In this case, th e identical treatment accord ed by the law -i.e. the
requirement that the stamp be affixed in the presence of internal tax inspectors- is necessary to ensure
the desired level of enforcement of the Domini can Republic's tax laws, whose WTO-consistency
Honduras has not challenged.
4.161 It is important to bear in mind here the Appella te Body's recognition that "[i]t is not open to
doubt that Members of the WTO have the right to determine for themselves the level of enforcement
of their WTO-consistent laws and regulations".
75 The Dominican Republic decided that the best way
to secure compliance with its tax laws in the case of cigarettes was through direct supervision by the
Directorate General of Internal Taxes of the affixation of the stamps. This is what the Dominican
Republic determined to be the necessary control measure to ensure the desired level of enforcement of
its tax laws. In cases where there has been no dir ect supervision by the Directorate General of
Internal Taxes (DGII) of the affixation of stamps, there have been problems of smuggling and stamp

72 Appellate Body Report, EC – Asbestos, para. 93.
73 See Panel Report, Canada – Periodicals, para. 5.38.
74 GATT Panel Report, US – Section 337, para. 5.11.
75 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

forgery. As the Dominican Republic demonstrated with documentary evidence, this has occurred in
the case of alcoholic beverages.76
4.162 The only way to maintain the desired level of enforcement -that is, to prevent tax evasion by
requiring that the stamp be affixed under the supe rvision of inspectors- while at the same time
permitting, as Honduras would require, that the st amp be affixed during the production of the
imported cigarettes, would be to have inspectors in the producing country. However, this option is
costly, possibly contrary to public international law, and potentially impossible to implement.
4.163 It is costly because it would require the Domini can Republic to have more inspectors to carry
out the supervision at the place of production, wherever that may be. 77 It is possibly contrary to
public international law because it would mean that the Dominican Republic would be enforcing its
laws in the territory of other sovereign States in which it has neither jurisdiction nor the possibility of
State enforcement. 78 It is potentially impossible to apply, because the most-favoured-nation
obligation would require the Dominican Republic to have an inspector in each one of the centres
producing cigarettes for export to the Dominican Republic, throughout the world.79
4.164 Besides, to require that the stamps be affi xed under the supervision of inspectors from the
Directorate General of Internal Taxes in the terr itory of the Dominican Republic does not alter the
conditions of the competition to the detriment of im ported cigarettes. Whatever differences may exist
in the conditions of competition are not the resu lt of the laws of the Dominican Republic. The
additional cost the importer may have to bear as a r esult of the requirement to affix the stamp in the
presence of official inspectors is no different in nature from the additional cost resulting from
transport, or from affixing labels in the official language of the importing country, or the cost of
sanitary or phytosanitary inspections in the territory of the importing country.80
4.165 Even if there were some difference in the tr eatment that the stamp requirement accords to
imported cigarettes, the fact is that the measure is not applied for protectionist reasons or purposes.
As the Dominican Republic stated earlier, the jurisprudence reveals that the purpose of Article III is to
ensure that internal measures are not applied so as to afford protection to domestic production. 81 It is
not enough to determine that the measure alters th e conditions of competition; its actual application
must additionally have a protectionist effect. C onsequently, it is unacceptable that Article III should
be invoked as a basis for challenging measures whose effect is not to protect the domestic industry.
4.166 In the case of the importation of cigarettes fro m Honduras, the measure has not been applied
so as to protect the domestic industry. In fact, imports increased by much more than half between
2002 and 2003.82 During the first quarter of this year, imports of cigarettes from Honduras increased
almost fifty-fold compared to the same period last year.83 Thus, the stamp requirement clearly has not
limited or adversely affected the volume or value of cigarette imports.
4.167 The stamp requirement and the bond are justified by Article XX(d) of the GATT since both
measures are necessary in order to secure compliance with laws or regulations which are not
inconsistent with the GATT.
84 These measures do not constitute a m eans of arbitrary or unjustifiable

76 See information submitted by the Dominican Republic as Exhibit DR-8.
77 First written submission of the Dominican Republic, 13 April 2004, para. 58.
78 Ibid., paras. 56 and 57.
79 Ibid., paras. 35-59.
80 Ibid., paras. 39-40, 42.
81 Ibid., paras. 46-52.
82 Statistics regarding imports by the firm British American Tobacco – República Dominicana , supra
note 24.
83 Statistics of imports of cigarettes into the Domini can Republic in the period January – March 2004,
submitted by the Dominican Republic as Exhibit DR-30.
84 First written submission of the Dominican Republic, 13 April 2004, paras. 97-167.

discrimination between countries where the same cond itions prevail, or a disguised restriction on
international trade. The stamp requirement meets th e three criteria of Article XX(d). First, it is a
measure which secures compliance with domestic laws; second, these laws are consistent with the
GATT; and third, the stamp is necessary to secure compliance with these domestic laws.
85 T h e
Dominican Republic shall refer briefly to each one of these elements.
4.168 The requirement to affix stamps under the superv ision and control of the Directorate General
of Internal Taxes secures compliance with the tax obligations of the domestic producers and importers
of cigarettes. The stamp avoids or prevents smuggling and tax evasion. When the stamps are not
affixed under the supervision of inspectors from the Directorate General of Internal Taxes, tax evasion
and even forgery of the stamps occurs. 86 Indeed, this is what happened in the case of alcoholic
beverages.
4.169 The stamp is a measure that is necessary to secure compliance with tax obligations under the
Tax Code of the Dominican Republic. According to the Appellate Body, the factors to be taken into
account in determining whether a measure is "necessar y" prominently include the contribution made
by the measure to enforcement of the law at issue, the importance of the purpose of the law, and the
impact of the law on imports.87
4.170 The stamp's contribution to the prevention of smuggling and tax evasion is internationally
recognized.88 According to the Appellate Body "[t]he greater the contribution, the more easily a
measure might be considered to be 'necessary'". 89 The requirement to affix the stamp in the presence
of inspectors makes a greater contribution to the prevention of tax evasion than if the stamp were
affixed abroad, without this direct control of the Directorate General of Internal Taxes. This is
demonstrated, inter alia , by the frequency with which smuggli ng and forgery of stamps has taken
place in the Dominican Republic when the stamp is affixed on products abroad without the
supervision of the inspectors.90
4.171 Compliance with tax laws is of critical importance in the case of the Dominican Republic.
Tax evasion is particularly serious worldwide in th e case of cigarettes and would block revenue from
this source.91
4.172 The Appellate Body stated that "[a] measure with a relatively slight impact upon imported
products might more easily be considered as 'ne cessary' than a measure with intense or broader
restrictive effects".92 Between January and March of this y ear, imports into the Dominican Republic
of cigarettes from Honduras increased by more than 4,800 per cent in comparison to the same period
last year. This shows that the stamp requirement has no real impact on imports.
4.173 The Dominican Republic currently has no reasonable GATT-consistent alternative for dealing
with the problem of smuggling and tax evasion in the case of cigarettes. 93 None of the alternatives
can secure the desired level of enforcement to which the Dominican Republic is entitled.94

85 Panel Report, Argentina – Hides and Leather, para. 11.290.
86 See information submitted by the Dominican Republic as Exhibits DR-8 and DR-29.
87 Appellate Body Report, Korea – Various Measures on Beef, para. 164.
88 First written submission of the Dominican Republic, 13 April 2004, paras. 110-113.
89 Appellate Body Report, Korea – Various Measures on Beef, para. 163.
90 First written submission of the Dominican Republic, 13 April 2004, para. 113; information submitted
by the Dominican Republic as Exhibit DR-8.
91 See "The FCTC and Tobacco Smuggling", supra note 23.
92 Appellate Body Report, Korea – Various Measures on Beef, para. 163.
93 Panel Report, Korea – Various Measures on Beef, para. 652.
94 Appellate Body Report, Korea – Various Measures on Beef, para. 176.

4.174 The stamp requirement is also consistent with the chapeau of Article XX. The measure is not
applied in a manner which would constitute a mean s of arbitrary or unjustifiable discrimination
between countries where the same conditions prev ail. As in the case of domestically produced
cigarettes, a tax stamp must be affixed in the pr esence of inspectors from the Directorate General of
Internal Taxes to every packet of imported cigarettes, regardless of its origin. Consequently, there is
no discrimination of any kind within the meaning of Article XX.
4.175 Lastly, the measure is not a disguised restri ction on international trade. The stamp
requirement fulfils a legitimate objective: to pr event smuggling and secure the payment of taxes.
There can be no trade restriction when imports of cigarettes from Honduras increased by more than
80 per cent between 2003 and 2004, and by more than 4,800 per cent during the first quarter of this
year as compared to the same quarter in 2003.95
4.176 The arguments the Dominican Republic has adduced thus far to justify the stamp requirement
under Article XX(d) of the GATT apply mutatis mutandis to the obligation to post a bond. In
conclusion, both the stamp requirement and the bond requirement are measures which, even if they
were inconsistent with Article III:4 of the GATT – which they are not – would in any case be justified
under the general exception in Article XX(d).
4.177 The foreign exchange fee is an exchange contro l or exchange restriction within the meaning
of Article XV:9(a) of the GATT. Consequently, in accordance with that Article nothing in the GATT,
including Article II, can preclude a WTO Member, including the Dominican Republic, from
maintaining such a measure.
4.178 The foreign exchange fee is a transitional meas ure which is justified under Article XV:9(a) of
the GATT, since it is an exchange control or an exchange restriction in accordance with the
Articles of Agreement of the International Moneta ry Fund (IMF). As such, it is under the exclusive
jurisdiction of that institution.
4.179 The foreign exchange fee is an exchange contro l or exchange restriction, and hence covered
by Article XV of the GATT. The foreign exchange fee was imposed by the monetary authorities as
an element of the new foreign exchange system , and was placed under the responsibility of the
Central Bank. Once the fee had been introduced, the Central Bank delegate d the responsibility for
collecting it to the Directorate General of Cust oms, not because it was a trade measure, but to
facilitate its administration. The resolution of th e Monetary Board establishing the fee shows that it
targets foreign currency transactions and not imports of goods. It is not a charge levied on imports,
but a charge levied on foreign currency outflows fro m the territory of the Dominican Republic. This
charge increases the cost of foreign currency tr ansactions, enabling the Government to limit the
outflow of foreign currency. Consequently, it is an exchange control or exchange restriction.
4.180 The IMF agreed that the Dominican Republic c ould maintain its current exchange system
while taking the necessary measures to unify its exch ange markets. On 11 February 2004, the IMF
announced that it had approved a request by the Do minican Republic, seeking inter alia a temporary
waiver for certain commitments, including those rela ting to exchange rate restrictions and multiple
currency practices.
96 In other words, the foreign exchange fee was permitted by the IMF.
4.181 In any event, as applied to cigarettes the forei gn exchange fee, like the transitional surcharge,
is consistent with Article II of the GATT.

95 See Statistics of imports of cigarettes, supra note 83.
96 International Monetary Fund Press Release, supra note 62.

4.182 Contrary to what Honduras asserts, the Domini can Republic did record in its Schedule of
tariff concessions the other duties or charges applie d to imports of cigarettes, at a level that far
exceeds the level of the transitional surcharge and the foreign exchange fee.
4.183 Under paragraph 1(b) of Article II, if a Member applies an ordinary customs duty to imports
of a product in excess of the tariff bound in its Schedule for that product, the importing Member is
violating its obligation under Article II. Similarly, if a Member imposes other duties or charges on
imports of a product in excess of the level of other duties or charges bound in its Schedule for that
product, the importing Member is likewise in violation of its obligation under Article II. On the other
hand, a Member is not in violation of that obliga tion merely because it has levied duties or charges
other than ordinary customs duties. What determ ines whether a Member has met its obligation under
Article II is the applied level as compared to th e level bound in its Schedule. According to this
criterion, the Dominican Republic has faithfully fulfilled its obligations under Article II.
4.184 The Dominican Republic has recorded, in its Sc hedule XXIII of tariff concessions, a level for
other duties or charges of 30 per cent ad valorem levied on cigarettes classified under tariff
heading 2402.
97 The transitional surcharge and the fore ign exchange fee taken individually or
together do not exceed 12 per cent of the value of imported cigarettes. Consequently, the Dominican
Republic clearly accords Honduras and other WTO Members "treatment no less favourable" than that
provided for in its Schedule of concessions for cigarettes, in accordance with Article II of the GATT.
4.185 The 30 per cent level corresponding to other duties or charges for cigarettes was recorded in
the Dominican Republic's Schedule as an add ition on 14 September 1994. Honduras expressed no
objection or reservation.
4.186 As its title indicates, this dispute between Honduras and the Dominican Republic concerns
measures affecting the importation and internal sale of cigarettes. Products other than cigarettes are
not included in the scope of the dispute.
E. SECOND WRITTEN SUBMISSION OF HONDURAS
1. Introduction
4.187 Throughout these proceedings, the main argumen ts of the Dominican Republic have been
that: the measures no longer exist, the measures are out side the terms of refere nce of the Panel and,
even if they were inconsistent with the basi c provisions of the GATT, they were justified by
exceptions to those provisions because they were be ing undertaken to pursue legitimate policy goals,
such as macroeconomic stabilization, monetary policies, the prevention of smuggling and the
reduction of tax evasion. However, all the measures still exist or were in existence at the time of the
establishment of the Panel and are therefore covered by the Panel's terms of reference. Moreover, the
measures all violate basic GATT provisions and do not meet the requirements set out in the
exceptions invoked by the Dominican Republic. The arguments of the Dominican Republic are based
on novel interpretations of the provisions of the GAT T that -if upheld by the Panel- would jeopardise
the effectiveness of the GATT as a legal framewo rk for the incorporation of market access
concessions. The issues raised in this dispute ha ve for these reasons legal implications that go far
beyond the importation and internal sale of cigarettes.

97 Additions to Schedules, Schedule XXIII – Dominican Republic, G/SP/3, supra note 61.

2. Legal arguments
(a) The requirement to affix a stamp in the territo ry of the Dominican Republic is inconsistent
with Article III:4 of the GATT
4.188 The requirement that a stamp be affixed on cigare tte packets in the territory of the Dominican
Republic is inconsistent with Article III:4 of the GATT because it accords to imported cigarettes
treatment less favourable than th at accorded to domestic cigarette s. The Dominican Republic argues
that because the requirement applies equally to both imported and domestic cigarettes, there is no
inconsistency with Article III:4. Ho wever, in this instance, formal equality is the very factor that
results in less favourable treatment being accorded to imported cigarettes as compared to domestic
cigarettes: by imposing costs and administrative bur dens on importers that domestic producers do not
have to bear and by making imported cigarettes less attractive than domestic cigarettes for the
consumer. Thus, an entity wishi ng to engage in the business of selling cigarettes in the Dominican
Republic has two options: (i) to buy from a domestic prod ucer or (ii) to import. If that entity were to
purchase from a domestic producer, it could sell the domestic cigarettes immediately after purchase.
On the other hand, if that entity were to import cigarettes, it could not sell the imported cigarettes
immediately even after customs clearance. At its own cost and expense: (i) it must make a prior
investment in warehouses or similar facilities (ii) hire manpower and (iii) go through the process of
unpacking, affixing stamps and repacking, a ll of which are essentially additional production
processes. Therefore, there is a built-in disin centive against importing cigarettes, as compared to
buying from domestic producers. As a consequen ce, the requirement distorts conditions of
competition between imported cigarettes and domestic cigarettes, to the disadvantage of imported
cigarettes. The Dominican Republic has argued that the "additional costs are inevitably linked to the
condition of an imported product" and are basically the result of the "inherent differences in the
normal conditions under which im ported products compete with domestic products". Honduras
reiterates that the additional cost s result from the imposition of the stamp affixation requirement and
that they are not the inherent costs of doing busin ess. Inherent costs of doi ng business would include
freight charges and insurance premiums. Any a dditional cost that is incurred as a result of
governmental action cannot be an "inherent cost". Honduras considers that whether the governmental
action is origin-neutral or not is completely irreleva nt in order to determine that the measure at issue
has caused additional costs to importers. The Dominican Republic argues that "many of the
'additional steps' that Honduras refers to… are eith er avoidable or are steps that domestic producers
also have to perform... The step of unpacking cigare ttes from cartons before affixing stamps could be
avoided if importers simply packaged individual cigarette packets into boxes". In Exhibits HOND 14,
15, 23, 24 and 25, Honduras had substantiated the num ber of steps and additional costs that importers
have to undergo. In contrast, the Dominican Republic has made an assertion that these steps are
avoidable, but has not specified which steps would be avoidable nor has it provided any proof to
support this assertion. In Exhibit DR-3, the Domi nican Republic has described the steps that a
domestic producer in the Dominican Republic has to undertake in order to comply with the stamp
requirement. There is no indication that the domestic producers have to comply with steps 3, 4, 6, 7
and 8 of the steps required for imported goods as stat ed in the comparative diagram presented in the
first submission of Honduras. The Dominican Rep ublic has suggested that the step of unpacking
cigarettes from cartons before affixing stamps c ould be avoided if importers simply packaged
individual cigarette packets. As demonstrated in Exhibit HOND-39, it is not feasible to export
individual cigarettes or to export unwrapped ciga rette packets as they would lose their firmness,
freshness, humidity and visual attractiveness, and woul d be more susceptible to damage in the course
of transportation.
4.189 Honduras submits that whether or not the eff ect of the measure on imported products is
negligible is irrelevant for the purpose of establis hing a violation of Article III:4. Honduras reiterates
the fundamental principle that the GATT protects equality of competitive conditions for imported
products in relation to domestic products, not trade volumes. The concept of "negligibility" implies a
trade effects test. In this regard, Article III does not contain a de minimis exception. Even though

trade volumes are not a relevant factor to be ta ken into consideration in this dispute, Honduras
nevertheless observes that in the context of its ma rket share of cigarettes in the Dominican Republic,
$65,641 per year represents 8.41 per cent of the tota l amount of sales by Honduran exporters to the
Dominican Republic. This amount is not negligible for a country like Honduras. Indeed, as
Honduran exporters are attempting to increase their share in the cigarette market of the Dominican
Republic, this amount is only expected to increase.
4.190 In addition, Honduras considers that the Domini can Republic implements the requirement to
affix stamps in a manner that makes imported cigarettes less attractive than domestic cigarettes for the
consumer. Therefore, conditions of competition ar e also adversely affected for imported cigarettes
from this perspective. The tax stamps of domestic cigarettes are uniformly affixed by machine as part
of the production process of domestic cigarettes unde rneath the cellophane wrapping of the individual
cigarette packets. On the other hand, because of the requirement that the tax stamps be affixed in the
territory of the Dominican Republic in the presence of tax authorities, tax stamps are affixed manually
on the cellophane wrapping of individual cigarette packets to minimize costs. The manual affixation
of the stamp results in a product that is not as visually pleasing as the professionally packaged
product. The final "look" of a product influen ces consumer preferences and therefore adversely
affects conditions of competition. Exhibits HOND –25 (a) to (n), and Exhibits HOND–27 (a) to (n)
show that, as a result of the lack of opportunity to affix tax stamps as part of the production process
for imported cigarettes (a privilege accorded to do mestic producers), less favourable treatment is
accorded to imported cigarettes in that domestic cigarettes are more aesthetically packaged as
compared to imported cigarettes. Of course, imported cigarettes could also be as aesthetically
packaged as domestic cigarettes, but in order to ach ieve the same result, the importer would have to
incur even further costs with respect to the purchase or lease of the appropriate specialised equipment.
4.191 Honduras also considers that in order to establish a violation of Article III:4 of the GATT,
Honduras need not demonstrate that the requirement to affix stamps is applied "so as to afford
protection to domestic production". The Dominican Republic asserts that Honduras has not
demonstrated that the requirement of affixing the stamp in the Dominican Republic is a measure
implemented "so as to afford protection to the domesti c industry" in the context of Article III:1 of the
GATT. In the first place, affording protection to domestic industry is not a material element in
establishing a violation of Article III:4. As Hondur as has established that there is "less favourable
treatment", Honduras has also establi shed that the measure at issue is applied "so as to afford
protection to the domestic industry".
4.192 The Dominican Republic has further noted that "i f there are differences in the conditions of
competition, but such differences do not afford prot ection to the domestic production, there can be no
violation of Article III:4. In conclusion, whether the application of a measure affords protection to
domestic production is not a separate inquiry, but rather an inquiry that is part of the determination of
whether a measure 'accords less favourable treatment'". However, in EC – Bananas III, the Appellate
Body sharply rejected an initiative of the Panel to inquire into the purpose of the measure at issue
before finding it inconsistent with Article III:4. It ruled that "Article III:4 does not specifically refer to
Article III:1. Therefore, a determination of whether there has been a violation of Article III:4 does not
require a separate consideration of whether a measu re 'afford[s] protection to domestic production'".
98
Honduras considers that the Dominican Republic's c onclusion does not flow from the wording of the
Appellate Body statement. Honduras agrees wi th the Appellate Body that distinctions do not
necessarily lead to less favourable treatment as there could be positive as well as negative distinctions.
The conclusion drawn by the Dominican Republic th at one needs to ascertain whether the measure
affords protection to domestic production is not warra nted, and implies a test that does not exist in
WTO jurisprudence.

98 Appellate Body Report, EC – Bananas III, paras. 215-216 (italics in original).

(b) The requirement to affix a stamp in the territo ry of the Dominican Republic is not justified
under Article XX(d) of the GATT
4.193 The Dominican Republic has argued that if the Panel finds that the stamp requirement is
inconsistent with Article III:4, th en it further submits that the stam p requirement is justified under
Article XX(d) of the GATT. Article XX(d) is an affirmative defence and the Dominican Republic has
the burden of establishing that the requirement at issue is justified under that provision. Honduras
considers that the Dominican Republic has not di scharged that burden. The Dominican Republic
states that the requirement that stamps be affixe d in its territory is a measure necessary to secure
compliance with "other Dominican Republic tax la ws and regulations; particularly, the Dominican
Republic's Tax Code, including but not limited to th e [Selective Consumption Tax] for cigarettes".
However, the Dominican Republic has failed to dem onstrate that Selective Consumption Tax and the
other fiscal laws and regulations that the Dominican Republic claims to enforce through the
requirement to affix stamps on cigarettes in the te rritory of the Dominican Republic are consistent
with the GATT; it has merely asserted the GATT-consistency of these measures, without any
substantiation. In addition, it has not specifi ed which "tax laws and regulations" the stamp
requirement is intended to secure compliance with. It has not provided any details on the relevant
"tax laws or regulations" nor did it provide any c opies of the relevant rules thereof. Therefore,
Honduras asks that the Panel draw an adverse infere nce and find that the Dominican Republic's tax
laws insofar as they relate to the Selective Consum ption Tax are inconsistent with the GATT. Even if
the Panel were to find that the Dominican Republic has, at the very least, identified the three taxes
listed in its reply to the Panel's question, Honduras then submits that, as the party bearing the burden
of proof, the Dominican Republic has failed to demo nstrate that the Selective Consumption Tax, the
tax on the transfer of goods and services (ITBIS) and the income tax are consistent with the GATT.
4.194 Even if the Panel were to find that the tax laws and regulations of the Dominican Republic are
not inconsistent with the GATT, then Honduras subm its that the stamp requirement is not a measure
to secure compliance with the Selective Consumpt ion Tax, the ITBIS and the income tax. The
measure at issue is contained in the provisions of the specific Regulations of the Application of Title
IV of the Tax Code (Selective Consumption Tax) a nd not in the general tax laws and regulations of
the Dominican Republic. An examination of the desi gn, structure and architecture of the measure at
issue reveals that it is not related to any tax laws or regulations, other than the specific Regulations for
the Application of Title IV if the Tax Code (Sel ective Consumption Tax). As the party bearing the
burden of proof, the Dominican Republic has failed to demonstrate that the stamp requirement is
designed to secure compliance with the laws impos ing the Selective Consumption Tax or other tax
laws.
4.195 Furthermore, the Dominican Republic has stated that: "[t]he stamp requirement exists as a
state measure to prevent tax evasion – i.e., it exists as a mark to alert Dominican Republic tax
authorities that the applicable taxes have been co llected". Nonetheless, in its response to Question
No. 67 from the Panel, the Dominican Republic noted that: "[t]ax stamps may be affixed to domestic
cigarette packets before the Selective Consumption Tax is paid (Article 368 of the Dominican
Republic Tax Code, Exhibit HOND–6)" (Emphasis adde d). In the case of domestic cigarettes, the
stamps are affixed prior to the payment of the Se lective Consumption Tax, which may be paid up to
the 20th day of the month following that in which th e sale is made. Therefore, it is clear that as the
stamp may be affixed on domestic cigarettes before the Selective Consumption Tax is paid, it cannot
be "a mark to alert Dominican Republic tax authorities that [the Selective Consumption Tax has] been
collected". In addition, given the fact that the stamp on domestic cigarettes may be affixed before the
payment of the Selective Consumption Tax is made , it may not be characterised as "indispensable" to
ensure the collection of the Selective Consumption Ta x. In the light of the fact that not all the
products that are subject to the Selective Consumpti on Tax are also subject to the stamp requirement,
the question arises as to why the stamp requirement is necessary to secure compliance with the
Selective Consumption Tax. Second, if all importe d products have to pay the Selective Consumption
Tax upon importation at the border, then the ques tion arises as to why the stamp requirement on

imported cigarettes is necessary to secure complian ce with a Selective Consumption Tax that has
already been paid.
4.196 The Dominican Republic has referred to an "… international agreement that properly affixed
and monitored tax stamps are necessary to prevent th e smuggling of cigarettes". In support of this
assertion, the Dominican Republic has referred to docu ments related to the International Conference
on Illicit Tobacco Trade (ICITT) in 2002 (Exhibit DR–4) and to the World Health Organization
Framework Convention on Tobacco Control of 2 003 (WHO Framework Convention) (Exhibit DR–
17). As noted by Honduras, Exhibit DR–4 is a briefing paper presented by the Framework
Convention Alliance in the course of the ICITT in 2002. The Framework Convention Alliance is a
non-governmental organization described as "a heterogeneous alliance of non-governmental
organizations from around the world". Exhibit DR-4 therefore has no legal status and is not legally
binding on both parties to this dispute. The WHO Framework Convention (Exhibit DR-17) has not
entered into force. The number of parties required for its entry into force is 40 contracting parties. Of
the 116 signatories to the Convention, thus fa r, only 16 have deposited their instruments of
ratification. The Dominican Republic and Honduras ar e not signatories. Therefore, that Convention
is not legally binding on the parties to this dispute. There is no obligation for the parties, pursuant to
this Convention, to enact a stamp requirement to prevent smuggling. Honduras further notes that even
if the WHO Framework Convention were binding on th e parties, Article 15 which is the relevant
provision of this Convention woul d not provide cover for the stamp requirement the Dominican
Republic has. The Dominican Republic's stamp require ment is not used for determining the origin of
cigarettes, so as to ascertain "any possible point of diversion from the exporters' factory to the
importing country". As the Dominican Republic has itself stated, "[t]he stamp requirement exists
as…a mark to alert Dominican Republic tax aut horities that the applicable taxes have been
collected".
99 The stamp requirement, therefore, serves only fiscal purposes. On the other hand, there
are other less-trade restrictive alternatives available that would fulfil the concerns raised in Article 15
of the Convention, such as allowing stamps to be affixed in the exporting country and/or permitting
pre-shipment inspections, which would facilitate the objective of determining the origin of cigarettes
to monitor the movement of such goods between the exporting and the importing country, in order to
determine any possible intervening diversion.
4.197 In any event, even if the stamp requirement we re closer to the pole of "indispensable", as
distinguished from the pole of "making a contribution to", Honduras submits that there are other less-
trade restrictive alternatives available to which th e Dominican Republic could easily resort to enforce
its tax laws and regulations. For example, the Do minican Republic could make the stamps available
for affixation on cigarette packets as part of the production process of the producer abroad, prior to
importation into the Dominican Republic. The authenticity of the stamps could be verified upon
importation. Furthermore, as domestic producers are held accountable and are required to keep track
of their inventory of tax stamps, importers could be held accountable in the same manner. As a matter
of fact, in respect of alcoholic beverages and matches in boxes, the Dominican Republic allows
affixation of tax stamps outside its territory. Th ere is no reason why it could not apply the same
system to cigarettes. Another less trade-restrictive option is pre-shipment inspection and certification
at the expense of the importer. For example, the SGS, a private certification and verification company
has confirmed that pre-shipment inspection services ar e available to ensure that tax stamps of the
Dominican Republic are affixed on tobacco products in Honduras. Both these options would be less
trade-restrictive than the current stamp require ment and would at least fulfil the objective of
countering smuggling in keeping with the concerns raised in Article 15 of the WHO Framework
Convention.
4.198 The Dominican Republic has also not demonstrated that the stamp requirement is not applied
in a manner which would constitute a means of ar bitrary or unjustifiable discrimination between
countries where the same conditions prevail. Ev en though Honduras does not bear the burden of

99 First written submission of the Dominican Republic, 13 April 2004, para. 102.

proof on this matter, it nevertheless takes this oppor tunity to demonstrate that the stamp requirement
is applied in a manner constituting arbitrary and unjustifiable discrimination.
4.199 As demonstrated in Exhibit DR-3 (RP-01), the Dominican Republic treats payments on tax
stamps for domestic cigarettes as an advance paym ent of the Selective Consumption Tax. For
domestic cigarettes, the effective cost of tax stamps is zero as it is credited as part of the payment for
the Selective Consumption Tax. For imported cigarett es, the cost of the stamps is in addition to the
Selective Consumption Tax. The Dominican Repub lic has defined "arbitrary" as "dependent on will
or pleasure; dependent on the decision of a legally recognized authority; discretionary" or "based on
mere opinion or preference as opposed to the real nature of things; capricious, unpredictable,
inconsistent". Honduras notes that there is no provisi on either in the Tax Code or in the Regulations
for the Application of the Selective Consumpti on Tax which would authorise domestic producers to
deduct the cost of the stamp from the Selective Consumption Tax. Thus, Honduras submits that such
discriminatory treatment in the application of th e stamp requirement depends on the will of the
Dominican Republic's tax authorities, and therefor e, it is "arbitrary" according to the Dominican
Republic's own definition. This discriminatory appli cation of the tax stamp is also "unjustifiable" as
there is no reason for such less favourable treatment accorded to imported cigarettes.
4.200 The Dominican Republic has suggested that in WTO jurisprudence, "unjustifiable
discrimination means discrimination that is not unavoi dable or discrimination that is coercive". It
added that "in Argentina – Hides and Leather, in particular, the Panel equated the question of whether
discrimination is justifiable with the question of whether it is unavoidable . The Panel in that case
found the application of the measures in question was not justifiable because the extra tax burden
imposed on importers as a result of those measures was not unavoidable " (Emphasis added). In this
case, applying the Dominican Republic's own defi nition of "unjustifiable discrimination", Honduras
notes that by allowing domestic producers to deduct the cost of the stamps from their payment of the
Selective Consumption Tax, and not similarly pr oviding this option to importers, the Dominican
Republic is imposing an extra tax burden on importers . This extra tax burden would be avoidable if
either domestic producers were not allowed to deduct th e cost of the stamp or if importers were given
the option to so deduct. Therefore, the manner in which the stamp requirement is applied by the
Dominican Republic constitutes a means of arbitrary or unjustifiable discrimination.
(c) The requirement to post a bond is inconsistent with Article XI:1 of the GATT
4.201 In its first submission, Honduras claimed that th e requirement to post a bond is a restriction
on the importation of cigarettes into the Dominican Repub lic that is inconsistent with Article XI:1 of
the GATT. In response to this claim, the Dominican Republic cites the distinction between Article XI
and Article III. Based on Note Ad Article III, as well on the Panel's findings in EC – Asbestos
100 that
when the applied measure leads to the same result for both the imported product and the like domestic
product, it falls within the terms of the Note Ad Article III the Dominican Republic concludes that
because the bond "does not affect the opportunities for importation itself, but rather opportunities on
the domestic market", the bond requirement is s ubject to Article III:4. However, a careful
examination of Note Ad Article III indicates that it contains two separate requirements that are
relevant for Honduras's purpose; namely, (i) that th e measure applies to an imported product and to
the like domestic product; and, (ii) that it is "an in ternal tax or other internal charge, or a law,
regulation or requirement of the kind referred to in paragraph 1". In its response to Question 86 from
the Panel, the Dominican Republic states that: "t he bond requirement does not "affect" the internal
sale, offering for sale, or distribution of imported cigarettes in the sense of Article III:4 [and therefore
Article III:1] of the GATT". Indeed, the Dominican Republic goes even further to state: "[t]he bond
requirement is not even related and does not affect the 'specific transactions' covered by Article III:4
of the GATT, and is thus outside the scope of that provision". Given the fact that the Dominican
Republic has acknowledged that the "bond requirement does not "affect" the internal sale, offering for

100 Panel Report, EC – Asbestos, paras. 8.91-8.99.

sale, or distribution of cigarettes", Honduras submits the bond requirement is not subject to
Article III:4 and III:1, and by implication, Note Ad Article III, of the GATT. Applying the test in
India – Autos set out by the Dominican Republic, the bond requirement must therefore be a measure
subject to Article XI:1 of the GATT. Based on this definition, the requirement to post a bond is
related to "the opportunities for importation itself, i. e., entering the market". The bond is required for
both domestic and imported cigarettes prior to thei r entry on the domestic market. As the bond
requirement is a condition for the importation of ciga rettes, it operates as a "restriction" within the
meaning of Article XI:1 of the GATT.
(d) In the alternative, the bond requirement is inconsistent with Article III:4 of the GATT
4.202 If the Panel were to consider that the bond re quirement is a measure falling under Article III
of the GATT, then Honduras submits that the bond require ment is inconsistent with Article III:4. The
less favourable treatment results from the modification of the conditions of competition between
imported and domestic cigarettes. The bond requirem ent adversely modifies the incentives for a local
buyer who wishes to purchase imported cigarettes for sale. A company that sells cigarettes in the
Dominican Republic has two options: (i) to buy from a domestic producer; or, (ii) to import. If that
company were to purchase from a domestic producer, it would not have to post a bond. On the other
hand, if that company were to import cigarettes, it would have to post a bond and incur additional
costs of the amount of the bond. Therefore, there is a built-in disincentive against importing
cigarettes, as compared to buying from domestic producers.
4.203 In addition, the bond requirement accords l ess favourable treatment to importers in the
context of the liability and payment for the Selec tive Consumption Tax. For domestic producers, the
bond requirement is imposed under Article 376 in Title IV of the Tax Code. Title IV of the Tax Code
deals only with the Selective Consumption Tax. For both imported and domestic cigarettes, the bond
requirement is a supplementary oblig ation related to the principal ob ligation which is the payment of
the Selective Consumption Tax. However, with respect to imported cigarettes, the Selective
Consumption Tax is collected in its entirety upon importation. On the other hand, for domestic
cigarettes, the Selective Consumption Tax may be pa id up to the 20th day of the month following that
in which the sale is made. Therefore, for domes tic producers, the bond serves as a security in the
event that the tax obligation is not properly disch arged. However, for imported cigarettes, as the
importers pay the full amount of Selective Consum ption Tax upon importation, there is no liability
that the bond requirement would serve to secure. On a related point, the Dominican Republic has
argued that "the timing of the payment of the SC T, however, is not tied to or contingent on the
bond…It is an entirely distinct measure not specifi ed in either Honduras's Request for Consultations
or in its Request for Establishment of a Panel". Honduras notes that the measure at issue is the bond
requirement which is clearly set out as a challenged measure in both Requests. As the Dominican
Republic has noted in its response to Question 88, "[a]rticle 376 of the Dominican Republic Tax Code
explicitly provides that the bond shall secure the Sel ective Consumption Tax". It is obvious that the
Selective Consumption Tax has to be paid at a certain time for importers and domestic producers,
respectively, as set out in Articles 368 and 369, in relation to Article 353 of the Tax Code of the
Dominican Republic. Furthermore, domestic producers can collect the Selective Consumption Tax as
of the time of the purchase of the packet of cigare ttes by the buyers. This accords domestic producers
the opportunity to earn interest income on the money they receive as payment of the Selective
Consumption Tax for the period between the time of the purchase and the time they have to remit that
amount to the tax authorities.
4.204 The Dominican Republic has also argued that " it is often the case that the SCT originally
assessed at the time of importation is insufficient to cover the tax liab ility of the importer. As a result,
the tax liability for a particular importer and transacti on may have to be adjusted". From the evidence
of the 20 letters from the Directorate General of Cu stoms submitted in Exhibit DR-28, it appears that
the reassessments have been made with respect to unpaid customs duties and other charges, and not
the Selective Consumption Tax. Therefore, the Do minican Republic has not demonstrated that the

reassessments are necessary to cover shortfalls in th e collection of the Selective Consumption Tax. It
follows from that conclusion that the Dominican Republic has not demonstrated that the bond
requirement secures the payment of the Selective Consumption Tax after reassessments.
4.205 In any event, the Dominican Republic has ac knowledged that, out of the 494 companies on
the list of reassessment for the period of Marc h 2003 to April 2004, only cigarette and tobacco
companies were required to post bonds. It further noted that the list "...include[s] at least one cigarette
importer…" However, Honduras wishes to advise the Pa nel that, in that particular instance, the duties
or taxes that were reassessed were related to th e importation of merchandising material and not of
tobacco products. In any event, as the Domi nican Republic has acknowledged, out of the 494
companies on the list of reassessment for the period of March 2003 to April 2004, the majority of the
companies listed have not posted bonds.
(e) The bond requirement is not justified under Article XX(d) of the GATT
4.206 The Dominican Republic has argued that if the Panel finds that the bond requirement is
inconsistent with either Article XI:1 or Article III: 4, it should also find that the bond requirement is
justified under Article XX(d) of the GATT. In orde r to support this defence, the Dominican Republic
has merely asserted the GATT-consistency of its measures, without any substantiation. The
Dominican Republic has not provided the Panel with a definitive listing of all the legal obligations
that are supposed to be guaranteed by the bond. The Dominican Republic has indicated that the bond
requirement is also used to guarantee obligations , other than those it had specified, namely the
withholding of salaries of officials and employees. There may be other legal obligations that the bond
is intended to secure that the Dominican Republic h as failed to reveal. As the Dominican Republic
has not provided complete information on all the legal obligations the bond requirement would secure
compliance with, the Panel cannot find that all th e measures that the bond is intended to secure
compliance with, are GATT-consistent. Even if the Panel were to limit its examination to the three
taxes specified in the Dominican Republic's re ply to the Panel's question, Honduras would
nevertheless submit that, as the party bearing th e burden of proof, the Dominican Republic has failed
to demonstrate that these three taxes; namely the Selective Consumption Tax, the ITBIS and the
income tax are consistent with the GATT.
4.207 Even if the Panel were to assume that the Tax Code or any other tax obligation of the
Dominican Republic is not inconsistent with the GATT, then Honduras submits that the bond
requirement is not a measure to secure compliance with the Tax Code, including the Selective
Consumption Tax, the ITBIS and the Income Tax. An examination of the design, structure and
architecture of the measure at issue reveals that it is not related to any tax laws or regulations, other
than the specific Regulations for the Application of Title IV of the Tax Code (Selective Consumption
Tax). As the party bearing the burden of proof, the Dominican Republic has not demonstrated the
manner in which that the bond requirement is a meas ure to secure compliance with the tax obligations
other than the Selective Consumption Tax.
4.208 As not all the products that are subject to the Selective Consumption Tax are also subject to
the bond requirement, the question arises as to wh y the bond requirement is necessary to secure
compliance with the Selective Consumption Tax. The Selective Consumption Tax is imposed on
many products. However, the bond is only require d for tobacco and cigarettes. If the bond were
necessary to secure compliance with the Selective Consumption Tax, then presumably, it should be
applied to all products subject to the Selective C onsumption Tax. Second, if all imported products
have to pay the Selective Consumption Tax upon importation at the border, then the question arises as
to why the stamp requirement on imported cigare ttes is necessary to secure compliance with a
Selective Consumption Tax that has already been paid.
4.209 The Dominican Republic has argued that the bond requirement is also intended to secure the
payment of reassessments. However, as noted above based on Exhibit DR–28, the Dominican

Republic has acknowledged that out of the 494 companies on the list of reassessment for the period of
March 2003 to April 2004, only ciga rette and tobacco companies on that list had to post a bond.
Furthermore, based on Exhibit DR-28, it appears that the reassessments have been made with respect
to unpaid customs duties and other charges, and not the Selective Consumption Tax. Therefore, the
Dominican Republic has not demonstrated that the r eassessments are necessary to cover shortfalls in
the collection of the Selective Consumption Tax. Following from that conclusion, the Dominican
Republic has not demonstrated that the bond requirement is a measure necessary to secure
reassessments of the Selective Consumption Tax.
4.210 The Dominican Republic has argued that "bo nding and guarantee requirements" have been
identified by the 2002 International Conference on I llicit Tobacco Trade "as an aid to monitoring and
documenting the movement of tobacco products to en sure control over the movement of such goods".
As Honduras has previously stated, the document that the Dominican Republic refers to is not legally
binding. In any event, Honduras considers that the bond identified by the 2002 ICITT is a bond of a
different nature than that currently required by the Dominican Republic. The bond that the ICITT
identified "as an aid to monitoring and documenti ng the movement of tobacco products to ensure
control over the movement of such goods" is a bond in tended to be provided by the exporters with the
view to tracking and tracing the movement of t obacco products from the exporters' factory to the
declared importer or buyer in the importing country; it does not refer to bonds imposed on importers
to secure the payment of general tax obligations. Fu rthermore, the fact that the bond may be "an aid"
does not mean that it is necessary. R ecalling the Appellate Body finding in Korea – Various
Measures on Beef, a measure that is "necessary" must be clo ser to "indispensable" than to "making a
contribution". The Dominican Republic has cont ended that WTO Members have the right to
determine the level of enforcement of their laws and regulations. However, the Dominican Republic
only partially quoted the Appellate Body's finding. The full quote, contained in paragraph 176 of the
Appellate Body Report in Korea – Various Measures on Beef should be considered. Honduras fully
agrees that WTO Members have the right to determ ine for themselves the level of enforcement of
their WTO-consistent laws and re gulations, provided that the condition set forth by the Appellate
Body, i.e. that such law and such level of en forcement must be the same for imported and
domestically-produced products. In this case, th at condition is not observed by the Dominican
Republic.
4.211 Furthermore, in Exhibit DR-12, the Dominican Republic attempts to link the bond
requirement with the circumstance s provided for in Article 81 of the Tax Code. However, this
provision of the Tax Code is not applicable.
4.212 As it is clear that the bond requirement cannot be provisionally justified under Article XX(d),
then there is no need for the Panel to proceed with the examination of compliance with the chapeau of
Article XX(d).
(f) The Selective Consumption Tax and its appli cation are inconsistent with Articles III:2,
Article III.4, X:1, X:3(a) of the GATT
4.213 With respect to the Selective Consumption Tax imposed under Article 367 of the Dominican
Republic's Tax Code, Honduras has submitted the following:
• that the Selective Consumption Tax, as applie d to imported cigarettes, is inconsistent
with Article III:2 of the GATT;
• that the Dominican Republic's failure to establish or apply tran sparent and generally
applicable criteria for determining the value of imported cigarettes is inconsistent with
Article X:3(a) of the GATT; and,

• that the Dominican Republic's failure to pub lish the surveys that are used to determine
the Selective Consumption Tax is inconsistent with Article X:1 of the GATT.
4.214 The Dominican Republic has not presented any s ubstantive arguments in specific rebuttal of
any of the claims made by Honduras. Instead, the sole defence presented by the Dominican Republic
is that the claims of Honduras "are based on an outdated version of Article 367 of the Tax Code…",
and that "all three claims target measures that the Dominican Republic eliminated on the same day
this Panel was established". The Dominican Republic states that "Law No. 3-04 of 9 January 2004
amended Articles 367 and 375 of the Tax Code", and that "Articles 367 and 375 of the Tax Code, as
amended, establish a specific and identical tax base for the [Selective Consumption Tax] for imported
and domestic cigarettes". Furthermore, according to the Dominican Republic, Law 3-04 was "enacted
and published on [1]4 January 2004". The Dominica n Republic then concluded that the Panel should
dismiss the claims of Honduras as "they are based on measures that no longer exist".
4.215 The Dominican Republic has now acknowledged that Law 3-04 entered into force on
15 January 2004, 6 days following the establishment of the Panel. Therefore, when the Panel was
established, the Selective Consumption Tax that was in force was the measure challenged by
Honduras in its request for the establishment of the Panel dated 8 December 2003; the operative
provisions of Article 367 of the Ta x Code and related provisions th at constitute the basis for the
claims of Honduras were in force. The Panel is therefore competent to examine measures existing as
of that date. The Panel should make findings on th e claims related to the determination of the tax
base for the Selective Consumption Tax. The "matter" before a Panel is determined by its terms of
reference. The "matter" referred by Honduras to the DSB is clearly indicated in document
WT/DS302/5 and includes "the Selective Consumpti on Tax in accordance with Article 367 of its Tax
Code, Article 3 of Decree 79-03 and Article I of General Rule 02-96", in the context of those
provisions as they existed and were applied as of 8 December 2003, the date of the Request of the
Establishment of a Panel by Honduras.
4.216 In addition to the legal obligation of the Panel to make an objective assessment of the "matter
before it", there are cogent policy reasons for uph olding the competence of Panels to examine the
WTO consistency of measures that are withdrawn afte r the request for the establishment of a Panel is
made. If withdrawal of a measure after the request for the establishment of a Panel is made were
deemed to be a ground for dismissal of a claim then a WTO Member could escape the enforcement of
its obligations by revoking the measures challenge d by another Member after the request for the
establishment of a Panel is submitted and re-introduc ing them as soon as the Panel is established. In
order to avoid such circumvention, GATT and WTO Panels have agreed to examine measures that
have been withdrawn or that were no longer in existence.
4.217 In India – Autos, the Panel confirmed that the measure at issue as it existed at the time of the
complainants' request for the establishment of a Pane l are expressly contained in the Panel's terms of
reference and are consequently within its jurisd iction in accordance with Articles 6.2 and 7 of the
DSU.
4.218 As the Dominican Republic has only presented a procedural defence to address the claims of
Honduras with respect to the Selective Consumpt ion Tax, and as Honduras has shown that this
defence is baseless, Honduras requests the Panel to fi nd that the measure is properly before it and to
proceed with its examination of the consistency of the measure based on the arguments and evidence
that Honduras has submitted throughout these proceedings. The Dominican Republic has not
presented any substantive defences to these claims and arguments. Therefore, Honduras has made a
prima facie case which the Dominican Republic has not rebutted.
4.219
 In addition, as stated above, it appears that the Dominican Republic treats payments on tax
stamps for domestic cigarettes as an advance payment of the Selective Consumption Tax.

4.220 The Dominican Republic has stated that "[t]he authorities of the Dominican Republic relied
on several factors, including the declared customs value of the imported cigarettes, whenever there
was evidence that the pricing policies of the impor ter alone could not be re lied on to determine the
nearest similar product in the domestic market". However, there is no provision in either the Tax
Code or the Regulation 79-03 which would allow th e tax authorities to exercise discretion as to the
selection of the factors that they could consider to determine the nearest similar product in the
domestic market. There is no provision that would allow the authorities to rely on the declared
customs value. As a matter of fact, Article 15 of the Agreement on Implementation of Article VII of
the General Agreement on Tariffs and Trade 1994 est ablishes that "'customs value of imported goods'
means the value of goods for the purposes of levying ad valorem duties on customs of imported
goods". Pursuant to Article 367 and Article 3 of De cree 79-03, the relevant factor to determine the
tax base for the Selective Consumption Tax is the "r etailing selling price". There are no other factors
listed. Recourse to ""customs value" is certainly not listed. Therefore, the manner in which the
authorities have recourse to factors other than t hose listed in the laws is not reasonable and is,
therefore, inconsistent with Article X:3(a).
4.221 The Dominican Republic has alleged that it dete rmined that the "nearest similar product" to
Viceroy was Marlboro "given the disparity and inconsistency in the information by the importer".
First, Honduras notes that the Dominican Republic has not provided any evidence supporting the
alleged disparities and inconsistencies in the inform ation from the importer. On the other hand, the
importer has presented detailed evidence of the prices that Viceroy, Líder, Kent and Marlboro (among
others) were selling at. There is no legal basis for the authorities to disregard the relevant criterion of
the retail selling price established in the law. As a result of this unreasonable and arbitrary
administration of the regulations governing the Se lective Consumption Tax, the Dominican Republic
has acted inconsistently with Article X:3(a) of the GATT. In addition, the arbitrary determination of
the tax base for imported cigarettes has resulted in the imposition of the Selective Consumption Tax at
higher amount than that applied to the like domest ic product, e.g. less favourable treatment provided
to Viceroy as compared to Líder.
4.222 The Dominican Republic acknowledges that for determining the nearest similar product to
imported cigarettes it uses criteria other than the reta il selling prices. However, these are not stated in
any of the regulations governing the Selective Consumption Tax.
(g) The transitional surcharge for economic stabilizati on is inconsistent with Article II:1(a) and
Article II:1 (b) of the GATT
4.223 Honduras notes that both Decree 646-93 and Law 2-04 are within the terms of reference of
the Panel. Therefore, the Panel's finding in respect of the transitional surcharge should refer to both
instruments establishing it. The Dominican Repub lic has argued that this dispute between Honduras
and the Dominican Republic relates to cigarettes, and, the transitional surcharge as it relates to
products other than cigarettes is outside the terms of reference of the Panel.
4.224 As a matter of principle, Article 6.2 of the Understanding on Rules and Procedures Governing
the Settlement of Disputes ("DSU") which sets out th e requirements of a request for the establishment
of a Panel does not require the identification of pro ducts. El Salvador and Ni caragua have noted that
the Appellate Body has confirmed that " …Article 6.2 of the DSU does not explicitly require that the
products to which the 'specific measures at issue' apply be identified".101 Honduras acknowledges that
the Appellate Body has also stated that: "[h]owever , with respect to certain WTO obligations, in order
to identify "the specific measures at issue", it may also be necessary to identify the products subject to
the measures in dispute". Honduras is of the view that it would be illogical for a challenge of the
transitional surcharge which, by definition, appli es to all products, to require the complainant to
"identify the products subject to the measure in disput e". In the view of this fact, both the request for

101 Appellate Body Report, EC – Computer Equipment, para. 67 (italics in original).

consultations and the request for the establishment of the Panel challenged the transitional surcharge
as applied to all "imported goods". In US – FSC, the United States argued that a claim brought by the
EC concerning the U.S. Foreign Sales Corporation scheme and its inconsistency with Articles 3 and 8,
in conjunction with Articles 9.1(d), 10.1 and 10.3 of the Agreement on Agriculture, was inconsistent
with Article 6.2 of the DSU as the EC had faile d to identify specific products. Following the same
reasoning, the text of the Panel request by Ho nduras shows that the claim regarding the WTO-
inconsistency of the transitional surcharge has an "all -encompassing nature". It is a claim that gives
rise to violations of Articles II:1(a) and II:1(b) of the GATT with respect to any imported good.
Furthermore, from the text of the Panel request both the Dominican Republic and third parties were
put on notice that Honduras was asserti ng the existence of violations of Articles II:1(a) and II:1(b) of
the GATT with respect to all imported goods.
4.225 The transitional surcharge is an "other duty or charge" that was not imposed as of 15
April 1994. A Member may not impose "other duties or charges of any kind" … "in excess of those
imposed on the date of [the] Agreement" i.e. on 15 April 1994, in excess of the levels applying on that
date.
4.226 The transitional surcharge was first impo sed by Decree 646-03 of 30 June 2003, as
subsequently modified by Decree 693-03 of 16 Ju ly 2003, and more recently by Law 2-04. The
Dominican Republic acknowledges that "the tran sitional surcharge for economic stabilisation was
introduced for the first time in June 2003" and th at "it did not replace any previous similar or
equivalent measure". It is therefore undisputed that the transitional surcharge was not imposed on 15
April 1994. The provisions set out in the second sentence of Article II:1(b), however, cannot justify
the imposition of charges that did not exist on that date.
4.227 In any event, the transitional surcharge wa s not recorded in the Dominican Republic's
Schedule of concessions and, therefore, it is inconsistent with Article II:1(b) of the GATT.
4.228 The nature and level of "other duties or ch arges" levied on bound tariff items should have
been recorded in the Schedules of concessions a nnexed to the GATT 1994 against the tariff item to
which they apply.
4.229 Therefore, even if a Member had imposed an "o ther duty or charge" as of 15 April 1994, that
fact alone would not authorize that Member to impose that "other duty or charge" thereafter. The
Understanding requires the recording of the "nature and level" of that "other duty or charge" in the
Schedules of concessions annexed to the GATT 1994 ag ainst the tariff item to which they apply.
Thus, both the nature and the level of any "other duty or charge" that is recorded are bound.
4.230 The Understanding provides that the recording "doe s not change the legal character of 'other
duties or charges'". In relation to Article II:1( b) of the GATT, what could have been recorded
therefore were only "other duties or charges", "imposed on or in connection with… importation" as of
15 April 1994. Thus, if a Member had recorded an internal tax in its Schedule of concessions, the
recording does not change the nature of that tax into an "other duty or charge" the imposition of which
is, subject to certain conditions, permitted under Article II:1(b) of the GATT.
4.231 In its Schedule of concessions, the Dominican Republic did not record the transitional
surcharge; it recorded only the Selective Consumption Tax.
4.232 An examination of Law 11-92 of the Dominican Republic in force as of 15 April 1994
confirms that what the Dominican Republic had recorded in its Schedule of concessions as "other
duties or charges" was the Selec tive Consumption Tax, an internal tax levied on selected products,
both domestic and imported. Title IV, Chapter VI of that law contains a list of selected products
entitled "Lista de productos importados que pagar án el Impuesto Selectivo en Aduanas
". Thus, both
the Schedule of concessions of the Domini can Republic and Law 11-92 refer to " Impuesto Selectivo",

or the Selective Consumption Tax. Furthermore the products listed in Exhibit DR-19 and in Law 11-
92 and the respective ad valorem tax rates imposed on them are identical.
4.233 Considering that "other duties or charges" may be levied only if they were imposed on 15
April 1994 and only to the extent of the levels a pplied on that date, it is incumbent on the Dominican
Republic to establish that as of 15 April 1994, ther e was another law in existence (other than the
legislation establishing the Selective Consumpti on Tax) under which "other duties or charges"
"imposed on or in connection with… importation" we re levied on the specific products and at the ad
valorem rates recorded in the Dominican Republic's Schedule. The Dominican Republic has not
provided this demonstration. The simple explanation is that there is no such other law. As a matter of
fact, the Dominican Republic acknowledges that "[T]he only duty or charge in force on 15 April 1994
was the exchange fee, at a rate of 1.5 per cent …" (emphasis supplied). Therefore, the recording by
the Dominican Republic must refer to the Selec tive Consumption Tax which had been applied on 15
April 1994.
4.234 As the Dominican Republic recorded only the Se lective Consumption Tax (an internal tax)
the Dominican Republic effectively did not record any "duty or charge" of the kind that could be
recorded in its Schedule of Concessions according to the Understanding. Thus, even assuming that
the transitional surcharge was imposed on 15 April 1994, it is inconsistent with Article II:1(b) of the
GATT, because it has not been recorded in the Dominican Republic's Schedule of Concessions.
4.235 Members retain their right to challenge at an y time the WTO consistency of "other duties or
charges" imposed by other Members.
4.236 The Dominican Republic contends that since no objection was made to the addition of the
Selective Consumption Tax as "other duties or char ges" in its Schedule of concessions within the
period specified in the note of the Secretariat, "the addition was approved". If the Dominican
Republic implies that approval of the addition means that Members have waived the right to challenge
the WTO consistency of what was recorded under "o ther duties or charges", the Dominican Republic
is in error.
4.237 The Secretariat's statement in the note -that "[i]f no objection is notified to the Secretariat
within thirty days from the date of this document, the rectifications to Schedule XXIII – Dominican
Republic will be deemed to be approved and will be annexed to the Protocol Supplementary to the
Marrakesh Protocol to the General Agreement on Tari ffs and Trade 1994"- simply means that if there
are no objections, the Dominican Republic's additions will be annexed, i.e. they will be deemed to
have been recorded in the Dominican Republic's Sc hedule. That is all that it means. The above
statement certainly cannot be interpreted to mean that the Secretariat intended -as it has no authority
to do so- to divest Members of their right to ch allenge the WTO-consistency of what is recorded
under "other duties or charges". That right is governed solely by WTO law.
4.238 Thus, the recording of "other duties or charges" is without prejudice to their consistency with
rights and obligations under GATT 1994, and Members re tain the right to challenge that consistency
"at any time". The sole exception to this general ru le is paragraph 4 of the Understanding. However,
as the party raising the exception, it is incumben t on the Dominican Republic to establish that the
exception applies.
4.239 In any event, paragraph 4 does not apply becau se what the Dominican Republic had recorded
under "other duties or charges" was an internal tax, not "other duties or charges" in the context of
Article II:1(b) of the GATT.
4.240 Thus, paragraph 4 applies only to "other duties or charges" imposed on "a tariff item [that]
has previously been the subject of a concession". Even assuming that the Dominican Republic had
previous concessions on all tariff items currently bound and that other duties or charges had been

imposed on those tariff items, the three-year prescrip tive period applies only to the "existence of an
'other duty or charge' … at the time of the origin al binding, as well as the consistency of any 'other
duty or charge' with the previously bound level". In short, if a Member that had a previously bound
concession on a tariff item imposed a 10 per cent ad valorem "other duty or charge" at the time of the
first incorporation of its concession in the appropriate Schedule and imposed a 20 per cent ad valorem
"other duty or charge" on that tariff item on 15 April 1994, other Members had three years after the
date prescribed to challenge the 20 per cent ad valorem "other duty or charge". After that three year
period, other Members can no longer challenge the imposition of the 20 per cent ad valorem duty or
charge on the ground that it is higher than the 10 per cent ad valorem "other duty or charge" imposed
at the time of the first incorporation of the (p revious) concession in the appropriate Schedule of
Concessions. After the lapse of the three-year period, the WTO consistency of the 20 per cent ad
valorem "other duty or charge" may still be challenged at any time, pursuant to paragraph 5 of the
Understanding.
4.241 In any event, according to the Dominican Repub lic, the only "other duty or charge" imposed
on 15 April 1994 was the foreign exchange fee, which was then imposed at the rate of 1.5 per cent.
4.242 The recording of the Selective Consumption Tax at the level of 30 per cent does not give the
Dominican Republic the authority to levy other types of duties or charges up to that level now. The
Dominican Republic proceeds on a fundamental misunderstanding of paragraph 7 of the
Understanding and Article II:1(b) of the GATT. Th e Dominican Republic implies that an "other duty
or charge" need not have been imposed on 15 April 1994 for it to be recorded in a Member's Schedule
of Concessions. It further implies that every Member reserved the right to impose any "other duties or
charges" at any level (notwithstanding the non-existence of that ODC on 15 April 1994 or
notwithstanding that the level imposed on 15 April 1994 was lower), subject only to the condition that
it recorded those "other duties or charges" within the period provided for under paragraph 7 of the
Understanding.
4.243 Paragraph 7 of the Understanding refers to two categories of "other duties or charges": (i)
those omitted from a Schedule at the time of the depos it of the instrument of incorporation into the
Schedule in question and (ii) those recorded at a le vel lower than that prevailing on the applicable
date. Paragraph 7 allows corresponding "additions or changes" within the six-month period specified.
But those "other duties or charges" allowed to be a dded or changed cannot be just any "other duties or
charges".
4.244 Each Member therefore had the obligation to reco rd the "nature and level of any 'other duties
or charges' levied on bound tariff items, referred to in that provision…" That provision is "paragraph
1(b) of Article II [of the GATT]". The second sentence of Article II:1(b) of the GATT in turn refers
to "all other duties or charges of any kind imposed on or in connection with… importation in excess
of those imposed on [15 April 1994] …" Thus, no Member had a right to record any "other duty or
charge" and to impose that solely on the basis that the ODC had been recorded. Rather, it is necessary
that that "other duty or charge" must have been (i) imposed on 15 April 1994, (ii) on or in connection
with importation and, (iii) recorded in the a ppropriate Schedule of Concessions. A Member may
incorporate in its Schedules of Concessions an act yielding its rights, but not diminishing its
obligations.
(h) The Foreign Exchange Fee
4.245 The Dominican Republic makes the same argument with respect to the foreign exchange fee
that it made with respect to the transitional surcharge, namely that this dispute relates to cigarettes and
that products other than cigarettes are outside the terms of reference of the Panel. Honduras briefly
recalls the arguments it submitted with respect to the competence of the Panel to examine the
transitional surcharge as it applies to products other than cigarettes. Honduras therefore considers that
the foreign exchange fee, as it applies to products other than cigarettes, is within the terms of

reference of the Panel, and therefore, requests the Panel to examine the WTO-consistency of the
foreign exchange fee as it applies to products other than cigarettes.
4.246 The imposition of the foreign exchange fee is in consistent with Article II:1(b) of the GATT,
in relation to the Understanding, because it was not r ecorded as an "other duty or charge" in the
Dominican Republic's Schedule. The foreign excha nge fee currently applied is imposed pursuant to
the First Resolution of the Monetary Board of 22 October 2003. The operative act giving rise to the
accrual of "other duties and charges" under Article II:1(b) is "importation". The operative act giving
rise to the accrual of the foreign exchange fee is likewise "importation", and not the purchase of
foreign currency to pay for the im ported products. Thus, regardless as to when payment is actually
made, importation gives rise to the liability for the fo reign exchange fee. Furthermore, the foreign
exchange fee is computed on the "value of imports at the selling rate of foreign exchange". This is no
different from the "transaction value" for purposes of the imposition of customs duties. The phrase
"at the selling rate of foreign exchange" does not effectively establish a distinction between customs
duties and the foreign exchange fee, as the "tran saction value" of most, if not all, imports is
denominated in the currency of the exporter, and customs duties are paid in the currency of the
importer. Invariably, in the imposition of cust oms duties, there is also a conversion from one
currency to another. Thus, the foreign exchange fee constitutes another "duty or charge" imposed on
or in connection with importation within the meaning of Article II:1(b) of the GATT.
4.247 Furthermore, Honduras makes the following points:
• The nature and level of "other duties or charge" levied on bound tariff items should
have been recorded in the Schedules of concessions annexed to the GATT 1994 against
the tariff item to which they apply.
• The recording of a tax or charge under the Schedules of concessions does not change
the legal character of "other duties or charges".
• In its Schedule, the Dominican Republic ha d recorded only the Selective Consumption
Tax, an internal tax.
• Therefore, for all intents and purposes, th e Dominican Republic had not recorded any
"other duties or charges" in its Schedule, including the foreign exchange fee.
• Members retain their right to challenge at any time the WTO consistency of "other
duties or charges" imposed by other Members.
4.248 Even assuming that the Dominican Republic had recorded the foreign exchange fee as an
"other duty or charge" in its Schedule, the fo reign exchange fee would be inconsistent with
Article II:1(b) of the GATT because it is imposed at a rate in excess of the rate applicable on 15
April 1994.
4.249 The foreign exchange fee currently applied pursu ant to the First Resolution of the Monetary
Board of 22 October 2003 is 10 per cent of the value of imports. According to the Dominican
Republic, the "only duty or charge in force on 15 April 1994 was the exchange fee, at a rate of
1.5 per cent…" Thus, the rate currently applied is hi gher than that imposed on 15 April 1994. This is
inconsistent with Article II:1(b) of the GATT, whic h provides that "all other duties or charges of any
kind imposed on or in connection with... importation [shall not be] in excess of those imposed on [15
April 1994]".
4.250 The foreign exchange fee is not justified under Article XV:9 of the GATT. The International
Monetary Fund ("IMF") has its own "guiding principle" in determin ing what constitutes a "[foreign]
exchange restriction". As cited by the Dominican Republic, "[t]he guiding principle in ascertaining

whether a measure is a restriction on payments and transfers for current transactions under
Article VIII, Section 2, is whether it involves a di rect governmental limitation on the availability or
use of exchange as such".
4.251 Since there does not exist in the WTO "a formal decision on how to distinguish between trade
and exchange controls … the [WTO Members] have thus in practice used the same definition as the
IMF even though they have not formally taken a deci sion to that effect". Thus, applying the IMF's
guiding principle, Honduras submits that the fore ign exchange fee is not a "[foreign] exchange
restriction" because it is not a "direct… limitation on th e availability or use of exchange as such". "As
such" in relation to "limitation on the availability or use" means that the limitation must be on access
to or the use of (foreign) exchange, as such, or pe r se. While the foreign exchange fee increases the
costs of imports (which renders it a "trade restricti on"), the availability of foreign exchange to pay for
those imports remains unrestricted.
4.252 The Dominican Republic itself confirms that the foreign exchange fee is a measure applied to
imports of goods, not on exchange transactions as such.
4.253 Even if the foreign exchange fee is determined to be an exchange restriction in the context of
Article XV:9(a), its use is not in accordance with the Articles of Agreement of the IMF. Under
Sections 2 and 3 of Article VIII of the Agreem ent, exchange restrictions or multiple currency
practices, respectively, cannot be imposed without the approval of the IMF. The Dominican Republic
has not presented evidence that the IMF has appr oved the imposition of the foreign exchange fee
either as an exchange restriction or a multiple currency practice.
4.254 The Dominican Republic contends that the approv al of the stand-by arrangement by the IMF
on the basis of Letters of Intent constitutes such an approval. Without establishing what "continuous
performance criteria" concerning exchange rate rest rictions and multiple currency practices have been
waived, the Dominican Republic regards this st atement by the Executive Board of the IMF as
providing a carte blanche for the imposition of excha nge restrictions or multiple currency practices.
Regardless of what those "continuous performance criteria" might be, a waiver thereof is not
equivalent to the approval of the imposition of excha nge restrictions or multiple currency practices in
the context of Sections 2 and 3 of the Article VIII of the Articles of Agreement of the IMF.
4.255 Paragraph 3 of the Agreement between the Inte rnational Monetary Fund and the World Trade
Organization provides that the IMF "shall inform th e WTO of any decisions approving restrictions on
the making of payments or transfers for current international transactions, decisions approving
discriminatory currency arrangements or multiple cu rrency practices, and decisions requesting a IMF
member to exercise controls to prevent a large or sustained outflow of capital. A search of the WTO
website as of 6 May 2004 reveals that thus far, ther e have been 31 notifications relating to exchange
restrictions, exchange measures, or exchange system s of 18 countries. The latest decision reported to
the WTO was taken on 24 March 2004, relating to the exchange restrictions of Botswana. The IMF
has not reported any decision on any approval of the imposition of an exchange restriction or a
multiple currency practice by the Dominican Republic. That no such approval by the IMF has been
notified to the WTO is further confirmed by the WT O Secretariat. Honduras is submitting a copy of
the letter of the Trade and Finance Division dated 5 May 2004 confirming that "…no such notification
from the IMF has been received by the WTO". Th e simple explanation is that the IMF has not
granted any such approval.
4.256 Therefore, even assuming that the foreign exch ange fee is an exchange restriction or a
multiple currency practice, the Dominican Republic has not discharged its burden of establishing that
the foreign exchange fee is imposed "in accordance with the Articles of Agreement of the [IMF]" in
the context of Article XV:9(a) of the GATT.

F.
SECOND WRITTEN SUBMISSION OF THE DOMINICAN REPUBLIC
1. Introduction
4.257 The Dominican Republic responds to Honduras's latest arguments in this second written
submission, which is organized into three sections, showing the measures challenged by Honduras are
not GATT-inconsistent or are justified by the GATT. The First Section deals with the "Dead
Measures": (a) the manner in which the Selective Consumption Tax (SCT) tax base was determined,
(b) the manner in which the Dominican Republic ad ministered the provisions used to determine the
"nearest similar product in the domestic market", and (c) the Central Bank surveys that identified the
retail price to be used as the SCT tax base. The Second Section deals with the "Measures Applied to
Guarantee Compliance with Internal Tax Laws": (a) the obligation of domestic producers and
importers to post a bond, and (b) the requirement to affix tax stamps to domestic and imported
cigarette packets in the presence of tax inspectors in the territory of the Dominican Republic. The
Third Section deals with the "Temporary Measures Imposed on Imports": (a) the transitional
surcharge, and (b) the foreign exchange fee.
2. Rebuttal of Honduras's claims
(a) Dead measures
4.258 The Panel should issue no recommendations and make no findings regarding withdrawn laws
and practices of the Dominican Republic because: (i) recommendations in this case would be legal
error and devoid of purpose, inutile, and redundant; (ii) there is no evidence that the measures are still
in place or have lingering effects; (iii) there is no evidence that th e Dominican Republic will
reintroduce the measures; and (iv) the measures were revoked before the Pane l began its adjudication
process.
(i) The measures challenged by Honduras have been withdrawn
4.259 Honduras continues to argue against (a) th e manner in which the SCT tax base was
determined, (b) the manner in which the Dominican Republic administered the provisions used to
determine the "nearest similar product in the domestic market", and (c) the Central Bank surveys that
identified the retail price to be used as the SCT tax base (the "Dead Measures"). However, those
measures were based on a version of Article 367(b) of the Dominican Republic Tax Code that has
been radically modified by Law 3-04 of 9 January 2004. The current determination of the SCT tax
base is completely different, and the Central Ba nk surveys no longer exist, as confirmed by the
Directorate General of Internal Taxes (DGII). Even Honduras agrees that the Dominican Republic
has completely eliminated the challenged measures.
102 Therefore, the Panel should dismiss
Honduras's claims regarding these Dead Measures.
(ii) A recommendation with respect to the dead measures would constitute legal error
4.260 WTO jurisprudence makes clear that Panels should not rule on expired or withdrawn
measures.103 In fact, it is legal error for Panels to issue recommendations regarding measures no
longer in existence, or make findings regarding such measures unless necess ary to "secure a positive
solution" to the dispute.104

102 See Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 39, p. 31.
104 Appellate Body Report, US – Certain EC Products, para. 81; Panel Report, Chile – Price Band
System, para. 7.112.

4.261 In addition, making recommendations in this case would violate the principle of judicial
economy, which states that Panels should address only those claims on which a finding is necessary
for recommendations and rulings that would resolve the matter at issue and "secure a positive solution
to the dispute". 105 I n India – Autos , the Panel considered modifications made by India during the
proceedings because it felt those changes may aff ect its ability to make meaningful recommendations
to the DSB.106 This shows that if a finding or recomm endation cannot help secure a positive solution,
the Panel should not make that finding or recommendation.
(iii) There is no evidence that the dead measures are still in place or have lingering effects
4.262 In cases where Panels have made findings regarding withdrawn measures, those measures
have been carried forward in some way. For instance, the Panel in EC – Poultry found it not moot to
examine a measure that was within its terms of re ference, but which had been withdrawn, because of
such "lingering effects". 107 Similarly, in India – Autos , a case cited by Honduras, the Panel
considered withdrawn measures, noting that alt hough the challenged framework measure had ceased
to operate, related Memorandums of Understanding (MOUs) remained. 108 The circumstances in the
present case are fundamentally different. Honduras does not contest that the Dead Measures have
been withdrawn, nor does it claim any lingering effects from those measures. Honduras's only
concern is that the measures may be reintroduced.109
(iv) There is no evidence that the Dominican Republic will reintroduce the dead measures
4.263 Honduras's argument that the Panel should make findings on the Dead Measures lest the
Dominican Republic revert to them 110 is incorrectly premised on the assumption that WTO Members
will act in bad faith and violate the principle of pacta sunt servanda . The Appellate Body has made
clear that the correct assumption is that Members act in good faith. 111 Panels have applied this
assumption and refused to assume respondents would reintroduce withdrawn measures. 112 I n t h e
present case, there is no evidence the Dominican Republic will reintroduce the Dead Measures.
Accordingly, the Panel must assume the Dominican Republic is acting in good faith and must not
make findings based on a bad faith presumption.
(v) The dead measures were revoked before the panel began its examination
4.264 Honduras erroneously believes that if the measure s complained of are within the terms of
reference and jurisdiction of the Panel, the Panel will be compel led to make recommendations and
findings regarding these measures. As such, Honduras has devoted most of its energy to
demonstrating that Law 3-04 entered into force six days after the Panel was established on
9 January 2004.
4.265 What is dispositive, however, is not whether these measures were in force on the date the
Panel was established, but whether they were revoked before the Panel began its adjudication process,
which is a question of fact based on individual circ umstances. In the present case, the Panel began its
adjudication process long after the elimination of these measures, as it did not hold an organizational

105 Appellate Body Report, Australia – Salmon, para. 223.
107 Panel Report, EC – Poultry, paras. 153, 252.
109 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No.
40, p. 34.
110 Ibid., reply to question No. 39, p. 31.
111 See Appellate Body Report, C hile – Alcoholic Beverages , para. 74. See also Panel Report, US –
Certain EC Products, para. 6.110.
112 Panel Report, Argentina – Footwear (EC), para. 6.14.

meeting until almost two months after establishment. Therefore, the Panel should not review these
Dead Measures.
4.266 In its Replies to Questions Addressed by th e Panel, Honduras has relied almost entirely on
cases where a measure was modified, amended, or withdrawn long after these Panels began their
adjudication process. In US – Wool Shirts and Blouses , the measure in question was withdrawn
several weeks after the issuance of the interim report to the parties.
113 I n Indonesia – Autos , the
respondent's communication that the measure in question had been terminated came after the Panel's
deadline for submitting information and arguments, and moreover, the complainants challenged the
effective termination of the measure.114
(vi) The dead measures do not cause nullification or impairment of the benefits of Honduras
4.267 Should the Panel decide to find the Dead M easures were GATT-inconsistent, the Dominican
Republic requests it find no resulting nullification or impairment to Honduras. The withdrawal of
these measures is sufficient evidence to rebut the pr esumption in DSU Article 3.8 that a rules breach
adversely impacts other Members. No prospectiv e adverse impact can result from measures that no
longer exist.
4.268 For the reasons stated above, the Dominica n Republic requests the Panel to dismiss
Honduras's claims against the Dead Measures and make no recommendations or findings with regard
to these claims. Furthermore, the Dominican Repub lic requests the Panel to find that such Dead
Measures, at present, do not constitute a case of nullification or impairment.
(b) Measures applied to guarantee compliance with internal tax laws
(i) The bond requirement for domestic and imported ciga rettes is consistent with Article XI:1
and Article III:4 of the GATT
4.269 The bond requirement is neither a restriction or prohibition on the importation of cigarettes
contrary to Article XI:1, nor an internal measu re that discriminates against imported cigarettes
contrary to Article III:4. Honduras and the Dominican Republic agree that Article XI and Article III
cannot apply concurrently to the same measure.
115 In any event, Honduras did not request a
cumulative analysis of the bond requirement under the two provisions. 116 Instead, Honduras claimed
a violation of Article XI:1 and, in the alternative , a violation of Article III:4. 117 Both claims are
unfounded and should be dismissed.
The bond requirement is outside the scope of Article XI:1 of the GATT
4.270 Honduras argument that the bond requirement is cont rary to Article XI:1 is incorrect for two
reasons. First, the bond requirement is outside th e scope of Article XI:1. Second, even if it were
within the scope of Article XI:1, it is not a "pr ohibition" or "restriction" "on the importation" of
cigarettes.

113 Panel Report, US – Wool Shirts and Blouses, para. 6.2.
115 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No.
18, p. 19. Replies of the Dominican Republic to the questions addressed by the Panel, reply to question No. 18,
para. 28.
116 See Panel Report, EC – Asbestos , para. 8.100 (finding that a claim by Canada for cumulative
application of Article III:4 and Article XI:1 would not be within the terms of reference of the Panel).
117 Request for the Establishment of a Panel by Honduras, supra note 2, para. 4. First written
submission of Honduras, 16 March 2004, section IV.G. and para. 112.

4.271 The bond requirement is outside the scope of Article XI:1 because, contrary to Honduras's
argument118, it is not a "condition" for the importation of cigarettes that applies "prior" to importation,
as there is no law or regulation in the Dominican Republic that stipulates such. Article 14 of Decree
79-03 provides that importers and domestic producer s of cigarettes alike must provide the bond,
which is enforced by the DGII. Article 40 of D ecree 79-03 requires importers of cigarettes to obtain
an import license from the DGII, but posting the bond is not among the conditions for obtaining a
license.
119 Moreover, after a bond is posted, a local pr oducer or importer must simply renew it prior
to expiration – i.e. importers need not post a new bond every time they import. Customs authorities
do not even check if an importer has posted the bond, as evidenced by the fact that the importer BAT
República Dominicana has been importing cigarettes from Honduras for years despite never posting
the bond.
120
4.272 The bond requirement is also outside the scope of Article XI:1 because it is an internal
measure that applies equally to imported and domes tic cigarettes, not a measure "on the importation"
of cigarettes. When an applied measure leads to the same result for both imported and like domestic
products, it is subject to Article III:4, not Article XI:1. 121 Honduras admits that the bond's application
leads to the same result 122, and it does not deny that the bond requirement applies identically to
importers and domestic cigarette producers. 123 Rather, it argues that identical treatment between
imported and domestic products can result in less favourable treatment124, which is a separate issue
under the purview of Article III.
4.273 Even if the bond requirement is a measure " on the importation" of cigarettes, Honduras has
not established that it prohibits or restricts the importation of cigarettes, as its only argument along
these lines is based on the same in correct assertion highlighted above that the bond requirement is a
"condition" for the importation of cigarettes. 125 The facts show that Dominican Republic authorities
do not regard nor require, either de jure or de facto, the posting of the bond as a pre-requisite for the
importation of cigarettes, as evidenced by the fact that BAT República Dominicana has been
importing cigarettes for several years without ever having posted the bond. 126 Honduras also
specifically chose not to answer the Panel's ques tion asking whether its cigarette exports to the
Dominican Republic had suffered restrictive effects, given the fact that such exports seem to have
increased.127
4.274 In conclusion, the Dominican Republic requests the Panel find that the bond requirement is
not a measure "on the importation" of cigarettes, a nd therefore outside the scope of Article XI:1.
Should the Panel find otherwise, the Dominican Republic requests the Panel find that it is not a
"prohibition" or "restriction" on the importation of cigarettes, and therefore not contrary to
Article XI:1.

118 Oral statement of Honduras to the Panel, 11 May 2004, para. 79 (English version). Replies of
Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30.
119 Decree 79-03, supra note 8, Article 40.
120 Certification by the Director General of Customs, dated 26 May 2004, submitted by the Dominican
Republic as Exhibit DR-43. Certification by the Dir ectorate General of Internal Taxes, dated 24 May 2004,
submitted by the Dominican Republic as Exhibit DR-35.
121 Panel Report, EC – Asbestos, paras. 8.91-8.99.
122 Oral statement of Honduras to the Panel, 11 May 2004, para. 79 (English version). See also Replies
of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 35, p. 30.
123 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 31, p. 27.
124 Ibid.
125 Oral statement of Honduras to the Panel, 11 Ma y 2004, para. 80 (English version). First written
126 See Certification by the Directorate General of Internal Taxes, supra note 120.
127 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 32, p. 29.

The bond requirement is also outside the scope of Article III:4 of the GATT

4.275 The bond requirement is outside the scope of Article III:4, and consequently cannot be
contrary to that Article, because it does not affect the "internal sale, offe ring for sale, purchase,
transportation, distribution or use" of imported cigarettes.128 The Appellate Body has agreed that it is a
requirement that, in addition to being an internal measure, a measure must fall within the scope of
Article III:4.129 In fact, Honduras has stated, in unequivo cal terms, that "the requirement to post a
bond does not affect " these specific transactions. 130 The bond does not preclude cigarette importers
from clearing cigarettes through customs, selling or offering them for sale, transporting them, or
distributing them within the territory of the Dominican Republic. Moreover, it does not preclude
consumers from buying or using imported cigarettes. As already mentioned, BAT República
Dominicana has been importing and selling cigarettes in the Dominican Republic for years, despite
not having posted the bond.
131
Alternatively, the bond requirement is consistent with Article III:4 of the GATT
4.276 Assuming the bond requirement is within the scope of Article III:4, it is nevertheless not
contrary to that Article since it does not accord "less favourable treatment" to imported cigarettes,
which according to the Appellate Body depends on whether a measure "modifies the conditions of
competition in the relevant market to the detriment of imported products".132 Honduras acknowledges
that the bond "does not affect per se 'the competitive opportunities on the domestic market,'" 133 and it
has not disagreed that the bond applies iden tically to importers and domestic producers. 134 Honduras
argues instead, based on US – Section 337 (GATT) , that identical treatment can result in less
favourable treatment. 135 The situation in that case, however, is different from the situation in the
present case because that Panel did not deal with a situation involving formally identical legal
treatment for domestically produced and imported products.136
4.277 Honduras has not demonstrated how the equal tr eatment accorded by the bond to domestic
and imported cigarette producers modifies conditions of competition, for it does not. All foreign
cigarettes can be imported, offered for sale, sold, tr ansported, distributed, purchased, and used within
the Dominican Republic, just like any domestic cigarette. Moreover, the bond does not impose an
additional charge on the importation of cigarette s, which Honduras recognizes as it desisted from
pursuing such a claim.137
4.278 Honduras seems to challenge the timing of the payment of the SCT, rather than the bond
requirement itself, as it continues to highlight the difference in timing between importers and
domestic producers.
138 That difference, however, does not explain how the bond affects importers'
conditions of competition. Moreover, requiring impor ters to post the bond at the time of importation

128 GATT, Article III:4.
129 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 208.
130 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No.
35, p. 30 (emphasis added).
131 See Certification by the Directorate General of Internal Taxes, supra note 120.
132 Appellate Body Report, Korea – Various Measures on Beef, para. 137 (emphasis in original).
133 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No.
35, p. 30 (emphasis in original). See also oral statement of Honduras to the Panel, 11 May 2004, para. 79
(English version).
134 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No.
31, p. 27.
135 Ibid.
136 See GATT Panel Report, US – Section 337, para. 3.11.
137 Request for the Establishment of a Panel by Honduras, supra note 2, para. 4.
138 First written submission of Honduras, 16 March 2004 , paras. 115-116. Oral statement of Honduras
to the Panel, 11 May 2004, para. 86 (English version).

is consistent with Note Ad Article III. In any event, the timing is sue is not within the Panel's terms of
reference.
4.279 Honduras has also not demonstrated how the id entical treatment accorded to domestic and
imported cigarettes by the bond requirement modifies conditions of competition "to the detriment of
imported products". 139 To ascertain detriment and find an Article III:4 violation, the Panel must
determine whether differences in conditions of competition afford protection to domestic producers140,
which Honduras has not shown. To the contrary, th e fact that cigarette imports into the Dominican
Republic have increased in recent years shows that importers have not been disadvantaged by the
bond requirement.141
(ii) The stamp requirement for imported and domestic ciga rettes is consistent with Article III:4 of
the GATT
4.280 Honduras has not established that the stamp requi rement accords "less favourable treatment"
to imported cigarettes, thereby violating Article III:4, as it has not shown that the stamp affords
protection to domestic producers, which is a necessary inquiry under Article III:4.142 Honduras argues
that affording protection to domestic industry "is not a material element" of Article III:4 143, citing the
Appellate Body's statement in EC – Asbestos that where there is less favourable treatment, there is
conversely protection of the like domestic product. 144 That statement, however, does not support
Honduras's conclusion.
4.281 The inquiry of whether a measure "afford[s] prot ection to domestic production" is an integral
part of the determination of whether a measure " accords less favourable treatment" –i.e. it is not a
separate inquiry. Only those modifications of the conditions of competition that are detrimental to
imported products are considered "less favourable treatment" under Article III:4. 145 " D e t r i m e n t "
means "loss sustained by or damage done to a pe rson or thing" or "a cause of loss or damage". 146
Determining detriment requires inquiry into the th rust and effects of the measure to ascertain if
imported products have sustained damage relative to like domestic products.147
4.282 Thus, it is of course true that a finding of "less favourable treatment" necessarily includes: "so
as to afford protection to domestic production" 148, which is consistent with the Appellate Body's
conclusion in EC – Asbestos mentioned above.149 This, however, does not contradict the necessity of
examining the effects that differences in conditions of competition have on imported products.
4.283 The Dominican Republic has shown that the stamp requirement is not applied "so as to afford
protection".150 The fact that Honduras's cigarette imports have increased significantly in 2003 and the
first trimester of 2004 shows that the stamp requireme nt has had no, or at most negligible, detrimental

139 Appellate Body Report, Korea – Various Measures on Beef, para. 137.
140 See Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply
to question No. 75, para. 89.
141 Oral statement of the Dominican Republic to the Panel, 11 May 2004, para. 41. See also Statistics
of imports of cigarettes, supra note 83.
142 First written submission of the Dominican Republic, 13 April 2004, paras. 34, 44, 46-54.
143 Oral statement of Honduras to the Panel, 11 May 2004, para. 64 (English version). See also Replies
of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 29, p. 25.
144 Appellate Body Report, EC – Asbestos, para. 100.
145 Appellate Body Report, Korea – Various Measures on Beef, para. 137.
146 The New Shorter Oxford English Dictionary, supra note 52, Vol. I, p. 652.
147 See Appellate Body Report (Article 21.5), US – FSC, para. 215.
148 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 29, p. 26.
149 See Appellate Body Report, EC – Asbestos, para. 100.
150 First written submission of the Dominican Republic, 13 April 2004, para. 53.

effect on imports.
151 Honduras has not reconciled this fact with its assertions that the stamp
requirement adds costs to the production process and affects the presentation of cigarettes to
consumers.
4.284 The Dominican Republic reiterates that any difference in the conditions of competition
between imported and domestic products caused by the stamp requirement is inherent in the nature of
imported products, not the result of form ally equal treatment as Honduras claims.
152 While
Article III:4 prohibits Members from modifying the conditions of competition to the detriment of
imported products, it does not require Members to compensate for the inherent differences between
imported and domestic products.
(iii) The requirement to affix stamps in the t erritory of the Dominican Republic and the
requirement to post a bond are justified by Article XX(d) of the GATT
4.285 The Dominican Republic has argued, in the a lternative, that the stamp and bond are both
justified by GATT Article XX(d), as they are necessary to secure compliance with the Dominican
Republic's GATT-consistent tax laws, a nd are consistent with the Article XX chapeau.
153 T h e
Dominican Republic rebuts Honduras's few counter-arguments below, bearing in mind the purpose of
Article XX.
4.286 As noted by the Appellate Body, Article XX es tablishes a "line of e quilibrium" between the
trade-specific rights of exporti ng members and the equally-importa nt non-trade specific rights of
importing members.154 In this case, Honduras has the right to import cigarettes, which it claims is
affected by the Dominican Republic's stamp and bond requirements. However, these measures are
not trade-restrictive at all, as they are not structur ed to have protective application, apply equally to
imported and domestic products, and have not resulted in fewer imports. On the other hand, the
Dominican Republic has the right to enforce its GA TT-consistent tax laws, and it has demonstrated
these measures are necessary to ensure the collection of taxes, which is especially crucial given the
country's serious macroeconomic crisis.
The requirement to affix stamps in the territo ry of the Dominican Republic is justified by
Article XX(d) of the GATT
4.287 The Dominican Republic has already demonstrated that its stamp requirement is justified by
Article XX(d) of the GATT, as it is necessary to secure compliance with its GATT-consistent Tax
Code, and is not arbitrary or unjustifiable discrimin ation or a disguised restriction on international
trade contrary to the Article XX chapeau.155 Honduras only questions the necessity of the stamp
requirement to secure compliance with the Domini can Republic Tax Code. The Dominican Republic
answers below.
4.288 First, the Dominican Republic has already shown, and there is no dispute over, the fact that
the stamp secures compliance with its Tax Co de, specifically the SCT, which is all GATT
consistent.156

151 Oral statement of the Dominican Republic to the Panel, 11 May 2004, para. 41. First written
submission of the Dominican Republic, 13 April 2004, para. 114. See also Statistics regarding imports by the
firm British American Tobacco – República Dominicana , supra note 24 and Statistics of imports of cigarettes,
supra note 83.
152 Oral statement of Honduras to the Panel, 11 May 2004, para. 59 (English version).
153 First written submission of the Dominican Republic, 13 April 2004, paras. 97-167; Oral statement of
the Dominican Republic to the Panel, 11 May 2004, paras. 33-47.
154 Appellate Body Report, US – Shrimp, para. 159.
155 First written submission of the Dominican Republic, 13 April 2004, paras. 100-140.
156 Ibid., paras. 102-105.

4.289 Honduras primarily argues the stamp is not a necessary measure, claiming it does not alert tax
authorities that applicable taxes have been collected 157, especially since the dispute is over cigarettes
that enter through regular customs channels. 158 Honduras's argument misses the point of the stamp
requirement and is wrong for two reasons. First, even if customs agents collect the taxes, the stamp
still serves to alert authorities that required taxes have been paid. Second, alerting authorities is only
one objective of the stamp requirement. Another is to foreclose non-legitimate channels of commerce
and ensure cigarettes enter through regular channels, thereby allowing authorities to log the number of
cigarette imports and account for the taxes on those cigarettes. Without stamps, cigarette smuggling
would increase, leading to a diminution of tax coll ection. Thus, the stamp requirement is indeed
necessary to secure tax compliance.
4.290 Honduras also argues the stamp requirement is not necessary because there are reasonable
alternatives. However, these alternatives would not achieve zero tolerance of tax evasion and
cigarette smuggling, which the Dominican Republic has the sovereign right to pursue. 159 T h e s e
alternatives also do not recognize the Dominican Republic's limited resources and the history of
smuggling in similar products. First, Honduras suggest s tax stamps be made available to importers
abroad.160 This would require customs agents to spend extra time verifying the affixation and
authenticity of the stamps, while this is currently ensured by affixation in the presence of DGII agents.
Moreover, sending stamps abroad has le d to smuggling and tax evasion with alcohol 161, while there
have been no such problems with cigarettes. C onsequently, the stamp requirement may be extended
to alcohol.162 Second, Honduras suggests pre-shipment inspection and certification at the importer's
expense.163 However, private companies cannot substitute for the state in enforcing domestic laws.
Finally, Honduras highlights that in the United States, agents stamp both domestic and imported
cigarettes at warehouses. 164 This would require extra resources to ensure all cigarettes are properly
transported to and stamped at this facility. It cannot be assumed the Dominican Republic has the
means to implement the system of a developed Member.
4.291 Honduras also failed to answer the Panel's qu estion as to whether less trade-restrictive
methods used by other countries have achieved zer o-tolerance enforcement. Instead, Honduras tried
to shift the burden of this question to the Dominican Republic 165, which it cannot do simply because
the Dominican Republic has the original burden with respect to the issue underlying the question.
The Dominican Republic has met its burden of proof under Article XX(d) by demonstrating the stamp
is necessary to achieve zero-tolerance enforcement, as it has led to no known instances of cigarette
smuggling, while there have been such problems with alcoholic beverages where there is no similar
stamp requirement.
4.292 Finally, the stamp is consistent with the chapeau of Article XX, which only admonishes
discrimination "between countries where the same conditions prevail"; a discrimination standard
different from elsewhere in the GATT. 166 As the stamp is applied consistently across all countries

157 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 25, p. 22.
158 Oral statement of Honduras to the Panel, 11 May 2004, para. 69 (English version).
159 First written submission of the Dominican Republic, 13 April 2004, para. 117.
160 Oral statement of Honduras to the Panel, 11 May 2004, para. 71 (English version). See also Replies
of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 25, p. 22.
161 See information submitted by the Dominican Republic as Exhibit DR-8.
162 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to
question No. 65, para. 70.
163 Oral statement of Honduras to the Panel, 11 May 2004, para. 72 (English version). Replies of
Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 25, p. 22.
164 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 12, p. 16.
165 Ibid., reply to question No. 26, p. 23.
166 First written submission of the Dominican Republic, 13 April 2004, para. 122.

where the same conditions prevail, there is no di scrimination of any kind, let alone arbitrary or
unjustifiable discrimination, or disguised restrictions on trade.
The Requirement to post a bond is justified by Article XX(d) of the GATT

4.293 The Dominican Republic has already shown that its bond requirement is justified by
Article XX(d) of the GATT, as it is necessary to secure compliance with its GATT-consistent Tax
Code, and is not arbitrary or unjustifiable discrimin ation or a disguised restriction on international
trade contrary to the Article XX chapeau.167 Honduras only questions whether the bond secures
compliance with the Tax Code, and whether it is necessary to do so. The Dominican Republic
answers below.
4.294 Honduras first claims that the bond cannot secure compliance with the Dominican Republic
Tax Code because tax liabilities cannot accrue to im ported products that disappear before clearing
customs.168 The Dominican Republic has already dem onstrated how the bond requirement indeed
secures such compliance, especially as tax liabilities can arise after a product has cleared customs and
after a tax has been paid.169
4.295 Honduras then argues that the bond is not necessary to secure such compliance. First, it notes
that taxes are paid before customs clearance. 170 However, the bond is indeed necessary to secure
payment of tax liabilities that may arise after customs clearance and tax payment. Second, it points
out there is no bond requirement for other products also subject to the SCT. 171 However, a bond may
be necessary to collect taxes only for some products , especially those susceptible to smuggling, such
as alcohol and cigarettes.172
4.296 Moreover, the Dominican Republic has no reasona ble alternatives available to it to achieve
the same zero-tolerance level of enforcement it has chosen, which is its sovereign right. 173 Honduras
specifically failed to answer the Panel's questi on regarding reasonable alternatives to the bond,
choosing instead to reiterate, erroneously, that th ere is no fiscal obligation for the bond to secure. 174
The lack of cigarette smuggling to date in the Dominican Republic shows the bond is necessary.
4.297 Finally, the bond is consistent with the chapeau of Article XX, which only admonishes
discrimination "between countries where the same conditions prevail"; a discrimination standard
different from other GATT provisions. 175 As the bond is applied cons istently across all countries
where the same conditions prevail, there is no discrimination of any kind, whether arbitrary,
unjustifiable, or disguised.
(c) Temporary measures imposed on imports
(i) The Dominican Republic has the right to maintain the Foreign Exchange Fee
4.298 The Dominican Republic has argued that the foreign exchange fee is an exchange measure
justified by GATT Article XV:9(a), and, in the alternative , is consistent with Article II:1 since it is

167 Ibid., paras. 141-167.
168 Oral statement of Honduras to the Panel, 11 May 2004, paras. 92-93 (English version).
169 First written submission of the Dominican Republic, 13 April 2004, paras. 82-91, 143-145.
170 Oral statement of Honduras to the Panel, 11 May 2004, para. 91 (English version).
171 Ibid.
172 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to
question No. 79, para. 97.
173 First written submission of the Dominican Republic, 13 April 2004, para. 150.
174 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 33, p. 29.
175 First written submission of the Dominican Republic, 13 April 2004, para. 153.

within the level of other duties or charges (ODC s) recorded by the Dominican Republic in its
Schedule. As the Dominican Republic has expl ained, GATT Article XV establishes that where a
Member implements exchange restrictions or exch ange controls consistent with the Articles of
Agreement of the International Monetary Fund (IM F), those exchange measures cannot be the basis
for a GATT violation.
4.299 Honduras wrongly tries to resurrect its Article XV:4 claim, which it raised in its Request for
the Establishment of a Panel 176, but not in its first written submission. Parties must "present the facts
of the case and their arguments" in their first written submission. 177 Honduras's assertion that
Article XV:4 is an exception to Article XV:9 is specious. Article XV:9 is unqualified. Honduras
could have raised its Article XV:4 claim, at least in the alternative, in its first written submission.
Having not done so, it must be deemed to have abandoned this claim now.
4.300 Honduras also claims the Dominican Republic acknowledges the exchange fee is a "trade
restriction"178, but Honduras fails to distinguish arguments in the alternative from admissions of fact.
The Dominican Republic argued that even if the Pa nel finds the exchange fee is not justified by
Article XV:9(a), Honduras's Article II:1 claim still fails as the fee is consistent with the ODCs
recorded in the Dominican Republic's Schedule. 179 This was an argument in the alternative, not an
admission of fact.
(ii) The transitional surcharge and foreign exchange fee are consistent with Article II:1 of the
GATT
4.301 Honduras still argues the Dominican Republic's tr ansitional surcharge and foreign exchange
fee are inconsistent with Articles II:1(a) and II:1(b) of the GATT.180 The Dominican Republic
disputes these claims below, and objects to Hondur as's undue expansion of the product coverage of
these claims.
The transitional surcharge and foreign exchange fe e are consistent with Article II:1(b) of the
GATT
4.302 Honduras argues the transitional surcharge and fo reign exchange fee are inconsistent with
GATT Article II:1(b) because the Dominican Repub lic did not record them as ODCs in its
Schedule181, and because they are "in excess of" the ODCs imposed -i.e. did not exist- as of 15
April 1994.182 The Dominican Republic has already shown it properly recorded these ODCs in accord
with paragraph 7 of the Understanding on the Inte rpretation of Article II:1(b) of the GATT 1994 (the
"Understanding").183 Honduras acknowledges no Member objected to this recording 184 which means
the recorded ODCs properly reflect those imposed as of 15 April 1994. The Dominican Republic has
also already shown that the surc harge and exchange fee are within this recorded level of ODCs. 185

176 Request for the Establishment of a Panel by Honduras, supra note 2, para. 6.
177 Panel Report, US –Steel Plate, paras. 7.27-7.29.
178 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question
No. 10, p. 12, citing first written submission of the Dominican Republic, 13 April 2004, para. 204.
179First written submission of the Dominican Republic, 13 April 2004, paras. 189 and 202.
180 Oral statement of Honduras to the Panel, 11 May 2004, paras. 4-21 (English version). Replies of
Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 24, pp. 20-21.
181 First written submission of Honduras, 16 March 2004 , paras. 53-56, 64-66. Replies of Honduras to
the questions addressed by the Panel, 27 May 2004, question No. 23, p. 20.
182 First written submission of Honduras, 16 March 2004, paras. 57-58, 67.
183 First written submission of the Dominican Repub lic, 13 April 2004, paras. 179-183, 203-205.
Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, para. 4.
184 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 3,
p. 3.
185 First written submission of the Dominican Republic, 13 April 2004, paras. 183, 204.

Nevertheless, the Dominican Repub lic shows below that Honduras is time-barred from challenging
the recording or existence of th ese ODCs based on the Understanding, an d that such challenge is not
within the Panel's terms of reference.
4.303 Honduras's claim, based on paragraph 5 of th e Understanding, that it can challenge the
recording or existence of the Dominican Republic's ODCs at any time
186, is wrong. Paragraph 5 of
the Understanding does not apply to rights affected by paragraph 4, which states the right to challenge
"the existence of an 'other duty or charge'" or "the consistency of the recorded level of any 'other duty
or charge'" lapses three years after the recordi ng of the ODCs (14 September 1997 in this case). The
negotiating history of the Understa nding demonstrates that this time limit for such challenges was
established to ensure certainty over the legal status of ODCs. 187 Therefore, Honduras's current claims
as to the recording and existence of the surcharge and exchange fee as ODCs are time-barred. Even if
Honduras challenges these ODCs under Articles XXII a nd XXIII of the GATT, the GATT Secretariat
has indicated that Panels should find "an ODC, havi ng been recorded in the schedule for more than
three years, could no longer be challenged".188
4.304 In addition, as the right to challenge the reco rding or existence of ODCs is established by
paragraph 4 of the Understanding, Honduras needed to raise these claims under the Understanding,
not under Article II:1(b) of the GATT. Honduras has not done so, and may not do so now.
Honduras's claims that the surcharge and exchange f ee are inconsistent with Article II:1(b) because
they were not recorded as ODCs or did not exis t as ODCs as of 15 April 1994 are therefore outside
the terms of reference of this Panel and should be dismissed.
The transitional surcharge and fore ign exchange fee are consistent with Article II:1(a) of the
GATT
4.305 Honduras's arguments that the surcharge a nd exchange fee are inconsistent with
Article II:1(a) must be rejected for two reasons. First, contrary to Honduras's claim that Article II:1(a)
forbids all ODCs 189, only ordinary customs duties or ODCs "in excess of" those recorded in a
Schedule can be inconsistent with Article II:1(a). 190 The European Communities agrees. 191 Second,
Honduras has only argued inconsis tency with Article II:1(a) as a consequence of inconsistency with
Article II:1(b).192 Honduras's contention that the Dominican Republic has not rebutted its
Article II:1(a) arguments 193 is therefore unfounded, as the Dominican Republic has done so by
rebutting its Article II:1(b) arguments. 194 There is nothing separate for the Dominican Republic to
rebut.
Honduras attempts to unduly expand the product c overage of its claims in respect of the
Transitional Surcharge and the Foreign Exchange Fee
4.306 Honduras's expansion of the produc t coverage of its challenge to the surcharge and exchange
fee is barred by due process, equity, and good faith, which must be accorded to all WTO respondents

186 Replies of Honduras to the questions addressed by the Panel, 27 May 2004, reply to question No. 3,
p. 3.
187 See "Article II:1(b): Legal Questions, Note by the Secretariat", Group of Negotiations on Goods
(GATT), Negotiating Group on GATT Articles, MTN.GNG/NG7/W/61, 16 November 1989, paras. 7-10,
submitted by the Dominican Republic as Exhibit DR-49.
188 Ibid.
189 First written submission of Honduras, 16 March 2004, para. 2.
190 First written submission of the Dominican Republic, 13 April 2004, paras. 174-178, 206.
191 Third party submission by the European Communities, 27 April 2004, para. 4.
192 Oral statement of Honduras to the Panel, 11 May 2004, paras. 4, 15-17 (English version).
193 Ibid., para. 15.
194 First written submission of the Dominican Republic, 13 April 2004, paras. 184-186, 207.

to give them full and fair opportunity to defend. 195 As the Appellate Body recognizes, an important
element of due process is setting terms of reference early. 196 Although a complainant's Panel request
initially defines the terms of reference, they can be narrowed by the proceedings. A complainant that
does not raise, in its first written submission, clai ms listed in its request for the establishment of a
Panel should be deemed to have waived such claims. 197 Otherwise, respondents may not have
adequate opportunity to respond, as in the case where a complainant raises a claim for the first time
during its closing statements at the second Panel meeting with the parties.
4.307 The product coverage of a dispute is an integral element of the terms of reference that must
also be defined at an early stage so as not to thwart due process and equity. 198 The present case has
been confined specifically to cigarettes based on consultations between the parties, Honduras's
reference to the surcharge and exchange fee " as [they apply] to the bound item of cigarettes" 199, and
the very title of this dispute. Therefore, H onduras may not expand the pr oduct coverage of its
challenge to the surcharge and exchange fee at this late stage, as it attempts to do 200, for that would
undermine due process, equity, and good faith.
3. Conclusion
4.308 For these reasons, the Dominican Republic ag ain asks the Panel to dismiss Honduras's
claims.201
G. ORAL STATEMENT OF THE DOMINICAN REPUBL IC AT THE SECOND SUBSTANTIVE MEETING OF
THE PANEL
1. Introduction
4.309 The Dominican Republic declared that it intended to use the opportunity to respond directly
to the assertions made by Honduras in its latest written submission to the Panel which, in its opinion,
remains silent as regards many of the arguments and much of the documentary evidence submitted by
the Dominican Republic.
4.310 The Dominican Republic began with a general re mark. Honduras claims that in this case,
what is at issue is the effectiveness of the GATT as a legal framework securing the results of market
access negotiations.202 The main theme of this dispute is not the threat of market access concessions,
as Honduras contends. What this dispute is essentiall y about is an importing country that is enforcing
its laws in its own territory, laws which are app lied in an identical manner to domestic products and
imported products, laws which pursue a legitimat e objective and not a protectionist one, namely
preventing smuggling and ensuring that taxpayers meet their tax obligations.
4.311 The Dominican Republic stated that it would refer briefly to each one of the measures or
categories of measures attacked by Honduras, starting with the stamp requirement.

195 See Panel Report, Thailand – H-Beams , para. 7.24. See also Appellate Body Report, US – FSC ,
para. 166.
196 See Appellate Body Report, Brazil – Desiccated Coconut, p. 22.
197 See Panel Report, US – Steel Plate , paras. 7.27-7.29. See also Appellate Body Report, Mexico –
Corn Syrup (Article 21.5 – US) , para. 50 (noting a Member must raise objections in a timely manner or risk
waiving them).
198 See GATT Panel Report, EEC – Import Restrictions, para. 30.
199 First written submission of Honduras, 16 March 2004, paras. 50, 61.
200 Oral statement of Honduras to the Panel, 11 May 2004, paras. 14, 21 (English version).
201 First written submission of the Dominican Republic, 13 April 2004, para. 208.
202 Second written submission of Honduras, 10 June 2004, para. 7.

2. Stamp requirement for domestic and imported cigarettes
4.312 Before turning to Honduras's arguments regard ing the stamp requirement, it is important to
remember that in its purpose, design, structure and application, the stamp requirement is intended to
secure compliance by taxpayers with their fiscal obligations and to combat smuggling. In that respect,
it has been an effective measure.
4.313 Honduras argues that if the Panel recognizes that the stamp requirement for cigarettes is a
legitimate measure, this could lead to the imposition of th
e requirement for any product. 203 T h e
Dominican Republic has explained that it is the particular circumstances surrounding smuggling and
tax evasion in the case of cigarettes that jus tify the stamp requirement. Until Honduras has
acknowledged that there is a global problem of smuggling of tobacco products, and until it has
recognized that the stamp requirement contributes to eliminating or preventing such smuggling, it will
not be able to understand that the affixing of stamps in the presence of inspectors from the Directorate
General of Internal Taxes is a legitimate, non-discriminatory and necessary measure.
4.314 Unfortunately, Honduras continues to ignore th ese two fundamental facts. The Dominican
Republic has submitted documentary evidence showing that the problem of the smuggling of tobacco
products is recognized worldwide.
204 More specifically, the Dominican Republic presented an
international convention negotiated in the World Hea lth Organization and an instrument issued by an
alliance of NGOs. Honduras's response was surprising: it said that these documents were not legally
binding on either Honduras or the Dominican Republic. 205 The Dominican Republic submitted these
documents for their value as evidence in respect of the fact alleged, and not because they represented
a source of international rights or obligations fo r the parties to the case. The Dominican Republic
does not need to negotiate, sign and ratify an interna tional treaty stating that the sun rises in the east
and sets in the west for this to be an incontrovertible fact. Similarly, the fact that the two instruments
submitted by the Dominican Republic as evidence are not binding on Honduras and the Dominican
Republic does not alter the truthfulness of their conten t. In fact, Honduras did not even try to refute
their content.
4.315 At the same time, Honduras states that the stam p requirement does not control the movement
of tobacco products within the meaning of Article 15 of the WHO Framework Convention – the same
convention which, according to Honduras, the Panel should not consider at all. 206 In fact, the stamp
requirement does control the movement of tob acco products, since the absence of a stamp on a
cigarette packet indicates to the authorities, traders and consumers that that packet entered the market
through illegal channels, without paying taxes. And yet Honduras argues that the stamp cannot be a
mark to alert Dominican Republic tax authorities that the Selective Consumption Tax has been
collected, since the stamp is affixed before that tax is paid. 207 What is important is for the stamp to be
affixed before the cigarette packets enter the market. No packet, whether domestic or imported, may
enter the market without a stamp having been affixed. The internal tax authorities control the stamps
that have been sold to each trader and importer. They also know how many of these stamps have
been affixed to the packets, and hence how many packets have entered the market. Consequently,
traders cannot evade tax control by declaring a numb er of packets lower than the number that entered
the market, and hence they cannot evade their taxe s by attempting to be assessed on a lower number
of packets.

203 Ibid., para. 4.
204 See "The FCTC and Tobacco Smuggling", supra note 23. See also, WHO Framework Convention
on Tobacco Control, supra note 47.
205 Second written submission of Honduras, 10 June 2004, paras. 53 and 116.
206 Ibid., para. 55.
207 Ibid., para. 49.

4.316 Honduras's complaint with respect to the stamp requirement is that it accords identical
treatment to imported and domestic cigarettes. 208 According to Honduras, given the conditions in
which the two products are competing, identical treatment under the law implies discrimination;
specifically, insisting that the imported product having to comply with the requirement in the territory
of the Dominican Republic increases the cost of the imported products.
209 According to this
reasoning, the "additional cost" of complying with the importing country's non-discriminatory law is a
source of discrimination. If this were the case, all WTO Members would be under the obligation to
apply differential measures for im ported products to eliminate any cost or inconvenience to the
importer resulting from compliance with the laws applied to domestic products. The cost of
complying with laws which do not discriminate, in letter, between imported and domestic products, is
something that any importer takes into account a nd assumes as a condition and cost inherent to
international trade.
4.317 Honduras argues that the Dominican Republic failed to specify which additional steps to
comply with the stamp requirement in the case of imported produc ts could be avoided. 210 However,
two paragraphs further on Honduras explains why one of the steps that the Dominican Republic
suggested as unnecessary is unavoidable. 211 This is one of Honduras's many contradictions according
to the Dominican Republic. The Dominican Republic said it would be identifying others in the course
of this oral submission.
4.318 Before discussing the Dominican Republic's defence under Article XX of the GATT, the
Dominican Republic would briefly mention some other arguments that Honduras has made with
respect to the stamp requirement. Honduras did not include, in its request for the establishment of a
Panel, the difference in the moment at which the domestic producer and the importer pay the Selective
Consumption Tax.212 The additional steps that the importer must go through before being able to sell
the imported product on the local market are inevitab le (except, perhaps, in cases where there is a
perfect customs union). For example, the importer will always have to complete import forms and
fulfil certain requirements which obviously do not apply to the domestic product. Consequently,
Honduras's argument that cigarette im porters are disadvantaged by the requirement that stamps be
affixed in the presence of inspectors is without merit. 213 As regards additional costs, Honduras has
ignored the fact that affixing stamps during the pr oduction process also has its cost for the domestic
producer.
4.319 In its effort to rebut the Dominican Republic 's defence under Article XX(d) of the GATT,
Honduras errs in its appreciation of the facts and contradicts itself. Honduras claims that the
Dominican Republic failed to identify the tax laws in respect of which compliance is secured by the
stamp requirement. It also argues that these laws are inconsistent with the GATT.
4.320 Regarding the first of these claims, Honduras contradicts itself once again: in paragraph 42 of
its second written submission, it stat es that the Dominican Republic has not specified which laws the
stamp requirement secures compliance with. Two pa ragraphs later, Honduras cites the reply given by
the Dominican Republic to questions of the Panel, namely that the stamp requirement guarantees the
payment of the Selective Consumption Tax, the ta x on the transfer of goods and services (ITBIS) and
the income tax. 214 In its replies, the Dominican Republic states that the ITBIS is established and
collected in accordance with Articles 335 to 360 of the Dominican Republic Tax Code, and the

208 Ibid., para. 12.
209 Ibid., para. 13.
210 Ibid., para. 21.
211 Ibid., para. 23.
212 Ibid., para. 14.
213 Ibid., para. 17.
214 Ibid., para. 44.

income tax in accordance with Articles 267 to 334 of the Dominican Republic Tax Code.
215 In its
first written submission, the Dominican Republic point ed out that the Selective Consumption Tax is
collected in accordance with Article 367 of the Tax Code as amended by Law 3-04 of
9 January 2004.216 This was confirmed by a letter from the Director General of the DGII, submitted
as Exhibit DR-2.217
4.321 Honduras's second argument is that the Dominica n Republic's tax laws are contrary to the
GATT.218 Honduras refers in particular to the Selectiv e Consumption Tax, and then goes on to repeat
the same argument with respect to the bond requirement. 219 And yet, the Dominican Republic did
demonstrate that the Selective Consumption Tax is GATT-consistent. The Selective Consumption
Tax on imported and domestic cigarettes is a specific duty of RD $0.48 per cigarette, both in the case
of the imported product and in the case of the domes tic product. The tax base is provided for by
Article 367(c) of the Tax Code, as amended by Law 3-04 of 9 January 2004. The specific amount is
provided for by Article 375, paragraph V, of the Tax Code, as amended by Law 3-04. This was all
mentioned by the Dominican Republic in its first written submission. 220 No further explanation is
needed to demonstrate that the Selective Consumption Tax on cigarettes is not contrary to the national
treatment obligation or any other obligation under the GATT. The Dominican Republic has
established a prima facie case of consistency of its tax laws with the GATT.
4.322 Honduras nevertheless insists on trying to demons trate that the Selective Consumption Tax,
before its amendment by Law 3-04, is contrary to the GATT. 221 The Dominican Republic stresses
that the versions of Articles 367 and 375 of the Tax Code on which Honduras is basing its argument
have ceased to exist, and that it is unnecessary, and ind eed a legal error, to refer to a version of a law
that is no longer in effect.
4.323 Also in connection with the Dominican Republic's defence of its measures under
Article XX(d) of the GATT, Honduras argues that the measures are not "necessary" within the
meaning of paragraph (d) as interpreted by the Appellate Body. According to Honduras, for a
measure to be necessary, it must be indispensable, and the Dominican Republic's measures are not
indispensable to the enforcement of its tax laws. 222 Honduras cites paragraph 161 of the Appellate
Body Report in Korea – Various Measures on Beef , in which the Appellate Body speaks of
"indispensable". However, what Honduras fails to mention is what the Appellate Body states three
paragraphs further on:
"In sum, determination of whether a meas ure, which is not 'indispensable', may
nevertheless be 'necessary' within the c ontemplation of Article XX(d), involves in
every case a process of weighing and balancing a series of factors which prominently
include the contribution made by the complia nce measure to the enforcement of the
law or regulation at issue, the importance of the common interests or values protected
by that law or regulation, and the accompan ying impact of the law or regulation on
imports or exports".
223

215 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, replies to
questions 70 and 78, paras. 78 and 96.
216 First written submission of the Dominican Republic, 13 April 2004, para. 19 and footnotes 11 and
12.
217 Certification by the Director General of Internal Taxes, dated 5 April 2004, submitted as Exhibit
DR-2.
218 Second written submission of Honduras, 10 June 2004, para. 42.
219 Ibid., para. 100.
220 First written submission of the Dominican Republic, 13 April 2004, footnote 11.
221 Second written submission of Honduras, 10 June 2004, para. 45.
222 Ibid., paras. 50, 51 and 117.
223 Appellate Body Report, Korea – Various Measures on Beef, para. 164.

4.324 The Dominican Republic has demonstrated how the stamp requirement contributes to securing
the desired level of enforcement of its tax laws . Since the introduction of the stamp requirement,
there has been practically no cigarette smuggling. On the other hand, in the case of alcoholic
beverages and matches, for which the stamp require ment is different, smuggling continues to pose a
problem. Nor is there any question of the importance of tax laws and the payment of taxes, especially
in a country with little resources like the Dominican Republic. Finally, the Dominican Republic has
demonstrated that the impact of the stamp requirement on imports of cigarettes is almost nil. This can
clearly be seen from the growth rate in cigare tte imports from Honduras, which reached more than
4,800 per cent during the first quarter of this year as compared to the same period last year. 224 Thus,
following the Appellate Body's interpretation of the word "necessary" in Article XX(d), the
Dominican Republic can only conclude that the stam p requirement is a measure that is necessary to
secure compliance with laws and regulations which are not inconsistent with the provisions of the
Agreement.
4.325 Honduras asks how the stamp requirement can secu re compliance with tax obligations when
there are other products that are subject to th e Selective Consumption Tax to which the stamp
requirement does not apply. 225 The need for the stamp requirement in respect of cigarettes must be
assessed in relation to that product alone. It is determined by the particular nature of the product. The
stamp requirement is applied to the sale of ci garettes, both imported and domestically produced,
because cigarette smuggling is so common and po ses such a serious problem. The Dominican
Republic knows of no cases of Jacuzzi or jet ski sm uggling, or if such smuggling has taken place, it
certainly does not represent 25 to 30 thousand milli on dollars (i.e. 25 to 30 billion dollars) in losses
for governments across the world. The evidence show s that cigarette smuggling is a serious problem,
whose repercussions at the global level are so ser ious that they have led to the negotiation of
declarations and international treaties under the auspices of such international governmental
organizations as the World Health Organization, and non-governmental organizations.226
4.326 Honduras contends that there are alternatives to the requirement to affix a stamp in the
presence of the Dominican Republic's internal tax in spectors. It insists, for example, that one
alternative would be to allow foreign cigarette producers to affix the stamps abroad. 227 However, the
Dominican Republic has provided clear evidence, whic h has not been refuted by Honduras, that when
the stamp is allowed to be affixed abroad, without the supervision of inspectors from the Directorate
General of Internal Taxes, smugg ling and forgery of stamps occur. 228 T h i s i s p r e c i s e l y w h y t h e
Dominican Republic is considering imposing the sam e stamp requirement on alcoholic beverages.
Another alternative measure suggested by Honduras is allowing the stamp to be affixed abroad and
then checking at the border that the packets ar e stamped and that the stamps are authentic. 229 This
would require increased resources in the Directorate General of Internal Taxes, since in addition to
inspecting each shipment of packets, it would ha ve to open each one of the cigarette boxes and
cartons in order to ensure that the stamps had no t been forged, a process that would delay the arrival
on the market of the imported product and would possibly entail higher costs for importers.
4.327 With respect to the chapeau of Article XX, Honduras argues that the stamp requirement is an
arbitrary and unjustifiable discrimination. 230 Firstly, Honduras does not deny that it is not just any
type of discrimination that the chapeau of Article XX prohibits, but only discrimination that is

224 Oral statement by the Dominican Republic before the Panel, 11 May 2004, para. 41. See also
Statistics of imports of cigarettes, supra note 83.
225 Second written submission of Honduras, 10 June 2004, para. 52.
226 See "The FCTC and Tobacco Smuggling", supra note 23. See also WHO Framework Convention
on Tobacco Control, supra note 47.
227 Second written submission of Honduras, 10 June 2004, para. 58.
228 See information submitted by the Dominican Republic as Exhibits DR-8 and DR-29.
229 Second written submission of Honduras, 10 June 2004, para. 58.
230 Ibid., paras. 68-72.

arbitrary and unjustifiable, between count ries where the same conditions prevail.
231 Secondly,
Honduras's entire argument concerning the chapeau is based on the incorrect assumption that the
purchase of the stamp by the domestic producer is credited towards payment of the Selective
Consumption Tax.232 Honduras bases this assumption on an inte rnal document of one of the domestic
cigarette producers in the Dominican Republic wh ich was presented as Exhibit DR-3 merely to
illustrate the procedure followed by domestic produ cers in requesting and obtaining the stamps. The
contents of that document do not implicate the G overnment of the Dominican Republic. In any case,
paragraph III of Article 37 of Decree 79-03 expres sly stipulates that stamp payments shall not be
credited to the payment of the Selective Consumpti on Tax. This is confirmed by the certification
from the Directorate General of Internal Taxes that the Dominican Republic circulated as Exhibit DR-
50. Thus, since the payment of stamps is not an advance on the payment of the Selective
Consumption Tax, the only arguments put forward by Honduras with respect to the consistency of the
Dominican Republic's measures with the chapeau of Article XX are discredited.
4.328 In conclusion, the Dominican Republic has shown that the stamp requirement is not contrary
to Article III:4 of the GATT, and even if it were , it would be justified under Article XX(d) of the
GATT.
3. Bond requirement for domestic and imported cigarettes
4.329 Honduras argues that should the Panel uphold th e Dominican Republic's right to require
bonds to be posted for the sale of imported cigarette s, it will be opening the door for any member to
impose bond requirements that would make imports prohibitive. 233 In addition to being an
exaggeration, this argument is contradicted by Honduras's other arguments concerning the bond.
Honduras never claimed that the bond was a prohibition under Article XI of the GATT. It merely
claimed, without any explanation or substantiation, that the bond was a restriction. However, the
Dominican Republic demonstrated that the bond was neith er a restriction, nor a disincentive, and still
less a prohibitive measure. This is best illustrated by the fact that BAT República Dominicana
imported for more than two years without posting th e bond. It was only some four days after the
Dominican Republic delegation informed the Panel that BAT República Dominicana had not paid the
bond, that the company hastily turned to the authorities to rectify its illegal situation. This shows that
the imports are not subjected to any such restricti on or prior condition. Furthermore, the significant
increase in cigarette imports from Honduras over the p ast year and a half shows that there is no
restriction or prohibition.
4.330 It is also important to remember that in th is case, Honduras recognized that the bond applies
in exactly the same way to domestic cigarettes a nd imported cigarettes. Indeed, this is precisely
Honduras's complaint: that they are given identical treatment. If the law does not discriminate, in
letter, as to the origin of the product, the discrimin ation that Honduras claims exists in this case must
be a de facto discrimination. If it is a de facto discrimination, Honduras must demonstrate how, in
this particular case, and not in hypothetical, alle ged or invented cases, there is discrimination.
However, in spite of its references to the diffe rences in the moment at which the importer and
domestic producer pay their respective taxes, H onduras has not been able to explain how a bond
which must be posted both for the domestic product and for the imported product, and which does not
in any way affect the sale, supply, distribution, transport, use or purchase of the imported product, can
be restrictive. If it is not restrictive, then there is no threat that it will become a prohibitive
requirement.
4.331 In its second written submission, Honduras focuses its efforts with respect to the bond on
explaining why the bond does not reflect one of the situations described in Note Ad Article III of the

231 First written submission of the Dominican Republic, 13 April 2004, para. 125.
232 Second written submission of Honduras, 10 June 2004, paras. 68-72.
233 Ibid., para. 5.

GATT. It asserts that the said Note does not apply because the bond requirement does not "affect" the
internal sale, offering for sale, purchase, transport, distribution or use of products. 234 This is a matter
on which the Dominican Republic and Honduras agree. The bond requirement does not affect the
sale, offer for sale, purchase, transport, distribution or use of products on the domestic market.
Consequently, Article III does not apply to the bond . However, contrary to what was said earlier,
Honduras then claims that the bond is contrary to Article III:4.
4.332 Honduras would appear to think that it is e nough to argue that the bond requirement does not
match any of the suppositions of Note Ad Article III in order to demonstrate that the bond falls within
the scope of Article XI. This is an incorrect in terpretation of Article XI, and moreover, it does not
comply with the general rule of burden of proof so often mentioned by Honduras in its second written
submission. It is Honduras that bears the burden of proof with respect to the claim that the bond is
contrary to Article XI. And yet, in its legal argum ent, which is barely two paragraphs long, Honduras
fails to demonstrate how a measure that is not even required as a prior condition or upon importation
can constitute an import prohibition or restriction. Its legal argument boils down to two paragraphs in
its first written submission.
235 In its latest submission, the lega l argument consists of one sentence.
One sentence which merely claims, without substan tiation, that the bond operates as a restriction
within the meaning of Article XI.236
4.333 This is one of the many occasions on which H onduras fails to respond to the arguments and
documentary evidence submitted by the Dominican Republic. Exhibit DR-43 submitted by the
Dominican Republic shows that imported cigarettes en ter its territory without the Directorate General
of Customs even noting whether the importer has posted the bond. Exhibit DR-35 shows that during
the period of over two years in which BAT has been importing cigarettes into the Dominican
Republic, it has never posted the bond. On the basis of these facts, Honduras cannot seriously argue
that the bond is a restriction on importation and therefore contrary to Article XI of the GATT.
4.334 At the same time, Honduras clai ms that the bond does not secure compliance with any tax,
since the Selective Consumption Tax is paid upon importation.
237 And yet, the Dominican Republic
demonstrated through Exhibit DR-28 that the pa yment made upon importation frequently has to be
adjusted, and as a result, there is a shortfall. In such cases, the bond secures the payment of the tax.
Honduras responded to this evidence by stating, without substantiation, that the reassessment of taxes
does not include the Selective Consumption Tax. It repeated this same argument in its second written
submission, as regards both the stamp requirement and the bond requirement. 238 I n i t s r e p l y t o
Honduras's written question, the Dominican Republic explained that the reassessments did include the
shortfall in the Selective Consumption Tax. The le tters sent by the Director General of Customs to
importers, provided as Exhibit DR-28, do not exclud e the Selective Consumption Tax. Honduras has
not proved the contrary, although it is up to Honduras to do so, since it is Honduras that claims that
the reassessment in no case includes the Selective Consumption Tax.
4.335 Another issue in respect of which Honduras has not offered a response or explanation is the
fact demonstrated by the Dominican Republic throu gh a declaration by the Director General of the
DGII that, in practice, the bond secures the paym ent of other taxes and not only the Selective
Consumption Tax.
239 Honduras simply repeats that the provision establishing the bond requirement
for domestic producers is contained in the chapter of the Tax Code of the Dominican Republic in

234 Ibid., para. 79. See also Replies of Honduras to the questions addressed by the Panel, 27 May 2004,
235 First written submission of Honduras, 16 March 2004, paras. 115-116.
236 Second written submission of Honduras, 10 June 2004, para. 82.
237 Ibid., para. 86.
238 Ibid., paras. 89, 115.
239 Letter from the Director General of Internal Taxes, supra note 39.

which the Selective Consumption Tax is established.
240 This is not a response to what is the actual
practice of the authorities of the Dominican Republic. That practice qualifies the measure in the same
way that the letter of the law qualifies the measure. The ruling of the Panel in the US - Section 301
Trade Act confirms this.241
4.336 In that case, the practice and statements of th e authorities of the United States Government
were sufficient to reverse the conclusion that th e letter of sections 301-310 of the United States Trade
Act was contrary to the provisions of the Dispute Settlement Understanding. Likewise, in this case,
the practice of the Dominican Government author ities should be taken into account. Exhibit DR-12
establishes that the practice of the authorities of the Dominican Republic is to use the bond
established under Article 376 of the Tax Code an d Article 14 of Decree 79-03 as a guarantee of
compliance with other taxes.
4.337 Another of Honduras's arguments with respect to the Dominican Republic's defence under
Article XX(d) of the GATT is that the Dominican Re public failed to specify all of the obligations in
respect of which compliance is secured by the bond. 242 This is yet another of Honduras's
contradictions. On the one hand, Honduras argues that the bond does not secure compliance with any
obligation, and on the other hand, it argues that it secures compliance with more than one
obligation.243 Moreover, Honduras speculates, without any grounds, that these other unspecified
obligations may be contrary to the GATT.
4.338 When it comes to demonstrating that the oblig ations in respect of which compliance is
secured by the bond are contrary to the GATT, Honduras once again relies on a version of
Article 367(b) of the Tax Code that no longer exists.
244 The Dominican Republic has shown that the
Selective Consumption Tax under the current la w cannot under any circumstance be considered
contrary to the GATT. It is now up to Honduras to provide evidence to the contrary, and it has not
done so. Rather, Honduras persists in asking the Pa nel to examine a law and a measure that no longer
exist.
4.339 With respect to the bond, Honduras repeats what it said with respect to the stamp requirement.
It asks how the bond can secure compliance with tax ob ligations if there are other products that are
subject to the Selective Consumption Ta x but not to the same bond requirement. 245 The Dominican
Republic reverts to the reply it gave to the same argument by Honduras with respect to the stamp
requirement. No other product subject to the Sel ective Consumption Tax is as likely to be smuggled
as cigarettes and alcoholic beverages.
4.340 Honduras recognizes the Dominican Republic's right to establish its desired level of
enforcement. However, it maintains that according to the Appellate Body, the level of enforcement
must be the same for domestic products as for impo rted products. It argues that in the case of the
bond for cigarettes in the Dominican Republic, the level is not the same. The Dominican Republic
agrees. The level of enforcement is more strict fo r domestically produced cigarettes. In its reply to
questions 80 and 81 of the Panel, the Dominica n Republic explains how in the case of domestically
produced cigarettes, the bond must be posted as a pre-requisite to the marketing of the product.
246 In
the case of imported cigarettes, on the other hand, the bond is not a prerequisite to importation. If this
were not so, it would mean that BAT República Dominicana has been operating illegally and in

240 Second written submission of Honduras, 10 June 2004, para. 111.
241 Panel Report, US – Section 301 Trade Act.
242 Second written submission of Honduras, 10 June 2004, para. 105.
243 Ibid., paras. 86 and 105.
244 Ibid., para. 124.
245 Ibid., para. 112.
246 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to
questions 80 and 81, paras. 98 and 99.

violation of the law of the Dominican Republic ove r the past few years, since although it has been
selling cigarettes imported from Honduras and other countries, it has not yet paid the bond.247
4.341 Honduras does not provide any argument with respect to the consistency of the bond
requirement with the chapeau of Article XX. 248 Consequently, the prima facie case for consistency
made by the Dominican Republic in its written submission has not been refuted.
4. Interpretation of Article III:4 of the GATT
4.342 Before responding to Honduras's arguments rega rding the other measures, the Dominican
Republic would like to refer to Honduras's interpre tation of Article III:4 of the GATT in relation to
the stamp and bond requirements.
4.343 The Dominican Republic has explained how it thinks these measures should be examined
from a legal point of view under Article III. Hondur as points out that Article III:4 does not require a
separate inquiry of whether the measures are applie d so as to afford protection to the domestic
industry.249 The Dominican Republic does not challenge this conclusion. On the contrary, it
recognises what the Appellate Body has stated with r espect to a separate inquiry of this element under
paragraph 4. The Dominican Republic is not aski ng the Panel to conduct this inquiry separately.
What the Dominican Republic is asking of the Panel is to conduct a co mplete inquiry under
paragraph 4, which requires it to determine whethe r as a result of the stamp and bond requirements
imported cigarettes are being accorded less favourable treatment than that acco rded to like domestic
products. According to the Appellate Body, a meas ure accords less favourable treatment to imported
products when it modifies the conditions of competition to the detriment of imported products.250 The
definition of the word "detriment" includes the noti on of damage or loss. Consequently, it must be
determined whether the measure modifies the conditi ons of competition, and in addition, it must be
determined whether this modification causes damage or loss to imports.
4.344 The effect that the measure has on trade in the product in question is also relevant. It can
stand as evidence that the differences in the condi tions of competition are not detrimental to the
imported product, and hence do not result in less favourable treatment. The Appellate Body also
pointed out that the determination of whether th ere was less favourable treatment under Article III:4
must be grounded in close scrutiny of the "fundamental thrust and effect of the measure itself".251 It is
pertinent in this case that the e ffect of the stamp and bond requirements on imports of cigarettes from
Honduras was practically nil.
4.345 Honduras's arguments in its second written subm ission do not respond to the arguments put
forward by the Dominican Republic on the basis of a correct interpretation of Article III:4.
5. Dead measures
4.346 The Dominican Republic turned to what it calle d the "dead measures". Honduras insists that
the Panel has the jurisdiction to examine measures that have already been abolished. Throughout
these proceedings it has persisted in trying to dem onstrate that the law abolishing the measures which
Honduras is challenging entered into force six days after the Panel was established. The Dominican
Republic has explained that the law was signed on th e day that the Panel was established, and that
even if it entered into force six days later, this was not sufficient reason for the Panel to rule and make
recommendations concerning measures that had already been abolished.

247 Certification by the Directorate General of Internal Taxes, supra note 120.
248 Second written submission of Honduras, 10 June 2004, para. 122.
249 Ibid., para. 30.
250 Appellate Body Report, Korea – Various Measures on Beef, para. 137.
251 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 215.

4.347 The Dominican Republic has submitted arguments , cited precedent, and pointed to various
provisions explaining why the Panel should not issue rulings with respect to measures that have been
abolished. The Appellate Body itself pointed out, in similar circumstances, that to issue
recommendations with respect to measures that had already been abolished was a legal error.
252
4.348 The main reason given by Honduras to justify the Panel's examining measures that have
already been abolished and issuing a recommendation is that failure to do so would mean that WTO
Members could evade their obligations by abolis hing measures when they were challenged and
reinstating them once the Panel established to examin e them had issued its ruling. In essence, what
Honduras is saying is that the Dominican Republic a ppears to be acting in bad faith and intends to
reinstate the measures. Apart from being untrue, H onduras's presumption of bad faith is contrary to
the principles of international law and to Appella te Body precedent. As the Dominican Republic
stated in its second written submission, according to the Appellate Body in Chile – Alcoholic
Beverages, "Members of the WTO should not be assumed, in any way, to have continued previous
protection or discrimination through the adoption of a new measure".253
4.349 At the same time, according to the Panel in Argentina – Textiles and Apparel, "in the absence
of clear evidence to the contrary, we cannot assu me that Argentina will withdraw the safeguard
measure and reintroduce the specific duties measure in an attempt to evade panel consideration of its
measures. We must assume that WTO Members will perform their treaty obligations in good faith, as
they are required to do by the WTO Agreement and by international law".
254 Honduras has not
presented any evidence that the Dominican Republic intends to reintroduce the measure. All that
Honduras has done is to submit press Articles expr essing the discontent of certain producers of
alcoholic beverages with the new measure. Hondur as cannot expect this Panel to presume that the
Government of the Dominican Republic has the intention of reintroducing the measure it has just
withdrawn simply because certain productive sectors are not content with the new measure.
4.350 Consequently, on the basis of the arguments set forth in its second written submission, the
Dominican Republic requests the Panel to reject Honduras's complaint against the dead measures.
6. Transitional surcharge and foreign exchange fee
4.351 In the opinion of the Dominican Republic, Honduras attempts to unduly expand the terms of
reference of this Panel to include all products subject to the Selective Consumption Tax in its
complaint against the transitional surcharge. In its first written
submission, Honduras clearly states
that it considers the transitional surcharge to be c ontrary to paragraph 1(b) of Article II of the GATT
as the surcharge applies to cigarettes. It does not mention any other product. It was not until the first
meeting of the Panel that Honduras suddenly included all of the products in the complaint, taking the
idea from the written submission of certain third par ties. By that time, the Dominican Republic had
already used two of its opportunities to present its defence before the Panel. By including other
products and thus expanding the cove rage of its complaint, Honduras interfered with the Dominican
Republic's right of defence and due process.
4.352 As regards substance, the Dominican Republic has already explained its position. By
submitting an addition to its Schedule of Concessi ons on 14 September 1994, it bound other duties or
charges at 30 per cent ad valorem in the case of cigarettes. This addition to its Schedule was
submitted within the six months allowed under paragraph 7 of the Understanding on the Interpretation
of Article II:1(b) of the GATT 1994. Neither Honduras nor any other WTO Member objected to this
binding. Honduras is nevertheless now claiming th at in April 1994, the Dominican Republic did not

252 Appellate Body Report, US – Certain EC Products , para. 81. Second written submission of the
Dominican Republic, 10 June 2004, para. 6.
253 Appellate Body Report, Chile – Alcoholic Beverages, para. 74 (italics in original).
254 Panel Report, Argentina – Textiles and Apparel, para. 6.14 (footnote removed).

impose the transitional surcharge.255 However, as the Dominican Republic has explained, it was up to
Honduras to submit that objection within three years following the day on which the Dominican
Republic recorded that level of other duties and charges, pursuant to paragraph 4 of the
Understanding. In other words, Honduras had until the end of 1997 to argue what it is belatedly
claiming now.
4.353 The negotiating history of the Understanding leaves no room for doubt: it belies Honduras's
argument. According to that history, set forth in paragraph 84 of the Dominican Republic's second
written submission, the level, or indeed the existe nce, of another duty or charge is considered
established as recorded by the Member, unless other Members challenge that binding within a given
period of time. After that time, the binding is de finitive and can no longer be challenged. According
to the negotiating history, this was done in order to guarantee legal security.
4.354 Rather than acknowledging the meaning of th e lapse of right under paragraph 4 of the
Understanding, Honduras misrepresents the Dominica n Republic's argument as suggesting that the
lapse of the right to challenge the binding of other duties or charges derives from the approval of the
schedules of concessions submitted by each Member to the Secretariat.
256 This is not a faithful
reflection of the Dominican Republic's argument. Th e lapse of the right to challenge the binding of
other duties or charges derives from paragraph 4 of the Understanding, and not only from the failure
to object to the lists annexed to the accession protoc ol within a period of 30 days following their
submission.
4.355 Honduras also argues that the lapse within a pe riod of three years does not apply because
paragraph 4 of the Understanding only provides for s ituations in which a Member records a level of
other duties or charges different from that which existed in April 1994. 257 However, the second
sentence of paragraph 4 establishes the lapse in case s in which the Member records a duty or charge
that did not exist at the time of binding. That sentence reads as follows:
"It will be open to any Member to challenge the existence of an 'other duty or charge',
on the ground that no such 'other duty or ch arge' existed at the time of the original
binding of the item in question, (...) for a pe riod of three years after the date of entry
into force of the WTO Agreement..."
4.356 This is precisely the situation that Honduras cl aims exists in this case. Consequently,
Honduras's claim that the lapse in a period of three years applies only to differences in the levels of
other duties or charges and not to the actual existence of that other duty or charge is untrue.
4.357 Since Honduras provides the same arguments ag ainst the transitional surcharge and the
foreign exchange fee, the Dominican Republic will not repeat the arguments by which it responded to
and rejected Honduras's claims. It simply refers to what it had al ready said with respect to these
measures.
4.358 Honduras has also failed to provide any new arguments or documentary evidence regarding
the Dominican Republic's defence of the foreign exch ange fee under Article XV:9 of the GATT. It
merely cites the documentary evidence already presented and repeats its previous arguments.
Consequently, the Dominican Republic reiterates its defence and arguments under Article XV in
refutation of what Honduras has stated.

255 Second written submission of Honduras, 10 June 2004, para. 163.
256 Ibid., para. 174.
257 Ibid., para. 30.

H.
ORAL STATEMENT OF HONDURAS AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL
4.359 Honduras took this opportunity to focus on the following factors: its claims, its arguments and
its evidence, in order to demonstrate that the Do minican Republic is breaching its WTO obligations.
It also addressed the points that the Dominican Republic had made in its second submission.
4.360 First, Honduras claims that less favourable treat ment for imported products is accorded as a
result of the requirement that stamps be affixed in the territory of the Dominican Republic, in light of
the privilege granted to domestic producers to af fix the stamps in the course of their production
process, a privilege that is not similarly accorded to foreign producers. It is important to emphasize
that Honduras is not challenging the stamp requirement in and of itself as a fiscal measure. Honduras
is challenging the unequal and discriminatory tr eatment that results from the requirement for
importers and for domestic producers to affix the ta x stamps at different points in the commercial
process. In order to provide equal treatment to both importers and domestic producers, there are two
options. The first is to allow the stamp to be affi xed in the course of the production process for both.
The second is to permit the affixation after the produc tion process for both. It is, of course, up to an
individual Member to determine which of these tw o alternatives would eliminate the discriminatory
elements of the measure. Honduras has been consistently of the view that the first option would result
in fewer costs than the second option and would also be less trade-restrictive.
4.361 The less favourable treatment accorded to imported cigarettes is inconsistent with the
Dominican Republic's obligations under Article III:4 of the GATT. It is undisputed that imported and
domestic cigarettes are like products. Therefore, the only issue is whether the Dominican Republic
accords less favourable treatment to imported cigare ttes. In its second submission, the Dominican
Republic reiterates that "[l]ess favourable treatment, according to the Appellate Body, consists of the
importing member modifying the conditions of competition in its market 'to the detriment of imported
products' ".
258
4.362 Using the Dominican Republic's own definition of "detriment", that is, "loss sustained by or
damage done to a person or thing" or "a cause of loss or damage" 259, Honduras has demonstrated that
there is detriment to imported products. Honduras has sustained losses because of the additional costs
and additional production steps associated with the affixation of stamps on imported cigarettes. These
additional costs and additional production steps are not incurred and are not undertaken in respect of
domestic cigarettes. To demonstrate these differe nces in costs and production steps, Honduras has
submitted Exhibits HOND-14, 15, 16, 23, 24, 25, 26(a), 26(b) and 26(c). Until now, the Dominican
Republic has not disputed these differences. Honduras also notes that damage in a different context is
done to imported cigarettes. As a result of th e stamp being fixed manually over the cellophane
wrapping, the cigarette packets are less visually app ealing to consumers than domestic cigarettes. To
demonstrate such damage, Honduras has submitted to the Panel Exhibits 25(a) to (n) and 27(a) to (n).
4.363 The Dominican Republic has implicitly acknow ledged that there are differences in the
conditions of competition between imported and domestic pr oducts in respect of compliance with the
tax stamp requirement.
260 The point of contention between the Dominican Republic and Honduras is
whether the modification of the conditions of comp etition is the result of the "inherent differences
between imported and domestic products". The Domi nican Republic does not explain clearly what it
considers to be "inherent differences". As an example, the Dominican Republic refers to
transportation costs and states: "There are additiona l costs that are inevitably linked to the condition
of an imported product. The most obvious exampl e of one such additional cost is the cost of

258 Second written submission of the Dominican Republic, 10 June 2004, para. 46, citing the Appellate
Body Report, Korea – Various Measures on Beef, para. 137.
259 Ibid., para. 47, quoting The New Shorter Oxford English Dictionary, supra note 52, Vol. I, p. 652.
260 First written submission of the Dominican Republic, 13 April 2004, para. 39. Second written
submission of the Dominican Republic, 10 June 2004, para. 50.

transportation, which raises a product's delivered price and consequently, the final price of the
imported product". 261 Honduras wished to note that transportation costs are not "inherent" in the
nature of imported products. It must be noted that transportation costs will also be incurred for the
shipment within a country and sometimes the domes tic transportation costs may be higher than the
transportation costs for imported products. For ex ample, an imported product shipped to Geneva
from Ferney-Voltaire in neighbouring France would have lower transportation costs than a product
shipped to Geneva from Zurich. Therefore, it is not correct to say that transportation costs are
inherent costs in the nature of imported products.
4.364 In addition, the costs arising from compliance with the stamp requirement can hardly be
considered as costs arising from the "inherent" differences between imported and domestic cigarettes.
Instead, they are costs which arise from the different points in time at which the stamp must be affixed
on imported cigarettes as compared to domestic cigarettes. They do not arise as a result of the
"inherent differences" between imported and domestic goods. The costs are directly caused by a measure
imposed by the Government of the Dominican Republic.
4.365 Moreover, under Article III:4, once a product has cleared customs, it should be subject to the
same laws and requirements as a domestic product a nd should be treated no less favourably than the
like domestic product. The issue of whether there are "inherent differences between imported and
domestic products" is, therefore, irrelevant under Article III:4.
4.366 In its second submission, the Dominican Republic reiterates that Honduras has not established
that the measure in question "has a protective applica tion – i.e. that it affords protection to domestic
producers".262 Honduras rebutted this argument in detail in its oral statement at the first hearing and
in its second submission. 263 Honduras emphasizes that the Appellate Body has sharply rejected the
approach suggested by the Dominican Republic. It ruled that "Article III:4 does not specifically refer
to Article III:1. Therefore, a determination of whet her there has been a violation of Article III:4 does
not require a separate consideration of whethe r a measure 'afford[s] protection to domestic
production'".264
4.367 In its second submission, the Dominican Repub lic reiterates that because the volume of
cigarette imports has increased, then "the stamp require ment has had no, or at most negligible, effect
on imports and therefore has not been detrimental to the imported product". 265 Again, Honduras has
rebutted this argument in detail. The Appellate Body has also specifically addressed this issue. It
stated: "…it is irrelevant that 'the trade effects' of the tax differential be tween imported and domestic
products, as reflected in the volume of imports, are insignificant or even non-existent; Article III
protects expectations not of any particular tr ade volume but rather of the equal competitive
relationship between imported and domestic products".266 This reasoning applies in this case.
4.368 In any event, even though the actual trade volum es are not relevant for the Panel to make a
finding of inconsistency, Honduras notes that the Dominican Republic has presented information in
its Exhibits that is inconsistent or contradictory. Honduras has presented in its Answers to the Panel's
Questions 1 and 2 evidence that total cigarette im ports to the Dominican Republic represent less than
4 per cent of the total domestic cigarette market. Exhibit-DR-32 presents an even lower estimate of
the market share of imported products: 0.4 per cent in 2002; 0.8 per cent in 2003 and 1.1 per cent in
2004. Yet, in Exhibit DR-31, the Dominican Repub lic presents information that the percentage of

261 First written submission of the Dominican Republic, 13 April 2004, para. 39.
262 Second written submission of the Dominican Republic, 10 June 2004, para. 45.
263 Oral statement of Honduras at the First Mee ting of the Panel, para. 64-65. Second written
submission of Honduras, 10 June 2004, paras. 30-34.
264 Appellate Body Report, EC – Bananas III, para. 216.
265 Second written submission of the Dominican Republic, 10 June 2004, para. 49.
266 Appellate Body Report, Japan – Alcoholic Beverages II, p. 16.

total imports is 1.5 per cent in 2001, 23.7 per cent in 2002 and 11.9 per cent in 2003. The information
presented in these two exhibits of the Dominican Republic is inconsistent and contradictory.
4.369 The Dominican Republic has also contradicted itself on the issue of the effectiveness of the
tax stamp requirement in the prevention of smuggling. In paragraph 60 of its second submission, the
Dominican Republic states that this effectiveness is "evidenced by the lack of any known instances of
cigarette smuggling in the Dominican Republic to da te". However, in paragraph 105 of its first
submission, the Dominican Republic stated, "[t] here are still documented cases of smuggling of
cigarettes for retail in the Dominican Republic". It is not clear which statement of the Dominican
Republic is correct.
4.370 Honduras notes that the Dominican Republic devoted a great deal of its first submission to the
important role the stamp requirement plays in the prevention of smuggling in the context of the WHO
Framework Convention. Honduras considers this Convention to be laudable and as a matter of fact, it
has signed it on 18 June 2004. Honduras observes th at despite the extensiv e references to the
objectives of the Framework Convention in attempting to justify its discriminatory requirements, the
Dominican Republic has not even signed the Conve ntion as of 28 June 2004. The deadline for
signature has now passed. In any event, Honduras notes that the entry into force of this Convention is
not a relevant factor in the Panel's assessment of the WTO-consistency of the measures at issue.
4.371 Honduras recalls its detailed argum ents rebutting this justification as set out in its second
submission in paragraphs 35 to 72. Honduras has submitted evidence to the Panel which
demonstrates that there are other less trade-restri ctive measures available to the Dominican Republic
which would achieve the same objective. (See Exhibit HOND-29.)
4.372 Contrary to the Dominican Republic's position, the requirement to affix the tax stamp at
different points in time for domestic and importe d cigarettes does not secure compliance with the
Dominican Republic's tax code. The Dominican Rep ublic, by defending a procedure designed to give
less favourable treatment to imports, has forgotten the objective of the stamp requirement. It is
Honduras's view that, by allowing the affixation of the stamp at the factory in Honduras below the
cellophane and as part of the manufacturing pr ocess, having the Dominican Republic oversee the
required administrative controls on the number of stamps given to the importer, and having the
Dominican Republic tax inspectors inspect the sh ipment upon arrival at the Dominican Republic's
Customs, the original objective of the stamp tax w ould be better achieved and with fewer costs to all
parties concerned -including the government of the Dominican Republic- than it is now.
4.373 Turning to the bond requirement, Honduras disagre es with the Dominican Republic's recent
assertion in its second submission that "[t]he bond requirement for domestic and imported cigarettes is
neither a restriction or prohibition on the importation of cigarettes contrary to Article XI:1 of the
GATT nor an internal measure that discriminates im ported cigarettes contrary to Article III:4 of the
GATT".
267 Honduras noted that the Dominican Republic initially subscribed to the fact that the
GATT disciplines would be applicable to the bond re quirement. In this regard, Honduras recalled the
statement in the Dominican Republic's first submission that:
"The fact that the bond is not enforced at the time or point of importation in the case
of imported cigarettes is further evidence that the bond requirement is not a measure
'on the importation' of a product. It is, theref ore, an internal measure within the scope
of Article III:4, not Article XI:1."
268
4.374 Honduras's view is that a measure that affects im ports of a particular product must be covered
under either Article XI or Article III. The bond requirement affects the imports of alcohol and tobacco

267 Second written submission of the Dominican Republic, 10 June 2004, para. 20.
268 First written submission of the Dominican Republic, 13 April 2004, para. 76.

products. Therefore, it must be subject to the discip lines of either Article XI or Article III. Honduras
therefore maintains the argument that it has presented throughout these proceedings on this issue.
4.375 Honduras's principal claim is that the bond requireme nt is inconsistent with Article XI:1. In
support of this claim, Honduras indicated in its Re ply to Question 35 from the Panel, that "the bond
requirement applies prior to the entry of both domestic and imported cigarettes in the domestic
market". Therefore, for imported products, it is a condition that must be met before importation can
take place. Thus, Article XI:1 applies, and not Article III. The Dominican Republic has argued that:
"... Article 14 of Decree No. 79-03, whic h requires that the bond requirement under
Article 376 of the Dominican Republic Tax C ode be posted by importers of alcoholic
beverages and tobacco products, does not state that the bond requirement is a
condition for importation of such products. It provides simply that importers and
domestic producers of cigarettes alike must provide the bond.
Article 40 of Decree No. 79-03 requires that importers of cigarettes obtain an import
license from the DGII. For that purpose, importers must meet a few objective and
non-discretionary conditions. The posting of the bond required of importers by
Article 14 of Decree No. 79-03 is not among those conditions." (footnote omitted.)
4.376 Article 14 of Decree 79-03 did introduce a bond re quirement for importers of cigarettes. It
specifically states "[t]his bond shall be posted with the Directorate General of Internal Taxes by both
importers and domestic producers". Even though Article 14 does not expressly state that the bond
requirement is a condition for importation, it does not mean that the bond is not a condition for
importation. Article 14 refers to Article 376 of the Dominican Republic's Tax Code which provides:
"No alcohol or tobacco product may be produced in the Dominican Republic unless
the person wanting to manufacture the said products has previously registered and
posted with the Tax Administration a bond intended to ensure that any tax obligation
established under this Chapter is met."
4.377 Article 376 makes clear that the posting of the bond is a pre-condition for domestic producers
of alcohol and tobacco products. It must be reca lled that, under the current regulations, the bond is
required identically for domestic producers a nd importers. The Dominican Republic does not
disagree with this. The fact remains that importe rs of cigarettes are obliged to post a bond and,
therefore, by implication the bond must also be a pre-condition for importers. If the bond is not a pre-
condition, then what would be the consequence of an importer not posting the bond? The only
plausible answer is that if an importer is request ed to post the bond for certain products, and does not
so comply, those products would not be allowed to enter the territory of the Dominican Republic. The
fact the Dominican Republic has failed to enforce the bond requirement until 13 May 2004 does not
contradict the fact that it is a requirement unde r the law, and therefore does not undermine Honduras's
claim that the measure as such is WTO-inconsistent.
4.378 In its second submission, the Dominican Re public asserts that "Honduras has not presented
any evidence that the bond require ment has any restrictive effect on the importation of cigarettes".
269
In response, Honduras refers to the consistent GATT and WTO jurisprudence on the irrelevance of
trade effects in the determination that a measure violates Article XI:1. Thus, the GATT Panel in the
case of EEC – Oilseeds I stated that:
"… the CONTRACTING PARTIES have c onsistently interpreted the basic
provisions of the General Agreement on restrictive trade measures as provisions
establishing conditions of competition. T hus they decided that an import quota

269 Second written submission of the Dominican Republic, 10 June 2004, para. 30.

constitutes an import restriction within the meaning of Article XI:1 whether or not it
actually impeded imports ..."
270
4.379 In the context of its claim that the bond requirement falls under Article XI, Honduras stated in
its reply to Question 35 addressed by the Panel that "… the requirement to post a bond does not affect
'the internal sale, offering for sale, purchase, transportation, distribution or use of products, an internal
quantitative regulations requiring the mixture, processi ng or use of products in specified amount or
proportions". Honduras noted that the Dominican Republic's argument that Article III:4 is not
applicable to the bond requirement, attempts to ma ke reference to this reply of Honduras as support.
However, Honduras took the opportunity to note that this reply was provided to respond to the Panel's
question on whether the measure fell under Article III or Article XI. It has been the consistent
position of Honduras that the bond requirement falls under Article XI:1. Honduras has also made an
"in the alternative" claim, that should the Panel find that the measure does not fall within Article XI:1,
then it should assess the bond requirement under Arti cle III:4. The Dominican Republic has therefore
misunderstood the context in which Honduras's reply was given.
4.380 In conclusion, Honduras has establis hed that the bond requirement is prima facie inconsistent
with the Dominican Republic's obligations under Article XI:1, or, in the alternative, with Article III:4.
The Dominican Republic has failed to rebut Honduras's claim. In addition, the Dominican Republic
has attempted to justify its violation of its GATT obligations by seeking recourse to Article XX(d),
but has failed to demonstrate that its measure is justified by that provision.
4.381 With respect to the Selective Consumption Tax, Honduras claims that the application of this
tax as it applied on the date of request of the est ablishment of the Panel, and on the date of the
establishment of this Panel, is inconsistent with Articles III:2, III:4, X:1, and X:3(a) of the GATT.
The Dominican Republic has not rebutted the mer its of these claims. Instead, the Dominican
Republic contends that the Panel should dismis s Honduras's claims regarding the Selective
Consumption Tax on procedural grounds. Hond uras would address certain new arguments made by
the Dominican Republic regarding this procedural argument and then briefly recall the arguments it
made earlier on this point.
4.382 In its first submission, the Dominican Republic did not cite any legal authority supporting its
contention that the claims should be dismissed. 271 Indeed, at the First Meeting of the Panel, the
Dominican Republic conceded that the Selectiv e Consumption Tax as challenged by Honduras is
within the terms of reference of the Panel. In their oral statement, the Dominican Republic also
asserted that the new Article 367 of the Tax Code, as amended by Law 03-04, is not within the terms
of reference of this Panel. 272 Honduras agrees that Law 03-04 is not within the terms of reference of
this Panel. Therefore, the measure at issue befo re the Panel is the Selective Consumption Tax as
challenged by Honduras. The Panel is, therefore, obliged to make an obj ective assessment of the
matter before it, including making findings and recommendations.
4.383 In its second submission, the Dominican Republic sought to base its contention on three broad
grounds:
• Any recommendations to be made by the Panel regarding the Selective Consumption
claims would "constitute legal error"273

270 GATT Panel Report, EEC – Oilseeds I , para. 150, referring to the GATT Panel report on Japan –
Leather II (US).
271 First written submission of the Dominican Republic, 13 April 2004, paras. 15-25.
272 Oral statement of the Dominican Republic at the First Meeting of the Panel, para. 6.
273 Second written submission of the Dominican Republic, 10 June 2004, section II.A.2.

• An examination by the Panel of the Sel ective Consumption Tax claims would be
"contrary to the principle of judicial economy"274
• An examination by the Panel of the Selec tive Consumption Tax cl aims is unwarranted
because of two factual circumstances:
o These measures do not have lingering effects 275, nor is there a danger of their
reinstatement276
o And the Selective Consumption Tax claims involve measures which were altered
before the date of functioning of the Panel.277
4.384 Honduras is of the view that these arguments ar e without merit and will respond to each of
these grounds in turn.
4.385 First, the Dominican Republic contends that recommendations by the Panel regarding the
Selective Consumption Tax (as it stood on the date of establishment of the Panel) would constitute
"legal error" on the basis of certain observations of the Appellate Body in the US-Certain EC
Products case. The Appellate Body report in US-Certain EC Products does not stand for the
proposition that a Panel cannot make findings in respect of measures that are no longer in existence.
The Appellate Body merely stated that "[t]he Pa nel erred in recommending that the DSB request the
United States to bring into conformity with its WTO obligations a measure which the Panel has found
no longer exists". 278 In that case, there was a disagreement between the parties concerning the
measures that were at issue in the terms of reference of the Panel.
4.386 In this case, there is agreement between the par ties as to the measure at issue covered by the
terms of reference. As noted above, the Domi nican Republic conceded that the Selective
Consumption Tax as challenged by Honduras is within th e terms of reference of the Panel. Therefore,
the Panel need not, and cannot, examine any replacement measure.
4.387 Indeed, Honduras submits that the Panel ca nnot examine the characteristics of any
amendment that may have been implemented after the date of the establishment of the Panel as it
would be outside of its terms of reference. Th e Panel cannot examine the provisions of Law 03-04 as
it does not fall within the Panel's terms of reference.
4.388 Therefore, the Panel must restrict its examination to the Selective Consumption Tax as
challenged by Honduras in the request for the establishm ent of the Panel and, as the Panel cannot take
into account developments after its terms of reference were estab lished, the Panel is duty-bound to
make a recommendation on the Selective Consump tion Tax as it existed at the time of the
establishment of the Panel. As the Panel does not have the factual basis to find that the original
Selective Consumption Tax is no longer in exis tence (because it cannot examine Law 03-04) it must
make a finding on the measure before it. If it finds the measure to be WTO-inconsistent, it is obliged
to make a recommendation to the Dominican Republic to bring its measures into conformity.
4.389 Second, the Dominican Republic contends th at the Panel's findings on the Selective
Consumption Tax claims would be contrary to the "principle of judicial economy". In US – Lead and
Bismuth II, the Appellate Body categorically rejected an attempt by the United States to put forward a
general principle that "…panels may not address an y issues that need not be addressed in order to

274 Ibid., para. 7.
275 Ibid., section II.A.3.
276 Ibid., Section II.A.4.
277 Ibid., Section II.A.5.
278 Appellate Body Report, US – Certain EC Products, para. 81.

resolve the dispute between the parties".
279 The principle of judicial economy involves discretion to
decline to rule on particular issues, but only if the resolution of those issues is not necessary to resolve
the dispute. In this case, the dispute concerns the Selective Consumption Tax as it stood as of the time
of the request for the establishment of the Panel, or as of the time of the Panel's establishment, at the
latest. The Panel has a duty to resolve this dispute.
4.390 The cases cited by the Dominican Republic do not support its position on this point. In
Australia – Salmon , the Appellate Body did not invalidate the Panel's findings because they were
contrary to the "principle of judicial economy". Indeed, it did precisely the opposite; it found fault
with the Panel for not making findings on matters within the terms of reference.
280 The Dominican
Republic cites the Panel in Chile – Price Band System to the effect that "a panel is required to make
the recommendation to bring a measure which it has found inconsistent into conformity if that
measure is still in force. Conversely, when a Panel concludes that a measure was inconsistent with a
covered agreement, the said recommendation cannot and should not be made".281 Honduras notes that
this finding of the Panel was not reviewed by or endorsed by the Appellate Body on appeal.
4.391 Third, the Dominican Republic contends that an examination by the Panel of the Selective
Consumption Tax is unwarranted because of f actual circumstances. The presence of "lingering
effects" or a "danger of reintroduction" is not a prerequisite for the examination of measures which
are terminated after the date of establishment of th e Panel. These tests were not even considered by
the Panels in United States – Wool Shirts and Blouses 282 and Indonesia – Autos 283, where findings
were made in respect of measures terminated or m odified in the course of the proceedings. In any
case the Dominican Republic cannot assert that H onduras has not provided evidence regarding the
possibility of reintroduction of the Selective Cons umption Tax system as it stood on the date of
establishment of this Panel. Honduras has presente d 10 exhibits demonstrating this possibility. 284 The
Dominican Republic has not responded to this evidence.
4.392 In a similar vein, the Dominican Republic reli es on the fact that the Selective Consumption
Tax claims involve measures that were revoked before the organizational meeting of the Panel. It
fails to explain why the status of the measures at the time at which the Panel "started its adjudicative
process"285 should be the relevant standard. This asser tion is directly contrary to consistent
GATT/WTO jurisprudence to the effect that the re levant time to assess whether a measure is within
the terms of reference is the time at which the Panel is established. 286 The Dominican Republic's
assertion lacks any basis.
4.393 Moreover, the Dominican Republic elaborates on this flawed standard by stating"[t]here is no
reason to believe that the precise moment when a Pa nel is established is the moment it begins its
adjudication process".287 At least one Panel has taken a different view. In Argentina – Textiles and
Apparel, the Panel observed: "the Argentine measur e under consideration was revoked before the
Panel was established and its terms of reference set, i.e. before the Panel started its adjudicative
process".288

279 Appellate Body Report, US – Lead and Bismuth II, para.71.
280 Appellate Body Report, Australia – Salmon, paras. 225 -226.
281 Panel Report, Chile – Price Band System, para.7.112 (italics in original).
282 Panel Report, US – Wool Shirts and Blouses.
283 Panel Report, Indonesia – Autos.
284 Information provided by Honduras as Exhibits HOND-40 to HOND-49.
285 Second written submission of the Dominican Republic, 10 June 2004, para. 15.
286 See e.g. Panel Report, India – Autos, para. 7.22; Panel Report, Argentina – Textiles and Apparel,
Panel Report, Canada – Wheat Exports and Grain Imports, paras. 6.255, 6.256 and 6.258.
287 Second written submission of the Dominican Republic, 10 June 2004, para. 15.
288 Panel Report, Argentina – Textiles and Apparel, para. 6.13.

4.394 Honduras notes that in all the cases where a Panel chose not to examine a measure, the
measure in question was terminated before the date of establishment of the Panel. That is not the
situation in this case. In this case, the Selectiv e Consumption Tax claims are within the terms of
reference and this Panel is under a duty, deriving from Article 11 of the DSU, to assess those claims.
In Japan – Alcoholic Beverages II , the Appellate Body held that a failure to address the full range of
matters included in the terms of refe rence constituted an "error of law". 289 It has reiterated this
principle in Australia – Salmon290 and Japan – Agricultural Products II.291
4.395 Lastly, Honduras noted that the Dominican Republ ic requests an additional finding that the
Selective Consumption Tax, as it stood at the date of the establishment of the Panel, does not result in
any nullification and impairment of benefits to Honduras. Honduras noted that Article 3.8 of the DSU
states the presumption of prima facie nullification or impairment of benefits in cases where there is an
infringement of the obligations assumed under a covered agreement.
4.396 Turning to the Transitional Surcharge and the Foreign Exchange Fee, Honduras claims that
the transitional surcharge and the foreign excha nge fee constitute a charge imposed on or in
connection with importation inconsistent with Article II:1(a) and (b) of the GATT.
4.397 Article II:1(b) must be construed in light of the Understanding on the Interpretation of
Article II:1(b) of the GATT 1994. Paragraph 1 of the Understanding provides that "the nature and
level of any 'other duties or charges' levied on bound tariff items, as referred to in that provision
[Article II:1(b) of the GATT] shall be record ed in the Schedules of concessions annexed to
GATT 1994 against the tariff item to which they appl y…" Paragraph 2 of the Understanding clarifies
that "the date as of which 'other duties or char ges' are bound, for purposes of Article II of the GATT,
shall be 15 April 1994".
4.398 Both parties agree that the transitional surcharge is an "other duty or charge" imposed on or in
connection with importation within the meaning of the second sentence of Article II:1(b) of the
GATT.
4.399 In addition, the Dominican Republic has acknow ledged that "the transitional surcharge for
economic stabilisation was introduced for the first time in June 2003" and that "it did not replace any
previous similar or equivalent measure".
292 Furthermore, the Dominican Republic has likewise
clarified that "[t]he only 'other duty or charge ' in force on 15 April 1994 was the exchange fee …" 293,
thus admitting that the transitional surcharge was not imposed on 15 April 1994.
4.400 With respect to the foreign exchange fee, it cannot be denied that it is a duty or charge. It is
undisputed that the fee is imposed on imports, and therefore, it can properly be characterized as
falling within "other duties or charges of any kind imposed on or in connection with … importation"
(emphasis supplied) within the meaning of Ar ticle II:1(b), second sentence, of the GATT.
Furthermore, both parties agree that it is currently imposed "… in excess of [the duties or charges]
imposed on the date of [the GATT 1994]".
4.401 On the basis of the foregoing, the Panel shoul d find that the transitional surcharge and the
foreign exchange fee are inconsistent with Article II:1(b) of the GATT because they are "other duties
or charges" within the meaning of Article II:1(b) of the GATT and are currently imposed "…in excess
of [the duties or charges] imposed on the date of [the GATT 1994]".

289 Appellate Body Report, Japan – Alcoholic Beverages II, p. 26.
290 Appellate Body Report, Australia – Salmon. paras. 224-226.
291 Appellate Body Report, Japan – Agricultural Products II, paras. 111-112.
292 Replies of the Dominican Republic to the questions addressed by the Panel, 27 May 2004, reply to
question No. 47, para. 44.
293 Ibid., reply to question No. 43, para. 40.

4.402 In its defence, the Dominican Republic has stated the following:
"The Dominican Republic has already de monstrated, contrary to Honduras's
assertions, that it did properly record th e transitional surcharge and the foreign
exchange fee as ODCs in its Schedule of Concessions on 14 September 1994, within
the six-month period provided for by pa ragraph 7 of the Understanding on the
Interpretation of Article II:1(b) of the General Agreement on Tariffs and Trade 1994
(the ''Understanding'').* Honduras itself acknowledges that ''no Member had notified
objections to the Dominican Republic's list of 'other duties and charges' filed on 14
September 1994".* This recording must therefore be considered the properly
recorded level of ODCs imposed by the Dominican Republic as of 15 April 1994.
The Dominican Republic has also already s hown that its transitional surcharge and
foreign exchange fee are within the upper li mit established by this recorded level of
ODCs."
294 (footnotes omitted.)
4.403 Thus, the Dominican Republic argues that becau se it recorded (incorrectly in the view of
Honduras) a certain specific level in its Schedule, it can levy any other duties or charges up to that
level now. The Dominican Republic has agreed that the transitional surcharge did not even exist in
1994 and that the foreign exchange fee was only levi ed at a rate of 1.5 per cent in 1994. If this
spurious line of argument is followed, there are sever al questions that would arise. The first question
is: why would a Member record a duty or charge that did not even exist at the time or that existed at a
significantly lower level than what it recorded? The second question is, as the Dominican Republic
"uses up" 12 per cent (that is 10 per cent for the fore ign exchange fee currently applied and 2 per cent
for the transitional surcharge) – does that mean that in the future, the Dominican Republic can
introduce new duties or charges up to the remainder of the present level? If the Panel were to accept
such an approach, that would undermine the whol e basis of commitments made in a Schedule of
Concession and the requirement for transparency in recording.
4.404 The Dominican Republic has attempted to argue th at it "did properly record the transitional
surcharge and the foreign exchange fee as ODCs in its Schedule of C oncessions on 14 September
1994, within the six-month period provided fo r by paragraph 7 of the Understanding…". 295
Throughout these proceedings, Honduras has demonstr ated that the measure that the Dominican
Republic recorded was the Selective Consumption Ta x, an internal measure. It did not record the
transitional surcharge or the foreign exchange fee. As the Understanding only applies to the recording
of "other duties or charges", the fact that the Domi nican Republic recorded an internal tax within the
six-month provided in paragraph 7 of the Understanding is completely irrelevant. The transitional
surcharge and the foreign exchange fee cannot be brought under the cover of the recording of the
Selective Consumption Tax. More specifically, the Dominican Republic has claimed that "the
transitional surcharge and the foreign exchange fee are within the upper limit established by this
recorded level of ODCs".
296 However, as was cl early pointed out in the second submission of
Honduras, the recording of the Selective Consump tion Tax at a certain level does not give the
Dominican Republic the authority to levy other types of duties or charges up to that level now. The
Dominican Republic did not merely record a quantita tive level for a general category of "ODCs". It
specifically named the instrument " Impuesto Selectivo en Aduanas ". The Dominican Republic has
admitted that "[t]he heading 'Impuesto Selectivo en Aduanas' in the list attached to [its] 14 September
1994 notification… is a mistake", and that "there is a correspondence between the recorded level of
other duties or charges… and the [ Impuesto Selectivo en Aduanas ] in force on September 1994…".
297

294 Second written submission of the Dominican Republic, 10 June 2004, para. 80.
295Ibid., para. 80.
296 Ibid., para. 103.
297 Replies of the Dominican Republic to questions addressed by the Panel, 27 May 2004, reply to
question No. 42, para. 38.

Thus, the transitional surcharge and the foreign ex change fee were not "properly recorded" in the
Dominican Republic's Schedule of Concessions.
4.405 Even assuming that the transitional surcharge a nd the foreign exchange fee were imposed on
15 April 1994, pursuant to paragraph 7 of the Unde rstanding, the Dominican Republic had a period of
six months from "the date of deposit of the instrume nt" referred to in that paragraph within which to
inscribe the same in its Schedule of Concessions. That six-month period has long since expired, and,
after the expiration of that period, the Dominican Republic was no longer authorized to add the
transitional surcharge or the foreign exchange fee in its Schedule of concessions. This being the case,
notwithstanding that the Dominican Republic had im posed the foreign exchange fee on 15 April 1994
at the rate of 1.5 per cent ad valorem, after the expiration of the six-month period, having failed to add
the foreign exchange fee in its Schedule of C oncessions, the continued imposition of the foreign
exchange fee after that period at any level, includi ng the present level of 10 per cent, is inconsistent
with Article II:1(b) of the GATT. Article II: 1(b) cannot be construe d independently of the
Understanding.
4.406 In its second submission, the Dominican Republic contends that "Honduras's challenge to the
Dominican Republic's [other duties or charges] is barred by paragraph 4, second sentence, of the
Understanding and therefore must not be allowed to proceed".
298 In Honduras view, this argument is
based on an incorrect interpretation of the scope and coverage of paragraph 4.
4.407 In Honduras's view, paragraph 4 does not apply because what the Dominican Republic
recorded under "other duties or charges" was an inte rnal tax, not "other duties or charges" within the
meaning of Article II:1(b). Even if the transitio nal surcharge and the foreign exchange fee were
somehow to be covered by the recording of the Se lective Consumption Tax, the conditions set out in
paragraph 4 to make this provision applicable would still not be met.
4.408 As indicated in its first sentence, paragraph 4 applies only to "other duties or charges"
imposed on "a tariff item [that had] previously been the subject of a concession". (The Dominican
Republic omitted the first sentence of paragraph 4 when it cited that paragraph in paragraph 84 of its
Second written submission.) Therefore, this provision does not apply to any product that has not been
the subject of a previous concession. Furthermore, the three-year deadline only applies to the right to
challenge the recording of an other duty or charge which was not in existence at the time of the
original binding or which was recorded at a higher leve l than that of the previously bound level. It is
only in these situations that other Members had a three-year period to challenge the existence or
consistency with the previous bindings.
4.409 The situation contemplated under the exception in paragraph 4 is not relevant to this dispute,
as Honduras has not made a claim on any "tariff item [that had] previously been the subject of a
concession", i.e. prior to 15 April 1994. Paragraph 4 does not apply to a challenge of a recording of
an "alleged other duty or charge" which was not in fact imposed as of 15 April 1994.
4.410 This is the situation in this case. Therefore, pa ragraph 5 is applicable. Paragraph 5 states that
Members retain the right to challenge the consistency of a recording of an "other duty or charge" with
a Member's rights and obligations under GATT 1994 at any time.
4.411 In further support of its arguments relative to the three-year prescriptive period, in paragraph
84 of its second written submission, the Dominican Re public quoted selected portions of paragraphs 7
to 10 of the paper entitled "Article II:1(b): Legal Questions, Note by the Secretariat,
MTN.GNG/NG7/W/61, 16 November 1989" and presented the paper as Exhibit DR-49. Reading
only the selected portions quoted by the Dominican Republic, one might be misled into concluding

298 Second written submission of the Dominican Republic, 10 June 2004, para. 84.

that the three-year prescriptive period is applicable to this dispute. The Dominican Republic omitted
the following wording in paragraph 7, which precedes the portion quoted by the Dominican Republic:
 (i) The point had been made that the inscription of ODCs in schedules would not
establish their legality in terms of consiste ncy with other GATT obligations, and that
it should always remain possible for third c ountries to challenge the legal character of
any particular charge… However it had also been suggested that …"

 (ii) [The Dominican Republic's selective quote starts with the portion immediately after
this omitted portion: "… the consistency of a recorded charge with the obligation
under Article II:1(b) … might be regarded as being established if it were not
challenged within an agreed period, such as three years from the date of
inscription…"]

4.412 Indeed, a close scrutiny of Exhibit DR-49 indicates that it is a Note prepared by the
Secretariat to provide
advice on "two issues of a legal nature arising from the proposal that 'other
duties or charges' (ODCs) should hencefor th be recorded in tariff schedules". 299 It is not part of the
negotiating history of the Understanding nor does it constitute under Article XVI:1 of the Marrakesh
Agreement a decision, procedure or customary practice followed by the CONTRACTING PARTIES
to GATT 1947. Therefore, the probative value of this Exhibit must be questioned.
4.413 In any event, in the light of the clear language of paragraphs 4 and 5 of the Understanding
which reflects the agreement of the Members, ther e is no need to examine secondary sources such as
Exhibit DR-49.
4.414 In addition, the Dominican Republic contends that "any challenge to the recording or
existence of [other duties or charges] must be brought under the Understanding, not under the GATT"
as the right to challenge the recording or existen ce of [other duties or charges] is established by
paragraph 4 of the Understanding"; and that "Honduras 's challenges to the recording and existence of
the transitional surcharge and foreign exchange fee as [other duties or charges] as of 15 April 1994 are
therefore outside the terms of reference of the Panel and should be dismissed".
4.415 As earlier stated, paragraph 4 of the Understanding applies only to challenges to "other duties
or charges" imposed on "a tariff item [that had] prev iously been the subject of a concession", and that
paragraph 4 is not applicable to this dispute.
4.416 The Vienna Convention on the Law of Treaties pr ovides that "[A] treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose" 300 and that "[T]he context for the purpose of the
interpretation of a treaty shall comprise … (a) an y agreement relating to the treaty which was made
between all the parties in connection with the conclusion of the treaty…" 301
4.417 The Understanding is an agreement relating to the GATT 1994, specifically Article II:1(b)
thereof, and was made in connection with the conclusion of the GATT 1994. It is therefore part of the
context of GATT 1994, specifically Article II:1(b) thereof. Since a treaty interpreter has the
obligation to interpret Article II:1(b) in accordance with the ordinary meaning given to its terms "in
their context", among others, the references to Article II:1(b) in the terms of reference of the Panel
necessarily include references to the Understanding. Thus, the Understanding is within the terms of
reference of the Panel. In any event, the Dominican Republic has raised the recording of "other duties
or charges" pursuant to the Understanding as its principal defence.

299 See "Article II:1(b): Legal Questions, Note by the Secretariat", supra note 187, para. 1.
300 Vienna Convention on the Law on Treaties, Article 31.1.
301 Ibid., Article 31.2.

4.418 As Honduras has demonstrated that the measure is inconsistent with Article II:1(b), it has also
demonstrated that the measure is inconsistent with Article II:1(a).
4.419 Turning to the Dominican Republic defence in r espect of the foreign exchange fee, Honduras
notes that by way of an alternative defence, the Dominican Republic argued that the foreign exchange
fee is an exchange measure justified by Article XV:9 of the GATT. In its oral statement, replies to the
questions of the panel, and second written submissi on, Honduras has demonstrated that the foreign
exchange fee is not justified under Article XV:9 of the GATT because:
• The foreign exchange fee is not an "excha nge restriction" within the meaning of
Article XV:9 of the GATT;302

• Even if the foreign exchange fee were determ ined to be an exchange restriction in the
context of Article XV:9(a), its use is not in accordance with the Articles of Agreement of
the IMF.303

4.420 As the party invoking
an exception, it is incumbent on the Dominican Republic to
demonstrate that its measure is justified under Ar ticle XV:9(a). It has not done so. In its second
submission, the Dominican Republic confines itsel f to a discussion of Article XV:4 of the GATT,
stating that Honduras is "erroneously trying to resurrect its claim under Article XV:4 [of the
GATT]".304 However, it is only in th e event that the Dominican Repub lic were to successfully prove
that its measure falls within Article XV:9(a) that Honduras would need to rebut by arguing that even
if the measure is in accordance with Article XV: 9(a), and consequently with the Articles of
Agreement of the IMF, then Honduras would have to demonstrate that the measure nevertheless is
inconsistent with Article XV:4. As Honduras considers that the Dominican Republic has not
successfully established that its measure is justified by XV:9(a), there is no need for Honduras to raise
Article XV:4 as a subsidiary claim. Furthermore, even though it does not bear the burden of proof on
this issue, Honduras has demonstrated in Exhib it HOND-21(a), that there has been no notification
from the IMF to the WTO to the eff ect that the Dominican Republic has been granted authorisation in
order to levy the foreign exchange fee as an exchange action.
4.421 As Honduras had explained in the course of th e First Substantive Meeting with the Panel,
Honduras reserved its right to raise Article XV:4 not as a principal claim, but as a subsidiary claim,
should the Dominican Republic be able to establish that the foreign exchange fee is justified under
Article XV:9 of the GATT.
4.422 Finally, Honduras considers that the transitiona l surcharge and the foreign exchange fee as it
applies to all products, including cigarettes, are within the mandate of the Panel. The reasons are the
following: Article 6.2 of the DSU does not require a complainant to specify in its Panel request which
are the products at issue; the request for consulta tions and the request for the establishment of the
Panel make it clear that the challenge on the fore ign exchange fee and the transitional surcharge
referred to "imported goods" in gene ral and therefore it is not necess ary to specifically identify each
and every product; unlike the other measures such as the bond requirement, the transitional surcharge
and the foreign exchange fee are not product-speci fic. Based on the foregoing, Honduras requests the
Panel to examine the WTO-consistency of the tr ansitional surcharge as applied to all products
including cigarettes.

302 Oral statement of Honduras at the First Substantiv e Meeting with the Panel, paras. 22 to 35; Second
written submission of Honduras, 10 June 2004, paras. 196 to 198.
303 Oral statement of Honduras at the First Substantiv e Meeting with the Panel, paras. 36-40; Second
written submission of Honduras, 10 June 2004, paras. 199-203.
304 Second written submission of the Dominican Republic, 10 June 2004, paras. 75-76.

V. ARGUMENTS OF THE THIRD PARTIES
A. C
HILE
1. Introduction
5.1 Chile declares that, as indicated in Annex DR-5 , it is a major exporter of cigarettes to the
Dominican Republic, so that the tax regime applicab le to cigarettes affects it directly. Moreover, it
has a special systemic interest in the proper application of the provisions of the WTO Agreement.
5.2 Chile asserts that the tax regime applied by th e Dominican Republic is complex, and similar
to those which have been applied in other destination markets for Chilean cigarettes. In general, these
tax schemes provide for a variety of measures, a ll of which are characterized by their lack of
transparency and give considerable discretion to the authorities. Consequently, rather than
considering each measure individually, these regimes should be examined as a whole. The regime in
force in the Dominican Republic and which is challe nged by Honduras is no exception to this rule. It
consists of measures, such as differential taxes, excessive administrative requirements, bonds, and so
forth, which add up to protection of the local industry.
5.3 Chile contends that the tax base applied to ci garettes was not determined on the basis of the
value thereof, or of some objective, transparent and non-discriminatory element, but rather, using
prices fixed by the authorities on the basis of unpublis hed price surveys. Moreover, it appeared that
while the law – Article 367(b) of the Tax Code – established how th e tax base should be determined
(according to the retail selling price), the regula tion – Article 3 of Regul ation 79-03 – made it less
transparent and more arbitrary. Added to which, there was another rule – General Rule 02-96 – that
established a different formula for making the calcu lation. Consequently, the determination was
ultimately left up to the administrative authorities through mechanisms lacking in transparency. Chile
has taken note of the fact that this formula has now been abolished in favour of a single selective tax.
5.4 Chile stresses that tax schemes such as the one applied by the Dominican Republic must be
examined in the light of the reality of the market s. For example, in many cases not only is the tax
base determined using criteria lacking in transparency, but the selling prices of the cigarettes are fixed
by the authorities, which means that the effect (discriminatory) of the tax – which is calculated
without taking account of the sales price of the product – can be much greater.
5.5 Chile highlights the amount of discretion that appears to be given to the authority in
implementing the Dominican Republic's tax policy in the fact that although the law (Article 376 of the
Tax Code) requires the posti ng of a bond only for alcohol and tobacco products produced in the
Dominican Republic, a decision of the authorities (Article 14 of Regulation 79-03) has extended the
bond requirement to imported cigarettes.
2. The repealed measures
5.6 Chile notes that on the very day that the Pa nel was established, the Dominican Republic
repealed two of the measures challenged by Hondur as. That is, through the introduction of a single-
rate tax determined on a single basis, the differen tial determination of the tax base for domestic and
imported cigarettes was eliminated, as were the price surveys.
5.7 Chile suggests that, although it considers this lega l reform to be a step forward towards the
establishment of a transparent and non-discriminatory tax regime, there is nothing to prevent the Panel
from ruling on the consistency of the measures in ques tion with the WTO. As has been stated in the
past:

"...[i]n previous GATT/WTO cases, where a measure included in the terms of
reference was otherwise terminated or amended after the commencement of the panel
proceedings, panels have nevertheless made findings in respect of such a measure."305
5.8 Chile insists that the Panel must rule on the i ssues referred to it by the parties, in this case
Honduras, in order to comply with one of the basic objectives of the WTO dispute settlement system,
i.e. providing security and predictability to the multilateral trading system.
5.9 Chile argues that, although it seems the new methodology would guarantee equal treatment
between domestically produced goods and importe d goods, not only are there legal discriminations,
but de facto discriminations as well, so that there could still be other instances of discriminatory
treatment, for example in the way in which this new la w is applied. Since it is still too early to make
an assessment in this respect, gi ven that the law was only recently adopted, Chile shall not engage in
any analysis of the measures in this submission; i ndeed, their elimination clearly represents the best
evidence of the view Chile shares with Honduras that they did in fact constitute unnecessary barriers
to trade.
5.10 Chile highlights the fact that a significant portion of the arguments presented by the
Dominican Republic in its written submission rest on the exception contained in Article XX(d) of the
GATT 1994. In other words, that the requirement to affix stamps in the territory of the Dominican
Republic and to post a bond are n ecessary to secure compliance with laws which are not inconsistent
with the GATT. If these laws are inconsistent , the Article XX(d) exception cannot be invoked, as
explained below.
3. GATT 1994 Article XX(d) exception
5.11 The Dominican Republic argues that if the Panel were to determine that the requirement to
affix tax stamps on imported cigarettes in the territory of the Dominican Republic and the requirement
that importers post a bond are inconsistent w ith Article III of the GATT 1994, they would
nevertheless be justified under Article XX(d) of the GATT 1994.
5.12 Chile will confine itself, on this point, to expressing its views on the subparagraph in
question, and not on the introductory paragraph of Ar ticle XX. In any case, if the Panel applies the
Article XX exception logically – based on the first Appellate Body Report
306 – it must begin by
examining the necessity stipulated in the subparagr aph and conclude that the measures in question are
not covered by that subparagraph, and that consequently there is no need for it to continue its analysis.
5.13 Article XX(d) states:
"(d) necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Agreement" (Emphasis added).
5.14 The Dominican Republic considers that the laws and regulations for which it is trying to
secure compliance are the country's tax laws a nd regulations, particularly for the purpose of
preventing tax evasion.307 Chile considers that the measures are not necessary for that purpose.
4. Requirement to affix stamps in the territory of the Dominican Republic
5.15 As Honduras stated in paragraph 2 of its wr itten submission, the general practice among
WTO Members is to permit such stamps to be a ffixed in the territory where the cigarettes are

305 Panel Report, Chile – Price Band System, para. 7.6 (italics added and footnote omitted).
306 Appellate Body Report, US – Gasoline, p. 18.
307 First written submission of the Dominican Republic, 13 April 2004, paras. 102 and 143.

produced. In fact, this is what the Dominican Rep ublic itself has established for other products. The
requirement to affix the stamps in the territory of the Dominican Republic makes the procedure more
cumbersome than necessary to comply with th e legitimate objective, (e.g. practical problems
associated with the unpacking and repacking of cigarettes); it increases costs; and it discourages
imports. Chile insists that none of these can be considered to be normal costs associated with
importation as the Dominican Republic claims. Nor can it be claimed that since this cost represents a
very low percentage of the earnings of the importing company, there is no discrimination.
5.16 Chile further posits that it cannot be claime
d that equal treatment does not involve
discrimination. On the contrary, GATT/WTO ju risprudence recognizes that the prohibition of
discrimination is an obligation not to treat similar situ ations differently or to treat different situations
in the same way.308
5.17 The question Chile asks itself here is not whethe r or not the Dominican Republic is within its
rights when it adopts measures necessary to secure compliance with its laws, regulations and other
measures such as payment of taxes, but rat her, whether or not the way in which this is being done
discriminates between domestic and imported products. Given the difference in nature between them,
the Dominican Republic's requirem ent that the stamps must in all cases be affixed in the territory of
that Member (a) results in less favourable treatment for imported cigarettes as compared to domestic
cigarettes; or (b) alters the conditions of competiti on in the market in question to the detriment of
imported products.
5. Bond requirement
5.18 Chile argues that the Bond required by the authorities of the Dominican Republic to guarantee
the payment of the Selective Consumption Tax and ot her taxes is not an effective measure for that
purpose. Given that the importer must pay the fu ll amount of the Selective Consumption Tax when
importing the product, the bond loses its purpose, since there is nothing to guarantee. If the importer
does not pay the tax upon entry of the products, th e products cannot be cleared. In its written
submission, the Dominican Republic repeatedly points out that the tax authorities may reassess the
liquidation and payment of the Selective Consumpti on Tax (within a period of three years). Given,
however, that the new legislation establishes a si ngle and fixed rate of RD$0.48 per cigarette,
reassessment by the Directorate General of Internal Taxes (DGII) would no longer be necessary, and
hence, neither would the bond.
5.19 For all of these reasons, Chile considers th
e stamp and bond requirements to be unjustified
under Article XX(d) of the GATT 1994 in that: (a) they are not measures necessary to secure compliance
with the tax laws of the Dominican Republic; (b) those laws are inconsistent with the WTO.
6. Inconsistent legislation
5.20 Chile considers that the laws and regulations of the Dominican Republic are inconsistent with
the WTO in determining the tax base for cigarettes imported from Honduras – without transparent and
generally applicable criteria – differently than fo r domestically produced cigarettes, and on the basis
of unpublished sales surveys. This being the case, the measure that would be necessary to secure
compliance with the said law is not covered by Article XX(d) of the GATT 1994.
5.21 Chile considers that Honduras made a prima facie case that the said measures were
inconsistent with Articles III:2 and X of the GA TT 1994. The Dominican Republic has not refuted
that claim. Moreover, it errs in paragraphs 106 and 146 of its written submission when it states that
Honduras did not challenge the WTO consistency of th e tax legislation. Honduras did do so, and that
is exactly what this dispute is about.

308 See Appellate Body Report, EC – Tariff Preferences, para. 153.

5.22 Chile insists that the fact the Dominican Republic revoked certain elements of its tax
legislation applied to cigarettes that were cha llenged by Honduras does not relieve the Panel from
ruling on their consistency with the WTO.
7. Other duties or charges
5.23 The Dominican Republic states that it bound, under the WTO, a list of "other duties or
charges" applied to imports. That list, according to the Dominican Republic, can be said to include all
of the duties and charges applied to imports to th e extent that they do not exceed the 30 per cent
binding in its Schedule XXIII. Consequently, the transitional surcharge on imports (2 per cent) and
the foreign exchange fee are consistent with Ar ticle II:1(b) of the GATT 1994, second sentence, since
together they do not exceed the 30 per cent bound rate.
5.24 Chile point outs that the Dominican Republic's Schedule XXIII contains a list of imported
products subject to the Impuesto Selectivo en Aduanas (Selective Customs Tax). The Schedule makes
no mention of the transitional surcharge on imports or the foreign exchange fee, or indeed any other
tax. Consequently, the other "duty or charge imposed on or in connection with importation" bound by
the Dominican Republic is the Selective Customs Tax.
5.25 Chile remarks that, although this Selective Cust oms Tax is not defined, it appears to be a
certain tax which is (in the language of Article II: 1(b), second sentence) "imposed on the date of this
Agreement [the GATT] or... directly and mandator ily required to be imposed thereafter by the
legislation in force in the importing territory [the Dominican Republic] on that date". Consequently,
it is up to the Dominican Republic to show that th e transitional surcharge on imports and the foreign
exchange fee were applied at the date on which th ey were notified to the WTO or that they were
directly and mandatorily required to be imposed thereafter by the legislation in force.
5.26 Chile considers that the Dominican Republic di d not prove that the transitional surcharge on
imports and the foreign exchange f ee were equivalent to the Selec tive Customs Tax, and they were
certainly not in force on the date of WTO notification, i.e. in 1994, since both of the measures were
introduced last year. Nor did it identify the legisl ation in force on that date which directly or
mandatorily required that the transitional surcha rge on imports and the foreign exchange fee be
imposed.
5.27 In Chile's view, the other duties and charges notified by WTO Members and included in their
Schedules of Commitments are limited in two ways. Firstly, they are limited to the duty or charge
specifically identified (in this case, a Selective Customs Tax), and secondly they are limited to the
ceiling bound in each notification. Consequently, Members may not apply a charge or duty notified
in excess of the maximum amount indicated nor, moreover, can they apply other duties or charges of
another kind if they have not been notified and lis ted, even if their rates are lower than the bound
level.
5.28 Finally, as pointed out by El Salvador and Nicar agua in their written submission, Chile is of
the view that Honduras's challenge to the transiti onal surcharge on imports a nd the foreign exchange
fee is not restricted to cigarettes alone. Both me asures are in fact applicable to the whole tariff
universe. Therefore, were the Panel to find that they are indeed "other duties or charges" properly
recorded in the Schedule, they would only be so for the products specified in Schedule XXIII. For all
other products, they would constitute duties or char ges inconsistent with Article II.1(b) of the GATT
1994.

8. Conclusion
5.29 For the above reasons, Chile requests that the Panel, upon examining the consistency of the
measures challenged by Honduras, take into account the context of the tax regime applied by the
Dominican Republic to cigarettes.
B.
CHINA
1. Introduction
5.30 In regard to consistency of the measures concerned with WTO obligations, China focuses its
submission on the analytical approach established by WTO jurisprudence 309 and provisions related to
Article II:1, Article III, Article XV and Article XX(d).
5.31 Below China will proceed to address each of th ese issues involved in different measures
separately.
2. Selective Consumption Tax and Survey of Average Retail Prices
5.32 According to the submission presented by th e Dominican Republic, these two measures were
replaced by new ones through Law 3-04 which amended Article 367 and 375 of the Tax Code 310 on
9 January 2004, the same date on which the Pane l for the present dispute was established and the
terms of reference of the Panel were fixed. 311 China would like to briefly comment on the factors
which the Panel may take into account in considering whether it should make findings regarding these
two alleged "dead measures".
5.33 China notes that Panels differentiated their pos itions in past GATT/WTO cases with regard to
the issue of whether a Panel should make findings for revoked measures. Several factors, including
the timing of the amendment, revocation or termina tion of the measures challenged, the extent to
which the measure was amended, and the rele vance of revocation of the measure to the
implementation stage of the dispute settlement proc ess, have been taken into account by previous
Panels.
3. The timing of the amendment, revocation, or termination of the measures challenged
5.34 China point outs that for the measures that had been withdrawn prior to the issuance of the
Panel report, the Panel in US – Wool Shirts and Blouses , similar to the GATT Panels in EEC –
Dessert Apples and US – Canadian Tuna , nevertheless made findings on those measures
challenged.312
5.35 China remarks that, in contrast, the Panel in Argentina – Textiles and Apparel declined to
examine measures that had been revoked "prior to est ablishment of Panel", since the Panel refused to
engage in speculating whether the defendant would re-introduce the measure, and operated on the
assumption that the defendant would carry out its WTO obligations in good faith.313

309 The Appellate Body stated that "[a]dopted panel reports are an important part of the GATT acquis...
[and are] often considered by subsequent panels". See Appellate Body Report, Japan – Alcoholic Beverages II,
p. 14.
310 See first written submission of the Dominican Republic, 13 April 2004, paras. 19-25.
311 Minutes of the WTO Dispute Settlement Body (DSB) Meeting on 9 January 2004, WT/DSB/M/162,
circulated on 16 February 2004.
312 See Panel Report, US – Wool Shirts and Blouses, para. 6.2.
313 Panel Report, Argentina – Textiles and Apparel, paras. 6.10-14.

4. The extent to which the measure challenged has been changed
5.36 China notes that the Appellate Body in Chile – Price Band System chose to deal with the
changes, after the establishment of the Panel, which amended the measure challenged "without
changing its essence". 314
5.37 Similarly, in Brazil – Aircraft the Ap pellate Body ruled on changes and amendments to the
measure challenged before the establishment of th e Panel (and after consultation), which did not
change the essence of the measure.315
5. The relevance of any revocation of the challe nged measure to the implementation stage
of the dispute settlement process
5.38 In Indonesia – Autos , the complaint ch allenged the effectiveness of the revocation of one of
the measures challenged. The Panel noted th e practice of past GATT/WTO cases where Panels made
findings in respect of a measure included in the terms of reference, which was otherwise terminated or
amended after the commencement of the Panel proceedings. 316
5.39 Bearing in mind the aforementioned factors considered by the Appellate Body and past
Panels, China hopes the Panel could clarify the fo llowing preliminary questions before proceeding
with any further examination of substantive i ssues with respect to these two measures which are
included in the terms of reference of the Panel:
• the legal significance of the timing of the revocation, which took place simultaneously
with the commencement of the Panel proceedings; and
• the extent to which the two measures have been amended.
6. The Foreign Exchange Fee
5.40 With regard to the foreign exchange fee, Chin a would like to address the issue of whether the
imposition of the foreign exchange fee complies with Article XV.
5.41 The core of Honduras's claim hinged upon the char acterization of the foreign exchange fee as
an "other duty or charge" within the meaning of Artic le II:1(b). In the footnote to paragraph 62 in its
submission, Honduras considered it unnecessary for the Panel to decide "...whether the fee is an
'exchange action' or a 'trade ac tion' within the meaning of Article XV:4 of the GATT". The
Dominican Republic rebutted in its submission that "the transitional foreign exchange fee is an
exchange restriction within the jurisdiction of the Fund, not a charge on imports within the
jurisdiction of the GATT".317
5.42 China is of the view that, before proceedi ng with further examination on whether the
imposition of the foreign exchange fee is inc onsistent with the Dominican Republic's WTO
obligations, it is necessary to consider whether th e imposition of the foreign exchange fee obtains
justification under Article XV:9(a) of the GATT 1994.

314 Appellate Body Report, Chile – Price Band System, paras. 136-139.
315 Appellate Body Report, Brazil – Aircraft, para. 132.
316 See e.g., Panel Report, Indonesia – Autos, para. 14.9.
317 First written submission of the Dominican Republic, 13 April 2004, para. 193.

7. Relationship between Article XV:9 and Article XV:2, and the obligation to consult with
IMF pursuant to Article XV:2
5.43 The negotiating history of the GATT provided that paragraphs 2, 4 and 9 of Article XV of the
GATT 1994 served to avoid overlapping jurisdic tion between IMF and GATT, although the
WTO/GATT jurisprudence left the issue of whet her Article XV:9(a) of the GATT serves as an
exception to a Member's GATT obligations unanswered.
318 China considers that interpretation of
Article XV:9 cannot be isolated from other paragra phs of Article XV, particularly Article XV:2 and
Article XV:4. As upheld by the Appellate Body in US – Gasoline, it is required by the general rule of
interpretation in the Vienna Convention to give mean ing and effect to all the terms of the treaty in
order to avoid reducing whole clauses or paragraphs of a treaty to redundancy or inutility.319
5.44 GATT jurisprudence has established the juri sdiction of the WTO forum over monetary
measures with an effect on trade. The 1977 GATT Report on the Monetary Measures Applied by
Italy (Italian Measures) addressed a monetary measure (requirement of deposit for payment abroad)
that contributed to the stabilization of Italian currency and served for the establishment of a longer
term economic stabilization policy. The measure wa s non-discriminatory in its nature and would be
gradually phased out at that time . Although some GATT Contracting Parties recognized that the
measure had been approved by the International Monetary Fund and by the European Communities, a
working party with a term of reference restricted to Article XV was established for the examination of
the trade effects of the measures which was a matte r of direct concern to the GATT. The working
party invited Italy to consider an early removal of foreign exchange meas ure and to replace this
temporary measure by "comprehensive alternative measures to help restore equilibrium as indicated in
the finding of the International Monetary Fund".
320 Despite this precedent, the extent to which
Article XV:2 may require Panels to consider as "d ispositive specific determinations of the IMF" has
not yet been well clarified in GATT/WTO disputes.321 In Greece – Import Taxes, the Panel suggested
the CONTRACTING PARTIES address an inquiry to th e IMF with regard to the issues of whether
the tax in question (a) was a multiple currency practi ce, and (b) whether or not it was in conformity
with the Articles of Agreement of the International Monetary Fund. The staff of the IMF participated
in the discussion.322 In contrast, the Appellate Body in Argentina – Textiles and Apparel , did not rule
against the Panel's declination to consult with the IMF. 323 Similarly, the Panel in India – Quantitative
Restrictions ruled that under Article 13.2 of the DSU a Panel enjoys discretion and significant
authority as to whether or not to seek information from experts and from any other external source.
5.45 In China's view, the plain text of Article XV:2 provides that the WTO "shall accept" the
IMF's factual findings within its competence rela ting to foreign exchange, monetary reserves and
balances of payments, as well as its legal determ ination on the consistency of "actions by a
contracting party in exchange matters" with the IMF's Articles.
5.46 The title of Article XV indicates that it deals with "exchange arrangements". However, China
notes that there exist differences in the use of terms with regard to exchange arrangements in
Article XV:2, Article XV:4 and Article XV:9. Sp ecifically, Article XV:2 refers to the mandatory
consultation requirement with the IMF on "actions [by a contracting party] in exchange matters";
Article XV:9 refers to the justifications of "excha nge controls or exchange restrictions" in accordance

318 Report of the GATT Special Sub-Group, "Working Party on Quantitative Restrictions - Relations
between the GATT and the International Monetary Fund ", adopted on 2,4 and 5 March 1955, BISD 3S/170,
L/332/rev.1 and Addenda, p. 195, para. 8.
319 Appellate Body Report, US – Gasoline, p. 23.
320 See Report of the GATT Working Party on Italian Measures, adopted on 2 March 1977, BISD
24S/129-134, L/4442), January 1978, para. 13.
321 See Panel Report, India – Quantitative Restrictions, para. 5.13. (The issue was not appealed). See
Appellate Body Report, India – Quantitative Restrictions, para. 152.
322 GATT Panel Report, Greece – Import Taxes, para. 10.
323 Appellate Body Report, Argentina – Textiles and Apparel, paras. 84-85.

with IMF Articles, while Article XV:4 refers to "exc hange actions" that may frustrate the intent of the
GATT provisions. GATT/WTO jurisprudence is not clear on whether these differences connote a
certain logic subordinate relationship of these term s, particularly between "exchange controls or
exchange restrictions" under Article XV:9 in one category, and "actions in exchange matters" under
Article XV:2 and "exchange actions" under Article XV:4 in the another category. In other words, it
might be arguable whether the former category is a subset of the latter category.
5.47 By reviewing the provisions of Article XV, China further notes that Article XV:9 and
Article XV:2, although by no means identical, are largely similar and, to some extent, in parallel:
5.48 Article XV:9 provides, in pertinent part, that:
"Nothing…shall preclude… exchange controls or exchange restrictions in
accordance with the Articles of Agreement of the International Monetary Fund or
with that contracting party's special exchange arrangement with the
[CONTRACTING PARTIES]"(underlining added)
5.49 Article XV: 2 provides, in relevant part, that:
"… In such consultation, the [CONTRACTING PARTIES]…shall accept the
determination of the Fund as to whether action by a contracting party in exchange
matters is in accordance with the Articles of Agreement of the International
Monetary Fund, or with the terms of a sp ecial exchange arrangement between that
contracting party and the [CONTRACTING PARTIES]" (underlining added)
5.50 In view of the parallel terms of the language in the two provisions, and in the absence of any
contrary indication in the context, China believes fulfilment of the requirements under
Article XV:9(a) should correspond to satisfaction of requirements under Article XV:2. Further, taking
into account the institutional allocation
of expertise resulting from multilateral negotiations regarding
trade and exchanges between the WTO and IMF, assuming arguendo that measures constituting
"exchange controls or exchange r estrictions" within the meaning of Article XV:9, is subset to the
category of "actions in exchange matters" under Artic le XV:2, the Panel is obliged to consult with
IMF with regard to the measure of the foreign exchange fee in this dispute pursuant to Article XV:2.
5.51 China considers that two issues, specifically, should be resolved through consultation with
IMF with respect to (a) whether the imposition of th e foreign exchange fee falls within the scope of
"exchange matters", and in partic ular, constitutes certain kinds of "exchange controls or exchange
restrictions", and (b) whether the imposition of th e foreign exchange fee is "in accordance with" the
Articles of Agreement of the International Monetary Fund.
8. The legal effect of the IMF-endorsed criterion to the WTO
5.52 The Dominican Republic argued that the fore ign exchange fee constitutes an "exchange
control or restriction within the meaning of Article XV:9(a)". 324 Having argued that the meaning of
"exchange restriction" shall be interpreted in the light of the criterion established by the Executive
Directors of the IMF on 1 June 1960 325, the Dominican Republic seems to assert that the Panel may
apply this criterion directly in the present dispute to determine the characterization of the foreign
exchange fee.
5.53 The IMF criterion cited by the Dominican Repub lic states that "[t]he guiding principle in
ascertaining whether a measure is a restriction on payments and transfers for current transactions

324 First written submission of the Dominican Republic, 13 April 2004, para. 198.
325 Ibid., para. 194.

under Article VIII, Section 2, is whether it in volves a direct governmental limitation on the
availability or use of exchange as such".
326
5.54 China notes that the GATT/WTO regime, however, unlike that of the IMF, has never formally
decided on how to distinguish between trade and exchange controls.327
5.55 China hopes that the Panel in the present case could clarify the issue of whether the aforesaid
IMF-endorsed criterion, on the basis of which the IMF distinguishes trade and exchange matters, can
be directly applied to the determination of whet her the imposition of the foreign exchange fee falls
within the scope of "exchange controls or exchange restrictions" under GATT Article XV:9(a).
9. Relationship between Article XV:9 and Article XV:4
5.56 Under Article XV:4, "[C]ontracting Parties shall not, by exchange action, frustrate the intent
of the provisions of this Agreement". Assuming arguendo that the foreign exchange fee is an IMF-
consistent foreign exchange action which falls with in the scope of Article XV:4, it might be argued
that such measure is still actionable under the provision of Article XV:4.
5.57 In accordance with the burden of proof principle established in US – Wool Shirts and
Blouses328, it is for Honduras to establish a prima facie case of violation of Article XV:4 by the
Dominican Republic. However, Honduras has chosen not to do so by stating it its first submission that
it is unnecessary for the Panel to decide "whether the fee is an 'exchange action' or a 'trade action'
within the meaning of Article XV:4 of the GATT".329
5.58 China hopes the Panel in the present disput e would clarify the relationship between
Article XV:9 and Article XV:4 in examining of this dispute.
10. The stamp requirement
5.59 With regard to the stamp requirement, China would like to express its views regarding the
requirements for the constitution of a violati on under Article III:4, and discuss the possible
justification for a breach of Article III:4 under Article XX(d) of GATT 1994 as follows:
(a) The parameters related to the "less favourable treatment" criterion
5.60 The Appellate Body has held that, for a viola tion of Article III:4 to be established, three
elements must be satisfied: (a) the imported and domestic products at issue are "like products"; (b) the
measure at issue is a "law, regulation, or requirement affecting internal sale, offering for sale,
purchase, transportation, distribution, or use" of the like products; and (c) the imported products are
accorded "less favourable treatment" than that accorded to like domestic products.330
5.61 Among these three criteria, China would like to make further comments on certain parameters
related to the examination of the third criterion, i.e. whether in the present dispute, the imported

326 Decision of the International Monetary Fund No. 1034-(60)27, para. 1 (1 June 1960), in Selected
Decisions and Selected Documents of the International Monetary Fund (Twenty-fifth Issue, 2000) p. 428,
reprinted at de Vries & Horsefield, The International Monetary Fund 1945-1965: Twenty Years of International
Monetary Cooperation (IMGF, 1969), vol. III, pp. 260-261, cited from the First written submission of the
Dominican Republic, 13 April 2004, footnote 163.
327 See 1981 Secretariat Background Paper on the consultation with Italy concerning the Italian deposit,
BOP/W/51, p. 5, para. 14, cited in GATT, Analytical Index: Guide to GATT Law and Practice, updated Sixth
Edtion, 1995, p. 435.
328 Appellate Body Report, US – Wool Shirts and Blouses, pp. 13-14.
329 First written submission of Honduras, 16 March 2004, footnote to para. 62.
330 Appellate Body Report, Korea – Various Measures on Beef, para. 133.

products concerned are accorded "less favourable treatment" than that accorded to like domestic
products. As upheld by the Appellate Body in US – FSC (Article 21.5 -EC), an examination of an
alleged Article III:4 violation must be grounded in close scrutiny of the "fundamental thrust and effect
of the measure itself". 331 The focus of the examination in this regard is the "modification of
competition conditions". 332 In other words, an examination of whether the Dominican Republic
accords "less favourable" treatment to imported product s should hinge on whether the actual effect of
the measure in question, if it exists, adversel y changes or affects the equality of competitive
opportunities in the relevant market to the detriment of imported products.
5.62 China is of the view that, although this genera l principle, which seeks to avoid protection to
domestic production in the application of internal tax and regulatory measures, is not explicitly
invoked in Article III:4, nevertheless, it "informs" that provision. 333 An examination of the "actual
effect" of the measures in question on the competit ive relationship is also guided by the "general
principle" set out in Article III:1. In the present di spute, it becomes relevant to take into account the
issues of whether or not the purpose of the stamp requirement is discriminatory or protective in favour
of domestic products in the evaluation of its consistency with Article III:4.
(b) Justification under Article XX (d)
5.63 China suggests that, should the Panel find the st amp requirement inconsis tent with relevant
GATT/WTO provisions, it might also need to examine whether the measure is provisionally justified
under Article XX(d), and whether the measure me ets the requirements as set forth in the chapeau of
Article XX.
334 The chapeau of Article XX makes it clear that it is the "measures", not the "legal
finding of [violation], which are to be examined under Article XX (d)".335
5.64 In this submission, China would comment on the burden of proof and the analytical approach
the Panel might consider in order to qualify a measure as "necessary" under Article XX (d).
(c) Burden of proof
5.65 China point outs that it has become a well- established rule that it is for the party invoking
Article XX to demonstrate a prima facie case that the measure in question falls within one of the
exceptions as specified in Article XX, and that it meets the requirements of the chapeau of
Article XX.
5.66 For example, with regard to the burden of proof for individual paragraphs of Article XX, the
Panel in Canada – FIRA held that "[s]ince Article XX(d) is an exception to the General Agreement it
is up to Canada, as the party invoking the exception, to demonstrate that the purchase undertakings
are necessary to secure compliance with the Foreign Investment Review Act".336
5.67 With regard to the burden of proof for the chapeau of Article XX, the defending party is
required to establish to the Panel's satisfaction that the application of the measure does not constitute
"a means of arbitrary or unjustifiable discrimin ation between countries where the same conditions
prevail". In US – Gasoline , the Appellate Body noted the diffe rence between the burden of proof

331 Appellate Body Report, US – FSC (Article 21.5 – EC), para. 215. Appellate Body Report, Korea –
332 Appellate Body Report, Korea – Various Measures on Beef, para. 137.
333 Appellate Body Report, EC – Asbestos, para. 98.
334 Appellate Body Report, Korea – Various Measures on Beef, para. 157.
335 Appellate Body Report, US – Gasoline, p. 16. While the original statement refers to Article XX (g),
the Appellate Body's reasoning relies on the chapeau, which applies equally to Article XX (g) and Article XX
(d). The Appellate Body's reasoning must therefore also extend to Article XX (d). See Panel Report, Argentina
– Hides and Leather, footnote 560.
336 GATT Panel Report, Canada – FIRA, para. 5.20 (italics in original).

under the individual paragraphs of Article XX on th e one hand, and the burden of proof under the
chapeau of Article XX on the other, and found that the burden of proof for the chapeau was a
"heavier" one.
 337
5.68 In the light of the above principle, it is up to the Dominican Republic, who invokes
Article XX(d) in the present dispute, to demonstrate that there is no other alternative WTO-consistent
or less WTO-inconsistent measure it could reasonably employ in order to secure the compliance with
its domestic policy goals.
(d) Analytical approach for Article XX justification
5.69 The Appellate Body in Korea – Various Measures on Beef stressed that the reach of the word
"necessary" is within a continuum of degrees of ne cessity, which is located "significantly closer" to
the pole of "indispensable" than to the opposite pole of "simply making a contribution to". 338 The
more vital or important those common interests or values are, the easier it would be to accept as
"necessary" a measure designed as an enforcement instrument.
339
5.70 In China's view, along this continuum between "significantly closer to indispensable" and
"simply making a contribution to", there may exist situations where a measure may be "necessary" to
achieve the compliance pursuant to Article XX(d), an d at the same time, achieve other objectives. By
analogy, the necessity of the measure in question to secure compliance with the WTO-consistent laws
and regulations need not amount to a "sole and exclusive" one.
5.71 Taking into consideration the relationship between the claimed policy objective of the
measure and its "general design and structure" 340and in order to fully assess the "necessity" of a
measure along the continuum, Panels in the p ast have undergone a process of "weighing and
balancing a series of factors which prominently include the contribution made by the compliance
measure" on the one hand, and "the importance of the common interests or values protected by that
law or regulation, and the accompanying impact of the law or regulation on imports or exports" on the
other hand.341
5.72 In addition, whether an alternative less trade -restrictive measure is reasonably available is
relevant to the determination of the degree of n ecessity. So far, numerous Panel and Appellate Body
reports, which have examined the test of "necessity" under Article XX (d) of GATT, have come to the
conclusion that a restrictive measure taken by a Member is not necessary if an alternative measure,
which that Member could reasonably be expected to employ and which is not inconsistent with other
GATT provisions, is available to it.
342 In order to decide whether a less trade-restrictive alternative
measure is available, previous Panels took into account the specific facts of each individual case.
5.73 Finally, it could be argued, it is up to the Panel to decide, presuming that the stamp
requirement were withdrawn, whether the Dominican Republic's regulatory goals to secure
compliance with the Tax Code and prevent rampant cigarette smuggling would be satisfied.

337 Appellate Body Report, US – Gasoline, pp. 22-23.
338 Appellate Body Report, Korea – Various Measures on Beef, para. 161.
339 Ibid., para. 162.
340 Panel Report, Argentina – Hides and Leather, para.11.303.
341 Appellate Body Report, Korea – Various Measures on Beef, para. 164.
342 See, e.g. GATT Panel Report, US – Section 337, para. 5.26; GATT Panel Report, Thailand –
Cigarettes, para. 75; Panel Report, US – Gasoline , para. 6.22-6.28; and Panel Report, Argentina – Hides and
Leather, paras. 11.324-11.331.

11. Conclusion
5.74 As a third party to this dispute, China is not necessarily aware of the detailed contents and
effects of several measures in question. In the lig ht of the relevant WTO/GATT jurisprudence and the
analytical approach with regard to the meas ures in question set forth above, China hopes the
viewpoints and various issues it has raised may assist the Panel in its decision.
1. Introduction
5.75 In the light of the strong historical, legal and economic ties between the two countries and in
view of their common status as third parties to the dispute Dominican Republic – Measures Affecting
the Importation and Sale of Cigarettes (WT/DS302), El Salvador and Nicaragua have decided to
make a joint contribution to the proceedings.
5.76 The different matters at issue in this dispute are of considerable systemic interest, and in some
cases, of substantial interest, as shall be shown further on.
2. Legal aspects
5.77 In the paragraphs that follow, El Salvador a nd Nicaragua will present their views on the legal
aspects of the measures in dispute.
(a) 2 per cent transitional surcharge on imports
5.78 In addressing this point, El Salvador and Nicaragua consider that it is important to refer to the
fact raised by the Dominican Republic in its first written submission that Decree 646-03 of
30 June 2003 was revoked, and that a measure of equal effect was introduced by Law 2-04 of
4 January 2004. El Salvador and Nicaragua consider that the measure at issue, independently of the
legal instrument containing it, continues to be the same, and its essential attributes have not been
altered by the new law.
5.79 Consequently, to fully comply with its terms of reference, the Panel should analyse the
measures at issue, i.e. Decree 646-03 and Law 2-04.343
5.80 At the same time, El Salvador and Nicaragua feel that it is also necessary to address the
comments made by the Dominican Republic to the effect that the "transitional surcharge for economic
stabilisation" of 2 per cent on the c.i.f. value of imports is duly covered by the reservation it made
when it submitted an addition to its Schedule XXIII on 14 September 1994, under "other duties or
charges". El Salvador and Nicaragua would like to examine the following points in this connection.
(i) Validity of the "transitional surcharge" as in cluded in the Dominican Republic's Schedule
XXIII under "other duties and charges"
5.81 Article II:1(b) of the GATT 1994 stipulates:
"The products described in Part I of the Schedule relating to an y contracting party,
which are the products of territories of other contracting parties, shall, on their
importation into the territory to which the Sc hedule relates, and subject to the terms,
conditions or qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of those set forth and provided therein. Such products shall

343 Panel Report, Argentina – Footwear (EC), paras. 8.24 and 8.45.

also be exempt from all other duties or charges of any kind imposed on or in
connection with the importation in excess of those imposed on the date of this
Agreement or those directly and mandatorily required to be imposed thereafter by
legislation in force in the importing territory on that date". (Emphasis added)
5.82 At the same time, paragraph 1 of the Understandi ng on the Interpretation of Article II:1(b) of
the GATT 1994 states:
"In order to ensure transparency of the legal rights and obligations deriving from
paragraph 1(b) of Article II, the nature and level of any 'other duties or charges'
levied on bound tariff items, as referred to in that provision, shall be recorded in the
Schedules of concessions annexed to GATT 1994 against the tariff item to which they
apply. It is understood that such record ing does not change the legal character of
'other duties or charges'". (Emphasis added)
5.83 Thus, both provisions establish the conditions or circumstances under which a duty or charge
may be levied in addition to the ordinary custom s duties in order to be valid. El Salvador and
Nicaragua shall turn to these conditions or circumstances below in order to examine the validity of the
Dominican Republic's assertion that the "transitional surcharge" applied to cigarettes is covered by the
addition it made to its Schedule XXIII under "other duties and charges" on 14 September 1994.
(ii) Existence of the measure on 15 April 1994
5.84 A simple reading of Article II:1(b) of the GATT 1994, second sentence, reveals that for the
levy of "other duties and charges" in addition to "ordinary customs duties" to be valid, one of the
following circumstances must apply:
• They must be duties or charges that were im posed on the date of the Agreement (in this
case, 15 April 1994); or
• They must be duties or charges directly and mandatorily required to be imposed by
legislation in force in the importing territory on the date of the Agreement (in this case,
15 April 1994).
5.85 El Salvador and Nicaragua note that the "trans itional surcharge" of 2 per cent on the c.i.f.
value of imports does not comply with either of th e circumstances set forth in Article II:1(b) of the
GATT 1994, since neither of the measures by which the Dominican Republic imposed the said
surcharge, in the past, or currently imposes it, was in force on 15 April 1994:
• Decree 646-03, enacted on 30 June 2003; and
• Law 2-04, enacted on 4 January 2004.
(iii) Recording of the measure in the Schedule of Concessions
5.86 A reading of paragraph 1 of the Understanding on the Interpretation of Article II:1(b) of the
General Agreement on Tariffs and Trade 1994 reveals that the nature and level of any "other duties or
charges" levied on bound tariff items must be reco rded in the Schedules of Concessions annexed to
the GATT 1994.
5.87 Needless to say, then, that the addition ma de by the Dominican Republic on 14 September
1994 to its Schedule XXIII, under "other duties or charges", makes no refere nce whatsoever to a
measure whose nature or level is equal or similar to the nature and level of the "transitional surcharge
for economic stabilisation" of 2 per cent on the c.i.f. value of imports.

5.88 In this connection, it should be noted that the addition made to the Dominican Republic's
Schedule XXIII under "other duties or charges" refers only to " lista de productos importados que
pagan el Impuesto Selectivo en aduanas " (list of imported products wh ich pay the Selective Tax at
customs), in which it indicates as the level of the charge an ad valorem rate determined as a
percentage for each tariff item. This charge is, apparently, a selective consumption tax.
5.89 The two above points lead to the firm conclusion that despite its contentions to the contrary,
the Dominican Republic's "transitional surcharge fo r economic stabilisation" is at no time covered by
its entries in its Schedule of Concessions XXIII.
(b) Coverage of the measure as applied
5.90 In this second part of their analysis of th e legal aspects of the "transitional surcharge",
El Salvador and Nicaragua felt that it was extremel y important to present their views on the coverage
of goods falling within the scope of the measure at issue.
5.91 It was established above that the "transitional surcharge" is not covered by the Dominican
Republic's entries in its Schedule of Concessions XXIII as it contends. Beyond that, however, the
Dominican Republic has left a large void in its firs t written submission in its attempt to justify its
transitional measure with respect to cigarettes only, and not with respect to the tariff universe to which
the measure applies.
5.92 The Panel must examine the matter referred to it by Honduras which, with respect to the
"transitional surcharge", can essentially be described as follows:
"The Dominican Republic levies a transitional surcharge for economic stabilisation in
accordance with Decrees 646-03 and 693-03, a surcharge which currently amounts to
2 per cent of the c.i.f. value of the imported goods . Honduras considers that the
surcharge constitutes a charge imposed on or in connection with importation
inconsistent with Article II:1(a) and (b) of the GATT".344 (Emphasis added).
5.93 Thus, both Decree 646-2003 and Law 2-04 establis h a transitional surcharge on the totality of
goods in the tariff universe. Honduras has challe nged the measure as such, without making any
distinction in terms of a specific product. In this connection, the Appellate Body in the case European
Communities – Customs Classification of Certain Computer Equipment notes that "Article 6.2 of the
DSU does not explicitly require that the products to whic h the 'specific measures at issue' apply be
identified." When Honduras submitted this measure for analysis by the Dispute Settlement Body, it
never confined nor restricted its request for exam ination to the specific case of cigarettes, which
means that the measure should be examined in respec t of all products. At the same time, El Salvador
and Nicaragua note that the Dominican Republic tried, and failed, to demonstrate the validity of its
measure only in relation to cigarettes, which are in cluded in the list that it annexed on 14 September
1994 to its Schedule of Concessions XXIII.
5.94 Furthermore, El Salvador and Nicaragua consider that the application of the measure to the
tariff universe is inconsistent with the Dominican Republic's commitments under Article II:1(b) of the
GATT.
5.95 Indeed, in the above paragraphs El Salvador and Nicaragua have show n that the "transitional
surcharge" is a measure imposed by the Dominican Republic in violation of Article II:1(b) of the
GATT in that it is applied to the products in cluded in the Dominican Republic's Schedule XXIII,
under "other duties and charges" added on 14 September 1994, as well as to the rest of the products of

344 Request for the Establishment of a Panel by Honduras, supra note 2, para. 5.

the tariff universe. Consequently, the measure is al so in violation of the General Principle laid down
in Article II:1(a).
345
5.96 It is on the basis of these legal arguments that El Salvador and Nicaragua consider the
"transitional surcharge" for economic stabilization of 2 per cent on the c.i.f. value of imports applied
by the Dominican Republic to be totally inconsistent with the Dominican Republic's obligations under
the GATT.
3. Foreign exchange fee of 10 per cent imposed on imports
5.97 The Dominican Republic maintains in force a measure which establishes a levy in the form of
a "foreign exchange fee" imposed on the value of imports.
5.98 El Salvador and Nicaragua have examined at length the arguments submitted by the
Dominican Republic to the effect that this measu re constitutes an "exchange measure" in accordance
with the Articles of Agreement of the Internati onal Monetary Fund, and is therefore duly permitted
under Article XV:9(a) of the GATT.346
5.99 It should be borne in mind, however, that the measure at issue retains the following
characteristics:
• The foreign exchange fee is applied upon importation into the Dominican market;

• The foreign exchange fee is applied to the value of imports;

• The fee is charged by the customs authorities.

5.100 These characteristics of the "foreign exchange fee" clearly point to a different conclusion: far
from being an "exchange measure" associated with the inherent characteristics of exchange
transactions, as the Dominican Republic contends, it is a duty or charge levied in addition to the
ordinary customs duties.
5.101 Also, the Dominican Republic bears the burden of proof with respect to its claim that the
"foreign exchange fee" is an exchange measure th at is justified under Article XV:9(a). Indeed, El
Salvador and Nicaragua note that the various elements of that claim remain to be proved.
5.102 This calls for a number of immediate comments on the statement made by the Dominican
Republic in its first written submission that "... even if the Panel finds that the exchange fee is not an
exchange measure justified by Article XV:9(a), the claim that it is inconsistent with Article II:1 would
fail since the rate of the exchange fee is within the level of the ODCs re corded by the Dominican
Republic in its Schedule".
347
5.103 In this connection, El Salvador and Nicaragua revert to the remarks made with respect to the
Dominican Republic's right to impose other duties or ch arges in the light of its entries in its Schedule
of Concessions:

345 First written submission of Honduras, 16 March 2004, footnote 34 to para. 58.
346 First written submission of the Dominican Republic, 13 April 2004, para. 201.
347 Ibid., para. 189.

(a) The validity of the "foreign exchange fee of 10 per cent" in relation to the Dominican
Republic's Schedule XXIII – "other duties or charges"
5.104 As already stated in this submission in the part concerning the "transitional surcharge", a
simple reading of Article II:1(b) of the GATT, sec ond sentence, reveals that for the levy of "other
duties or charges" in addition to "ordinary customs duties" to be valid, one of the following
circumstances must apply:
 They must be duties or charges that were im posed on the date of the Agreement (in this
case, 15 April 1994); or
 They must be duties or charges directly and mandatorily required to be imposed by
legislation in force in the importing territory on the date of the Agreement (in this case,
15 April 1994).
5.105 The "foreign exchange fee" is a measure applied by the Dominican Republic since 1991, and
consequently, it was in force on 15 April 1994 at the time when the other duties and charges which
could be applied in addition to the ordinary customs duties were bound. However it was never
applied at its current rate of 10 per cent on the value of imports to the Dominican Republic.
5.106 Furthermore, the measure was never recorded in the list of "other duties or charges" that could
be applied by the Dominican Republic in accordan ce with its Schedule of Concessions. In this
connection, paragraph 1 of the Understanding on the Interpretation of Article II:1(b) of the GATT
1994 states that the nature and level of any "other du ties or charges" levied on bound tariff items shall
be recorded in the Schedule of Concessions annexed to the GATT 1994. The paragraph reads:
"In order to ensure transparency of the legal rights and obligations deriving from
paragraph 1(b) of Article II, the nature and level of any 'other duties or charges'
levied on bound tariff items, as referred to in that provision, shall be recorded in the
Schedules of concessions annexed to GATT 1994 against the tariff item to which they
apply. It is understood that such record ing does not change the legal character of
'other duties or charges'". (Emphasis added)
5.107 In the light of the above and of the Dominican Republic's Schedule of Concessions as
supplemented by "other duties or charges" on 14 September 1994, it quickly becomes clear that
neither the foreign exchange fee itself, nor its leve l of application, were recorded by the Dominican
Republic. As was previously mentioned, the entrie s recorded by the Dominican Republic refer to a
selective customs tax, which is apparently a selective consumption tax.
5.108 Thus, having established that the "foreign exch ange fee" imposed by the Dominican Republic
is applied at a level different from that applie d on 15 April 1994, and having found that neither the
measure itself nor its level were ever recorded in the Dominican Republic's Schedule of Concessions,
it can clearly be concluded that the said measure is a duty or charge levied in addition to the ordinary
customs duties and is therefore inconsistent with the Dominican Republic's obligations under the
GATT 1994.
(b) Coverage of the measure as applied
5.109 The Dominican Republic applies the "foreign ex change fee" to the totality of the tariff
universe. El Salvador and Nicaragua note in this respect that the Dominican Republic has tried to
justify its measure by stating that it was added to its Schedule of Concessions on 14 September 1994.
5.110 However, even if it turned out to be valid, this justification would cover the "foreign
exchange fee" only for those tariff items includ ed in the mentioned list that was added on

14 September 1994, and not for all of the products of th e tariff universe. Here, as in the case of the
transitional surcharge, the terms of reference given to the Panel by the DSB do not restrict
examination of the measure to cigarettes and the Do minican Republic has therefore again left a large
gap in its argument in attempting to justify the validity of the measure.
5.111 On the basis of the above considerations it can be said that the Dominican Republic has
violated its obligations under Article II:1(b) of th e GATT, and hence, it has also violated the general
principle laid down in Article II:1(a) of the GATT.
348
5.112 It is on the basis of these legal arguments that El Salvador and Nicaragua consider that the
"foreign exchange fee" imposed by the Dominican Repub lic is a measure that is inconsistent with its
obligations under the GATT.
4. Stamp requirements for cigarettes
5.113 The Dominican Republic requires that a stamp be affixed on cigarette packets in its territory
pursuant to Article 37 of Decree 79-03, and Articles 1 and 2 of Decree 130-02. 349 T h i s s t a m p
requirement is a measure that applies to both domestic and imported products.350
5.114 Consequently, it is important to analyse this measure in the light of Article III:4 of the GATT,
which states:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use. The provisions of this paragraph shall not prevent the application
of differential internal transportation ch arges which are based exclusively on the
economic operation of the means of tran sport and not on the nationality of the
product".
5.115 Similarly, in connection with this provision, the Appellate Body in Korea – Various Measures
on Beef, stated that:
"For a violation of Article III:4 to be estab lished, three elements must be satisfied:
that the imported and domestic products at issue are 'like products'; that the measure
at issue is a 'law, regulation, or requirement affecting their internal sale, offering for
sale, purchase, transportation, distribution, or use'; and that the imported products are
accorded 'less favourable' treatment than th at accorded to like domestic products.
Only the last element -'less favourable' treatment- is disputed by the parties and is at
issue in this appeal".
351
5.116 El Salvador and Nicaragua agree with the pos ition stated by Honduras and shared with the
Dominican Republic that for the purposes of this case, imported cigarettes and domestic cigarettes are
like products.
352
5.117 The second of the mentioned elements establishes that the measure at issue must be a law,
regulation, or requirement affecting the sale, offeri ng for sale, purchase, transportation, distribution or

348 First written submission of Honduras, 16 March 2004, footnote 34 to para. 58.
349 Ibid., paras. 20 to 23.
350 Ibid., paras. 75, and First written submission of the Dominican Republic, 13 April 2004, para. 37.
351 Appellate Body Report, Korea – Various Measures on Beef, para. 133.
352 First written submission of Honduras, 16 March 2004, paras. 72 to 74, and First written submission
of the Dominican Republic, 13 April 2004, para. 32.

use of the products on the domestic market. The me asure at issue complies with this condition, since
the requirement to affix a stamp on cigarettes in the Dominican Republic is imposed by the
Dominican Republic in order to sell those products. Specifically, in the case of imported cigarettes,
Decree 130-02 stipulates that these products shall be placed in a bonded warehouse or warehouse
under the Directorate General of Internal Taxes where the control stamps provided for by Law 2461
of 1950 shall be applied.
5.118 The third and last of the elements which, accord ing to the Appellate Body, must be satisfied
for a violation of Article III:4 to be established is that the imported products must be accorded "less
favourable" treatment than that acco rded to like domestic products. In the case of the measure at
issue, the producers of cigarettes in the Domini can Republic can affix the stamp on the cigarette
packet as part of the production and labelling proce ss, while in the case of imported cigarettes, the
cigarettes have to be taken to bonded warehouses or warehouses under the control of the Directorate
General for Internal Taxes, th e packages unpacked, the cellophane wrapping removed, the stamp
affixed and the packages wrapped and packed once again.
353 For imported cigarettes, this process
involves labour and capital costs in addition to those incurred in the case of domestic cigarettes,
placing the former at a competitive disadvantage.354
5.119 Thus, though the measure may be applied accord ing to the law both to domestic products and
to imported products, in reality it results in less favourable treatment for imported products, and this
constitutes a discrimination.
5.120 In the light of the above considerations, El Salvador and Nicaragua consider that the
requirement to affix a stamp on cigarette packets exclusively in the territory of the Dominican
Republic constitutes a violation of Article III:4 of the GATT.
5.121 El Salvador and Nicaragua also consider that th is case has considerable systemic implications
owing to the precedent that it could create with resp ect to measures that could be adopted for other
products. If the Panel were to find that the re quirement to affix stamps on cigarette packets
exclusively in the territory of the Dominican Republic constitutes a GATT-consistent measure, it
would be setting a precedent which would give ri se to numerous abuses of the multilateral trading
system that would be improperly justified by invoking a variety of problems parallel to the obligations
of Members.
5.122 Having said this, El Salvador and Nicaragua do not deny the sovereign right of Member
States to introduce, under the multilateral trading system, measures whose pur pose is legitimate.
However, the application of those measures must fully respect and comply with the obligations
deriving from the commitments made by Members as part of that multilateral system.
5. Conclusions
5.123 El Salvador and Nicaragua consider that the current dispute is of considerable importance
owing to its implications for trade relations with the Dominican Republic and for the proper
functioning of the multilateral trading system in accordance with the co mmitments assumed by each
WTO Member.
5.124 El Salvador and Nicaragua stated that in th e foregoing submission they have established the
factual and legal grounds for reaching the following conclusions:
• Regarding the "transitional surcharge of tw o per cent on imports", El Salvador and
Nicaragua consider that the Dominican Republic has violated Article II:1(a) and

353 First written submission of Honduras, 16 March 2004, para. 78.
354 Ibid., para. 82.

II:1(b) of the GATT, since the measure is a "duty or charge" le vied unjustifiably in
addition to the ordinary customs duties.
• Regarding the "foreign exchange fee of 10 per cent on imports", El Salvador and
Nicaragua consider that the Dominican Republic has violated Article II:1(a) and
II:1(b) of the GATT, since the measure unjustifiably constitutes a "duty or charge"
levied in addition to the ordinary customs duties.
• Regarding the "requirement to stamp cigare tte packets in the Dominican Republic",
El Salvador and Nicaragua consider that the Dominican Republic has violated
Article III:4 of the GATT, since the application of that measure results, in practice, in
less favourable treatment for imported products.
5.125 In the light of the above, El Salvador and Ni caragua requested the Panel to recommend that
the Dominican Republic bring its measures into c onformity with the respective provisions of the
GATT.
D. E
UROPEAN COMMUNITIES
1. Introduction
5.126 The European Communities stated that it inte rvenes in this case because of its systemic
interest in the interpretation of fundamental provisions of the General Agreement on Tariffs and Trade
1994 (the "GATT"), in particular Article III. Th erefore, the European Communities does not take a
position on the specific facts of this case and the qu estion of whether or not the challenged measures
are WTO-consistent.
2. The transitional surcharge on imports
5.127 In its submission, Honduras argues that the tran sitional surcharge on impor ts is inconsistent
with Article II:1(b) of the GATT. Moreover, in a footnote, Honduras maintains that, for this reason,
the measure is also in breach of Article II:1(a) of the GATT.355
5.128 At the outset, the European Communities would note that it cannot agree with the statement
made by Honduras that "Article II:1(a) of the GATT prohibits, in principle, duties and charges on
bound items other than ordinary customs duties".
356 Rather, that Article mandates treatment no less
favourable than that provided for in the relevant schedule. The same applies to Article II:1(b) second
sentence of the GATT as is further corroborated by the Understanding on the Interpretation of
Article II:1(b).357 The text of the schedule will therefore govern the question of the WTO-
compatibility of the particular "other duties or char ges" a Member imposes. To the extent that the
transitional surcharge on im ports is inconsistent with the schedule , it would be in violation of
Article II:1(b) of the GATT and consequently, to this extent, also in breach of Article II:1(a) of the
GATT.358
3. The foreign exchange fee
5.129 The foreign exchange fee, as the European Communities understands it, is imposed on the
exchange of local currency into foreign currenc y which is necessary to pay for imported goods. 359

355 First written submission of Honduras, 16 March 2004, paras. 47 et seq., footnote 34.
356 Ibid., para. 2.
357 Cf. Panel Report, Chile – Price Band System, para. 7.107.
358 Appellate Body Report, Argentina – Textiles and Apparel, para. 45.
359 First written submission of Hondur as, 16 March 2004, paras. 15 et seq.; Dominican Republic first
written submission, 13 April 2004, para. 193.

Honduras argues that this fee is contrary to Article II:1(b) of the GATT because it exceeds the levels
of ''other duties and charges'' as inscribed by the Dominican Republic in its schedule. 360 T h e
Dominican Republic defends the foreign exch ange fee in the first place by referring to
Article XV:9(a) of the GATT.361
5.130 The European Communities does not take a positio n on Honduras's allegation that the foreign
exchange fee would be contrary to Article II:1(b) of the GATT. However, the European Communities
would like to make some systemic comments on the interpretation of Article XV:9(a) of the GATT:
5.131 First of all, the European Communities notes that this provision, and Article XV of the GATT
as a whole, are closely related to the IMF field of activity. Under Article XV:9(a) of the GATT WTO
Members may use ''exchange controls'' or ''excha nge restrictions'' consistent with IMF rules.
Therefore, the interpretation of this provision shoul d not be conducted in is olation from the relevant
IMF concepts and rules. The GATT cannot be assumed to have restricted the scope for Members to
adopt these exchange measures consistent with IMF rules.
5.132 That said, the European Communities would note th at it appears that a ''fee'' is not necessarily
an ''exchange restriction'' within the terms of Artic le XV:9(a) of the GATT. The ordinary meaning of
the term ''restriction'' is ''a limitation on action, a limiting condition''. 362 Thus, while it is of course true
that a fee would make foreign exchanges more expe nsive, this does not necessarily entail a limitation
on the availability of foreign currencies. Thus, th e exception under Article XV:9(a) of the GATT may
not be pertinent in this case.
5.133 The European Communities would also note that Article XV:4 of the GATT provides that any
''exchange action'' shall not ''frustra te the intent of the provisions of this Agreement''. Clearly, not all
''exchange actions'' are exempted by virtue of Article XV:9(a) of the GATT. Care must be taken not to
interpret this latter provision in a rather broad wa y to the detriment of the general principle under
Article XV:4 of the GATT. To avoid such a conclusion, it appears, therefore, appropriate to give the
notion of an ''exchange restricti on'' under Article XV:9(a) of the GA TT a meaning consistent with the
actual terms used, with its immediate context and with the relevant IMF provisions.
5.134 In this context, the European Communities would also emphasise the objective and purpose
of the WTO Agreements which aims at "expanding the trade in goods and services". 363 It would be
contrary to this objective if the trade impact of certain foreign exchange actions were to escape the
GATT rules by virtue of a too broad interpreta tion of the term "exchange restriction" under
Article XV:9(a) of the GATT.
4. The requirement to affix tax stamps in the territory of the Dominican Republic
(a) Article III:4 of the GATT
5.135 The European Communities wish es to comment upon the legal test to be applied under
Article III:4 of the GATT when as sessing the question whether imported products are accorded "less
favourable treatment" compared to the "like" do mestic products. As is well established in the
GATT/WTO jurisprudence, less favourable treatme nt can arise both from formally different and
formally identical treatment of imports and like domestic products.364 The fact that the requirement to

360 First written submission of Honduras, 16 March 2004, paras. 59 et seq.
361 First written submission of the Dominican Republic, 13 April 2004, paras. 190 et seq.
362 The New Shorter Oxford English Dictionary , supra note 52, Vol. II, p. 2,569. The European
Communities would note that this definition appears to be similar to the term "exchange restriction" as
interpreted by the IMF, cf. First written submission of the Dominican Republic, 13 April 2004, para. 194.
363 Agreement establishing the World Trade Organization, Preamble.
364 Appellate Body Report, Korea – Various Measures on Beef, paras. 136, 137; GATT Panel Report,
US – Section 337, para. 5.11.

affix the stamp in the Dominican Republic's terr itory is identical for importers and domestic
manufacturers, therefore, does not exclude the possibility of de facto less favourable treatment.
365
5.136 According to the Appellate Body in Korea – Various Measures on Beef, the relevant standard
for a determination of "less favourable treatment" is whether the measure at issue accords "conditions
of competition" that are less favourable for imports than for the like domestic goods.366
5.137 The European Communities would object to the Dominican Republic's attempt to narrow the
obligation of national treatment in Article III:4 of the GATT by importing "so as to afford protection"
into the criterion of "less favourable treatment". On the basis of "so as to afford protection to the
domestic industry" in Article III:1 of the GATT, the Dominican Republic appears to advocate an
additional requirement under Article III:4, which is that the measure has "protective application".
367
5.138 Firstly, this attempt goes in the direction of advocating the "aims-and-effects" approach which
has been explicitly rejected in the WTO jurisprudence.368 A responding party can therefore not defend
itself against the allegation of an Article III viola tion by insisting that its measure pursues entirely
legitimate policies and is not inherently and intentionally discriminatory.
5.139 Secondly, while the Dominican Republic is ri ght that the Appellate Body has acknowledged
that Article III:1 of the GATT informs a ll of Article III, including its paragraph 4 369, this does not
result in the additional requirement(s) for a violati on of Article III:4 of the GATT as argued by the
Dominican Republic. The Appellate Body has made it clear that the principle of Article III:1 of the
GATT is already expressed in the requirement of "no less favourable treatment" in Article III:4 of the
GATT. Where there is less favour able treatment of the group of like imports, there is automatically
protection of the group of like domestic products:
"The term 'less favourable treatment' expresses the general principle, in Article III:1,
that internal regulations 'should not be a pplied… so as to afford protection to
domestic production'. If there is 'less favour able treatment' of the group of 'like'

365 In this context, it should be pointed out that one should not misunderstand the GATT Panel's
reference in US – Section 337, to "cases where the application of formally identical legal provisions would in
practice accord less favourable treatment to imported products and a contracting party might thus have to apply
different legal provisions to imported products to ensure that the tr eatment accorded them is in fact no less
favourable" (emphasis added). The remedy to abolish the de facto discrimination which arises from identical
treatment need not necessa rily and always introduce different treatment of imports and domestic products.
There may also exist forms of identical treatment other than the discriminatory one that would remove any less
favourable treatment.
366 Appellate Body Report, Korea – Various Measures on Beef, para. 135. The Appellate Body's
formulation, in para. 137 of that Report, "whether a measure modifies the conditions of competition in the
relevant market to the detriment of imported products" (compared to domestic goods) expresses the same idea,
even though strictly speaking "modifies to the detrimen t of imports" is a correct standard only where there
previously was no (such) discriminatory measure imposing a competitive disadvantage on imports. Where,
however, the previous regulatory situation was equally or even more discriminatory, there would be no
"modification" to the detriment of imports, but nevertheless a national treatment violation because the measure
in question still "accords" less adva ntageous conditions of competition to imports. See also Panel Report,
Canada – Wheat Exports and Grain Imports, para. 6.184: "the relevant requirement… must adversely affect the
competitive opportunities of imported grain vis-à-vis like domestic grain".
367 First written submission of the Dominican Republic, 13 April 2004, paras. 46, 51.
368 Appellate Body Report, EC – Bananas III , para. 241; Appellate Body Report, Japan – Alcoholic
Beverages II, pp. 27-28.
369 Appellate Body Report, EC – Asbestos , para. 98; Appellate Body Report, Japan – Alcoholic
Beverages II, p. 18.

imported products, there is, conversely, 'prot ection' of the group of 'like' domestic
products".370
5.140 Thus, there is no need for an additional finding of the existence of what the Dominican
Republic calls "protective application".
5.141 For this reason, the Dominican Republic also cannot defend itself with the argument that the
costs imposed by its tax stamp measure are minimal and therefore result in no discriminatory or
protective effect.371 Indeed, according to established jurisprudence even a minimal difference in taxes
may contravene Article III:2, first sentence, of the GATT as this provision contains no de minimis
exception.372 In addition, Article III of the GATT protects expectations of equal competitive
opportunities, not of trade volumes. 373 This simultaneously shows the irrelevance of the Dominican
Republic's argument that the volume of imports has actually increased despite the allegedly
discriminatory trade practice.
5.142 Finally, the Dominican Republic's arguments rega rding the need for effective enforcement of
tax laws, the danger of forgery and tax evasion and the lack of reasonably available regulatory
alternatives do not belong in the analysis of compe titive conditions and thus of national treatment. In
the event of an inconsistency with Article III of th e GATT, such considerations would be relevant in
the examination of a justification under Article XX:(d) of the GATT.
5.143 Regarding the analysis of the "conditions of competition" one would need to assess whether
the measure imposes additional costs on imported pr oducts compared to those imposed on like
domestic products. In contrast, additional costs wh ich are not truly the result of the governmental
measure, but of a free choice by the importer, woul d be irrelevant. In the latter case, the additional
costs borne by imports as compared with the like domestic products would not be entailed by the
governmental measure and they should, therefore, be ignored in the "less favourable treatment"
analysis. The same is valid for those competitive disadvantages which are not the result of the
measure, but of economic, geographic or cultural circ umstances inherently connected with the sale of
products in export markets.
5.144 In sum, Article III:4 of the GATT requires th at one considers only those costs that are
imposed by the challenged measure itself and to assess whether the result is a disadvantage for
imports in their competitive relationship with the like domestic products.
5.145 In the present case, the European Communiti es would not exclude that the Dominican
Republic's requirement to affix the tax stamps in its territory creates a higher burden for imports and
thus a competitive disadvantage vis-à-vis like domestic products. The Panel would need to assess the
extent to which the alleged additional costs are truly imposed on importers compared to domestic
producers and not only an ex aggerated description of necessary add itional steps or costs that are self-
imposed by the importer, for instance by inefficient production processes.

370 Appellate Body Report, EC – Asbestos, para. 100.
371 First written submission of the Dominican Republic, 13 April 2004, paras. 45 and 53.
372 Appellate Body Report, Japan – Alcoholic Beverages II , p. 23; GATT Panel Report, Japan –
Alcoholic Beverages I, paras. 5.8, 5.11; GATT Panel Report, US – Malt Beverages, para. 5.26.
373 Appellate Body Report, Japan – Alcoholic Beverages II , p. 16; GATT Panel Report, US –
Superfund, para. 5.1.9.

(b) Article XX:(d) of the GATT
5.146 Assuming that the ''tax stamp requirement'' were to be found in violation of Article III:4 of the
GATT the Panel would then be called upon to adj udicate on the Dominican Republic' argument that
the measure is justified under Article XX(d) of the GATT.
374
5.147 The European Communities believes that a ta x stamp requirement pursues a legitimate
objective under the GATT, i.e. the levy of taxes on cigarettes, and that a tax stamp is an appropriate
means to secure compliance with such an objec tive. However, the Eu ropean Communities would
invite the Panel to consider whether the concre te measure applied by the Dominican Republic is
''necessary'' in terms of Article XX(d) of the GATT.
5.148 The Appellate Body gave an exhaustive in terpretation of the term "necessary" under
Article XX(d) of the GATT in the case Korea – Various Measures on Beef . Thus, an examination of
this term,
"involves in every case a process of weighing and balancing a series of factors which
prominently include the contribution made by the compliance measure to the
enforcement of the law or regulation at i ssue, the importance of the common interests
or values protected by that law or regulation, and the accompanying impact of the law
or regulation on imports or exports".
375
5.149 The Appellate Body has further added that, in its view,
"the weighing and balancing process [it has] outlined is co mprehended in the
determination of whether a WTO-consistent alternative measure which the Member
concerned could 'reasonably be expected to employ' is available, or whether a less
WTO-inconsistent measure is 'reasonably available'."376
5.150 In the case at hand, the European Communitie s would not contest that the tax stamp
requirement is apt to achieve the compliance wi th the taxation of cigarettes in the Dominican
Republic. However, Honduras contends that the ta x stamp requirement has also a considerable
adverse impact on the cost of importation due to the necessity to put the stamp on the cigarettes in the
Dominican Republic. The European Community is not in a position to judge whether all the
additional steps described by Honduras 377 would necessarily occur, but it seems clear that the
Dominican Republic' tax stamp requirement, at leas t, entails some more manufacturing steps for
imports compared to the situation in which the stamps could be affixed in the ''home'' factory of the
producer of imported cigarettes. According to th e Appellate Body jurisprudence, such an aspect
should be taken into account when assessing the ''ne cessity'' of the measure under Article XX(d) of
the GATT.
5.151 In the EC's view, the requirement of a ''tax st amp'' could in principle also be achieved in a
way that would be less burdensome for imports in to the Dominican Republic. Such alternative
methodology could consist, for instance, of selling ta x stamps to authorized producers who would be
entitled to fix the stamps on the cigarettes pack ets during the manufacturing process. If properly
designed, such a procedure could sufficiently guarant ee that only original tax stamps would be used,
thus securing the objective of the tax stamp, wh ile avoiding an unnecessary doubling in the
manufacturing process for importers.

374 See First written submission of the Dominican Republic, 13 April 2004, paras. 100 et seq.
375 Appellate Body Report, Korea – Various Measures on Beef, para. 164.
376 Ibid., para. 166.
377 First written submission of Honduras, 16 March 2004, para. 78.

5.152 This being said, the European Communities do es not contest the right of the Dominican
Republic to choose its level of enfo rcement for its legitimate tax laws. 378 However, as in the case
Korea – Various Measures on Beef , this argument is not a "blank cheque" to the Member invoking
Article XX(d) GATT. Instead, it is for the Panel to balance and weight all the arguments put forward
by the party relying on this defence.
5. The Selective Consumption Tax
5.153 The Dominican Republic argues that the Panel should dismiss the claim because it is moot
given the enactment of the Law 3-04 wh ich was published on 14 January 2004 379, that is after the
establishment of the Panel, i.e. on 9 January 2004. Against this background, the European
Communities considers that the Panel should conc lude that the claim has become moot unless
Honduras advances a special legal interest on why the Panel should still make a finding on this issue.
5.154 The European Communities is aware that the Panel's terms of reference form the
jurisdictional basis for a case. For th is reason, past Panels have been reluctant to dismiss a claim in
case the underlying facts changed.
380 That said, in the EC's view, it is important to take into account
the rationale of the dispute settlement system. For instance, Article 3.2 of the DSU provides that this
system "serves to preserve the rights and obligations of Members". Moreover, Article 3.3 of the DSU
refers to "measures taken by another Member" a nd Article 3.7 of the DSU second sentence stipulates
that "the aim of the dispute settlement mechanism is to secure a positive solution to a dispute".
5.155 The European Communities considers that, in cas e a measure is withdrawn, the basis for a
''dispute'' does not exist any more. 381 In these circumstances, it would be for the complaining party to
demonstrate why the dispute settlements proceedings should continue and to what extent its rights and
obligations could still be affected. However, if the measure has simply become moot it is neither
appropriate nor necessary any more for the Panel to ma ke any findings on such a claim. Indeed, there
would be no longer a ''measure'' which could ''affect the rights and obligations'' of another Member
and, consequently, the case would be deprived of a "dispute".
6. The requirement to post a bond
5.156 The European Communities would insist that Artic le XI:1 of the GATT is not applicable to
the bond requirement. This measure should be ap plied identically by both domestic manufacturers
Ad Article III makes clear, such a measure falls under Article III of the GATT and not within the
scope of Article XI of the GATT.
5.157 In support of its subsidiary claim under Artic le III:4 of the GATT, Honduras asserts that the
bond, which is a specific one-o ff guarantee (RD$ 5 million per importer or domestic producer),
burdens an importer with small market share much more than a domestic producer with large market
share. Honduras also claims that the bond serv es to guarantee the payment of the Selective

378 First written submission of the Dominican Republic, 13 April 2004, para. 117.
379 See Corrigendum to the First written submission of the Dominican Republic, letter of 23 April 2004.
380 See GATT Panel Report, EEC – Animal Feed Proteins ; Panel Report, US – Wool Shirts and
Blouses, para. 6.2; Panel Report, Indonesia – Autos, para. 4.61. But see also, Panel Report, Argentina – Textiles
and Apparel , para. 6.11 et seq. The European Communities however not es that each case presents its own
particularities; thus, they may not necessarily constitute appropriate precedents.
381 See also Article 3.7, fourth sentence, Dispute Settlement Understanding: "the first objective of the
dispute settlement mechanism is usually to secure the withdrawal of the measures concerned" (emphasis added).
Obviously, if the measure does not exist any more the dispute settlement procedure has already achieved its
primary purpose.
382 Decree 79-03, supra note 8, Article 14.

Consumption Tax, the actual burden of which depends on the quantities sold, such that the bond is not
commensurate with the tax payable.
5.158 The European Communities would submit that the assessment whether the bond requirement
de facto accords less advantageous competitive conditions to imported products than to the like
domestic products should also take into account whet her the bond requirement has a deterrent effect
on potential domestic operators a nd importers. Domestic producer s and also importers may be
reluctant to set up business operations in the mark et of the Dominican Republic because of the bond
requirement, with the result that that they do not actually exist on that market. When considering
entry barriers resulting from the bond, it may be worth recalling that domestic producers must post the
bond before starting production and importers (only) prior to importation.
5.159 The European Communities notes that while th e parties have no disagreement about the
"likeness" of the products in this case, i.e. cigarettes
383, it is nevertheless important to note that for the
purpose of the determination of a "less favourable treatment" "domestic" a nd "imported" should be
compared as respective "groups". Thus, the Appellate Body in EC – Asbestos held
"A complaining Member must still establish th at the measure accords to the group of
'like' imported products 'less favourable treatment' than it accords to the group of 'like'
domestic products."384
5.160 Therefore, in order to determine whether impor ted products are treated less favourably than
domestic products one has to compare the "groups" of the respective like products. 385 In the present
case, it is not clear to the European Communiti es whether the bond requirement constitutes a "less
favourable treatment" of the "group" of imported ci garettes compared to the "group" of cigarettes
from the Dominican Republic. Indeed, in its claim Honduras only construes one example where an
importer with a small market share is allegedly treated disadvantageously compared to a domestic
producer with a big market share. Such an isolated example, however, is not sufficient to demonstrate
that, under the terms of the decision EC – Asbestos , the "group" of imported products is treated less
favourably than the "group" of domestic products. In other words, a single example, which might be
purely anecdotal, tells nothing about the effects of the measure on the overall competitive relationship
of imported and like domestic goods.
5.161 Furthermore, in order to make a prima facie case, it is not sufficient to rely for the
determination of a "less favourable treatment" solely on the relative market share of importers as a
group and domestic producers as a group. Honduras w ould also have to show that the imposition of a
specific, fixed-amount bond results in a higher bur den and a competitive disadvantage for the group
of imported goods, as compared to the group of domestic like products.
5.162 As far as the Dominican Republic's defence on Ar ticle III:4 is concerned, in particular the
relevance of "so as to afford protection" and "protective application" within "less favourable
treatment", the European Communities would refer to its comments in connection to the tax stamp.
7. Conclusions
5.163 The European Communities considers that th is case raises important questions on the
interpretation of Article III of the GATT. While no t taking a final position on the merits of the case,
the Panel should carefully review the scope of the claims in light of the observations made in this
submission.

383 First written submission of Hond uras, 16 March 2004, para. 73 et seq.; First written submission of
384 Appellate Body Report, EC – Asbestos, para. 100 (italics in original).
385 See also Appellate Body Report, Chile – Alcoholic Beverages, para. 52.

E. GUATEMALA
1. Introduction
5.164 Guatemala stated that it would limit its comments to certain issues relating to the proper legal
interpretation of various Articles of the GATT.
2. The stamp requirement for imported and domestic cigarettes
5.165 In paragraph 28 of its first written communication, the Dominican Republic states that:
"There is nothing discriminatory about the stamp requirement specified in Article 37
of Decree No. 79-03 of 4 February 20 03 and Article 2 of Decree 130-02 of
11 February 2002".
5.166 Further, in Paragraph 37, the Dominican Republic maintains that:
"Accordingly to Article 37 of Decree 79-03, both the domestic producer and the
importer of cigarettes are required to a ffix stamps in the presence and under the
supervision of the DGII inspector".
5.167 Based on this reasoning, the Dominican Republic suggests that a Member may meet the
requirement of Article III:4, by according to like products of any other Member, formally identical
treatment to that it accords to its own like products.
5.168 Guatemala claims that the obligation of "treatment no less favourable" contained in
Article III.4 is not, in essence, limited to de jure discrimination. Therefore, the term "treatment no less
favourable" in Article III.4 of the GAT T should be interpreted to include de facto, as well as de jure,
discrimination.
5.169 More specifically, formally identical treatment sh all be considered to be less favourable if it
modifies the conditions of competition in the relevant market to the detriment of imported goods.
5.170 From that, and given the absence of de jure discrimination in the present case, the Panel
should then turn to the question of whether the app lication of formally identical rules, nevertheless
modified conditions of competition for importers.386
5.171 In its first written submission, Honduras claims that:
"… by requiring that the tax stamp of cigare tte packages be affixed in the territory of
the Dominican Republic, the Dominican Republic accords treatment less favourable
to imported cigarettes than that accorded to domestic cigarettes, in a manner
inconsistent with Article III.4 of the GATT."
387
5.172 For imported cigarettes, the stamp can only be placed on the cellophane of each cigarette
packet after it is imported into the Dominican Repub lic, but prior to its sale. In contrast, domestic
producers can place the stamp in their own premises without any adjustment or cost.
5.173 This, as Honduras affirms, derives in additional st eps and costs, which as a result, modify the
conditions of competition in the relevant market for imported cigarettes.

386 Appellate Body Report, Korea – Various Measures on Beef, para. 137.
387 First written submission of Honduras, 16 March 2004, para. 69.

5.174 The cost of adjusting to this requirement li nked with the fact that domestic producers do not
have to undergo these additional steps, predominantl y burdens importers, thus affecting the internal
sale of imported cigarettes.
5.175 Therefore, the requirement to affix the stamp in the Dominican Republic discriminates against
imported cigarettes by increasing the cost of importe d cigarettes. This additional cost places imported
goods in a disadvantageous competitive situation vis à vis the like domestic products.
5.176 Consequently, it can be concluded that the requi rement to affix the stamp in the Dominican
Republic modifies the conditions of competition fo r imported cigarettes in the Dominican Republic.
This de facto discrimination reflects the less favourable treatment granted by Dominican Republic to
imported cigarettes, thereby, violating Article III.4 of the GATT.
5.177 It is worth noting that the Dominican Republic recognizes that the non-discrimination
obligation in Article III:4 "…requires Members to refrain from modifying or upsetting those
conditions of competition to the detriment of impo rters in a manner that affords protection to the
domestic producers."
388
5.178 However, by stating that "the effect that the measure has on imports is negligible" 389, the
Dominican Republic asserts, "(…) complying with the stamp requirement of the Dominican Republic
can hardly have any commercial or protective discriminatory effect at all".
5.179 Guatemala rejects the notion advanced by th e Dominican Republic that a discriminatory
measure, in violation of Article III.4, is justifie d by the minimal adverse effects generated by such
discrimination.
5.180 The contention that the effect of the measure is so small that its trade effects are negligible,
minimal or nil, and thus, did not nullify or impair benefits under the GATT, is irrelevant due to two
essential factors. On the one hand, the presumption of nullification or impairment following a prima
facie violation operates as an irrefutable presumption (Article 3.8 of the DSU). On the other hand,
Panels dealing with claims under GATT Article III ha ve refined and clarified this notion. The GATT
Panel on US-Tobacco noted:
 "…previous panels had rejected arguments of de minimis trade consequences and
had found that the size of the trade impact of a measure was not relevant to its
consistency with Article III [of GATT]".
390
5.181 For the reasons above, Guatemala considers that the requirement to affix a stamp in the
territory of the Dominican Republic is inconsistent with Article III:4 of the GATT.
3. The transitional surcharge on imports
5.182 In its first written submission, the Dominican Republic does not contest the fact that the
transitional surcharge is an "other duty or charge " within the meaning of Article II:1 (b) of the
GATT.391
5.183 Paragraph 1 of the Uruguay Round Understanding on the Interpretation of Article II:1(b) of
the GATT 1994 ("the Understanding") reads:

388 First written submission of the Dominican Republic, 13 April 2004, para. 40.
389 Ibid., para. 45.
390 GATT Panel Report, US – Tobacco, para. 99.
391 First written submission of the Dominican Republic, 13 April 2004, para. 172.

"… in order to ensure transparency of the legal rights and obligations deriving from
paragraph 1(b) of Article II, the nature and level of any 'other duties or charges' levied
on bound tariff items, as referred in that provision, shall be recorded in the Schedules
and concessions annexed to GA TT 1994 against the tariff item to which they apply.
It is understood that such recording does not change the legal ch aracter of 'other
duties or charges'."
5.184 According to the second paragraph of the Understanding:
"… the date as of which "other duties or charges" are bound, for the purposes of
Article II, shall be 15 April 1994. 'Other duties or charges' shall therefore be
recorded in the Schedules at the levels applying on this date."
5.185 From the above, Guatemala would conclude that if "other duties or charges" were not
recorded but are nevertheless levied, they are inc onsistent with Article II:1(b), in light of the
Understanding on the Interpretation of Article II:1(b).
5.186 Guatemala notes that the Dominican Republic did not record the transitional surcharge
established by Article 2 of Decree 646-03 of 30 June 2003 in the "other duties and charges" column of
its Schedule.
5.187 Guatemala is of the view that Article II:1(b) sets forth the legal obligation of contracting
parties to refrain from the application of "other dut ies and charges" that were not specified in each
country's Schedule.
5.188 Guatemalan exporters have assessed their comp etitive position on the basis of the inscribed
duties and charges of the Dominican Republic. For that reasons, the transitional surcharge
undermines the legitimate expectations upon which these actions were based and severely disrupts the
trade conditions upon which Guatemalan exporters had relied.
5.189 Consequently, Guatemala agrees with Honduras that the Dominican Republic's transitional
surcharge on imports is in violation of Article II:1(b) second sentence, because Dominican Republic
failed to record it in the "other duties and charges" column of its Schedule, as it should have done in
the light of the Understanding on Article II:1(b).
5.190 Finally, Guatemala notes that the Domini can Republic argues that its Schedule of
Concessions contains "other duties and charges" up to the level of 30 per cent. Even if the recording
was to be found WTO consistent for the products listed therein, the transitional surcharge,
nevertheless, remains WTO inconsistent in its application to the rest of the products.
F. U
NITED STATES
1. Introduction
5.191 The United States takes no position on the measur es at issue. However, the United States
does have a systemic interest in the analys is of two GATT 1994 provisions: Article III:4 and
Article X:3. The United States offers the following thoughts.
2. Legal aspects
5.192 As the Panel knows, Article III:4 provides that products of the territory of a Member imported
into the territory of another Member must be affo rded treatment no less favourable than that accorded
to like products of national origin in respect of laws, regulations, and requi rements affecting their
internal sale, offering for sale, purchase, tr ansportation, distribution, or use. Note Ad Article III of

GATT 1994 provides that such measures may be applied at the point of importation; application at the
border does not alter the fact that the measure is an internal one.
5.193 The necessary consequence of Note Ad Article III is that under Article III:4, the border may
be a locus of application for a Member administering laws, regulations, and requirements affecting the
internal sale of imported and domestic goods. In th is dispute, however, a question has arisen as to
whether a measure results in the imported good bei ng provided with treatment less favourable than
that accorded to the like domestic product, simply because the measure is being applied in the
territory of a Party – at the border. To put it a nother way: does Article III:4 in the context of this
dispute require that a Member apply its measure in the territory of the exporting Member, rather than
at the border?
5.194 Honduras appears to be arguing that because the Dominican Republic permits the tax stamp
to be affixed on domestic cigarettes at the domes tic production facility, the Dominican Republic must
also allow the stamp to be affixed on foreign cigarettes at the foreign production facility – in other
words, the Dominican Republic may not require the ta x stamp to be affixed in the territory of the
Dominican Republic.
392 Honduras thus alleges that the mere requirement that the tax stamp be affixed
in the territory of the Dominican Republic resu lts in discriminatory effects in the form of, inter alia,
additional packaging steps and additional costs.
5.195 The gist of Honduras's argument therefore appears to be that Article III:4 may require that a
Member apply a measure in the territory of the expo rting Member, rather than at the border – and that
the mere application of a measure at the border may result in a violation of Article III:4. The United
States does not believe that Article III:4 can be so interpreted. Such an interpretation ignores
Article III's recognition of the border as a permissi ble site of application. Indeed, a finding of a
breach of Article III:4 cannot rest simply on where the measure is being applied to imported products.
5.196 Moreover, the fundamental purpose of Article III is not to eliminate every perceived
differential between domestic and imported goods, ev en those incidental to the inherent differences
between imported and domestic goods. Inst ead, as the Appellate Body counselled in Japan –
Alcoholic Beverages II , the "fundamental purpose of Article III is to avoid protectionism in the
application of internal tax and regulatory measures" and to ensure that such measures are not applied
so as to afford protection to domestic production.
393 Rather, Article III:4 does not require identical
treatment so long as the treatment afforded to imported products is no less favourable than the
treatment afforded to domestic products. In other words, like imported and domestic products may be
treated differently so long as the different treatme nt does not result in less favourable treatment for
imported products.
5.197 The United States is aware that in considering th e language of Article III:2, first sentence, the
Appellate Body concluded that the analysis was si mple – either taxes on the imported product are in
excess of those on the domestic like product, or they are not. If the taxes are in excess, then the
measure providing for those taxes is inconsistent with Article III:2, first sentence. In Japan –
Alcoholic Beverages II , the Appellate Body stated that "[e]ven the smallest amount of 'excess' is too
much", and no trade effects or de minimis test is necessary.394
5.198 The Appellate Body's analysis of Article III:2, first sentence, however, is not automatically
applicable to every provision of Article III. Indeed , the Appellate Body did not apply it to the second
sentence of Article III:2 in that very same dispute.395 The Appellate Body considered that:

392 See First written submission of Honduras, 16 March 2004, paras. 2 and 76 through 85.
393 Appellate Body Report, Japan – Alcoholic Beverages II, p. 16.
394 Appellate Body Report, Japan – Alcoholic Beverages II, p. 23.
395 Ibid., pp. 26-27.

"[T]here may be an amount of excess taxati on that may well be more of a burden on
imported products than on domestic 'dir ectly competitive or substitutable products'
but may nevertheless not be enough to justify a conclusion that such products are 'not
similarly taxed' for the purposes of Article III:2, second sentence. We agree with the
Panel that this amount of differen tial taxation must be more than de minimis to be
deemed 'not similarly taxed' in any given case."
396
5.199 Likewise, it cannot be assumed that the Appellate Bo dy's Article III:2, first sentence, analysis
is applicable to Article III:4. To th e contrary, the Appellate Body in the Korea – Various Measures
on Beef dispute noted that a measure might produce "incidental effects" but that such effects might not
have "decisive implications" for an examination of whether the measure is inconsistent with
Article III:4. In that dispute, the Appellate Body examined the existence of a "dual retail system" in
Korea: one for imported beef, and a second for domestic beef. The Appellate Body stated:
"[E]ven if we were to accept that the dual retail system 'encourages' the perception of
consumers that imported and domestic beef ar e 'different', we do not think it has been
demonstrated that such encouragement necessarily implies a competitive advantage
for domestic beef. Circumstances like limitation of 'side-by-side' comparison and
'encouragement' of consumer perceptions of 'differences' may be simply incidental
effects of the dual retail system without decisive implication of the issue of
consistency with Article III:4."397
5.200 In short, the Appellate Body was reitera ting that under Article III:4 like imported and
domestic products may be treated differently so lo ng as the different treatment does not result in less
favourable treatment for imported products. Therefore, to the extent that the application of a measure
at the border results in differential, "incidental effects", those incidental effects do not necessarily
mean that an Article III:4 violation has occurred.
5.201 Finally, the United States would like to briefly comment on Honduras's argument regarding
Article X:3. According to Honduras, the Domi nican Republic's administration of its Selective
Consumption Tax is inconsistent with Article X:3(a) because the Dominican Republic allegedly
disregarded the actual retail selling price when determin ing the tax base. However, to the extent that
Honduras relies on Article X:3(a) to challenge the s ubstance of the Selective Consumption Tax, the
United States wishes simply to note that Article X:3(a) concerns the administration of a measure, not
the substance of the measure itself.
VI. INTERIM REVIEW
6.1 On 28 September 2004, both Honduras and the Dominican Republic informed the Panel that
they have no comments on the interim report issued to the parties on 21 September 2004. None of
the parties requested a meeting with the Panel on the interim report in due time. Accordingly, based
on Article 15.2 of the DSU, the Panel's interim repo rt became the Panel's final report. The Panel
made editorial corrections in a few places.

396 Ibid., p. 27.
397 Appellate Body Report, Korea – Various Measures on Beef, para. 141.

VII. FINDINGS
A.
CLAIMS OF THE PARTIES
1. The claims of Honduras
7.1 Honduras has made claims in respect of five di fferent measures: (i) the imposition of a 2 per
cent transitional surcharge for economic stabilizati on on all imported goods is inconsistent with
Article II:1(b) and, consequently, is also inconsis tent with Article II:1(a) of the GATT 1994; (ii) the
levying of a 10 per cent foreign exchange fee on all im ports is inconsistent w ith Article II:1(b) and,
consequently, is also inconsistent with Article II:1( a); (iii) the requirement that tax stamps be affixed
to cigarette packets in the territory of the Domini can Republic under the supervision of the local tax
authorities accords less favourable treatment to impo rted cigarettes and violates Article III:4 of the
GATT 1994; (iv) the requirement that importers of cigarettes post a bond of RD$5 million at the time
of importation is inconsistent with Article XI:1, or, in the alternative, is inconsistent with Article III:4
of the GATT 1994; and (v) the rules and practices used in determining the value of imported
cigarettes as tax bases for the application of the Selective Consumption Tax (SCT), including the
failure to publish the survey used to determine the SCT tax bases are inconsistent with Article III:2,
Article X:3(a) and Article X:1 of the GATT 1994.
7.2 Honduras requests the Panel to recommend that the DSB request the Dominican Republic to
bring these measures into conformity with the GATT 1994.
2. The defence of the Dominican Republic
7.3 The Dominican Republic does not disagree that the transitional surcharge is an "other duty or
charge"(ODC). However, it argues that the Do minican Republic has recorded 30 per cent ODCs
applied to cigarettes as of 15 Ap ril 1994 in its Schedule of Concessi ons. The 2 per cent transitional
surcharge is well below the level of ODC record ed in the Schedule, and therefore, it is not
inconsistent with Article II:1(b) and Article II:1(a) of the GATT 1994. The foreign exchange fee is
an exchange restriction applied in accordance w ith Articles of Agreement of the International
Monetary Fund and therefore is justified by Article XV:9(a) of the GATT 1994. Alternatively, the
Dominican Republic claims that the foreign excha nge fee is an "other duty or charge" and the
application of a 10 per cent foreign exchange fee plus the 2 per cent transitional surcharge is not "in
excess of" the level of 30 percent recorded ODCs on cigarettes in its Schedule, and therefore, the
foreign exchange fee is consistent with Article II:1(b) and Article II:1(a) of the GATT 1994.
7.4 In respect of the tax stamp requirement, th e Dominican Republic cl aims that Honduras has
not established that the tax stamp requirement accords less favourable treatment to imported cigarettes
and consequently, there is no violation of Article III:4. On the bond requirement, the Dominican
Republic claims that the measure is an internal measure that falls under Article III:4, rather than under
Article XI:1 and since it does not accord less fa vourable treatment to imported products, it is
consistent with Article III:4. The Dominican Republic also claims that should the Panel find that the
tax stamp requirement and the bond requirement are inconsistent with Article III:4, they are
nevertheless justified by Article XX(d) of the GATT 1994 because they are both necessary to secure
compliance with the Dominican Republic's Tax C ode which itself is consistent with the GATT 1994
and that their application satisfies the requirements of the chapeau of Article XX.
7.5 As to the measure on the determination of th e Selective Consumption Tax bases for imported
cigarettes, including the publication of relevant surveys, the Dominican Republic claims that
Articles 367 and 375 of the Tax Code have been amended by Law 3-04 which entered into force on
15 January 2004. As the amende d Tax Code changed the essence of the old measure, the Dominican
Republic contends that the claims that Honduras made with respect to the old measure are moot and
should be dismissed by the Panel.

7.6 The Dominican Republic requests the Panel to di smiss all the claims made by Honduras in its
submissions.
B. ORDER OF ANALYSIS
7.7 The Panel considers that Honduras has made cl aims under five separate measures in this
dispute. The failure to publish the survey used to determine tax bases as prescribed in paragraph 2 of
its panel request is not an independent measure, ra ther, it forms part of the rules and practices by
which the Dominican Republic determines the Selective Consumption Tax base for imported
cigarettes.
7.8 The Panel recalls the ruling of the Appellate Body in Australia – Salmon:
"This aim [of the dispute settlement system] is to resolve the matter at issue and to
'secure a positive solution to a dispute'. To provide only a partial resolution of the
matter at issue would be false judicial ec onomy. A panel has to address claims on
which a finding is necessary in order to en able the DSB to make sufficiently precise
recommendations and rulings for purpose of prompt compliance by a Member with
those recommendations and rulings...".398
7.9 As the five measures challenged by Honduras are all independent measures, the Panel is of
the view that a solution could only be secured in this dispute by examining and making findings on
each and every measure, although not necessarily on each claim. Leaving any one measure
unaddressed would, in the view of the Panel, lead to a partial resolution of the dispute.
7.10 Accordingly, the Panel considers it appropria te to examine claims made by Honduras under
each measure in the following order: (i) the imposition of transitional surcharge for economic
stabilization; (ii) the levying of foreign exchange f ee; (iii) the requirement that tax stamps be affixed
to cigarette packets in the territory of the Domini can Republic; (iv) the requirement that importers of
cigarettes post a bond of RD$5 million at the time of importation; and (v) the rules and practices in
determining the value of imported cigarettes as tax bases for the application of the Selective
Consumption Tax, including the failure to publish the survey used to determine the SCT tax bases.
C. T
HE IMPOSITION OF TRANSITIONAL SURCHARGE FOR ECONOMIC STABILIZATION
1. The measure at issue
7.11 The Dominican Republic imposes a surcharge on th e importation of all goods under the name
"transitional surcharge for economic stabilisation" ( recargo transitorio de estabilización económica ).
This surcharge was first established by Article 2 of Decree 646-03 of 30 June 2003. 399 The surcharge
rate is 2 per cent of the c.i.f. value of the imported goods.
7.12 Decree 646-03 was replaced by a new law after th e date of the establishment of the Panel.
The Dominican Republic informed the Panel that its Congress approved Law 2-04, which established
a temporary 2 per cent surcharge on all goods imported into the Dominican Republic with a few
exceptions.
400 This law entered into force on 15 January 2004, after the establishment of the Panel on
9 January 2004.401 The rate of the surcharge provided by Law 2-04 is the same as the rate provided in
the previous Decree. Article 4 of Law 2-04 also provides that the transitional surcharge shall expire,
at the latest, on 31 December 2004.

398 Appellate Body Report, Australia – Salmon, para. 223.
399 Decree 646-03, supra note 7.
400 Law 2-04, supra note 60.
401 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 45.

2. Introduction
7.13 Honduras claims that this transitional surcharge measure is inconsistent with Article II:1(b) of
the GATT 1994. It also points out the consequential violation of Article II:1(a) in the text of a
footnote in its first written submission. In light of the arguments and debates made by the parties
during the Panel proceedings, the Panel considers it necessary to address a series of issues logically
linked to the claim of inconsistency with Article II:1(b) of the GATT 1994 raised by Honduras.
These issues include: (i) which legal instrument cons titutes the measure to be examined by the Panel;
(ii) whether the transitional surcharge is an "o ther duty or charge" under Article II:1(b) of GATT
1994; (iii) whether the surcharge has been properly recorded in the Schedule of Concessions of the
Dominican Republic and the nature of the recorded measure; (iv) whether the right to challenge the
recording expired three years after the incorporation of the Uruguay Round Schedule; (v) whether the
surcharge is inconsistent with Article II:1(b); (vi) whether the measure is limited to cigarette products;
and (vii) whether the surcharge is inconsistent with Article II:1(a).
3. Which legal instrument constitutes the measure to be examined by the Panel
(a) Arguments of the parties
7.14 Honduras claimed that Decree 646-03 of 30 June 2003 prescribed a "transitional surcharge for
economic stabilization". Article 2 of the Decree requires that a 2 per cent surcharge, calculated on the
c.i.f. value of all goods imported into the Dominican Republic be levied. Honduras indicates that this
surcharge applies to both bound and unbound items.
402
7.15 The Dominican Republic informed the Panel in its first written submission that Decree 646-
03 is no longer in force. It has been replaced by Law 2-04 of 4 January 2004. 403 In its reply to panel
questions, the Dominican Republic confirmed that Law 2-04 entered into force on 15 January 2004,
the day following its publication, in accordance wi th Article 1 of the Dominican Republic Civil
Code.404
7.16 Honduras argues that what is relevant for the Pa nel's terms of reference is the "transitional
surcharge for economic stabilization" in substance ra ther than the legal acts in their original or
modified forms. Therefore, the measure, "tra nsitional surcharge for ec onomic stabilisation", as
provided in both Decree 646-03 and Law 2-04 should be analysed by the Panel.405
7.17 The Dominican Republic also confirmed that Law 2-04 has not changed the essence of the
transitional surcharge measure as provided in Decree 646-03. 406 One minor change is the list of
exceptions introduced by paragraph I to Article 1 of Law 2-04. The Dominican Republic considers
that the measure that the Panel should examine is the 2 per cent surcharge mandated by Law 2-04, but
only as it applies to cigarettes.407
(b) Analysis by the Panel
7.18 Decree 646-03 provides in Article 2 that "[a] tr ansitional surcharge for economic stabilization
shall be applied amounting to 2 per cent of the c.i.f. value of all goods under the tariff headings of the
Harmonized Commodity Description and Coding Syst em that are entered for consumption". Law 2-
04 provides the following:

402 First written submission of Honduras, 16 March 2004, paras. 11-14.
403 First written submission of the Dominican Republic, 13 April 2004, para. 180.
404 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 45.
405 Replies of Honduras to questions addressed by the Panel, replies to questions Nos. 6, 7 and 8.
406 Replies of the Dominican Republic to questions addressed by the Panel, replies to questions Nos. 6
and 7.
407 Ibid., replies to questions Nos. 7 and 8.

"Article 1 A temporary surcharge of 2 per cent is hereby established on all
goods imported into the Dominican Republic under the regime of customs clearance
for consumption, included in the nomenclature of the Harmonized Commodity
Description and Coding System.
Paragraph I The following shall be ex empted from this surcharge: final
importation of goods for personal use that are duty-free under the special regimes on:
passenger luggage, disabled persons, Domini can personnel abroad and diplomatic
representatives accredited to the Dominican Re public. Also exempt are final imports
not subject to import duties, made by ins titutions in the public sector, diplomatic and
consular missions and intern ational organizations. The same exemption shall apply
to final imports of samples and parcels exempt from tariff duties."
7.19 It is clear to the Panel that Law 2-04 does not change the essence of the measure. The
exception list in Paragraph I to Article 1 of Law 2- 04 concerns only imports relating to: (i) goods for
personal use by passengers, disabled persons and di plomatic representatives; (ii) goods imported by
public institutions and diplomatic missions; and (iii) goods imported as samples or parcels that are
exempted from paying tariff duties. The substa nce of the transitional surcharge for economic
stabilization, i.e. the 2 per cent charge on the c.i.f. value of the imported products, is unchanged in the
new legal instrument Law 2-04. It is the Pa nel's understanding that H onduras is challenging the
measure as it affects commercial imports into the Do minican Republic, rather than the measure as it
affects non-commercial imports exempted from paying the surcharge by Paragraph I to Article 1 of
Law 2-04. In this sense, the Panel is of the view that there is no difference between the measure as
provided in Decree 646-03 and that as provided in La w 2-04 with regard to the claim of Honduras in
this dispute.
7.20 Given that the amendment was made after the Pa nel was established, the question is whether
the Panel has the authority to examine the measur e as provided by the new legal instrument – Law
2-04. In this respect, the Panel recalls that a number of previous panels have examined measures
amended either after the consultation stage of dispute settlement proceedings, such as in Brazil –
Aircraft, or, after the establishment of a panel, such as in Chile – Price Band System. The Appellate
Body stated in Chile – Price Band System that
"... generally speaking, the demand of due process are such that a complaining party
should not have to adjust its pleadings th roughout dispute settlement proceedings in
order to deal with a disputed measure as a 'moving target'. If the terms of reference in
a dispute are broad enough to include am endments to a measure... and if it is
necessary to consider an amendment in or der to secure a positive solution, to the
dispute... then it is appropria te to consider the measure as amended in coming to a
decision in a dispute" (emphasis original).
408
7.21 The Panel considers that in this dispute, the terms of reference for this Panel refer to the
transitional surcharge for economic stabilization measure, which is essentially the same as the
measure amended by Law 2-04. The parties also explicitly agree that the amendment by Law 2-04
does not change the essence of the su rcharge. The terms of referen ce of this Panel are broad enough
to include the new law. The Panel also cons iders it necessary to examine Law 2-04 to secure a
positive solution to the matter mandated to this Pane l since Decree 636-03 has been replaced by Law
2-04. The Panel therefore considers that the measure to be examined is the transitional surcharge for
economic stabilization measure as provided by the new legal instrument Law 2-04.

408 Appellate Body Report, Chile – Price Band System, para. 144.

4. Whether the transitional surcharge is an "other duty or charge" under Article II:1(b) of
the GATT 1994
(a) Arguments of the parties
7.22 Honduras claims that the surcharge is imposed on, or in connection with, the importation of
all goods due to the fact that it is levied on the c.i.f. value of all goods included in the Harmonized
Commodity Description and Coding System and which fall under the regime of custom clearance for
consumption as provided by the Decree.
409 Honduras also argues that the obligation to pay the
surcharge arises concurrently with the customs duty payable, and is thus an obligation separate from
the obligation to pay the customs duty. Therefore, the surcharge is an "other duty or charge" within
the meaning of Article II:1(b). Honduras indicates th at for cigarette products, the bound rate of tariff
duty for the Dominican Republic is 40 per cent, and the surcharge is imposed in addition to that
duty.410
7.23 The Dominican Republic explains that it does not contest the fact that the transitional
surcharge is an ODC within the meaning of Artic le II:1(b). However, the Dominican Republic
disagrees with the argument by Honduras that th e Dominican Republic has not recorded the ODCs
into its Schedule of Concessions.411
(b) Analysis by the Panel
7.24 The Panel agrees with the parties that the surc harge as it is applied in Law 2-04 is imposed
on, or in connection with, the importation of all goods with a few exceptions prescribed in paragraph I
to Article 1 of Law 2-04. It is imposed on these imported products in addition to tariff duties on
these products. It is clearly a border measure.
7.25 The surcharge is based on the value of the imported products, rather than any service rendered
by the custom authorities. Therefore, it is not a fee or charge that falls under Article VIII of the
GATT 1994. It is not an internal tax either since it does not apply to domestic products. To
summarize, the surcharge is neither an ordinary customs duty, nor a charge or duty that falls under
Article II:2 of the GATT 1994. The Panel agrees with the parties that as a border measure, the
surcharge as prescribed in Law 2-04 is an "other dut y or charge" within the meaning of Article II:1(b)
of the GATT 1994.
5. Whether the surcharge has been properly recorded in the Schedule of Concessions of
the Dominican Republic and the nature of the recorded measure
(a) Arguments of the parties
7.26 Honduras submits that the Dominican Republic di d not record the transitional surcharge for
economic stabilization in its Schedule of Concessions. In the view of Honduras, paragraphs 1 and 2
of the "Understanding on the Interpretation of Article II:1(b) of the General Agreement on Tariffs and
Trade 1994" require that WTO Members record all "o ther duties and charges" in their Schedule as
applied as of 15 April 1994. The Dominican Republic did not record the surcharge as it did not exist
at the date of 15 April 1994.
412

409 First written submission of Honduras, 16 March 2004, para. 52.
410 Ibid., paras. 50 and 51.
411 First written submission of the Dominican Republic, 13 April 2004, para.172.
412 First written submission of Honduras, 16 March 2004, paras. 53-56.

7.27 The Dominican Republic responds that it did record ODCs applied to cigarettes as of 15 April
1994 in its Schedule. 413 On 14 September 1994, the Dominican Republic notified its addition of
"other duties and charges" to its Schedule XXIII, which was circulated by the Preparatory Committee
for the World Trade Organization to all Members in document G/SP/3 on 12 October 1994. In the
circulated list, a rate of 30 per cent ODC was included for cigarette products under tariff heading
2402.
414
7.28 The Dominican Republic submits that its notifi cation was filed with the WTO Secretariat in
accordance with paragraph 7 of the Understanding, with in six months of the date of the deposit of its
original Schedule on 15 April 1994. It also indi cates that there was a cover note stating that "if no
objection is notified to the Secretariat within th irty days from the date of this document, the
rectifications to Schedule XXIII – Dominican Repub lic will be deemed to be approved and will be
annexed to the Protocol Supplementary to the Marrakesh Protocol to the General Agreement on Tariff
and Trade". In the view of the Dominican Republic, since no objection was raised by any WTO
Member, the addition of the notified ODCs to its Schedule was therefore approved.
415
7.29 Honduras contends however, that paragraph 1 of the Understanding requires that both the
nature and the level of the ODCs be recorded in the Schedule and that both elements are bound.
Moreover, as provided by paragra ph 1 of the Understanding, the recording does not change the legal
character of "other duties or charges".416
7.30 Honduras also argues that what the Dominican Re public actually inscribed into its Schedule
was an internal tax as applied on 15 April 1994. The list added to the Schedule was entitled "Lista de
productos importados que pagan el Impuesto Selectivo en Aduanas " (List of imported products
subject to the Selective Tax at Customs), whereas chapter IV of its Law 11-92 in force on 15 April
1994 also contained a list of importe d products subject to the Selec tive Consumption Tax, which was
entitled " Lista de productos importados que pa garán el Impuesto Selectivo en Aduanas " (List of
imported products subject to the Selective Tax pa yable at Customs). They both refer to " Impuesto
Selectivo", that is, the Selective Consumption Tax. Moreover, the products listed in notification
G/SP/3 and in Law 11-92 as well as the respective ad valorem tax rates for these products are
identical. Honduras considers that the inscription of an internal tax into the Schedule has no legal
effect. In the view of Honduras, if a Member h as recorded an internal tax in its Schedule of
Concessions, the recording does not change the nature of that tax into an "other duty or charge" under
Article II:1(b) of the GATT1994.417
7.31 Honduras contends that the nature of the recorded " Impuesto Selectivo" is not the same as the
surcharge measure currently applied. The " Impuesto Selectivo" is an internal tax while the surcharge
is a border measure on the importation of all produc ts. Therefore, in the view of Honduras, the
Dominican Republic did not record the trans itional surcharge as an ODC in its Schedule. 418
Honduras also argues that, in any event, the Do minican Republic could not have recorded the
transitional surcharge due to the fact that the transitional surcharge was first imposed on 30 June
2003.419 In the view of Honduras, the recording of an internal tax, which falls under Article III:2,
does not change the nature of that tax into "other duties and charges" falling under Article II:1(b).420
7.32 The Dominican Republic submits, in its respon se to a question from the Panel, that the
heading "Lista de productos importados que pagan el Impuesto Selectivo en Aduanas " of the list in

413 First written submission of the Dominican Republic, 13 April 2004, para. 172.
414 Ibid., para. 181.
415 Ibid., para. 182; Second written submission of the Dominican Republic, 10 June 2004, para.80.
416 Second written submission of Honduras, 10 June 2004, paras. 165-166.
417 Ibid., paras. 164-166; First oral statement of Honduras, paras. 8-10.
418 First oral statement of Honduras, paras. 11-12.
419 First oral statement of Honduras, para. 13.
420 Second written submission of Honduras, 10 June 2004, paras. 166 and 171.

the notification of 14 September 1994 was a mistak e. It admitted that there was correspondence
between the recorded level of ODCs and the Sel ective Consumption Tax in force on 14 September
1994. However the level of ODCs recorded was neve r intended to substitute or replace the Selective
Consumption Tax. What was covered under that he ading was the level of ODCs that the Dominican
Republic decided to record in its Schedule. The Dominican Republic argues that it reserved its right
to impose ODCs up to that level.
421
7.33 In response to this argument, Honduras c ontends that as the Dominican Republic
acknowledged the mistake in the heading and the e quivalence between the re corded levels of ODCs
and the Selective Consumption Tax, the Domini can Republic has the burden of establishing the
existence of another law as the basis of the ODCs applied as of 15 April 1994.422
(b) Analysis by the Panel
7.34 The Panel is aware of the fact that the Do minican Republic did notify the "Additions to
Schedules Annexed to the Marrakesh Protocol to the GATT 1994" on 14 September 1994 and that the
Preparatory Committee for the World Trade Organi zation circulated the document on 12 October
1994 as document G/SP/3. The cover note states that "if no objection is notified to the Secretariat
within thirty days from the date of this document, the rectifications to Schedule XXIII – Dominican
Republic will be deemed to be approved and will be annexed to the Protocol Supplementary to the
Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994". There was no objection
during the specified period of time and therefore, the Panel considers that the notification was deemed
as approved.423
7.35 Under paragraph 7 of the Understanding on the Interpretation of Article II:1(b) of the General
Agreement on Tariffs and Trade 1994, any ODCs omitte d from a Schedule at the time of deposit of
the instrument incorporating the Schedule into GA TT 1994 shall be added to it within six months of
the date of deposit of the instrument. The Panel notes that this notification was made within six
months of deposit of the instrument incorpora ting the Schedules of Concessions into GATT 1994 on
the date of 15 April 1994, consistent with the re quirement of paragraph 7 of the Understanding.
Therefore, the recording of these additions in the Dominican Republic's Schedule of Concessions was
procedurally appropriate and the additions have been deemed prope rly approved since no objections
were raised by any Member.
7.36 The Panel also takes note of Honduras's argument that the Dominican Republic did not record
the transitional surcharge into its Schedule since it di d not exist on 15 April 1994. Rather, in the view
of Honduras, what the Dominican Republic recorded was the Selective Consumption Tax as applied
in 1994. In this regard, the Panel considers it necessary and appropriate to compare the list of
products in the notification document (G/SP/3) a nd the list of imported products subject to the
Selective Consumption Tax pursuant to the law in for ce in 1994. In this task, the Panel will use the
evidence provided by the Dominican Republic in Exhi bit- DR-19 as the basis of the ODC notification
made by the Dominican Republic in 1994, and the evidence provided by Honduras in Exhibit-
HOND-18 as the law governing the Selective Consump tion Tax as applied in 1994 (Title IV of Law
11-92) since the Panel has noticed that the parties ha ve not contested the accuracy or authenticity of
these two items of evidence during the proceedings.
7.37 On the titles of the two product lists, the one in the notification "Additions to Schedules
Annexed to the Marrakesh Protocol to th e GATT 1994" in document G/SP/3 is named " Lista de

421 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 42.
422 Second written submission of Honduras, 10 June 2004, paras. 169-170.
423 See "Status of Additions and Rectifications of Market Access Final Schedules" in document PC/3 at
30 November 1994 and "Situation of Schedules of WTO Members" in document G/MA/W/23/Rev.1 at 6 June
2001. Both documents indicate that Document G/SP/3 (see supra note 61) was approved.

productos importados que pagan el Impuesto Selectivo en Aduanas ", whereas the title of product list
subject to the Selective Consump tion Tax in 1994 according to chap ter IV of Law 11-92 in force in
1994 was "Lista de productos importados que pagarán el Impuesto Selectivo en Aduanas." Although
the wording is slightly different, the meaning of the titles is one and the same, that is, "List of
imported products subject to the Selective Tax paya ble at Customs". The Panel notes that although
Title IV of Law 11-92 actually contained two separ ate products lists, one fo r domestic products and
one for imported products, both imported and domestic products included in the two lists in chapter
VI of Title IV of Law 11-92 were subject to the Se lective Consumption Tax. Since the title of the
product list in the G/SP/3 notification was the same as the title of the imported product list contained
in Law 11-92, the Panel understands that the natu re of the measure as reflected in the G/SP/3
notification was an internal tax, specifically, the Selective Consumption Tax.
7.38 With regard to the scope of the products in cluded in the G/SP/3 notification, a comparison
reveals that all the 70 tariff lines of products as listed in the G/SP/3 notification were actually
included, in the meantime, in the list of importe d products that were subject to the Selective
Consumption Tax under Title IV of Law 11-92. Th e tax rates for these products in Law 11-92 were
exactly the same as the ad valorem rates set for the corresponding products in the notification in
document G/SP/3. The Dominican Republic has also admitted that there was a correspondence
between the recorded ODC level and the level of Selective Consumption Tax in force on 14
September 1994. The tax in Title IV of Law 11- 92 and the "duty" in the notification were all on ad
valorem basis. The only difference is that 14 additional tariff lines of products listed under Title IV of
Law 11-92 were not listed in the G/SP/3 notification, which concerns certain kinds of vehicles only.
In evaluating these facts, the Panel considers that th e tariff lines and the levels of rates in the G/SP/3
notification were all taken from the list of impor ted products and the rates thereof in Law 11-92,
which was the law governing the Selective Consumption Tax as applied in 1994.
7.39 On the question of what ODC was actually app lied at the time of the notification, the
Dominican Republic admits in its response to questions from the Panel, that the only "other duties and
charges" applied in 1994 was the 1.5 per cent fore ign exchange fee. But it argues that the ODC
notification in document G/SP/3 was different fro m the Selective Consumption Tax applied to
imported products at that time. The heading of the product list in the 1994 notification was a mistake
and the intention of the Dominican Republic was to reserve, through recording ODCs, the right to
apply ODCs up to the reserved level. 424 It is clear to the Panel that the products on the notified list in
G/SP/3 were only subject to the Selective Consump tion Tax, not to an equal amount of additional
"other duties and charges" back in 1994. Unde r such circumstance, the nature of the recorded
measure has not been established to be an ODC by the Dominican Republic. In fact, these products
in the notification list were only subject to a 1. 5 per cent of foreign exchange fee pursuant to a
Monetary Board Resolution in force in 1994, which, in the view of the Panel, was not specifically
notified at that time.
7.40 As a result, the Panel's factual assessment is th at the transitional surcharge did not exist in
1994 and that what the Dominican Republic notified in document G/SP/3 was the product list and the
ad valorem Selective Consumption Tax rates as app lied to these imported products under Law 11-92
in force in 1994. The Panel finds that althoug h the Dominican Republic followed the appropriate
procedure in making the notification and the notif ication was deemed approved after 30 days, the
Dominican Republic actually notified its Selectiv e Consumption Tax product list and the relevant
rates under the name of "other duties and charges". In the Panel's view, the Dominican Republic has
not proved its argument that the recorded measure is in fact in the nature of an "other duty or charge".

424 Replies of the Dominican Republic to questions addressed by the Panel, replies to questions No. 42
and 43.

6. Whether the right to challenge the existe nce of the measure and the nature of the
measure in the recording expired three years after the incorporation of the Uruguay
Round Schedule
(a) Introduction
7.41 The Dominican Republic argues that neither th e existence of the ODC as of 1994 nor the
nature of the recorded measure can be legally ch allenged three years after the incorporation of the
Uruguay Round Schedules of Concessions and that therefore, the notification in document G/SP/3 can
serve as a legal basis to demonstrate the consistenc y of the surcharge and the foreign exchange fee
measures with Article II:1(b), second sentence. The Pane l is of the view that the answer to the issue
of any limitation on the right of challenge can only be obtained by resorting to relevant paragraphs of
the Understanding on the Inte rpretation of Article II:1(b) of the GATT 1994 because it is the
Understanding that governs the process of the r ecording of ODCs during and after the Uruguay
Round. The Panel therefore will proceed by analysi ng relevant paragraphs of the Understanding that
the parties invoked and debated during the proceedings.
(b) Arguments of the parties
7.42 The Dominican Republic argues that based on paragraphs 4 and 5 of the Understanding on the
Interpretation of Article II:1(b), the right to challenge the existence and the consistency of the level of
the ODCs with those actually applied as of 15 Apr il 1994 expired three years after the deposit of the
instrument incorporating its Schedule into the GATT 1994. Making reference to a Secretariat note on
the negotiation of the Understanding during the Uruguay Round, the Dominican Republic submits
that paragraph 4 of the Understanding provides a three-year limit to challenging either the existence or
the recorded level of ODCs. Therefore, it cont ends that Honduras is barred from making the claim
that the Dominican Republic did not record the tran sitional surcharge and the foreign exchange fee as
ODCs into its Schedule and the claim that such ODCs did not exist as of 15 April 1994.
425
7.43 The Dominican Republic also argues that the language of paragraph 1 does not preclude the
recording of an ODC that did not exist in 1994 but which a Member wished to reserve for future use
and that the "nature" and the "level" of a record ed ODC can only be challenged during the three-year
period following the recording of an ODC in a Member's Schedule.426
7.44 The Dominican Republic contends that even if the recording or the existence could be
challenged after the expiry of the three-year pe riod, such a challenge must be brought under the
relevant paragraphs of the Unde rstanding. In the opinion of the Dominican Republic, given that
Honduras has not made any claims under the Understa nding in its request for the establishment of the
panel, it may not be allowed to challenge the reco rding and the existence of the surcharge and the
foreign exchange fee.427
7.45 The Dominican Republic therefore concludes that Honduras' argument that these measures
are inconsistent with Article II:1(b) because they we re not recorded in the Schedule of the Dominican
Republic or because they did not exist as of 15 April 1994 must be dismissed by the Panel.428
7.46 However, Honduras argues that Article II:1(b), read together with the Understanding on the
Interpretation of Article II:1(b), requires Members not to impose any ODCs in excess of those
imposed on 15 April 1994. Paragraph 1 of the Unde rstanding requires that Members record both the
nature and the level of ODCs in their Schedules of Concessions and that both the nature and the level

425 Second written submission of the Dominican Republic, 10 June 2004, paras. 82-85.
426 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 112.
427 Second written submission of the Dominican Republic, 10 June 2004, para. 86.
428 Second written submission of the Dominican Republic, 10 June 2004, para. 86.

recorded are bound.429 Honduras argues that the recording of an internal tax in a Member's Schedule
does not change the nature of that tax into an other duty or charge falling under Article II:1(b).430
7.47 Honduras also argues that the recording of the Selective Consumption Tax into the Schedule
does not give the Dominican Republic the authority to levy other types of duties or charges up to that
level today. The current transitional surcharge and the foreign exchange fee were not "properly
recorded" in the Schedule.
431 In the view of Honduras, Schedules of Concessions may yield rights but
they cannot diminish obligations under the GATT. In its opinion, allowing Members to record other
duties or charges that were not imposed as of 15 April 1994 would diminish the rights of other
Members under Article II:1(b).
432
7.48 On the right to challenge recorded ODCs, Honduras argues that paragraph 5 of the
Understanding provides that the recording of "other duties or charges" is without prejudice to their
consistency with rights and obligations under GA TT 1994 and that Members retain the right to
challenge that consistency at any time. 433 Honduras considers that the sole exception to the right of
challenge is paragraph 4 of the Understanding and the Dominican Republic has the burden of
establishing that this exception applies to the surcharge and the foreign exchange fee.434
7.49 Honduras submits that paragraph 4 applies to "other duties or charges" imposed on bound
items which had been the subject of previous concessions. In its view, the three-year limitation
applies only to the challenge of the "existence of an ODC" at the time of the original binding of the
item, as well as the challenge of th e consistency of the level of ODCs with the previously bound
level.435 It does not apply to any product that has not been the subject of a previous concession. In
this dispute Honduras is challenging a recording of an alleged ODC which was not in fact imposed as
of 15 April 1994 at the end of Uruguay Round. Theref ore, in the view of Honduras, paragraph 4 does
not apply and paragraph 5 is applicable.436
7.50 Analysing the text of the second sentence of paragraph 4 of the Understanding, Honduras
argues that the phrases original binding in relation to the challenge of non-existence of an ODC and
previously bound level in relation to the challenge of consiste ncy of the recorded level confirm that
the subject matter of the two sentences in paragraph 4 is the same, that is, ODCs in respect of a tariff
item that had previously been the subject of a concession.437
7.51 On the issue whether Honduras could challenge the recording of ODCs without making a
claim directly under the Understanding in its panel request, Honduras argues that the Understanding
is part of the context of Article II:1(b). Therefore, the references to Article II:1(b) in the panel request
necessarily include references to the Understanding. Honduras also argues that in any event, the
Dominican Republic as a defending party has ra ised the recording of ODCs pursuant to the
Understanding as its principal defence.438
7.52 The Dominican Republic responds that the sec ond sentence of paragraph 4 limits to three
years the right of Members to challenge either the existence or the recorded level of an ODC
regardless of whether or not the tariff item involved had been the subject of a previous concession.

429 Second written submission of Honduras, 10 June 2004, paras. 186 and 165.
430 Ibid., paras. 171 and 166.
431 Second oral statement of Honduras, para. 46.
432 Second written submission of Honduras, 10 June 2004, paras. 187-188.
433 Ibid., paras. 176-177.
434 Ibid., para. 177.
435 Ibid., para. 179.
436 Second oral statement of Honduras, paras. 50 and 52.
437 Replies of Honduras to questions addressed by the Panel, reply to question No. 113.
438 Second oral statement of Honduras, para. 59.

In its view, only the first sentence of paragraph 4 refers to the situation where a tariff item has
previously been the subject of a concession.
439
7.53 In the opinion of the Dominican Republic, the wording in the second sentence of paragraph 4
"existed at the time of the original binding" contem plates only the situation of an initial event.
Therefore, the phrase "original binding" includes not only situations where tariff items were subject to
concessions prior to the Uruguay Round, but also situations where tariff items were initially subject to
concessions in the Uruguay Round.440
(c) Analysis by the Panel
7.54 The Panel considers that the basic argument made by Honduras in this respect is that there is
no valid recording in the Schedule of Concessions of the Dominican Republic that can be used as the
legal basis for the application of the current surc harge measure since the measure did not exist as of
15 April 1994 and therefore, the current surcharge as an "other duty or charge" is in excess of what is
recorded in the Schedule.
7.55 The Panel understands that Honduras has raised objections to the substantive validity of the
recorded additions in the notification of the "Additions to schedules annexed to the Marrakesh
Protocol to the GATT 1994" in document G/SP/3, sp ecifically: (i) that the na ture of the recorded
measure was not an ODC within the meaning of Article II:1(b), but rather, an internal tax; and (ii) that
such ODCs did not exist in 1994. The Dominica n Republic then rebutted these objections on the
following ground that such challenges or objections could only be raised within a three-year period
after the incorporation of the Schedule into the GATT 1994 and that the three year period had expired.
Under such circumstances, the Panel considers that it is obliged to first determine whether such
challenges of or objections to the recording are pe rmitted by Article II:1(b) and the Understanding on
the Interpretation of Article II:1(b) of the General Agreement on Tariffs and Trade 1994.
7.56 The core issue that the Panel has to explore is what aspects of the recording are subject to the
limitation of the three-year challenge period under paragraph 4 of the Understanding and what aspects
are still challengeable after the expiration of the th ree-year period. Paragraph 4 of the Understanding
provides the following:
"Where a tariff item has previously been the subject of a concession , the level of
'other duties or charges' reco rded in the appropriate Schedule shall not be higher than
the level obtaining at the time of the first incorporation of the concession in that
Schedule. It will be open to any Member to challenge the existence of an 'other duty
or charge', on the ground that no such 'other duty or charge' existed at the time of the
original binding of the item in question, as well as the consistency of the recorded
level of any 'other duty or charge' with the previously bound level , for a period of
three years after the date of entry into force of the WTO Agreement or three years
after the date of deposit with the Directo r-General of the WTO of the instrument
incorporating the Schedule in question into GATT 1994, if that is a later
date."(emphasis added)
7.57 It is clear to the Panel that the first senten ce of paragraph 4 addresses the specific situation
where a tariff item has been the subject of a " previous" concession, i.e. a concession made in any
negotiating round "before" or "prior to" the Uruguay Round. The oblig ation in the first sentence is
that the recorded level be no higher than the level bound at the time of the first incorporation of the
item in the Schedule.

439 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 113.
440 Ibid., reply to question No. 114.

7.58 In this regard, the Panel also notes that the travaux préparatoires confirm that the intention
behind paragraph 4 is to prevent the breaching of earlier bindings in recording the ODCs as applied on
15 April 1994, which was the newly agreed applicab le date for the recording of ODCs. In other
words, the intention of paragraph 4 was to ensu re that the level of ODCs recorded on the newly
agreed date of 15 April 1994 would not be higher than any previously bound level of ODCs. A
Secretariat note on "Article II:1(b) OF THE GENERAL AGREEMENT" circulated during the process
of negotiation explained:
"If it were felt desirable to achieve the fu llest possible transparency and to minimize
the technical complexity of the entries to be made in the Schedules, the Group might
consider that for all bound items, whatever the date of their first incorporation into
GATT Schedules, the applicable date shoul d become the same. If it were decided
that for example the date of the Uruguay Round Protocol should be the applicable
date, all ODCs would be bound at the levels in force at the date of the Uruguay
Round tariff protocol, provided that these levels were not in themselves illegal –i.e.,
in breach of an earlier bindings."
441(emphasis added)
7.59 Although due to the complexity of the negotiating process, one can not really expect to find
explicit positions by each Member on all the issues concerning the text of the Understanding, the
Panel did find at least one document that clearly set out the view of one Member on relevant issues:
"2. Having regard to the provisions of paragr aph 2 of Article II, it is clear that the
term 'other duties and charges' does not include internal tax, anti-dumping or
countervailing duties, and fees or other charges commensurate with the cost of
services rendered. ...
3. ...
4. Taking into consideration of the above -mentioned aspects, India is willing to
support the following:
i) the date of the Uruguay Round Protocol should be the
applicable date;
ii) all the 'other duties and charges' should be bound at the levels
in force on the date of the Uruguay Round Protocol, provided that
those levels are not in themselves in breach of earlier bindings
(emphasis added); and
iii) for a period of three years following the date of the aforesaid
Protocol there should be the possibility of challenging the recorded
'other duties and charges' on the basis of their inconsistency with
earlier bindings."
442(emphasis added)
7.60 Paragraph 2 of the Understanding is relevant to the interpretation of paragraph 4. Paragraph 2
provides:
"The date as of which 'other duties or charges' are bound, for the purposes of
Article II, shall be 15 April 1994. 'Oth er duties or charges' shall therefore be

441 See "Article II:1(b) of the General Agreement, Additional Note by the Secretariat", Negotiating
Group on GATT Articles, MTN.GNG/NG7/W/53, 2 October 1989, para.15.
442 See "Article II:1(B), Statement by the Delegation of India", MTN.GNG/NG7/W/56, 16 November
1989.

recorded in the Schedules at the levels a pplying on this date. At each subsequent
renegotiation of a concession or negotiation of a new concession the applicable date
for the tariff item in question shall become the date of the incorporation of the new
concession in the appropriate Schedule. Ho wever, the date of the instrument by
which a concession on any particular tariff item was first incorporated into GATT
1947 or GATT 1994 shall continue to be recorded in column 6 of the Loose-leaf
Schedules."
7.61 Reading paragraph 2 and the first sentence of pa ragraph 4 together makes clear: (i) that the
obligation is to record the ODC levels applied as of 15 April 1994; (ii) for future renegotiation or
negotiation of a concession, the applicable date for recording of ODCs will be the date of the
incorporation of the new concessions into the Schedule; (iii) in case a previous lower level of ODC
was bound at the time of the original incorporation of the item into the Schedule prior to the Uruguay
Round, that earlier bound level shall be recorded rath er than the level as applied on the date of 15
April 1994; (iii) if the level bound at the time of the original incorporation of the item was higher
than that applied as of 15 April 1994, the level applied on 15 April 1994 shall be recorded and
bound.
443 Such understanding is also confirmed by the travaux préparatoires as indicated in
paragraphs 7.58 and 7.59.
7.62 The second sentence of paragraph 4 provides a lim itation in time of the right to challenge the
existence and the level of the ODCs re corded in the Schedule. In this regard, the three-year challenge
period is limited to challenges based on: (i) the non-existence of a recorded ODC at the time of the
original binding of the item ; or (ii) the inconsistency of the recorded level of ODC with the previous
bound level. The question is whether the second sentence can be interpreted separately from the first
sentence of paragraph 4 in which the level of record ed ODC is required to be no higher than the level
obtained at the time of the first incorporation of the item into the Schedule, prior to the Uruguay
Round.
7.63 The Panel is of the view that the logic of the whole paragraph 4 is one and the same, that is, to
prevent, in the process of the recording of ODCs during the Uruguay Round, the breach of earlier
bindings made in previous rounds when concessions were first incorporated into the Schedules of
Concessions. The three-year limitation on the right of challenge is prescribed precisely for the same
general obligation, i.e. "no breach of earlier bindings" in the recorded level of ODCs.
7.64 The word "existence" in the second sentence of paragraph 4 should not be completely
detached from the phrase "the consistency of the recorded level". Rather, in the Panel's view, they are
closely linked to each other. Strictly speaking, if the previous bound level of the ODC prior to the
Uruguay Round is "zero", then a challenge to the c onsistency of the recorded level of ODC with the
previous bound level “zero” also constitutes a challenge to the "existence" of the ODC at the time of
the original binging made prior to the Uruguay Round. To put it in other words, a challenge to the
existence of an ODC at the time of the original bindi ng is equivalent to a ch allenge to the consistency
of the recorded level with a speci fic "zero" level of ODC that had been bound in a previous round.
The Panel understands that under paragraph 4, it is intended that the comparison be made between the
recorded level and the level "at the time of the origin al binding", which is also the time of "the first
incorporation of the item" or, "the previous boun d time". Legally speaking, these three different
expressions written in the first and second sentence of paragraph 4 actually refer to the same time.

443 This understanding is confirmed by paragraph 26 of "Article II:1(b) of the General Agreement,
Additional Note by the Secretariat", which stated that "[l]ooked from another point of view, an agreement that it
should not be possible to restore ODCs to former bound levels, where these were higher than currently applied
rates, would be beneficial in that it would introduce gr eater stability of charges and would further the objectives
of trade liberalization; it would also create uniformity between obligations on new and existing bindings because
the applicable date for both would be the same". S ee "Article II:1(b) of the General Agreement, Additional
Note by the Secretariat", supra note 441.

7.65 The close relationship between a challenge to the existence and a challenge to the
consistency in level, whereby the fo rmer challenge is logically one specific type of the latter, implies
that both categories of challenges must be based on a comparison of the recorded ODC with the
bound level (or existence) at the previous bound time, i.e. the time of the first incorporation of the
item, which is also the time of the original binding of the item.
7.66 The ordinary meaning of the word "original" in the second sentence of paragraph 4 of the
Understanding, read in its context means "first, earliest, early", 444 or, "existing or belonging at or from
the beginning or early stage, primary, initial, innate", 445 all of which refer to the time prior to the time
of the drafting of the Understanding in the Uruguay Round which is the time that the concession was
first incorporated in previous rounds with respect to the tariff item concerned.
7.67 Therefore, the Panel finds that, the second sen tence of paragraph 4 provides that the right to
challenge the existence of the ODC at the time of the original binding of the item, i.e. the time of the
first incorporation of the item in a previous round , and the right to challenge the consistency of the
recorded level of the ODC with the previous bound level , that is, the level bound at the time of the
first incorporation of the item prior to the Uruguay Round , expired three years after the entry into
force of the WTO Agreement or three years after the deposit of the instrument incorporating the
Schedule into the GATT 1994, whichever is later. For the Dominican Republic, the date of deposit of
its instrument incorporating the Schedu le into GATT 1994 is 7 February 1995. 446 Therefore, after 7
February 1998, no Member could challenge the Dominican Republic's recording of ODCs on the
ground of the non-existence of the ODC in prev ious bound time when a tariff item was first
incorporated in its Schedule or could challenge the consistency of the level with the previous lower
bound level.
7.68 However, paragraph 4 only deals with challenges regarding the consistency of the level of the
recorded ODC with the level applied at the time of the first incorporation of the item prior to the
Uruguay Round and the existence of the ODC at that time. The possibility of all other challenges is
addressed under paragraph 5 of the Understanding:
"The recording of 'other duties or charges' in the Schedules is without prejudice to
their consistency with rights and obligations under GATT 1994 other than those
affected by paragraph 4 (emphasis added). All Members retain their right to
challenge, at any time, the consistency of any 'other duties or charges' with such
obligations"
7.69 It is clear that paragraph 5 of the Understandi ng allows all types of challenges to be made
based on all GATT articles, except those that fall un der paragraph 4. One specific challenge made by
Honduras is that the recorded ODC did not exist as of 15 April 1994 , which, in the opinion of the
Panel, is a challenge of the existence of the ODC during the Uruguay Round , rather than a challenge
of existence of an ODC at the time of the original binding of the item, i.e. at the time of the first
incorporation of the item prior to Uruguay Round. Therefore, it is not subject to the three-year
limitation under the second sentence of paragraph 4 a nd the challenge is permitted by paragraph 5 of
the Understanding.
7.70 The Panel recalls the fact that the surcharge has been applied since October 2003. It clearly
did not exist as of 15 April 1994. The recording of a measure which did not exist as of 15 April 1994

444 Concise Oxford Thesaurus, Second Edition, 2002, p. 611.
445 The New Shorter Oxford English Dictionary, supra note 52, Vol. II, p. 2,022.
446 The "Notification of Acceptan ce" in document WT/Let/7 shows that the Dominican Republic
deposited its acceptance of the Marr akesh Agreement with the Director-G eneral of the WTO on 7 February
1995. This acceptance also serves as the instrument incorporating its Schedule of Concessions into GATT
1994.

is therefore not legally valid as it does not meet th e obligation under paragraph 2 which requires that
ODCs be recorded at the levels applied on 15 April 1994.
7.71 The Panel considers that the other spec ific challenge made by Honduras that the nature of the
recorded measure is not an ODC within the meaning of Article II:1(b) is also clearly a challenge that
falls outside of the scope of paragraph 4 and is therefore pe rmitted by paragraph 5 of the
Understanding.
7.72 In this regard, the Panel notes that paragraph 1 of the Understanding also provides: "... the
nature and level of any 'other duties or charges' levied on bound tariff items, ... shall be recorded in
the Schedules of Concessions annexed to the GATT 1994 against the tariff item to which they apply.
It is understood that such recording does not change the legal character of 'other duties or charges'
(emphasis added)". Based on this paragraph, the Pa nel understands that the recording of the nature of
the measure is a necessary part of the recorded cont ent and it also constitutes an element that is bound
in the Schedule. Therefore, in case what was record ed is not in the nature or legal character of an
ODC, the recording can not be invoked to justify a current ODC measure due to the difference in
nature of the two measures.
7.73 In the Panel's view, a recording of the Selectiv e Consumption Tax, i.e. an internal measure,
into the Schedule, as the Dominican Republic did in 1994, does not change the recorded content into a
legally valid "other duty or charge" that can be i nvoked to justify the currently applied surcharge and
the foreign exchange fee, which are both in the nature of an ODC.
7.74 The Panel recalls the Dominican Republic's argu ment that, even if the recording could be
challenged after three years, such challenge has to be brought under the rele vant paragraphs of the
Understanding. The Dominican Republic contends that, since Honduras failed to specify any
paragraph of the Understanding in its Panel request, it cannot be allowed to bring the challenge.
7.75 On this point, the Panel considers that it was the Dominican Republic that invoked the
recording of the ODCs in an exhibit presented togeth er with its first written submission to justify its
surcharge and foreign exchange fee measures.
 447 Honduras then raised objections regarding the
existence of the ODC back in 1994 and regardi ng the nature of the recorded measure, citing
requirements in certain paragraphs of the Unde rstanding. The Dominican Republic subsequently
rebutted such objections arguing that paragraph 4 of the Understanding prohibits the challenge to the
existence, nature and level of the recorded ODCs afte r the three-year time period expired. Honduras
responded that paragraph 4 deals only with a speci fic situation where a tariff item had been bound
prior to the Uruguay Round whereas the challenges raised by Honduras concerned the non-existence
of ODC as of 15 April 1994 as well as the nature of the recorded measure in the Schedule, which are
not within the scope of paragraph 4. The Pa nel notes that during the proceedings, both parties
actually invoked the Understanding in support of thei r own arguments relating to the claim made by
Honduras under Article II:1(b).
7.76 The Panel believes that as context for Article II: 1(b) of the GATT 1994, it is relevant and in
fact necessary to consider and to apply the relevant para graphs of the Understanding for the purpose
of the interpretation of Article II:1(b) in examin ing the claim of Honduras made under Article II:1(b).
Moreover, since the Understanding was also actua lly invoked by both Honduras in explaining the
applicable date and the content of the recording 448 and by the Dominican Republic in arguing the
expiry of the right of challenge to the recording under paragraphs 4 and 5 of the Understanding449, the
Panel is obliged to address the arguments made by the parties concerning relevant paragraphs of the

447 "Additions to Schedules Annexed to the Marrakesh Protocol to the GATT 1994, Schedule XXIII –
Dominican Republic", supra note 61.
448 First written submission of Honduras, 16 March 2004, paras. 53-58.
449 Second written submission of the Dominican Republic, 10 June 2004, paras. 81-85.

Understanding in order to assess how relevant paragraphs of th e Understanding contribute to the
interpretation and application of Article II:1(b).
7.77 The Panel recalls that the panel in India – Quantitative Restrictions considered
Article XVIII:B and the 1994 Understanding on Balance-of-payments Provisions in its analysis of the
US claim under Article XVIII:11 of the GATT 1994, although both were not raised in the request for
the establishment of that panel. The reas on was that both Article XVIII:B and the 1994
Understanding are part of the context of Article XVIII:11 and that the defending party had invoked
Article XVIII:B as a defence. The panel stated: "the defending party is not restricted in the provisions
of the Marrakesh Agreement ... that it can invoke in it s defence. In this circumstance, the Panel finds
it relevant to consider the provisions of Article XVIII:B and the 1994 Understanding as part of the
context in deciding on the claims of the United Stat es [of inconsistency with Article XVIII:11 of the
GATT] and to examine them in relation to the defence raised [under Article XVIII:B] by India."450
7.78 The situation in this dispute is similar to that in India – Quantitative Restrictions . Since the
Understanding is part of the context of Article II:1(b) of the GATT 1994 and the Dominican Republic
has actually invoked the Understanding to raise ar gument concerning the recording of ODCs and the
expiry of the right of challenge to such record ing, the Panel is in a position to address various
arguments made by parties on the re levant paragraphs of the Understa nding, i.e. to examine them in
relation to the defence of the Dominican Republic and to the counter arguments by Honduras even
though the Understanding was not included in the request for the establishment of the Panel. The
Panel considers that the arguments that parties made under the Understanding are not independent of
the claim or defence under Article II:1(b). Rather, in the Panel's view, they are closely linked to the
claim and the defence under Article II:1(b). For these reasons, the Panel considers that it is permitted
and in fact it is also necessary to address relevant paragraphs of the Unders tanding for its findings on
the claim of inconsistency of the surcharge and the foreign exchange fee measures with Article II:1(b)
of the GATT 1994.
7.79 On the other hand, the Panel is also aware th at such assessment should be made only to the
extent necessary for the Panel to make a finding unde r Article II:1(b) of the GATT 1994. The Panel
is not authorized to make independent conclusions on the consistency of the surcharge measure or
foreign exchange fee with any paragraphs of the Understanding since the paragraphs of the
Understanding have not been specifically set out in the panel request as part of the mandate of this
Panel.
7. Whether the surcharge is inconsistent with Article II:1(b) of the GATT 1994
(a) Arguments of the parties
7.80 Honduras argues that Article II:1(b), second senten ce, read together with the Understanding,
prohibits Members from imposing "other duties or ch arges" in excess of the binding recorded in the
"other duties and charges" column of the Member's Schedule. Since the Dominican Republic did not
record the 2 per cent surcharge into its Schedule, th e surcharge, in the view of Honduras, is "in excess
of" that set out in its Schedule. Therefore, it is inconsistent with the obligation under Article II:1(b) of
the GATT 1994.
451 It is consequently also inconsiste nt with the general prohibition set out in
Article II:1(a) of the GATT1994.452
7.81 The Dominican Republic contends it did record ODCs in its Schedule and that the properly
recorded level of "other duties and charges" on ciga rettes is 30 per cent. Since the total level of
ODCs currently imposed on cigarettes by the Dominican Republic, including the transitional

450 Panel Report in India – Quantitative Restrictions, paras. 5.18-5.19.
451 First written submission of Honduras, 16 March 2004, paras. 57-58.
452 Ibid., footnote 34.

surcharge, is less than 30 per cent, the transitional surcharge is consistent w ith Article II:1(b), second
sentence.
453 Consequently, in the view of the Domini can Republic, there is no inconsistency of the
surcharge with Article II:1(a) either due to the fact that Honduras's claim of inconsistency of the
surcharge with Article II:1(a) is derived fro m the inconsistency of the surcharge with
Article II:1(b).454
7.82 Honduras submits that the Dominican Republic actua lly inscribed its internal tax as applied
on 15 April 1994 into its Schedule. Honduras considers that the inscription of an internal tax into the
Schedule has no legal effect. 455 Honduras contends that th e nature of the recorded " Impuesto
Selectivo" is not the same as the surcharge measure currently applies. The " Impuesto Selectivo" is an
internal tax while the transitional surcharge is a border measure on the importation of all products.
Therefore, in the view of Honduras, the Domi nican Republic had not properly recorded the
transitional surcharge as an ODC in its Schedule. 456 Honduras argues that the recording of an internal
tax which falls under Article III:2 does not change the nature of that tax into "other duty or charge"
which falls under Article II:1(b). 457 It also argues that the Dominican Republic could not have
recorded the transitional surcharge due to the fact that the transitional surcharge was first imposed on
30 June 2003. 458 Honduras therefore concludes that the tran sitional surcharge is inconsistent with
Article II:1(b) as it has not been recorded in the Dominican Republic's Schedule of Concessions.459
7.83 Honduras also argues in its oral statement durin g the first substantive meeting of the Panel
that the surcharge currently applie d by the Dominican Republic is inc onsistent with Article II:1(b) of
the GATT because it is also imposed on other products not listed in the controversial notification of
"Additions to Schedules Annexed to the Marrakesh Protocol to the GATT 1994, Schedule XXIII –
Dominican Republic" in document G/SP/3.460
(b) Analysis by the Panel
7.84 The Panel recalls its previous factual findings in paragraph 7.40 that the Dominican Republic
has actually recorded in its Schedule the Selectiv e Consumption Tax as applied to selected imported
products under Law 11-92 in force as of 15 April 1994. The fact that the Selective Consumption Tax
was applied both to imported and domestic products makes it clear that it was in the nature of an
internal tax. Article II:1(b) and Article II:2(a) make a distinction between an ODC that is subject to a
bound requirement and an internal tax that is not su bject to any bound requirement, but rather, subject
to Article III requirements. Article II:2 also makes it clear that the two are mutually exclusive. If a
measure is in the nature of an internal tax, it ca nnot be an ODC. Likewise, if a measure is in the
nature of an ODC, it cannot be an internal tax. For these reasons, the Panel reconfirms its findings
that the Dominican Republic has not established th at the nature of the measure recorded in the
Schedule of the Dominican Republic is an ODC measur e within the meaning of Article II:1(b), rather
than an internal tax measure, specifically, the Selective Consumption Tax measure.
7.85 The Panel recalls that in previous paragra phs, it has made the following findings: (i) the
Dominican Republic has not established that the reco rded measure is in the nature of an ODC and
therefore it can not be invoked as a legal basis to ju stify the application of the transitional surcharge
measure, which is an ODC measure under Article II:1(b);461 (ii) the recording of a measure which did
not exist as of 15 April 1994 is not legally valid as it failed to meet the requirement under paragraph 2

453 First written submission of the Dominican Republic, 13 April 2004, para.183.
454 Ibid., paras. 184-186.
455 First oral statement of Honduras, paras. 8-9.
456 Ibid., paras. 11-12.
457 Second written submission of Honduras, 10 June 2004, paras. 166 and 171.
458 First oral statement of Honduras, para. 13.
459 Second written submission of Honduras, 10 June 2004, para. 172.
460 First oral statement of Honduras, para. 14.
461 See paras. 7.40, 7.73,and 7.25.

of the Understanding; 462 (iii) both the challenge to the existence of the ODC on the date of 15 April
1994 and the challenge to the nature of the r ecorded ODC are permitted by paragraph 5 of the
Understanding.463
7.86 The Panel therefore finds that there is no legall y valid recording of "other duties or charges"
as required by the Understanding in the Domini can Republic's Schedule of Concessions. The
recording of the Selective Consumption Tax, i.e. an internal tax, can not be used as legal basis to
justify the current ODC measures, specifically, the transitional surcharge and the foreign exchange fee
measures.
7.87 Article II:1(b) of the GATT 1994 provides:
"The products described in Part I of the Sc hedule relating to any contracting parties.
Which are the products of territories of ot her contracting parties, shall, on their
importation into the territory to which the Sc hedule relates, and subject to the terms,
conditions or qualifications set forth in th at Schedule, be exempted from ordinary
custom duties in excess of those set forth and provided therein. Such products shall
also be exempted from all other duties or charges of any kind imposed on or in
connection with the importation in excess of those imposed on the date of this
Agreement or those directly and mandator ily required to be imposed thereafter by
legislation in force in the importing territory on that date."
Paragraph 2 of the Understanding on the Interpretation of Article II: 1(b) provides more details on the
bound date:

"The date as of which 'other duties or charges' are bound, for the purposes of
Article II, shall be 15 April 1994. 'Oth er duties or charges' shall therefore be
recorded in the Schedules at the levels applying on this date."
Paragraph 7 of the Understanding provides:

"'Other duties or charges' omitted from a Schedule at the time of deposit of the
instrument incorporating the Schedule in question into GATT 1994 … , shall not
subsequently be added to it and any 'other duties or charges’ recorded at a level lower
than that prevailing at the applicable date shall not be restored to that level unless
such additions or changes are made within six months of the date of deposit of the
instrument."
7.88 Reading Article II:1(b) together with paragraphs1, 2, 7 and 4 of the Understanding as context,
the Panel considers that the obligation under Article II:1(b), second sentence is for Members to record
in their Schedules, within six months of the date of deposit of the instrument, all ODCs as applied on
15 April 1994 unless those levels brea ch previous bound levels of ODCs.
464 In case any Member did
not record the ODCs in the Schedule within six mont hs of the date of deposit of the said instrument,
the right to record it in the Schedule and to invoke it expired after six months. In the context of the
recording requirements as prescribed in the Unde rstanding, the meaning of Article II:1(b), second
sentence is specifically that imported products shall be exempted from all "other duties or charges" of
any kinds in excess of those as validly recorded in the Schedule of the Member concerned.
7.89 There is no legally valid recording of "oth er duties or charges" as required by the
Understanding in the Schedule of Concessions of the Dominican Republic. For all legal and practical

462 See para. 7.70.
463 See paras. 7.69 and 7.71.
464 See also the findings of the Panel in para. 7.61

purposes, what was notified by the Dominican Republic in document G/SP/3 is equivalent to "zero" in
the Schedule. The Panel finds that the surcharge as an "other duty or charge" measure is applied in
excess of the level "zero" pursuant to the Schedule. Therefore, the surcharge measure is inconsistent
with Article II:1(b) of the GATT 1994.
7.90 The fact that the surcharge and foreign exch ange fee are currently applied to products outside
the scope of those selected products as listed in G/SP/3 notification constitutes an additional reason
for the Panel to find that they are inconsistent w ith Article II:1(b) because for these products outside
the scope of the notified list, nothing has been recorded in the Schedule, whether legally valid or not.
Therefore, any amount of surcharge or foreign exch ange fee is actually "in excess of" the level of
"zero" pursuant to the Schedule of the Dominican Republic.
8. Whether the measure is limited to cigarette products
(a) Arguments of the parties
7.91 Honduras argued in its oral statement during the first substantive meeting of the Panel that the
surcharge currently applied by the Dominican Republic is inconsistent with Article II:1(b) of the
GATT 1994. One reason given by Honduras for such cl aim is that the surcharge is imposed also on
other products not listed in the controversial addition of ODCs in the Schedule of Concessions in
1994.
465
7.92 Rebutting this argument of Honduras, the Domi nican Republic contends that the product
coverage with respect to the surcharge and fore ign exchange fee measures has been limited to
cigarettes from the early stage of the proceedings.466 The Dominican Republic submits that Honduras
claimed in its first written submission that the surcha rge and the foreign exchange fee are inconsistent
with Article II:1(b) as they apply to the bound item of cigarettes. The scope of the product coverage
has therefore been confined to cigarettes. 467 Expanding this scope of pr oduct coverage would, in the
view of the Dominican Republic, affect the right of the Dominican Republic to defend itself and
undermine the principles of due process, equity and good faith.
468
7.93 Honduras argues however, that the text of the Panel request with regard to transitional
surcharge has an "all encompassing nature" and that its claims of violation of Article II:1(b) and
Article II:1(a) are made with respect to any impor ted good. The panel request has put the Dominican
Republic and third parties on notice that the claims are made with respect to all imported goods.
Therefore, Honduras considers that the transitional surcharge, as it applies to products other than
cigarettes, is within the mandate of the Panel. 469 Honduras submits that from the language in its
request for the establishment of the Panel, the foreign exchange fee as it applies to products other than
cigarettes is within the terms of reference of the Panel.470
(b) Analysis by the Panel
7.94 On the issue of whether the measure to be examin ed by the Panel is limited to the transitional
surcharge as applied to cigarette products, i.e. ex cluding the examination of the application of the
surcharge to other products, the Panel believes that it is necessary to analyse the text of the panel
request to determine whether it is limited to the application of the surcharge to cigarette products.

465 First oral statement of Honduras, para. 14.
466 Second written submission of the Dominican Republic, 10 June 2004, para. 94; First oral statement
467 Second written submission of the Dominican Republic, 10 June 2004, para. 95.
468 Second written submission of the Dominican Republic, 10 June 2004, paras. 95, 96 and 89.
469 Second written submission of Honduras, 10 June 2004, paras. 154-155.
470 Ibid., paras. 189-190.

7.95 The request for the establishment of this panel provides:
"The Dominican Republic levies a transitional surcharge for economic stabilization in
accordance with Decrees 646-03 and 693-03, a surcharge which currently amounts to
2 per cent of the c.i.f. value of the im ported goods. Honduras considers that the
surcharge constitutes a charge imposed on or in connection with importation
inconsistent with Article II:1(a) and (b) of the GATT."
7.96 On the measure of foreign exchange fee, the panel request provides similar language:
"The Dominican Republic levies a foreign exchange fee in accordance with the
Seventeenth Resolution of the Monetary Board dated 24 January 1991 as amended,
inter alia, by... and the First Resolution of 22 October 2003. The fee is currently 10
per cent 'calculated on the value of the imports'. Honduras considers that this fee
constitutes a charge imposed on or in connection with importation which does not
meet the requirements laid down in Artic le II:1(a) and (b) of the GATT. Honduras
also considers that the fee constitutes an exchange action frustrating the intent of the
provisions of the GATT and that it is therefor e inconsistent with Article XV:4 of the
GATT."
7.97 It is clear to the Panel that the request describes the transitional surcharge for economic
stabilization measure and the foreign exchange fee measure in a general manner without mentioning
product coverage. The claim that Honduras made in respect of surcharge is that "the surcharge
constitutes a charge ... inconsistent with Article II:1( a) and (b) of the GATT". The claim with respect
to the foreign exchange fee is that "this f ee constitutes a charge ... which does not meet the
requirements laid down in Article II:1(a) and (b)". There is no specific indication of product coverage
in the panel request with respect to these two measures.
7.98 The Dominican Republic argues that the product c overage with respect to the surcharge and
the foreign exchange fee measures has been limited to cigarette products from the early stage of the
proceedings. It notes that Honduras stated in its first written submission that these two measures are
inconsistent with Article II:1(b) for the bound ite m of cigarettes. The Dominican Republic also
pointed out that the title of this dispute refers only to cigarettes.
7.99 In this regard, a reading of paragraphs 50 an d 51 of the first written submission of Honduras
indicates that Honduras used the application of the surcharge measure on cigarette products to
illustrate that the surcharge is applied to a bound item cigarettes in addition to the tariff duty on that
item; therefore, it falls under Article II:1(b). Sim ilarly, paragraphs 61 and 62 also explain that the
foreign exchange fee applies to the bound item cigare ttes in addition to its tariff rate; hence, it also
falls under Article II:1(b). While these could be seen as arguments or examples used by Honduras to
support its claims that the two measures in quest ion fall under Article II:1(b) and that they are
inconsistent with Article II:1(b), the Panel considers that it is not sufficient to conclude that these
arguments or examples effectively limited the product scope of the two measures to cigarettes only.
In fact, in the first written submission of Honduras, there are general claims that the 2% surcharge
itself is inconsistent with Article II:1(b)
471 and that the foreign exchange fee itself is inconsistent with
Article II:1(b).472 For these reasons, the Panel considers that Honduras has not limited in its first
submission, the product coverage of its claims on the surcharge and foreign exchange fee measures
solely to cigarette products.

471 First written submission of Honduras, 16 March 2004, para. 58.
472 Ibid., paras. 66-67.

7.100 Such conclusion is further supported by the wr itten replies to a Panel question by the third
parties El Salvador and Nicaragua. Both of them argue that the panel request has put third parties on
notice that the scope of products with regard to these two measures is not confined to cigarettes
473
7.101 Even assuming that Honduras did focus its argumen ts more on cigarette products in its first
written submission in arguing the inconsistency of th e surcharge and foreign exchange fee measures,
the fact that it made additional argument regardi ng other products not excluded by its Panel request
during the first substantive meeting of the Panel, would have given the Dominican Republic sufficient
opportunities to respond to it in its second writte n submission or during the second substantive
meeting of the Panel. The Panel does not see how the opportunity to respond to such argument is
limited in the proceedings. Therefore, the Pane l considers that it has not been presented with a
convincing case that a due process issue would arise if the Panel does not exclude from its
consideration new arguments made by Honduras concerning other products at the first substantive
meeting.
7.102 On the importance of the title of the dispute to the determination of the mandate of this Panel,
the Panel is of the view that it is the panel request, rather than the title of th e dispute that defines the
terms of reference of the Panel. In fact, in some cases, the title of a dispute does not make any
reference to the name of product at all. 474 In other cases, the title contains the names of certain
products, but not all those products addressed in the dispute. In Argentina - Textiles , the products
listed in the title of that case are "footwear, textil es, apparel and other items" , which did not preclude
that panel from examining a separate "statistical tax measure" which was set out in the panel request
and which was applied to all imported products. 475 Similarly, the Argentina – Hides and Leather
panel also examined a separate value-added tax meas ure in respect of all imported products beyond
those specified in the title of that dispute.476 Therefore, the Panel considers that the title of the dispute
is not relevant in determining the scope of prod uct coverage under each measure set out in the panel
request.
7.103 For these reasons, the Panel considers that the product coverage under both the transitional
surcharge measure and the foreign exchange fee measure includes all imported products.
9. Whether the surcharge is inconsistent with Article II:1(a) of the GATT 1994
7.104 The Panel is aware that Honduras made argu ments regarding Article II:1(a) only in a
footnote, not in the text of its written submission. The Panel has already found in paragraphs 7.89 and
7.90 that the surcharge is inconsistent with Artic le II:1(b) of the GATT 1994. Under the guidance of
the principle of judicial economy, the Panel considers it unnecessary to address the claim under
Article II:1(a) for the resolution of this dispute. Therefore, it refrains from making any findings under
Article II:1(a).

473 See Reply of El Salvador and Nicaragua to a question addressed by the Panel.
474 For example, in EC – Tariff Preferences case, the fact that no product name was included in the title
of the case did not prevent the panel from addressing the claim of violation of Article I:1 of GATT in respect of
all products involved under the Drug Arrangement regime originating from beneficiary countries vis-à-vis those
like products imported from other developing countries. See Panel Report, EC – Tariff Preferences, para. 7.60.
In the US – FSC case, the absence of product name from the title of the case did not prevent the panel from
examining claims under the Agriculture Agreement in respect of all agricultural products. See Panel Report, US
– FSC, paras. 7.23-7.30.
475 Panel Report, Argentina –Textiles, paras. 6.70-6.80.
476 Panel Report, Argentina – Hides and Leather, paras. 11.104-11.191.

D. THE LEVYING OF THE FOREIGN EXCHANGE FEE
1. The measure at issue
7.105 The Dominican Republic imposes a foreign exchange fee ( comisión de cambio ) on all
imports. This fee was originally introduced by the Seventeenth Resolution of the Dominican
Republic's Central Bank Monetary Boar d dated 24 January 1991 and amended, inter alia, by the First
Resolution of 27 September 2001, the First Resolutio n of 20 August 2002, and the First Resolution of
22 October 2003. The rate of the foreign exchan ge fee was 2.5 per cent when it was originally
introduced. It was later changed to 1.5 per cent, 5 pe r cent, 4.75 per cent, and then to its current level
of 10 per cent by the First Resolution of 22 Octobe r 2003. The current 10 per cent foreign exchange
fee is calculated on the value of the imports at th e selling exchange rate for foreign currency. The
surcharge applies to both bound and unbound items. According to the First Resolution of the
Monetary Board of 22 October 2003, the 10 per cent foreign exchange fee is transitional in nature and
would be eliminated at a time when such elimination would not entail a negative impact on
macroeconomic stability. The phasing out of this tr ansitional foreign exchange fee in future would
depend on the reform of the tax system currently under consideration and the economic stabilization
negotiations with the IMF.
477
2. Introduction
7.106 Honduras claims that the foreign exchange fee as an "other duty or charge" is inconsistent
with Article II:1(b) of the GATT 1994. The Dominican Republic contends that the fee is an exchange
restriction justified under Article XV:9(a). It stat es that should the Panel find to the contrary, it is
nevertheless consistent with Article II:1(b) since it was recorded in the Schedule. Given its terms of
reference and in light of the parties' claims and arguments during the proceedings, the Panel considers
it necessary to examine the matter by analysing th e following legal issues: (i) whether the foreign
exchange fee is an ODC as recorded in the Sche dule; (ii) whether the foreign exchange fee is
inconsistent with Article II:1(b); (iii) whether the foreign exchange fee is an "exchange restriction"
under Article XV:9(a); (iv) whether the fee is imposed "in accordance with" Articles of Agreement of
the IMF; and (v) whether the measure is justified under Article XV:9(a) of the GATT.
7.107 As to the order of analysis of the claim made by Honduras and the defence made by the
Dominican Republic, the Panel considers it necessary to first examine the claim of inconsistency of
the fee with Article II:1(b). Both parties agree that Article XV of the GATT is an exception or an
affirmative defence. The Panel agrees with this characterization of Article XV. That means that it
serves as a justification for inconsistency with other provisions of the GATT. If there is no
inconsistency with other GATT provisions in the first place, there is no need to have recourse to any
affirmative defence for justification. Therefore, the Panel should begin its analysis with the claim
under Article II:1(b) of the GATT 1994.
3. Whether the foreign exchange fee is an ODC as recorded in the Schedule of the
Dominican Republic
(a) Arguments of the parties
7.108 Honduras argues that the foreign exchange fee is an "other duty or charge". It is imposed at
the same time as ordinary customs duties a nd it is imposed on all imported goods, including both
bound and unbound items. 478 Honduras considers that it is applie d on the value of imports and at the

477 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 54.
478 First written submission of Honduras, 16 March 2004, para. 61.

time of importation and, as such, is a duty or charge other than "ordinary customs duties" imposed on,
or in connection with, importation, within the meaning of Article II:1(b).
479
7.109 Honduras argues that the Understanding requires that all duties or charges, other than
ordinary customs duties, be recorded in Member s' Schedules of Concessions and that the foreign
exchange fee was not recorded in the Sche dule of Concessions of the Dominican Republic. 480 In its
view, the Dominican Republic had not recorded OD Cs, including the foreign exchange fee, in its
Schedule, just as it had not recorded the surcharge in its Schedule. 481 Honduras argues that
Article II:1(b), second sentence read together w ith the Understanding, prohibits Members from
imposing "other duties or charges" other than tho se recorded in the ODC co lumn of that Member's
Schedule after 15 April 1994. Therefore, the foreign exchange fee is inconsistent with Article II:1(b),
second sentence.482
7.110 The Dominican Republic replies that the fo reign exchange fee is consistent with
Article II:1(b) because the Dominican Republic record ed a 30% level of ODCs applied to cigarettes
products as of 15 April 1994. The Dominican Repub lic argues that, since the total level of ODCs
applied to cigarettes product, including the 10% fore ign exchange fee, is less than 30%, there is no
inconsistency with Article II:1(b).483
7.111 Honduras argues, on the other hand, that the Do minican Republic did not record the foreign
exchange fee in its Schedule, just as it did not reco rd the surcharge measure in it Schedule. What the
Dominican Republic had recorded was the " Impuesto Selectivo", i.e. an internal tax enforced at the
border for certain imported products. The nature of the " Impuesto Selectivo " is different from the
foreign exchange fee, which is a border measure imposed on the importation of all products. 484
Honduras considers that its arguments regarding the claim that the Dominican Republic did not record
surcharges in its Schedule also apply to the clai m that the Dominican Republic did not record the
foreign exchange fee in its Schedule.485
7.112 The Dominican Republic argues that, even assu ming that it did not properly record the
transitional surcharge and the fore ign exchange fee in its Schedule, paragraphs 4 and 5 of the
Understanding prohibit Members from challenging the ex istence of the foreign exchange fee at the
original binding time and from challenging the consiste ncy of its level after the three-year period has
expired. 486 The Dominican Republic considers that th e fact Honduras has not invoked any paragraph
of the Understanding in its panel request also prohibits it from making a challenge under the
Understanding.487
(b) Analysis by the Panel
7.113 Although there is no definition of what constitutes an "other duty or charge" in the GATT
1994 and in the "Understanding on the Interpretation of Article II:1(b) of the General Agreement on
Tariffs and Trade 1994", the ordinary meanings of Ar ticle II:1(b) and Article II:2 make it clear that
any fee or charge that is in connection with importation and that is not an ordinary customs duty, nor a
tax or duty as listed under Article II:2 (internal ta x, anti-dumping duty, countervailing duty, fees or
charges commensurate with the cost of services re ndered) would qualify for a measure as an "other
duties or charges" under Article II:1(b).

479 Ibid., para. 63.
480 Ibid., paras. 64-65.
481 Second written submission of Honduras, 10 June 2004, para. 194.
482 First written submission of Honduras, 16 March 2004, para. 65.
483 First written submission of the Dominican Republic, 13 April 2004, paras. 202-205.
484 First oral statement of Honduras, paras. 19-20.
485 Second written submission of Honduras, 10 June 2004, para. 194.
486 Second written submission of the Dominican Republic, 10 June 2004, paras. 84-85.
487 Ibid., para. 86.

7.114 The travaux préparatoires concerning the Understanding c onfirm such interpretation. The
Secretariat note on “Article II:1(b) :OF THE GENERAL AGREEMENT” stated:
"4 The definition of ODCs falling under th e purview of Article II:1(b) can only
be done by exclusion –i.e. by reference to those categories of ODC not covered by it.
It would be impossible, and logically fall acious, to draw up an exhaustive list of
ODCs which do fall under the purview of Article II:1(b), since it is always possible
for governments to invent new charges. I ndeed, an attempt to provide an exhaustive
list would create the false impression that charges omitted from it, or newly invented,
were exempt from the II:1(b) obligation."
488
7.115 The foreign exchange fee is imposed on impor ted products only and it is not an ordinary
customs duty. It is computed on the value of im ports, not on the cost of the services rendered by the
customs authorities. Consequently, it is not a fee or charge that falls under Article VIII of the GATT.
It is obviously not an anti-dumping or countervailing duty. Therefore, it is a border measure in the
nature of an ODC within the meaning of Article II:1(b).
7.116 On the issue of whether the foreign exchange fee as an ODC has b een recorded in the
Schedules of Concessions of the Dominican Republic, the Panel notes that the parties made
essentially the same arguments as they did on the issue of whether the surc harge measure has been
recorded in the Schedule. The Panel therefore cons iders that the same analysis the Panel made with
respect to the recording of the surcharge measure in paragraphs 7.37 to 7.40 also applies to the
recording of the foreign exchange although the Panel notes that the fo reign exchange fee did exist at
the level of 1.5 per cent as of 15 April 1994.
7.117 Therefore, the Panel's overall factual assessment with respect to the recording of the foreign
exchange fee measure is that the foreign exchange fee was applied at 1.5 per cent in 1994, but it was
not recorded in the Schedule. What the Dominican Republic notified in document G/SP/3 was
basically the products list and the ad valorem Selective Consumption Tax rates as applied to these
imported products under Law 11-92 in force in 1994. It is clear that in fact these products were only
subject to the Selective Consumption Tax, not to an equal amount of additional "other duties and
charges" back in 1994.
7.118 The Panel has found in paragraph 7.40 that th e Dominican Republic has actually recorded in
its Schedule the Selective Consumption Tax as it app lied to imported products as of 15 April 1994.
The fact that the Selective Consumption Tax applied both to imported and domestic products makes it
clear that it is in the nature of an internal tax. Article II:2(a) and Article II:1(b) make a distinction
between an internal tax that is subject to Article III and an ODC that is subject to a bound requirement
with the consequence that the two are mutually exclusive. If a measure is in the nature of an internal
tax, it is not an ODC. If a measure is in the nature of an ODC, it is not an internal tax. For these
reasons, the Panel finds that the Dominican Republic has not established that the nature of the
measure recorded in the Schedule of the Dominican Republic is an ODC measure within the meaning
of Article II:1(b) that could be invoked to justify the current ODC measure, the foreign exchange fee.
7.119 The Panel also considers that Honduras’s challenge to the nature of the recorded measure is
not prohibited by paragraphs 4 and 5 of the Understanding or by the fact of absence of invocation of
the Understanding in its Panel request based on th e same analysis as developed by the Panel in
paragraphs 7.67, 7.71 and 7.78.
7.120 The Panel recalls that the foreign exchange fee is applied to all imported products, well
beyond the selective products list in the G/SP/3 notifica tion. As the Panel found in paragraph 7.103,

488 See "Article II:1(b) of the General Agreement, Additional Note by the Secretariat", supra note 441.

the foreign exchange fee as applied to products outsi de the scope of the products listed in the G/SP/3
notification, is within the Panel's terms of reference.
7.121 The Panel concludes for the reasons set out above, that there was no legally valid recording of
any ODC measure as required by the Understanding in the Schedule of the Dominican Republic. For
all legal and practical purposes, what was notified by the Dominican Republic in document G/SP/3 is
equivalent to "zero" in the Schedule. The Pane l finds that the foreign exchange fee is therefore
applied in excess of the level of "zero" pursuan t to the Schedule of the Dominican Republic and
therefore is inconsistent with Article II:1(b) of the GATT 1994.
7.122 The Panel also considers that the application of foreign exchange fee to products other than
those products listed in the G/SP/3 notification is in excess of the level of "zero" or "none" pursuant to
the Schedule of the Dominican Republic, since nothi ng was recorded for these products, either as an
ODC or otherwise.
4. Whether the exchange fee is an "exchange restriction" under Article XV:9 (a) of the
GATT 1994
(a) Arguments of the parties
7.123 The Dominican Republic argues that the foreig n exchange fee is an exchange measure
justified by Article XV:9(a) of the GATT 1994. The Dominican Republic considers that
Article XV:9(a) is an exception to other provisions of the GATT, including Article II. In its view,
Members are entitled to use exchange controls or exchange restrictions in accordance with the
Articles of Agreement of the International Monetary Fund.
489
7.124 The Dominican Republic also argues that th e foreign exchange fee is an "exchange
restriction" because of the following features: it is pr escribed by monetary authorities, not by trade or
customs authorities; it applies to exchange actions, not to import transactions as such; and it is a
charge on foreign exchange transactions imposed through the banking system, not a charge on import
transactions levied by customs authorities.
490
7.125 The Dominican Republic considers that the meaning of exchange restrictions is to be
interpreted by the IMF. In this regard, it re minds the Panel of a Decision made by the Executive
Directors of the Fund on 1 June 1960 stating that "[ t]he guiding principle in ascertaining whether a
measure is a restriction on payments and transfers for current transactions under Article VIII, Section
2, is whether it involves a direct governmental limi tation on the availability or use of exchange as
such".491 The Dominican Republic considers that the criterion for identifying an "exchange
restriction" does not involve the motive behind a measure or the effect it produces. 492 The Dominican
Republic considers that the foreign exchange fee is an "exchange restriction" because paragraph 12 of
the Resolution of 24 January 1991 provides that th e Central Bank will levy a percentage on foreign
exchange transactions.493
7.126 The Dominican Republic argues that the foreign exchange fee is an "e xchange restriction"
because it is a direct governmental limitation on the availability or use of exchange as such. It
qualifies as an "exchange restriction" since it effectiv ely and legitimately requires all payments to be
channelled through the banking system.494

489 First written submission of the Dominican Republic, 13 April 2004, para. 91.
490 Ibid., para. 93.
491 First written submission of the Dominican Republic, 13 April 2004, para. 94.
492 Ibid.
493 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 58.
494 First written submission of the Dominican Republic, 13 April 2004, para. 198.

7.127 Honduras submits that Article XV:9(a) is an a ffirmative defence and the Dominican Republic
bears the burden of establishing that the foreign exchange fee is justified under that Article.495
7.128 Honduras argues that in determining whether the measure is an "exchange restriction", it is
legally irrelevant whether the measure is impos ed by monetary authorities or by customs
authorities.496 The foreign exchange fee is ostensibly on foreign exchange transactions but it is
computed on the value of imports at the selling rate of foreign exchange. Honduras considers that this
is not different from the "transaction value" for the purpose of the imposition of customs duties. In
the view of Honduras, the foreign exchange fee is nothing more than an import charge, a trade
measure within the jurisdiction of the WTO, rather than an exchange measure under
Article XV:9(a).
497 In the view of Honduras, the foreign ex change fee is a trade restriction as it is a
restriction on the entry of products into the Dominican Republic and it is a barrier to trade as it adds to
the cost of trade.498
7.129 Honduras also argues that the act that causes th e imposition of the foreign exchange fee is
"importation", not the purchase of foreign currency, and the amount of this fee is based on the value
of imports.499 Honduras considers that the foreign excha nge fee does not apply to non-import related
transactions, including: (i) transactions for non-import related service; (ii) non-import related payment
made by the Dominican Republic residents; and (iii) remittances of dividends from companies
located in the Dominican Republic. Honduras i ndicates that the Resolution of 20 October 2002
confirms that this fee does not apply to "payments of external debt; repatriation of capital, remittances
of dividends, technology transfers, and payments for travel expenses and medical services; credit
cards and all other services".
500
7.130 Honduras emphasizes that the foreign exchange fee is not an "exchange restriction" because it
is not a "direct ... limitation on the availability or use of exchange as such". In the view of Honduras,
"as such" in relation to "limitation on the availability or use" means that the limitation must be on
access to or the use of fore ign exchange, as such, or per se. Honduras contends that the Dominican
Republic has not established that the foreign exch ange fee imposed a limitation on access to or use of
foreign exchange per se . While the foreign exchange fee increases the costs of imports, the
availability of foreign exchange to pay for imports remains unrestricted.501
(b) Analysis by the Panel
7.131 The Panel takes note that both parties agre e that Article XV of the GATT 1994 is an
exception or an affirmative defence. Although th e two concepts are not identical, an exception can
often be invoked as an affirmative defence. It is well established that under an exception provision,
the burden is on the defending party to justify th e consistency of its measure under the exception
provision it invoked502 Therefore, in this case, the Dominican Republic bears the burden to establish:
(i) that the foreign exchange fee measure is an " exch ange control or exchange restriction" within the
meaning of Article XV:9(a); and (ii) that th e measure is "in accordance with" the Articles of
Agreement of the International Monetary Fund", as required by Article XV:9(a).

495 First oral statement of Honduras, para. 22.
496 Ibid., para. 25.
497 Ibid., para. 26.
498 Replies of Honduras to questions addressed by the Panel, reply to question No. 10.
499 Ibid., reply to question No. 9. Second written submission of Honduras, 10 June 2004, para. 192.
500 Replies of Honduras to questions addressed by the Panel, reply to question No. 9.
501 First oral statement of Honduras, para. 27. Second written submission of Honduras, 10 June 2004,
para. 197.
502 For the reasoning of the Appellate Body, see Appellate Body Report, US – Wool Shirt and Blouses,
pp 15-16; Appellate Body Report, EC – Tariff Preferences , paras. 104-105; Appellate Body Report, US –
Gasoline, pp22-23; and Appellate Body Report, Turkey – Textiles, para. 45.

7.132 The Panel is also aware of the argument of the Dominican Republic that the criterion for
determining whether a measure is an "exchange restriction" is "whether it involves a direct
governmental limitation on the availability or use of exchange as such", as set out by a Decision of the
Executive Directors of the Fund in 1960 and the fact that Honduras does not disagree with this
criterion. The Panel considers that, since Article XV:9 of the GATT exempts exchange restrictions
measures that are applied in accordance with the Fund Articles, from obligations under other
Articles of the GATT, the guiding principle that the IMF prescribed as the criterion for the
determination of what constitutes an "exchange restriction" should be respected by this Panel.
Therefore, the Panel should apply this criterion in its evaluation of the measure before it.
7.133 In assessing whether the foreign exchange fee c onstitutes an exchange restriction, parties
disagree on whether the foreign exchange fee is a "direct limitation on the availability of foreign
exchange as such". The Dominican Republic c onsiders that the fee meets the criterion because
paragraph 12 of the 1991 Resolution provides that the fee is to be levied on foreign exchange
transactions. It implies that the focus is exchange transaction, not the act of importation. On the other
hand, Honduras argues that the fee does not apply to payments of external debt, repatriation of capital,
remittances of dividends, technology transfers, and payment for travel expenses and medical services,
credit cards and all other services and it is calculated on the value of imports. The fee, in the view of
Honduras, is actually caused by the act of importation and therefore is a trade restriction rather than
an "exchange restriction".
7.134 The Panel considers it necessary to examine the specific aspects of the current foreign
exchange measure to determine whether it is in fact imposed solely on import-related exchange
transactions. In this regard, the Panel notes that the 1991 Resolution provides differently from that of
the later Resolution.
7.135 A reading of the 1991 Resolution reveals the nature of foreign exchange fee as it was applied
in 1991. Paragraph 12 provides: "t he Central Bank shall charge users of official foreign exchange
transactions and commercial banks, fo r the delegation of foreign exch ange operations, the equivalent
in Dominican Pesos (RD$) of two and a half per cent (2-1/2%) of the selling exchange rate applied to
each transaction". This means that the fee was or iginally imposed on foreign exchange transactions
conducted in both official and private foreign exch ange markets through either the Central Bank or
commercial banks. This Resolution actually required that the foreign exchange fee be paid for all
kinds of foreign currency transactions, including both selling and purchasing transactions. This
measure actually increased the cost for the use of foreign currency, for all kinds of transactions
regardless of whether the transaction was related to importation. The Panel considers that the foreign
exchange fee as it was applied in 1991 could be characterized as an exchange measure, as it is
possible that the IMF would deem the increase of co st for the availability of foreign exchange as a
means of "restriction" on the availability of the foreign currency. However, it is not necessary for the
Panel to decide on the measure as it was applied in 1991. The measure to be examined by the Panel
for the resolution of the dispute is the currently applied foreign exchange fee measure.
7.136 With regard to the currently applied foreign exchange fee measure, the Panel notes that the
relevant provisions in the 1991 Resolution of th e Monetary Board have been amended by later
resolutions. On the issue of whether the fee is imposed on all types of transactions or solely on
import-related transactions, the applicable rules ar e those under the Resolution of 20 August 2002.
Paragraph 2 of this Resolution provides "exchange commissions shall henceforth no longer be applied
to external debt service payments, capital repatria tion, remittances of profits, technology transfers,
sales for travel expenses and medical services, credit cards and other services".
503 The Dominican
Republic confirms in its replies to a Panel question that "[t]he foreign exchange fee applies only to
importation of goods. It does not apply to foreign exchange payments of non-import related services,

503 The text of the First Resolution of the Monetary Board, dated 20 August 2002, was provided by
Honduras as Exhibit HOND-3(c).

nor to foreign currency payments made by Domini can Republic residents, nor to remittance of
dividends from companies located in the Dominican Republic".504
7.137 The Panel considers that the ordinary meaning of the "direct limitation on availability or use
of exchange ... as such" means a limitation direc tly on the use of exchange itself, which means the
use of exchange for all purposes . It cannot be interpreted in a way so as to permit the restriction on
the use of exchanges that only affects importation. To conclude otherwise would logically lead to the
situation whereby any WTO Member could easily ci rcumvent obligations under Article II:1(b) by
imposing a foreign currency fee or charge on imports at the customs and then conveniently
characterize it as an "exchange restriction". Such types of measures would seriously discriminate
against imports while not necessarily being effect ive in achieving the legitimate goals under the
Articles of Agreement of the IMF. Therefore, the Panel finds that because the fee as currently applied
is imposed only on foreign exchange transactions that relate to the importation of goods, and not on
other types of transactions, it is not "a direct limitation on the availability or use of exchange as such".
7.138 The Panel takes note of the argument made by the Dominican Republic that the foreign
exchange fee is approved by the IMF as a part of the stand-by arrangement between the IMF and
therefore it is in accordance with th e Articles of Agreement of the IMF.
505 The Panel notes that
paragraph 2 of Article XV provides that:
 "In all cases in which the CONTRACTING PARTIES are called upon to consider or
deal with problems concerning monetary reserves, balances of payments or foreign
exchange arrangements , they shall consult fully with the International Monetary
Fund. In such consultations, the CONTRACTING PARTIES shall accept all findings
of statistical and other facts presented by the Fund relating to foreign exchange,
monetary reserves and balances of payments, and shall accept the determination of
the Fund as to whether action by a contracting party in exchange matters is in
accordance with the Articles of Agreeme nt of the International Monetary Fund , or
with the terms of a special exchange arrangement between that contracting party and
the CONTRACTING PARTIES..."(emphasis added)
7.139 The Panel considered during the proceedings th at it needed to seek more information on the
precise legal nature and status of the foreign ex change fee measure in the stand-by arrangement
between the IMF and the Dominican Republic. Sec ondly, since the Dominican Republic argues that
the fee is an exchange restriction and it is impo sed in accordance with the Articles of Agreement of
the IMF, the Panel considered that it needed to consult with the IMF based on paragraph 2 of
Article XV to verify such an argument for a de termination by the Panel on whether the measure is
justified under Article XV:9(a) of the GATT. The co re issue in this regard is whether the foreign
exchange measure constitutes an "exchange restriction" in the package of the stand-by arrangement.
If the answer is positive, the next issue then is whether the foreign exchange fee is "in accordance
with" the Articles of Agreement of the IMF and he nce justified under Article XV:9(a) of the GATT
1994.
7.140 The Panel is also aware of the provision in paragraph 8 of the 1996 Agreement between the
International Monetary Fund and the World Trade Organization that "The Fund shall inform in
writing the relevant WTO body (including dispute se ttlement panels) considering exchange measures
within the Fund's jurisdiction whether such measures are consistent with the Articles of Agreement of
the Fund".

504 See, Replies of the Dominican Republic to ques tions addressed by the Panel, reply to question
No. 9.
505 First written submission of the Dominican Republic, 13 April 2004, paras. 199-201.

7.141 The Panel also recalls a similar situation in Argentina – Textiles , where an ad valorem
statistical tax was imposed allegedly for fiscal pe rformance purposes so as to obtain IMF financing to
deal with a financial crisis. That panel in that instance did not consult with the IMF. The Appellate
Body considered that that panel had good reason for not consulting the IMF because the statistical tax
was not one of the "problems concerning monetary reserves, balances of payments or foreign
exchange arrangements". However, it nevertheless stat ed that "it might perhaps have been useful for
the Panel to have consulted with the IMF on the le gal character of the rela tionship or arrangement
between Argentina and the IMF in this case".
506
7.142 Bearing these considerations in mind, the Pa nel requested information on 17 May 2004 from
the IMF on the following two issues: (i) how the fore ign exchange fee is being implemented by the
Dominican Republic; (ii) whether the foreign exch ange fee as currently applied by the Dominican
Republic is an "exchange control" or "exchange restriction" under the Articles of Agreement of the
IMF.
7.143 On the first issue, the IMF General Counsel replied that:
"(a) The 'exchange commission' is levied under the legal authority of the Banco
Central de la República Dominicana (BCRD). Since its introduction in January 1991,
the commission has undergone a number of changes in the way that it is levied.
Initially, the commission was payable on sales of foreign exchange and was
calculated as a percentage of the selling rate.
(b) Since August 2002, however, pursuant to the Agreement between the BCRD
and the Directorate General for Customs (DGC) of August 22, 2002, the commission
has been collected in its entirety by the DGC. Moreover, although the commission is
still referred to as an "exchange commission" (because it is levied on the basis of the
legal authority vested in the BCRD to charge a commission on sales of foreign
exchange), the commission is no longer payable on sales of foreign exchange. Rather,
it is payable as a condition for the importation of goods, and the amount of the
commission is now calculated exclusively on the CIF valuation of the imported goods
as determined by the DGC (Article 1 of the Agreement between the BCRD and the
DGC). By Notice of Resolution No. 1 of the Monetary Board of October 22, 2003,
the rate of the commission was increased to ten per cent in October 2003."
507
7.144 On the second issue that the Panel requested information on, the reply states:
"As applied since August 2002, the exchange commission is no longer a measure
subject to Fund approval. As noted above, the commission is no longer payable on
sales of foreign exchange. It is payabl e as a condition for the importation of goods
and the amount to be paid is based on th e CIF value of the imported goods (rather
than the amount of foreign exchange sold to an importer for the payment of goods).
As such, it does not constitute a multiple currency practice or an exchange restriction
notwithstanding its label or the fact that the commission is charged on the basis of the
legal authority vested in the BCRD to charge an exchange commission on sales of
foreign exchange. For the same reasons, it is not an exchange control
measure."(emphasis added)
7.145 The Panel fully agrees with the opinion of the IMF. For the reasons set out above by the
Panel and considering the opinion expressed by the IM F, the Panel finds that the foreign exchange fee

506 Appellate Body Report, Argentina – Textiles, para. 65.
507 Letter from the General Counsel of the International Monetary Fund, Annex D, supra note 6.

measure as it is currently applied by the Domi nican Republic does not constitute an "exchange
restriction" within the meaning of Article XV: 9(a) of the GATT 1994.
5. Whether the fee is imposed "in accordance with" Articles of Agreement of the IMF
(a) Arguments of the parties
7.146 The Dominican Republic argues that the foreign exchange fee is applied in accordance with
the Articles of Agreement of the Fund as provide d in Article XV:9(a). On 29 August 2003, The
Dominican Republic concluded a stand-by arrangement with the Fund by which the Dominican
Republic enforced, inter alia , a non-unified exchange rate system. The stand-by arrangement
incorporated performance criteria calling for full uni fication of the dual exchange system by the end
of 2003. The Fund approved the non-unified excha nge rate system. However, due to its economic
performance, the Dominican Republic was unable to fulfil its commitments made in the stand-by
arrangement with the Fund and requested a waiver from the Fund in January 2004 for non-observance
of the performance criteria, inter alia, on the unification of the foreign exchange market and for the
continuous performance criteria rega rding exchange rate restrictions and multiple currency practices.
The Dominican Republic submits that the Executive Bo ard of the Fund completed its first review and
the Dominican Republic understands that the Fund approved the "exchange ra te restrictions and
multiple currency practices". The foreign exchange fee as an exchange rate restriction, or multiple
currency practice, is applied by the Dominican Republic "in accordance with" the Fund Articles of
Agreement. Therefore, in the opinion of th e Dominican Republic, it is permitted under
Article XV:9(a) of the GATT.
508
7.147 The Dominican Republic argues that Article XV:9(a) does not oblige that a measure be
"required" under the terms of a stand-by arrangement. In its view, to the extent that this fee is
"permitted" under the terms of the standby arrange ment, this fee is "in accordance with" the
Articles of Agreement of the International Monetary Fund as provided by Article XV:9(a). 509 In the
view of the Dominican Republic, the foreign excha nge fee is justified under Article XV:9(a) of the
GATT 1994 even if it is inconsistent with Article II:1(b).510
7.148 Honduras argues that even assuming the foreign ex change fee is an exchange restriction or
multiple currency practice, it would be justified under Article XV:9(a) only if it is used "in
accordance with" the Articles of Agreement of the IM F. Sections 2 and 3 of Article VIII of the
Agreement provide that exchange restrictions or multiple currency practices respectively, cannot be
imposed without the approval of the IMF. Honduras considers that the Dominican Republic has not
provided evidence that the IMF has approved the fore ign exchange fee measure either as an exchange
restriction, or as a multiple currency practice.
511 Honduras argues that paragraph 3 of the Agreement
between the International Monetary Fund and the World Trade Organization provides that the IMF
"shall inform the WTO of any decisions approving restrictions on the making of payments or transfers
for current international transactions, decisions a pproving discriminatory currency arrangements or
multiple currency practices, and decisions requestin g a Fund member to excise controls to prevent a
large or sustained outflow of capital". Honduras submits that as of 6 May 2004, the IMF has made
31 notifications to the WTO involving 18 countries and there is no notification regarding the Fund
approval of any measure taken by the Dominican Republic. 512 Honduras submits that the absence of

508 First written submission of the Dominican Republic, 13 April 2004, paras. 199-201.
509 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 63.
510 First written submission of the Dominican Republic, 13 April 2004, para. 188.
511 First oral statement of Honduras, para. 34; S econd written submission of Honduras, 10 June 2004,
para. 199.
512 First oral statement of Honduras, para. 37; Second written submission of Honduras, 10 June 2004,
para. 202.

such approval by the IMF is further confirmed by the WTO Secretariat on 5 May 2004 in response to
a letter from Honduras requesting the information.
513
7.149 Honduras points out that the IMF Press Release No. 04/23 of February 2004 states that "the
Executive Board approved the Dominican Republic's request to waive the non-observance of ...
continuous performance criteria concerning ... exchange rate rest rictions and multiple currency
practices". It argues that without establishing wh at "continuous performance criteria" concerning
exchange rate restrictions and multiple currency pr actices have been waived, this statement cannot be
used as an approval for the imposition of exchange restrictions or multiple currency practices.
Moreover, Honduras contends that a waiver is not equivalent to an approval of the imposition of
foreign exchange restriction or a multiple curre ncy practices in the sense of Sections 2 and 3 of
Article VIII of the Articles of Agreement of the IMF. 514 In its view, the Dominican Republic has not
discharged its burden of establishing that the foreign exchange fee is imposed in accordance with the
Articles of Agreement of the IMF in the context of Article XV:9(a).515
(b) Analysis by the Panel
7.150 In fact, the reply of the IMF General Counsel concludes that since the foreign exchange
commission does not constitute an exchange restriction, "the issue of its consistency or inconsistency
with the Funds Articles for purpose of paragraph 8 of the Co-operation Agreement does not arise".
The Panel fully agrees with this statement.
7.151 The Panel considers that even if the forei gn exchange fee does constitute an "exchange
restriction", Article XV:9(a) requires that it has to be applied "in accordance with" Articles of
Agreement of the IMF. In light of the parties' arguments in this regard, the Panel will analyse whether
the Dominican Republic has discharged its burden of demonstrating that the foreign exchange fee is
"in accordance with" the Articles of Agreement of the IMF.
7.152 The Dominican Republic refers only to an IMF news release. The Panel has not been
presented with a copy of the formal Decision made by IMF. The Dominican Republic referred to this
decision as a "waiver". It is not clear which provis ion of the IMF Articles of Agreement is the legal
basis of the waiver and what is the legal basis to establish that the waiver was made in accordance
with the Articles of Agreement. The Dominican Re public confirmed in its replies to questions that
the waiver will be valid for three months.
516 As a result, the legal status of the waiver after the three-
month period is not clear to the Panel.
7.153 On the substance of the IMF news release, the meaning of the language that the IMF
"approved the Dominican Republic's request to waive the non-observance of ... continuous
performance criteria concerning ... ex change rate restrictions and mu ltiple currency practice" is not
self-evident. Does it mean that the IMF waived the obligation for the Dominican Republic to
completely unify the dual exchange markets and to fo rm one unified exchange rate? Is the foreign
exchange fee one compone nt of the "exchange rate restrictions"? The Panel considers that the
foreign exchange fee measure is independent of the dual exchange rates system. Even before the dual
exchange rates are unified, the foreign exchange fee can be eliminated without changing the dual
exchange rate system. It is also true that, even after the dual exchange rates are unified, the foreign
exchange fee can still be imposed without changing the unified exchange rate market.

513 See Letter from the WTO Trade and Finance Division, dated 5 May 2004, submitted by Honduras
as Exhibit- Hond-21(a). Second written submission of Honduras, 10 June 2004, para. 202.
514 First oral statement of Honduras, paras. 35-36. Second written submission of Honduras, para. 201.
515 Second written submission of Honduras, 10 June 2004, para. 203.
516 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 63.

7.154 For these reasons, the Panel finds that the IM F waiver decision does not constitute a legal
basis for the application of the foreign exchange fee measure and the Dominican Republic has not
demonstrated that the foreign exchange fee is a pplied "in accordance with" the Articles of Agreement
of the IMF.
6. Whether the measure is justified under Article XV:9(a) of the GATT 1994
7.155 The Panel considers that Article XV:9(a) as an exception provision has to be invoked and
proved by the Dominican Republic to justify the in consistency of the foreign exchange fee measure
with the second sentence of Article II:1(b). As the Panel has already found that the measure does not
constitute an "exchange restriction" within the meaning of Article XV:9(a) of the GATT 1994 and
that the Dominican Republic has not demonstrated that it is "in accordance with" the Articles of
Agreement of the IMF, the Panel concludes that the foreign exchange fee is inconsistent with
Article II:1(b) and can not be justified under Article XV:9(a) of the GATT 1994.
E. O
BLIGATION THAT STAMPS BE AFFIXED TO CI GARETTE PACKETS IN TH E TERRITORY OF THE
DOMINICAN REPUBLIC (THE TAX STAMP REQUIREMENT)
1. The measure at issue
7.156 Under Article 37 of the Decree 79-03 of 4 February 2003, 517 and under Decree 130-02 of
11 February 2002,518 the Dominican Republic requires that a stamp be affixed to all cigarette packets
in the territory of the Dominican Republic and under th e supervision of the local tax authorities. This
requirement applies both to domestic and imported cigarettes.
7.157 Article 37 of the Decree 79-03 of 4 February 2003 provides the following:
"ARTICLE 37. CONTROL OF TOBACCO PRODUCTS BY MEANS OF
STAMPS
Domestic producers and importers of cigarettes and cigars shall affix a stamp to
cigarette packets or cigar boxes at the time of production or importation. In the case
of cigarettes, domestic produc tion and importation shall be subject to the controls
described in Paragraphs I, II and III of this article.
PARAGRAPH 1. The stamps referred to in this Article shall be affixed to all
cigarette packets, subject to the following controls:
1. Control of the receipt of stamps

The stamps shall be issued by th e Directorate-General of Internal
Taxes only to persons or comp anies engaged in producing and
marketing these products that are duly registered with the
Directorate-General of Internal Taxes [DGII].
For the purposes of control of stamps, the Directorate-General of
Internal Taxes shall require previously authorized signatures to be
produced and, to this end, it shall keep a register.
Domestic producers and importers shall keep a ledger for the
inventory of stamps that is duly authorized by the Directorate-

517 Decree 79-03, supra note 8.
518 Decree 130-02, supra note 9.

General of Internal Taxes, which may review and inspect the ledger
where deemed appropriate. For th is purpose, each producer shall
maintain the following control of stamps received:
a) He shall apply to the DGII to purchase stamps and, after approval,
shall pay the amount of the stamps with a certified cheque.
b) When the certified cheque is paid, the DGII shall issue a receipt
of payment, which shall be record ed sequentially in the official
ledger.
2. Control of the pro duction process (transfer of finished product to
warehouse)
Every producer must at his factory set up a pre-warehouse area for
checking the daily production of cigarettes, which area shall be under
the control of the Directorate-General of Internal Taxes.
These products shall be transferred to the warehouse for distribution
to sales channels in the presence of tax inspectors, who shall verify
and count the previous day's cigarette production, which will serve as
the basis for issuing the stock movement (entry into warehouse) and
an official invoice, which is reco rded in the official ledger as an
outward movement of stamps.
The following documents shall be entered in the official ledger:
a) Receipt of stamps;
b) stock movement (production) of the company;
c) official invoice of the outward movement of the day's production.
At the end of each month, two communications will be sent to the
Directorate-General of Internal Taxes on the movement of stamps,
containing:
 The entries in the official ledger;
 the official invoices for the consignment of cigarettes;
 the invoices for the purchase of stamps, plus the standard
payment receipt.
d) any other document or record that the Tax Administration deems
appropriate.
PARAGRAPH II. Cigarette imports shall be placed in the customs
warehouse or in storage under the control of the Directorate-General
of Internal Taxes, where the stamps shall be affixed and checked as
stipulated below:

1. Control of the receipt of stamps
a) The importer shall apply to the DGII to purchase stamps and, after
approval, shall pay the amount of the stamps with a certified cheque.
b) When a certified cheque is paid, the DGII shall issue a receipt of
payment, which shall be recorded sequentially in the official ledger.
2. Control at customs warehouse or storage under the control of the
Directorate-General of Internal Taxes
a) In the presence of tax inspectors, the importation of cigarettes
shall be verified and counted and stamps shall be affixed to each
packet depending on the packaging. After the stamps have been
affixed, an official receipt shall be issued which will be entered in the
official ledger as an outward movement of stamps.
b) At the end of each day, a communication shall be sent to the DGII
with the movement of stamps, containing:
The entries in the official ledgers;
The official invoices for the consignment of cigarettes;
The invoices for the purchase of stamps, plus the standard payment
receipt.
c) Any other document or record that the Tax Administration deems
appropriate.
PARAGRAPH III. Under the terms of Article 380 of the Tax Code,
the value of the stamps is defrayed by the tax payers and is not
deductible from the Selective Consumption Tax."
7.158 The relevant parts of Decree 130-02 of 11 February 2002 provide the following:
"ARTICLE 1.- Local cigarette manufacturers shall, in national territory and under
the supervision of the Directorate-General of Internal Taxes, affix the stamps
provided for in Law No. 2461 of 18 July 1950 on Stamps and Stamped Paper.
ARTICLE 2.- Article 1 of this Decree shall also apply to imported cigars and
cigarettes; such goods shall be stored in a bonded warehouse or depository under the
control of the Directorate-General of In ternal Taxes where the control stamps
provided for by the aforementioned Law No. 2461 of 1950 shall be affixed."
7.159 The Panel will refer to the requirement that a stamp be affixed on cigarette packets in the
territory of the Dominican Republic and under th e supervision of local tax authorities, upon
importation and even after customs clearance as the "tax stamp requirement".
2. Whether the tax stamp requirement accord s less favourable treatment to imported
products in a manner inconsistent with Article III:4 of the GATT 1994
(a) Arguments of the parties
7.160 Honduras argues that the tax stamp requirement accords less favourable treatment to imported
cigarettes than that accorded to like domestic cigarettes, in a manner inconsistent with Article III:4 of

the GATT 1994. Honduras admits that the tax stam p requirement is applicable to both domestic and
imported cigarettes and, as such, it is a formally identical treatment for both domestic and imported
products.
519 However, in its view, the formally iden tical requirement of affixing stamps in the
Dominican Republic results in additional steps and costs for importers of cigarettes.520
7.161 The Dominican Republic’s first defence is that the tax stamp requirement does not accord less
favourable treatment to imported cigarettes than that accorded to like products of national origin. In its
opinion, the tax stamp requirement is not applie d so as to afford protection to the domestic
producers.521 The imports of cigarettes from Honduras ha ve increased significantly in 2003 and the
first trimester of 2004, both in absolute volumes and in market share. 522 Any difference in the
conditions of competition between imported and domestic products, in respect of compliance with the
tax stamp requirement, would be a result of the inherent differences betw een imported and domestic
products.523 The Dominican Republic’s alternative defe nce is that the tax stamp requirement is
necessary to secure compliance with the Dominican Republic’s tax laws and regulations. Therefore,
should it be found prima facie to be inconsistent with Article III:4, the tax stamp requirement should
benefit from the application of Article XX(d) of the GATT 1994 and be declared WTO-compatible.
524
(b) Analysis by the Panel
7.162 Under Article III:4 of the GATT 1994:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use..."
7.163 The Appellate Body has stated that
"[F]or a violation of Article III:4 to be established, three elements must be satisfied:
that the imported and domestic products at is sue are 'like products'; that the measure
at issue is a 'law, regulation, or requirement affecting their internal sale, offering for
sale, purchase, transportation, distribution, or use'; and that the imported products are
accorded 'less favourable' treatment than that accorded to like domestic products..."525
(c) Like product determination
7.164 There is no disagreement between the parties that imported and domestic cigarettes are "like
products". As expressed by the Dominican Republic, "[ l]ikeness of these products is not at issue in
this dispute."526
7.165 Honduras has presented physical evidence of ci garettes exported to the Dominican Republic,
as well as cigarettes domestically produced in the Dominican Republic. 527 From the available
evidence, the Panel is satisfied that both impor ted and domestic cigarettes have similar physical

519 First written submission of Honduras, 16 March 2004, para. 76.
520 Ibid., para. 77.
521 First written submission of the Dominican Republic, 13 April 2004, para. 30.
522 Ibid., para. 45. Oral statement of the Dominican Republic to the Panel, 11 May 2004, para. 45.
523 First written submission of the Dominican Republic, 13 April 2004, paras. 4 and 39-42.
524 Ibid., 97 and 100-140.
525 Appellate Body Report, Korea – Various Measures on Beef, para. 133.
526 First written submission of the Dominican Republic, 13 April 2004, para. 32.
527 See physical evidence provided by Honduras, mark ed Exhibits HOND-23(a) to 23(c), HOND-24(a)
to 24(c), HOND-25(a) to 25(n), HOND-26(a) to (26(c), and HOND-27(a) to 27(n).

properties, are made from similar materials, and have a similar presentation; they have the same end-
use (i.e. they are smoked by consumers); and th ey are classified under the same tariff heading
2402.20.00. Available evidence presented by the parties also indicates that, within the general
product description, cigarettes are presented to co nsumers distinguished by brands. Under the
identification of these brands, and within specifi c price segments, cigarettes compete against each
other and are interchangeable for consumers (t hat is, consumers may switch from one brand to
another).
7.166 The Panel therefore is of the view that impor ted cigarettes and domestic Dominican Republic
cigarettes are like products within the meaning of Article III:4 of the GATT.
(d) Law, regulation, or requirement affecting the internal sale, offering for sale, purchase,
transportation, distribution, or use
7.167 Honduras argues that the fulfilment of the ta x stamp requirement is a prerequisite for
withdrawing imported cigarettes from the warehouse in or der that they may be di stributed and sold in
the Dominican Republic and, therefore, affects the internal sale of imported cigarettes.528
7.168 The Dominican Republic replies that the tax st amp requirement does not affect the internal
sale, offering for sale, or distribution of cigarettes. In its opinion, the requirement does not directly
govern the conditions of sale or purchase of cigarett es, nor does it adversely modify the conditions of
competition between domestic and imported products, to the detriment of imported products.529
7.169 With respect to whether the tax stamp requirement affects the "internal sale" of cigarettes, the
Panel notes that, as stated by the Appellate Body, the ordinary meaning of the word "affecting"
implies a measure that has "an effect on" and thus indicates a broad scope of application. In the words
of the Appellate Body:
"[W]e note that Article I:1 of the GATS provides that '[t]his Agreement applies to
measures by Members affecting trade in services'. In our view, the use of the word
'affecting' reflects the intent of the drafters to give a broad reach to the GATS. The
ordinary meaning of the word 'affecting' implies a measure that has 'an effect on',
which indicates a broad scope of application. This interpretation is further reinforced
by the conclusions of previous panels that the term 'affecting' in the context of
Article III of the GATT is wider in scope than such terms as 'regulating' or
'governing'."
530
7.170 The Panel notes that, under Article 37 of the D ecree 79-03 of 4 February 2003, "Domestic
producers and importers of cigarettes and cigars shal l affix a stamp to cigarette packets or cigar boxes
at the time of production or importation". 531 The Dominican Republic states that no packet of
domestic cigarettes may leave the production factor ies and enter the stream of commerce unless the
tax inspector is satisfied that it bears a tax stamp. Likewise, no packet of imported cigarettes can
leave the bonded warehouse unless the tax stamps are a ffixed to each cigarette packet in the presence
of a tax inspector.
532

528 First written submission of Honduras, 16 March 2004, para. 75.
529 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 64.
First written submission of Honduras, 16 March 2004, para. 66.
530 Appellate Body Report, EC – Bananas III, para. 220.
531 Decree 79-03, supra note 8.
532 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 68,
para. 75.

7.171 In light of the previous factors, the Panel considers that the tax stamp requirement is an
internal regulation that affects the internal sale and offering for sale of cigarettes in the domestic
market of the Dominican Republic within the meaning of Article III:4 of the GATT.
(e) Less favourable treatment
(i) Arguments of the parties
7.172 Honduras indicates that the tax stamp requireme nt modifies the conditions of competition for
imported cigarettes in the Dominican Republic to th e detriment of imported cigarettes and therefore
treats imported cigarettes less favourably than the like domestic products.
533 Domestic producers of
cigarettes may purchase tax stamps in advance and a ffix those stamps to cigarette packets in the
course of their production process and prior to the fina l packaging of the product. For those domestic
producers, the production process is therefore a conti nuous one, after which cigarettes may be sold on
the domestic market. 534 For imported cigarettes, the affixing of the tax stamps in the territory of the
Dominican Republic requires a separate process, afte r the cigarettes have been produced and packed
in the exporting country. Foreign producers are not allowed to affix the stamp on their own premises
abroad. This additional process requires re-openi ng the boxes and cartons of cigarettes, affixing the
stamps to the individual cigarette packets (over the cellophane), and repackaging the cartons and
boxes.
535 All these additional steps would require the im porters to hire additional labour to carry out
these tasks in the Dominican Republic while dome stic producers would not have to undergo these
additional steps. Honduras has provided physical evidence of cigarette packets as they are wrapped in
different stages of the production and transportation processes, in order to highlight the additional
steps that are undertaken in the territory of the Dominican Republic.536
7.173 Citing reports from private consultants, Honduras submits that the additional cost to importers
from affixing the tax stamps in the territory of the Dominican Republic would be US$0.9 per
thousand cigarettes, that is, 9.70 per cent of the c.i.f. average price, whereas it estimates that the cost
to a domestic producer in the Dominican Republic would be around $0.01 per thousand cigarettes,
that is, 0.1 per cent of the c.i.f. average cost. Ho nduras additionally indicates that the fact that stamps
on imported cigarettes are placed over the cellophane detracts from the overall presentation of the
final product, as compared to the presentation of dom estic cigarette packets where stamps are placed
on the packet during the production process before the cellophane wrap is applied.537
7.174 In the opinion of the Dominican Republic, the tax stamp requirement is applied equally to
importers and to domestic producers. The Dominican Republic adds that Honduras has not presented
any evidence to establish that the tax stamp requirement accords less favourable treatment to imported
cigarettes, nor has it demonstrated that the measure h as protective application. Therefore, in its view,
Honduras has not established a prima facie case of inconsistency of the measure with Article III:4. In
its view, Honduras has only submitted evidence to s how that the importer bears certain costs as a
result of its method of affixing stamps in the Do minican Republic. Those additional costs would be
associated with compliance with non-discriminatory internal measures and would result from inherent
differences in the normal conditions under which impo rted products compete with domestic products.
They would be inevitably linked to the conditi on of imported products. The Dominican Republic
further adds that many of the additional steps that Honduras has identified as a result of the tax stamp
requirement are in fact either steps that domestic producers also have to perform (such as to manually
cut tax stamps for each of the cigarettes packets befo re they can be affixed) or avoidable steps which

533 First written submission of Honduras, 16 March 2004, para. 84.
534 First oral statement of Honduras, para. 48.
535 First written submission of Honduras, 16 March 2004, para. 78.
536 Ibid., para. 79. See physical evidence provided by Honduras, marked Exhibits HOND-23(a) to
23(c), HOND-24(a) to 24(c), and HOND-25(a) to 25(n).
537 First written submission of Honduras, 16 March 2004, paras. 81 and 82.

are the result of the technology used by the importer. In its view, the importer could avoid unpacking
cigarettes from cartons before affixing stamps, if it packaged individual cigarette packets into boxes.
7.175 The Dominican Republic expresses its opinion th at, even assuming that the cost estimates
provided by Honduras are correct, and assuming furthe r that they cannot be reduced by reasonable
means, the effect that the tax stamp requirement has on impor ters is negligible. Based on Honduras's
own estimates, it calculates that the annual cost of complying with the tax stamp requirement for the
Honduran firm exporting cigarettes into the Dominican Republic would be US$65,641. This importer
is part of the second largest tobacco company in the world with 15 per cent of the world market. The
world sales of this tobacco company were over $3 7 billion in 2003. In the Dominican Republic's
opinion, the measure is commercially irrelevant and lacks any protective effect, as demonstrated by
the fact that imports by the Honduran firm into the Dominican Republic increased by more than 80
per cent in value in 2003, compared with the previous year.
7.176 Honduras rebuts the latter arguments by identifyi ng the specific steps that both domestic
producers and importers take in their production an d packaging processes, and signalling the specific
additional steps that in its view importers have to adopt as a direct result of the tax stamp requirement.
Honduras has also produced a statement from the priv ate exporter of cigarettes into the Dominican
Republic, who claims that the wrapping is need ed to avoid packets deteriorating during the
manufacturing process and when the cartons are opened in the country of destination in order to affix
the tax stamps. The exporter also claims that, wit hout the wrapping, the packets would be exposed to
environment conditions without the protection affo rded by the cellophane, which would have an
adverse effect on the product. Without proper wr apping, cigarettes would lose their firmness and
moisture-holding properties and their visual qualit y, as well as being more prone to damage during
transit. They would not therefore meet the qua lity standards acceptable to the consumers in the
Dominican Republic.
7.177 The Dominican Republic also argues that the additional steps performed by importers are the
result of inherent differences in the normal cond itions under which imported products compete with
domestic products, and as such they are inevitably lin ked to the condition of imported products. In its
view, costs associated with compliance with legiti mate regulatory policies and laws of an importing
country should not be considered "additional costs" . Those costs are an unavoidable consequence of
trading goods across borders and a result of the geographical and jurisdictional circumstances that
separate importers from domestic producers. It is incumbent on rational economic players to factor
those costs into their total cost of production and to take the necessary step s to reduce the costs and
thus increase their margin of profit.
7.178 Honduras replies that the additional costs result from the imposition of the tax stamp
requirement and are not inherent costs that arise from doing business. In Honduras's view, the
inherent costs of doing business would include freight charges and insurance premiums. Any costs
incurred as a result of governmental action could not be considered "inherent costs".
7.179 Honduras claims additionally that the fact that the stamp on imported cigarettes is placed over
the cellophane on each individual packet aestheti cally detracts from the overall presentation of the
final product. Cigarettes manufactured in the Domi nican Republic are allowed to have the tax stamp
added to the packet before the cellophane wrap is applied and during the production process. Stamps
are uniformly affixed by machine under the cellophane wrapping of each individual packet of
cigarettes. However, because of the tax stamp requ irement, in the case of imports, such stamps are
affixed manually on the cellophane wrapping of each individual packet to minimize costs. Inevitably,
the result is not uniform and the risk of technical and other imperfections is increased. As a result, for
purposes of final presentation to the end consum er, imported cigarettes are not as attractively
packaged as domestic cigarettes and conditions of competition are distorted to the detriment of
imported cigarettes at the point of sale to end cons umers. Aesthetics are an important element in
competition. Honduras admits that, through the use of a different technology, imported cigarettes

could also be packaged in a similar manner to domestic cigarettes, by unw rapping and rewrapping
each individual packet, but this would entail substantial costs and investment.
(ii) Formally equal treatment
7.180 Both parties agree that the tax stamp requirement – i.e. the requirement that a tax stamp must
be affixed on cigarette packets in the territory of the Dominican Republic and under the supervision of
Dominican Republic tax authorities – applies to both domestic and imported cigarettes and is, as such,
a formally identical requirement.
7.181 The Panel notes, however, that in the view of the complaining party, this formal equality itself
results in less favourable treatment being accorded to imported cigarettes as compared to domestic
cigarettes, since tax stamps may be affixed on pack ets of domestic cigarettes as part of the production
process, while in the case of imported cigarettes an additional process has to be undertaken, which
entails added costs.
7.182 The Panel agrees that the relevant test for whether a measure is consistent with Article III:4 of
the GATT is not whether the measure accords a tr eatment which is formally the same for both
imported and like domestic products, but rather wh ether it accords a treatment for imported products
which is not less favourable than the one granted to like domestic products. In fact, as noted by a
previous panel, there are cases in which formally equal rules may accord a treatment for imported
products which is less favourable than the one granted to like domestic products:
"[T]here may be cases where the application of formally identical legal provisions
would in practice accord less favourable treatment to imported products and a
contracting party might thus have to appl y different legal provisions to imported
products to ensure that the treatment ac corded to them is in fact no less
favourable …"
538
7.183 The Panel thus considers that the fact that the tax stamp requirement is applied equally – i.e.
in a formally identical manner – to domestic a nd imported cigarettes does not automatically make it
compatible with Article III:4. The Panel then need s to look at whether that formally equal measure
results in a treatment that is less favourable for imported cigarettes.
(iii) Additional steps
7.184 The Panel considers that there is evidence that there are some steps performed by importers,
specifically associated with compliance with the tax stamp requirement, which are not necessary for
domestic producers, i.e. those related to unpackin g and repacking of boxes in order to affix the
stamps. Domestic producers of cigarettes are able to affix tax stamps as part of their production
process. They are thus relieved of having to unwrap cigarette packages in order to affix stamps and of
later having to rewrap those packages.
7.185 The Panel also notes that it is satisfied with the evidence presented by Honduras on the
reasons argued by the private exporter to why ci garettes cannot be exported between the countries
concerned, either unpackaged (loo se) or packaged but not over-wr apped in cellophane. The Panel
finds no reason to doubt the technical explanati on on the justification for wrapping the cigarette
packages in cellophane. The evidence presented by Honduras coincides with the common knowledge
that tobacco products are delicate and may lose their physical characteristics, including their moisture-
retaining characteristics and visual appeal for consumers, if they are not conserved properly.
Additionally, the Panel considers that it would not be reasonable to presume that a private exporter
would engage in additional steps and assume additional costs in its production process without

538 GATT Panel Report, US – Section 337, para. 5.11.

justification. The Panel is thus satisfied by the evidence that cigarettes could not be exported either
loose or in unwrapped packets, without having the quality of the product altered. As a result, the
affixation of tax stamps on indi vidual packets in the territory of the Dominican Republic would
require, in the case of imported cigarettes, that cigarette packages be unwrapped before the stamps are
affixed, and later rewrapped.
7.186 For the preceding reasons, the Panel considers that Honduras has presented a prima facie case
that the tax stamp requirement imposes on importers of cigarettes the burden of performing additional
steps to those performed by domestic producers of the like products. The Dominican Republic has
not shown that the additional steps undertaken by the importer are either avoidable, or the result of the
technology used by importers. Rather, in the Pa nel's view, they are related to the tax stamp
requirement itself.
(iv) Inherent differences in normal conditions of competition between imported and domestic
products
7.187 The Panel does not consider that the Dominican Republic has demonstrated that the costs
resulting from the tax stamp requirement can be cons idered as "inevitably linked to the condition of
imported products". On the contrary, they are the result of a measure adopted voluntarily by a
Member. The Dominican Republic could have chosen not to impose a tax stamp requirement, or to
have imposed a different type of tax stamp requirement. The Pane l therefore does not find that the
measure is a necessary result from inherent di fferences in the normal conditions under which
imported products compete with domestic products.
(v) Additional costs
7.188 The Panel notes that the Dominican Republic has not disputed Honduras's assertion that
complying with the tax stamp requirement may impl y additional costs for the importer of almost 10
per cent of the c.i.f. average price of the products , when the equivalent costs for domestic producers
would be one hundredth of that amount, i.e. 0.1 per cent of the c.i.f. average price of the products.
7.189 The Panel is not convinced about the relevance of the comparison, suggested by the
Dominican Republic, between the additional costs ge nerated on importers by compliance with the tax
stamp requirement and the world sales of those importers. Nor does it consider that the fact that those
importers have increased their exports to the Domi nican Republic necessarily means that the measure
does not grant a less favourable treatment to imports.
7.190 The Panel recalls that the Appellate Body has stated that:
"The broad and fundamental purpose of Article III is to avoid protectionism in the
application of internal tax and regulatory measures… Toward this end, Article III
obliges Members of the WTO to provide equality of competitive conditions for
imported products in relation to domestic products… Article III protects expectations
not of any particular trade volume but ra ther of the equal competitive relationship
between imported and domestic products."
539
7.191 In light of the preceding arguments, the Panel c onsiders that Article III:4 does not call for an
examination of the impact of a measure on the glob al sales of a particular firm, but rather on the
impact that the measure may have on the competitive conditions for imported pr oducts in relation to
domestic products in the relevant market. In the pr esent case, the relevant market would be that of
cigarettes in the Dominican Republic. It is thus i rrelevant whether the costs of complying with the
measure may be negligible in relation to the global sales of an importer.

539 Appellate Body Report, Japan – Alcoholic Beverages II, p.16.

7.192 Similarly, the Panel is not persuaded by th e argument concerning the increase of exports of
cigarettes from Honduras to the Dominican Republic. Even if imports have increased, that fact does
not per se exclude the possibility that conditions of competition between imported and domestic
products in a particular market could still be affect ed. Arguably, imports could have increased even
further, had the imported products not received a tr eatment that was less favourable than the one
accorded to like domestic products.
(vi) Aesthetic presentation of the products
7.193 The Dominican Republic has not disputed Honduras's argument that placing the stamp on
imported cigarettes over the cellophane on each i ndividual packet aesthetically detracts from the
overall presentation of the final product.
540 Honduras has provided physical evidence of packets of
imported cigarettes after the affixation of the stamp in the Dominican Republic, as well as evidence of
packets of domestic cigarettes, in order to highl ight how, in its view, from an aesthetic standpoint,
domestic cigarettes look better packaged than imported cigarettes.541
7.194 The Panel is satisfied with the evidence that from an aesthetic point of view, the tax stamp
requirement results in imported cigarette packets having a less smooth presentation than like domestic
cigarettes. The Panel is of the view that, othe r conditions being equal, a consumer may prefer a
product that is more attractively packaged over one that is less attractively packaged. While the
importer could surely engage in additional processes to produce a cigarette packet that is similarly
presented to the like domestic product, this would in turn entail further additional costs and the less
favourable treatment for imported products would thus still exist.
(vii) Less favourable treatment
7.195 In order to determine whether the requirement th at tax stamps be affixed only in the territory
of the Dominican Republic and under the supervis ion of tax authorities accords less favourable
treatment to imported cigarettes than to like domest ic products, the Panel is guided by the statement
from the Appellate Body that the assessment should focus on examining "whether a measure modifies
the conditions of competition in the relevant market to the detriment of imported products".542
7.196 In this respect, the Panel finds that, alt hough the tax stamp requirement is applied in a
formally equal manner to domes tic and imported cigarettes, it does modify the conditions of
competition in the marketplace to the detriment of imports. The tax stamp requirement imposes
additional processes and costs on imported products. It also leads to imported cigarettes being
presented to final consumers in a less appealing manner.
7.197 The Panel notes that, in this case, the differe nces in the conditions between imported and
domestic products mean that the Dominican Republic should not apply the tax stamp requirement in a
formally identical manner that does not take thos e differences into account, since this would, in
practice, accord less favourable treatment to imported products. On the contrary, the Dominican
Republic could have chosen to apply the requireme nt in a different manner to imported products, to
ensure that the treatment accorded to them is de facto not less favourable.
7.198 Therefore, for the reasons indicated above, the Panel concludes that the requirement imposed
by the Dominican Republic that a tax stamp be affixe d to all cigarette packets in its own territory and
under the supervision of the local tax authoriti es accords less favourable treatment to imported

540 See physical evidence provided by Honduras, mark ed Exhibits HOND-24(a) to 24(c), HOND-25(a)
to 25(n), and HOND-27(a) to 27(n).
541 See physical evidence provided by Honduras, mark ed Exhibits HOND-24(a) to 24(c), HOND-25(a)
to 25(n), and HOND-27(a) to 27(n).
542 Appellate Body Report, Korea –Various Measures on Beef, para. 137.

cigarettes than that accorded to the like domestic pr oducts, in a manner inconsistent with Article III:4
of the GATT 1994.
(viii) Protective application
7.199 The Dominican Republic claims that Article III:1 has a particular contextual significance in
interpreting Article III:4, so the Panel must c onsider whether the tax stamp requirement has a
protective application, i.e. whether it is applied so as to afford protection to domestic producers. In its
view, it is up to Honduras to provide evidence to demonstrate that the measure has protective
application and Honduras has not submitted evidence to establish that the tax stamp requirement is
applied so as to afford protection to domestic producers of cigarettes. The Dominican Republic
considers that an examination of the design, architecture, and revealing structure of the requirement to
affix a stamp in the territory of the Dominican Republic quickly reveals that the measure is not
applied so as to afford protection to domestic producers.
7.200 Honduras replies by arguing that protection affo rded to domestic production should not be a
decisive element in establishing a violation of Article III:4. In its opinion, since Honduras has
established that the tax stamp requirement accords "less favourable treatment" to imported cigarettes,
the Panel should likewise conclude that the measure is applied "so as to afford protection to domestic
production".
7.201 The Panel recalls in this respect the opinion of the Appellate Body:
"[In order to prove inconsistency with Article III:4, a] ...complaining Member must ...
establish that the measure acco rds to the group of 'like' imported products 'less
favourable treatment' than it accords to the group of 'like' domestic products. The
term 'less favourable treatment' expresses the general principle, in Article III:1, that
internal regulations 'should not be applied … so as to afford protection to domestic
production'. If there is 'less favourable treatment' of the group of 'like' imported
products, there is, conversely, 'protection' of the group of 'like' domestic products."
543
7.202 Having reached the conclusion that the ta x stamp requirement accords less favourable
treatment to imported cigarettes than that accorded to like domestic products, the Panel thus finds that
there is protection of the like domestic products. The Panel does not consider it necessary to make a
separate and additional determination on whether the tax stamp requirement has protective application
or is applied so as to afford protection to domest ic producers of cigarettes. Indeed, the Appellate
Body has expressed that:
"Article III:4 does not specifically refer to Article III:1. Therefore, a determination of
whether there has been a violation of Article III:4 does not require a separate
consideration of whether a measure 'afford[s] protection to domestic production'."544
3. Whether the tax stamp requirement is justified under Article XX(d) of the GATT 1994
(a) Arguments of the parties
7.203 The Dominican Republic requests that, should the Panel find that the tax stamp requirement is
inconsistent with Article III:4 of the GATT 1994, it should nonetheless find that the measure is
justified by Article XX(d) of the GATT. In the Dominican Republic's opinion, the requirement is a
measure that is necessary to secure complianc e with the Dominican Republic tax laws and
regulations, which themselves are consistent with th e GATT, and to prevent smuggling of cigarettes.

543 Appellate Body Report, EC – Asbestos, para. 100.
544 Appellate Body Report, EC – Bananas III, para. 216.

The tax stamp would serve as a mark to alert the Dominican Republic tax authorities that the
applicable taxes have been collected and would ensure that cigarettes continue to enter the Dominican
Republic through regular and leg itimate channels of commerce, preventing smugglers from selling
unstamped and undeclared cigarettes in the domestic market. The Dominican Republic argues that
the collection of tax revenue (and, conversely, th e prevention of tax evasion) is a most important
interest for any country and particularly for a developing country such as the Dominican Republic.
The Dominican Republic argues that there is interna tional agreement that tax stamps are a legitimate,
internationally recognized method to prevent the sm uggling of cigarettes and the resulting loss of tax
revenue. In its opinion, the effective enforcement of the measure requires the presence of inspectors
from its tax authority, the Dirección General de Impuestos Internos (the Directorate General of
Internal Taxes, DGII), at the production facilities of domestic producers and .at the facilities of
importers of cigarettes at the time the stamps are affixed. The Dominican Republic has also expressed
that there is evidence that allowing tax stamps to be shipped and affixed abroad would result in
forgery of such tax stamps and smuggling of the products in question. The Dominican Republic
argues that it has no reasonable GATT-consistent alternative for dealing with the problem of
smuggling and tax evasion in the case of cigarettes. None of the possible alternatives can secure the
same zero tolerance level of enforcement that th e Dominican Republic has chosen to pursue with
regard to tax collection and the prevention of ciga rette smuggling, and to which it is entitled. One
possible alternative would be to allow stamps to be affixed abroad. In the Dominican Republic's
opinion, this would lead to smuggling, forgery and tax evasion. Another alternative is to have an
inspector in each of the cities in the world in wh ich cigarettes are or could be produced for export to
the Dominican Republic, which could not be reas onably expected of the Dominican Republic.
Moreover, in the Dominican Republic's view, the requirement is not applied in a manner that
constitutes either arbitrary or unjustifiable discrimination between countries where the same
conditions prevail, nor a disguised restriction on international trade.
7.204 Honduras replies to this defence by arguing th at the Dominican Republic has not established
that the tax stamp requirement is justified under Artic le XX(d) as is its burden, since Article XX(d) is
an affirmative defence. In Honduras's view, the Dominican Republic has not demonstrated that the
tax laws and regulations that would be enforced through the requirement are consistent with the
GATT, nor has it demonstrated that the requirement is indeed a measure to secure compliance with
those tax laws and regulations. Honduras further adds that, in its view, the Dominican Republic's
Selective Consumption Tax, as described in Hondur as's request for the establishment of a panel, is
inconsistent with the Dominican Republic's obliga tions as set out in Articles III:2, III: 4, X:1 and
X:3(a) of the GATT. Honduras argues additionally that the tax stamp requirement is not "necessary"
to secure compliance with the tax laws and regulat ions of the Dominican Republic. Honduras argues
that the Dominican Republic has less trade-restrictiv e alternatives available for use to enforce a tax
stamp requirement. For example, Honduras mentions th at, just as tax stamps are made available to
domestic producers to enable them to affix the st amps in the course of the actual production process,
they could also be made available to producers ab road for affixation on packets of cigarettes in the
course of their own production process, prior to importation into the Dominican Republic. The
authenticity of the stamps could be verified at th e time of importation. Moreover, just as domestic
producers are held accountable and are required to k eep track of their inventory of tax stamps, the
same conditions could be imposed on importers. As an added precaution, and as an alternative which
is also less trade-restrictive, Honduras proposes that the Dominican Republic could resort to pre-
shipment inspection and certification, through a reputa ble company, at the expense of the importer, in
order to ensure that the tax stamps of the Dominican Republic are duly affixed to cigarettes in the
exporting country. Finally, Honduras claims that the Dominican Republic has not demonstrated that
the tax stamp requirement is not applied in a manne r which would constitute a means of arbitrary or
unjustifiable discrimination.
(b) Article XX(d) of the GATT 1994
7.205 According to paragraph (d) and the chapeau
 of Article XX of the GATT 1994:

"Subject to the requirement that such me asures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prev ail, or a disguised restriction on
international trade, nothing in this Agre ement shall be construed to prevent the
adoption or enforcement by any contracting party of measures: [...]
(d) necessary to secure compliance with laws or regulations which
are not inconsistent with the provisions of this Agreement, including
those relating to customs enfo rcement, the enforcement of
monopolies operated under paragraph 4 of Article II and
Article XVII, the protection of patents, trade marks and copyrights,
and the prevention of deceptive practices;"
7.206 As the Appellate Body has explained, the anal ysis of a measure under one of the paragraphs
of Article XX is "two-tiered":
"In order that the justifying protection of Article XX may be extended to it, the
measure at issue must not only come under one or another of the particular exceptions
-- paragraphs (a) to (j) -- listed under Ar ticle XX; it must also satisfy the
requirements imposed by the opening clauses of Article XX. The analysis is, in other
words, two-tiered: first, provisional justif ication by reason of characterization of the
measure under [in that case] XX(g); second, further appraisal of the same measure
under the introductory clauses of Article XX..."
545
7.207 More specifically with relation to paragraph (d), the Appellate Body has also stated that:
"For a measure... to be justified provisiona lly under paragraph (d) of Article XX, two
elements must be shown. First, the measure must be one designed to 'secure
compliance' with laws or regulations that are not themselves inconsistent with some
provision of the GATT 1994. Second, the measu re must be 'necessary' to secure such
compliance. A Member who invokes Article XX(d) as a justification has the burden
of demonstrating that these two requirements are met."546
7.208 The Panel will thus examine the Dominican Republic's arguments under Article XX(d), by
looking first at whether the tax stamp requirement is necessary to secure compliance with the tax laws
and regulations that have been identified by the Do minican Republic. Only if the Panel finds that the
measure is necessary to secure compliance with the Tax Code of the Dominican Republic and
therefore is provisionally justifiable under Article XX(d), would it proceed to examine whether it also
meets the requirements of the chapeau of the Article, i.e. whether the different treatment constitutes a
means of "arbitrary or unjustifiable discriminati on between countries where the same conditions
prevail", or a "disguised restriction on international trade."
(c) Laws and regulations which are not inconsistent with the provisions of the GATT 1994
7.209 In order to be justified by paragraph (d) of Article XX of the GATT 1994, a measure needs to
be "necessary" to secure compliance with laws or regulations which are not inconsistent with the
provisions of the GATT. This in turn means that the Dominican Republic has to prove that three
conditions are met: (i) that the tax laws and re gulations (which would be enforced through the
requirement) are not inconsistent with the GATT; (ii) that the tax stamp requirement is a measure to
secure compliance with those tax laws and regulations of the Dominican Republic; and, (iii) that the
tax stamp requirement is necessary to achieve that objective.

545 Appellate Body Report, US – Gasoline, p. 22.
546 Appellate Body Report, Korea – Various Measures on Beef, para. 157.

7.210 The Panel notes that the Dominican Republic has claimed that the tax stamp requirement
secures compliance with its tax laws and regulati ons generally, and more specifically with the
provisions governing the Selective Consumption Tax. These tax laws and regulations have not been
found to be inconsistent with provisions of the GATT. In the present case, Honduras has made claims
against the Dominican Republic's laws and regulati ons governing the Selective Consumption Tax.
However, those claims are limited to a specific as pect of those laws and regulations, namely the
manner in which the Dominican Republic determines the value of imported cigarettes for the purpose
of applying the Selective Consumption Tax. The tax stamp requirement is not specifically linked to
that particular aspect of the laws and regulations.
7.211 In conclusion, the Panel considers that for the purpose of examining the Dominican
Republic's arguments under Article XX(d), it may preliminarily assume that the tax laws or
regulations, which would be enforced through the tax stamp requirement, are not inconsistent with the
provisions of the GATT.
(d) "Necessary" to secure compliance with tax laws and regulations
7.212 The Panel will now examine whether the tax stamp requirement is "necessary" to secure
compliance with the Dominican Republic's tax laws and regulations.
7.213 The Panel begins by recalling several statements made by the Appellate Body. On the one
hand, the Appellate Body has clarified that, in order to be considered "necessary" to secure
compliance, a measure does not need to be "indispen sable". On the other hand, it should not just be
simply "making a contribution to". In the words of the Appellate Body:
"We believe that, as used in the context of Article XX(d), the reach of the word
'necessary' is not limited to that which is 'i ndispensable' or 'of absolute necessity' or
'inevitable'. Measures which are indispensable or of absolute necessity or inevitable
to secure compliance certainly fulfil the requirements of Article XX(d). But other
measures, too, may fall within the ambit of this exception. As used in Article XX(d),
the term 'necessary' refers, in our view, to a range of degrees of necessity. At one end
of this continuum lies 'necessary' understood as 'indispensable'; at the other end, is
'necessary' taken to mean as 'making a contribution to'. We consider that a 'necessary'
measure is, in this continuum, located significantly closer to the pole of
'indispensable' than to the opposite pole of simply 'making a contribution to'."
547
7.214 The Appellate Body has also clarified that th e necessity of a measure may also be examined
in the light of factors such as: the relative impor tance of the common interests or values that the law
or regulation to be enforced is intended to protect (the more vital or important those common interests
or values are, the easier it would be to accept as "necessary" a measure desi gned as an enforcement
instrument); the extent to which the measure cont ributes to the realization of the end pursued, the
securing of compliance with the law or regulation at issue (the greater the contribution, the more
easily a measure might be considered to be "necessary"); and, the restrictive impact of the measure on
imported goods (a measure with a relatively sm all impact upon imported products might more easily
be considered as "necessary" than a measure with inte nse or broader restrictive effects). Again, in the
words of the Appellate Body:
"In appraising the 'necessity' of a measure..., it is useful to bear in mind the context in
which 'necessary' is found in Article XX( d). The measure at stake has to be
'necessary to ensure compliance with laws and regulations… , including those
relating to customs enforcement, the en forcement of [lawful] monopolies… , the
protection of patents, trade marks and copyrights, and the prevention of deceptive

547 Appellate Body Report, Korea – Various Measures on Beef, para. 161.

practices'. (emphasis added) Clearly, Article XX(d) is susceptible of application in
respect of a wide variety of 'laws and regulations' to be enforced. It seems to us that a
treaty interpreter assessing a measure claime d to be necessary to secure compliance
of a WTO-consistent law or regulation may, in appropriate cases, take into account
the relative importance of the common interests or values that the law or regulation to
be enforced is intended to protect. Th e more vital or important those common
interests or values are, the easier it would be to accept as 'necessary' a measure
designed as an enforcement instrument... Th ere are other aspects of the enforcement
measure to be considered in evaluating that measure as 'necessary'. One is the extent
to which the measure contributes to the realization of the end pursued, the securing of
compliance with the law or regulation at issue. The greater the contribution, the more
easily a measure might be considered to be 'necessary'. Another aspect is the extent
to which the compliance measure produces restrictive effects on international
commerce,[footnote omitted] that is, in respect of a measure inconsistent with
Article III:4, restrictive effects on imported goods. A measure with a relatively slight
impact upon imported products might more easily be considered as 'necessary' than a
measure with intense or broader restrictive effects..."
548
7.215 The Panel finds no reason to question the Domi nican Republic's assertions in the sense that
the collection of tax revenue (and, conversely, th e prevention of tax evasion) is a most important
interest for any country and particularly for a developing country such as the Dominican Republic.
The Panel also notes that, although it has already found that the tax stamp requirement modifies the
conditions of competition in the marketplace to th e detriment of imported cigarettes, Honduras has
still been able to export cigarettes to the Dominican Republic and, in fact, its exports have increased
quite significantly over the last few years. So th e Panel may assume that the measure has not had any
intense restrictive effects on trade. Having said th at, the Panel will focus its analysis on whether the
tax stamp requirement is in fact necessary to secure compliance with the Dominican Republic tax
laws and regulations and to prevent smuggling of cigarettes.
7.216 In support of its argument on the internationa l recognition of tax stam ps as a legitimate
method to prevent the smuggling of cigarettes and the resulting loss of tax revenue, the Dominican
Republic has cited a 2002 document from a non- governmental association, the International
Conference on Illicit Tobacco Trade (ICITT)
549, as well as the World Health Organization (WHO)
Framework Convention on To bacco Control of 2003. 550 Both parties have agreed that these
documents are not legally binding on them. The ICITT document points out that labelling "is
particularly useful to constrain the distribution of contraband and as such is necessary to identify the
manufacturer, country of origin/destination, and the le gal status of the product (i.e. tax or duty paid or
exempt)". The ICITT document identifies "tax stam ps" as one practice available for the purpose of
labelling. The WHO Framework Convention on Tob acco Control, which has not entered in force,
calls upon Parties to "…ensure that all unit packets and packages of tobacco products and any outside
packaging of such products are marked to assist Parties in determining the origin of tobacco products,
and in accordance with national law and relevant bila teral or multilateral agreements, assist Parties in
determining the point of diversion and monitor, document and control the movement of tobacco
products and their legal status." The WHO Fr amework Convention also calls upon Parties to
"monitor and collect data on cross-border trade in tobacco products, including illicit trade, and
exchange information among customs, tax and other authorities, as appropriate". In the view of the
Dominican Republic, properly enforced tax stamps are required to mark, monitor, and collect data
regarding cross-border trade in cigarettes in accordance with the WHO Framework Convention.

548 Appellate Body Report, Korea – Various Measures on Beef, paras. 162-63.
549 See International Conference on Illicit Tobacco Trade, supra note 46.
550 See WHO Framework Convention on Tobacco Control, supra note 47 (emphasis added).

7.217 In light of the available information, the Panel does not disagree with the Dominican
Republic's argument that tax stamps may be a useful instrument to monitor tax collection on cigarettes
and, conversely, to avoid tax evasion. Indeed, as e xpressed by both parties, several countries have tax
stamp regulations applicable to products such as matches, alcoholic beverages and tobacco products.
As the Dominican Republic has noted, goods subjec t to tax stamp requirements tend to be mass-
consumed products, that are susceptible to being sm uggled. These products tend to be subject to high
levels of taxes, which make them an important so urce of governmental revenue, but also make them
more prone to smuggling.
7.218 Even admitting that tax stamps can generally be used to monitor tax collection, the specific
tax stamp requirement in place in the Dominican Re public would still need to be justified. As
mentioned, under the Dominican Republic's tax stamp requirement, tax stamps must be affixed in the
Dominican Republic and under the supervision of the Dominican Republic tax authorities.
7.219 The Dominican Republic has argued that the eff ective enforcement of its legislation requires
the presence of inspectors from its tax authority, the Dirección General de Impuestos Internos (the
Directorate General of Internal Taxes, DGII), at the production facilities of domestic producers and
the facilities of importers of cigarettes at the time th e stamps are affixed. It has also expressed that
there is evidence in the Dominican Republic that allowing tax stam ps to be shipped and affixed
abroad would result in forgery of such tax stamps and smuggling of the products in question. It has
further added that it does not have the right nor th e resources to relocate DGII officials to foreign
countries to enforce its own domestic laws abroad. Su ch an alternative would not be sufficient for the
Dominican Republic to achieve the zero tolerance le vel of enforcement that it has chosen to pursue
with regard to tax collection and cigarette smuggling.
7.220 However, Honduras claims that there are other less -trade restrictive alternatives available to
the Dominican Republic that would avoid illicit trade in tobacco products, such as allowing stamps to
be affixed in the exporting country or permitting pre-shipment inspections.
(e) The presence of tax authority inspectors and the forgery of tax stamps
7.221 In the Dominican Republic's view, affixing stam ps abroad may result in the forgery of tax
stamps. When the stamps are affixed in front of a DGII agent, there is no risk of forgery, whereas
allowing stamps to be affixed abroad has resu lted, in the case of alcohol, in smuggling and tax
evasion, as well as in forgery of tax stamps. The Dominican Republic has presented two sets of
evidence related to smuggling in alcohol products, as support for its assertions.
7.222 As Exhibit DR-8, the Dominican Republic has submitted "Evidence of forgery, smuggling,
and tax evasion resulting from allowing the affixatio n of Dominican Republic tax stamps abroad for
alcoholic beverages". The documents contain inform ation on a batch of alcoholic beverages seized in
a commercial establishment in July 2001, as well as a memo DAT-No. 46, dated 6 April 2004, signed
by the person in charge of the Department of Alcohol and Tobacco of the DGII.
551 The Dominican
Republic claims that this exhibit contains physi cal evidence of forged tax stamps for alcoholic
beverages. However, these documents do not suggest that forgery of tax stamps was an element. The
alcoholic drinks seized in July 2001 seem to have been smuggled from a neighbouring country.
Forgery of tax stamps is not mentioned in the documents.
7.223 Memo DAT-No. 46, dated 6 April 2004, is also included as part of Exhibit DR-8. In that
memo, the Department of Alcohol and Tobacco of the DGII explicitly states that only the National
Treasury would be in a position to confirm whether a set of tax stamps were forged. The same memo
expresses doubts on the validity of a group of ½ cent st amps, based on the fact that the stamps have a
seven figure number, whereas since 2002 tax stamps ha ve eight figure numbers and that the type of

551 See information submitted by the Dominican Republic as Exhibit DR-8.

numbers printed on the stamps is different from the type of numbers usually delivered by the National
Treasury. The Panel does not find, however, that this memo adds any conclusive elements as relate to
the relationship between the seizure of alcoholic beverages and the possible forgery of tax stamps,
since the seizure occurred in the year 2001, wher eas the doubts expressed about the stamps refer to
the format of stamps since 2002.
7.224 As Exhibit DR-29, the Dominican Republic h as submitted "Further evidence of smuggling of
alcoholic beverages into the Dominican Republic". The documents contain information on a batch of
garlic and alcoholic beverages se ized in March 2002. Again, no thing in these documents suggests
that forgery of tax stamps was an element. Ind eed, in this case, the merchandise seized was not only
alcoholic beverages, but also garlic, which does not carry tax stamps.
7.225 The Dominican Republic claims that the manne r in which the official records in the
Dominican Republic are kept makes it difficult for the authorities to provide an overall or general
assessment of the extent of forgery of tax stamps and smuggling of alcoholic beverages. However, it
indicates that there is physical evidence of forged tax stamps for alcoholic beverages (contained, inter
alia, in Exhibit DR-8). By contrast, there would be no evidence of forgery of tax stamps for
cigarettes. The only difference between the two is th at stamps for alcoholic beverages can be affixed
outside the territory of the Dominican Republic, whereas stamps for cigarettes can only be affixed in
the presence of inspectors from the tax authorities. Therefore, the Dominican Republic concludes that
"not requiring that stamps be affixed in the presence of DGII inspectors leads to forgery of tax stamps.
Conversely, requiring that tax stamps be affixed in the presence of DGII inspectors in the territory of
the Dominican Republic would possibly eliminate and certainly reduce the likelihood of tax stamps
being forged."
552
7.226 Even assuming arguendo that Exhibit DR-8 contains evidence that forgery of tax stamps may
occur, the Panel finds no supporting evidence in Exhibits DR-8 and DR-29 to the Dominican
Republic's assertion that there is a causal link betw een allowing stamps to be affixed abroad and the
forgery of tax stamps. The fact that two events may occur simultaneously (affixation of tax stamps
abroad and forgery of tax stamps) does not necessar ily imply that those two events are correlated,
much less that they are causally linked. On the contrary, that same eviden ce seems to indicate that
smuggling and tax evasion may occur even in products not usually subject to ta x stamps (i.e. garlic),
and to emphasize the importance of police enforcement of tax laws and regulations, even at the point
of commercial establishments. While tax stamps may be a useful instrument for that enforcement, it
does not necessarily follow that those stamps have to be affixed in the territory of the Dominican
Republic and in front of a DGII agent. In the opi nion of the Panel, the tax stamp requirement, as
currently in place in the Dominican Republic, woul d only serve to guaran tee that those tobacco
products that enter legally into the country and go through the proper customs procedures will carry
authentic tax stamps as a proof that the appropriate tax has been paid. That requirement, in and of
itself, would not prevent the forgery of tax stamps, nor smuggling and tax evasion. From the evidence
submitted by the Dominican Republic itself, the Panel w ould be inclined to believe that other factors,
such as security features incorporated into the tax stamps (to avoid forgery of stamps or make it more
costly) and police controls on roads and at differe nt commercial levels (such as at the points of
production, introduction into the country, distribution, and sale), may play a more important role in
preventing the forgery of tax stamps, the tax evasion, and the smuggling of tobacco products.
(f) Alternative instruments
7.227 The Appellate Body has referred to the issue of the "necessity" of a measure in the presence
of other reasonably available, less-GATT inconsistent, measures. In the words of the Appellate Body:

552 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 74,
para. 83.

"In our Report in Korea – Beef , we addressed the issue of 'necessity' under
Article XX(d) of the GATT 1994.[Footnote om itted] In that appeal, we found that
the panel was correct in following the standard set forth by the panel in United States
– Section 337 of the Tariff Act of 1930:
'It was clear to the Panel that a contracting party cannot justify a
measure inconsistent with anothe r GATT provision as 'necessary' in
terms of Article XX(d) if an alternative measure which it could
reasonably be expected to employ an d which is not inconsistent with
other GATT provisions is available to it. By the same token, in cases
where a measure consistent with other GATT provisions is not
reasonably available, a contracting party is bound to use, among the
measures reasonably available to it, that which entails the least
degree of inconsistency with other GATT provisions.'"
553
7.228 Even assuming that the Dominican Republic has chosen to pursue a zero tolerance level of
enforcement with regard to tax collection and ciga rette smuggling, it is the Panel's opinion that the
Dominican Republic, as the party raising this particul ar defence, has not discharged its duty to prove
why other, reasonably-available, less-GATT inconsiste nt, measures would not be able to achieve that
same level of enforcement. More specifically , the Dominican Republic has not proved why, for
example, providing secure tax stamps to foreign exporters, so that those tax stamps can be affixed on
cigarette packets in the course of their own produ ction process and prior to importation into the
Dominican Republic, would not be equivalent to the current tax stamp requirement in terms of
allowing it to secure the same high level of enfo rcement with regard to tax collection and the
prevention of cigarette smuggling. The Panel recalls that, as part of an alternative which would be
less trade-restrictive, Honduras proposed that the Dominican Republic could resort to pre-shipment
inspection and certification, through a reputable compan y, at the expense of the importer, in order to
ensure that the tax stamps of the Dominican Repub lic are duly affixed to cigarettes in the exporting
country. Honduras has presented as Exhibit HOND-29 a letter of 26 April 2004 from the
representative of an international inspection and certif ication company which refers to the availability
of those services.
7.229 The Panel notes additionally that the Dominican Republic argues that the requirement that a
tax stamp be affixed to all cigarette packets in th e territory of the Dominican Republic and under the
supervision of the local tax authorities is necessar y in order to secure a zero tolerance level of
enforcement that the Dominican Republic has chosen to pursue with regard to tax collection and the
prevention of cigarette smuggling, and to which it is entitled. The Dominican Republic, however,
also admits that despite its efforts to curb the smuggling of cigarettes, its country is not exempt from
this problem and has presented evidence that th ere are still documented cases of smuggling of
cigarettes for retail in the Dominican Republic.
554 The Panel thus finds no evidence to conclude that
the tax stamp requirement secures a zero tolerance leve l of enforcement with regard to tax collection
and the prevention of cigarette smuggling.
7.230 Since the Dominican Republic has not proved why other, reasonably available, less-GATT
inconsistent, measures would not be able to achieve that same level of enforcement that it has chosen
to attain, it is the Panel's opinion that the Domi nican Republic has not proven that the tax stamp
requirement is a measure which is "necessary" to secure compliance with the Dominican Republic's
tax laws and regulations.

553 Appellate Body Report, EC – Asbestos, paras. 171.
554 Dominican Republic, First Written Submission to the Panel, 13 April 2004, para. 105. See also,
information submitted by the Dominican Republic as Exhibit DR-16.

7.231 In light of the preceding considerations, and since the tax stamp requirement has not been
found to be a "necessary" measure to secure complia nce with the Dominican Republic's tax laws and
regulations, the Panel does not need to analyse the elements contained in the chapeau of Article XX
of the GATT 1994, i.e. whether the different treatment constitutes a means of "arbitrary or
unjustifiable discrimination between counties where the same conditions prevail", or a "disguised
restriction on international trade."
7.232 In conclusion, the Panel considers that the Domi nican Republic has failed to establish that the
tax stamp requirement is justified under Article XX(d) of the GATT 1994.
4. Conclusion
7.233 For the reasons indicated above, the Panel's overall conclusion with respect to the requirement
that a tax stamp be affixed to all cigarette packet s in the territory of th e Dominican Republic and
under the supervision of the local tax authorities is that the measure is, as such, inconsistent with
Article III:4 of the GATT 1994 and that it is not ju stified under Article XX, paragraph (d) of the
GATT 1994.
F. BOND REQUIREMENT FOR IMPORTERS OF CIGARETTES
1. The measure at issue
7.234 Under Article 376 of the Dominican Republic Tax Code 555 and Article 14 of Decree 79-03 556,
the Dominican Republic imposes the requirement, for both importers and domestic producers of
cigarettes, to post a bond (bond requirement).
7.235 According to Article 376 of the Dominican Republic Tax Code:
"No alcohol and tobacco products may be manufactured in the Dominican Republic
unless the person wishing to do so has previously registered and provided the Tax
Administration with a bond to guarantee compliance with all of the tax liabilities
established pursuant to this Chapter."
7.236 Article 14 (Bond) of Decree 79-03 extends the requi rement to importers of cigarettes and sets
the conditions for the bond:
"For the purposes of Article 376 of the Ta x Code, the amount of the bond shall be
five million pesos (RD$5,000,000) indexed for inflation. Such a bond shall be posted
with the DGII [ Dirección General de Impuestos , Directorate General of Internal
Taxes] both by importers and local manufact urers of alcoholic beverages, beers and
tobacco products and shall be issued by an insurance company or banking institution
accredited in the Dominican Republic."
7.237 The Panel will refer to this measure, as regulat ed in the Dominican Republic legislation, as
the "bond requirement".
2. Main claims and defences
7.238 Honduras claims that the bond requirement is a restriction on the impor tation of cigarettes
into the Dominican Republic that is inconsistent with Article XI:1 of the GATT 1994. Honduras
argues alternatively that, should the Panel consider that the bond requirement is an internal measure,

555 Dominican Republic Tax Code, supra note 10.
556 Decree 79-03, supra note 8.

rather than a restriction on importation, it should find that it is inconsistent with Article III:4 of the
GATT, because it modifies the conditions of competition between imported and domestic cigarettes.
7.239 The Dominican Republic responds that the bond requirement is outside of the scope of
Article XI:1 of the GATT, since it is neither a restriction nor a prohibition on the importation of
cigarettes. In its opinion, the bond requirement is an internal measure that applies equally to imported
and domestic cigarettes, rather than a measure on the importation of cigarettes. The Dominican
Republic additionally claims that the bond requirement is also outside of the scope of Article III:4 of
the GATT, because it does not affect the "internal sale, offering for sale, purchase, transportation,
distribution or use" of imported cigarettes. Should the Panel consider that the bond requirement affects
the internal sale, offering for sale, purchase, tran sportation, distribution or use of cigarettes, the
Dominican Republic argues that it is nevertheless not inconsistent with Article III:4, because it does
not accord less favourable treatment to imported cigarettes than that accorded to like domestic products.
Finally, the Dominican Republic argues that, s hould the Panel find that the bond requirement is
inconsistent with either Article XI:1 or Article III: 4 of the GATT, it should also consider that it is
justified by the general exception provided in Article XX(d) of the GATT, because it is necessary to
secure compliance with Dominican Republic tax laws and regulations which are not inconsistent with
the provisions of the GATT and it is consistent with the chapeau of Article XX.
7.240 Honduras rebuts the Dominican Republic's defence under Article XX(d) of the GATT. In its
view, the Dominican Republic has not discharged its burden of establishing that the bond requirement
is justified under Article XX(d), since it has not pr oven that the requirement is consistent with the
provisions of the GATT, nor has it proven that the bond requirement is a measure to secure
compliance with the Tax Code, including the Selec tive Consumption Tax, the ITBIS and the Income
Tax. Finally, Honduras claims that the Dominican Republic has not proven that the bond requirement
is necessary to secure compliance with the Selective Consumption Tax.
3. Whether the bond requirement is an import rest riction inconsistent with Article XI:1 of
the GATT 1994
(a) Introduction
7.241 Honduras has made alternative claims agains t the bond requirement under Article XI:1 and
Article III:4 of the GATT. Since the latter claim is on ly relevant in the event that the Panel finds that
the measure is not an import restriction, the Panel will begin by considering Honduras's claim under
Article XI:1.
(b) Arguments of the parties
7.242 Honduras claims that the bond requirement is a restriction on the impor tation of cigarettes
into the Dominican Republic that is inconsistent with Article XI:1 of the GATT 1994. Honduras
argues that the measure falls under Article XI:1 of the GATT, rather than under Article III:4, based on
two factors. First, in its opinion the bond require ment is related to "the opportunities for importation
itself, i.e. entering the market". The bond is re quired for both domestic and imported cigarettes prior
to their entry into the domestic market. In Hond uras's view, the bond requirement is a condition for
the importation of cigarettes, that is, importatio n would not be allowed unless the bond requirement
were complied with. It therefore operates as a "restri ction" within the meaning of Article XI:1 of the
GATT. Second, Honduras considers that the bond re quirement falls under Article XI:1 of the GATT,
because the Dominican Republic has acknowledged that it does not affect the internal sale, offering
for sale, or distribution of cigarettes and is therefore not subject to Article III:4.
7.243 The Dominican Republic responds that the bond requirement is outside of the scope of
Article XI:1 of the GATT, since it is neither a restriction nor a prohibition on the importation of
cigarettes. According to the Dominican Republic , Honduras’s argument that the bond requirement is

within the scope of Article XI:1 is based on an incorrect assertion that the bond requirement is a
"condition" for the importation of cigarettes into the Domi nican Republic that applies "prior" to their
importation. The Dominican Republic argues that, under its domestic law, compliance with the bond
requirement is legally irrelevant to the clearance of imports at customs. There is no law or regulation
in the Dominican Republic that states that the bond must be provided as a condition of, or prior to, the
importation of cigarettes. Article 14 of Decr ee 79-03, which extends the bond requirement under
Article 376 of the Dominican Republic Tax Code to importers of alcoholic beverages and tobacco
products, does not state that the bond requirement is a condition for importation of such products, but
only provides that importers and domestic producers of cigarettes alike must post a bond. However,
Article 40 of Decree 79-03, which requires that im porters of cigarettes obtain an import licence from
the DGII and lists the conditions for obtaining th e licence, does not include the posting of a bond as a
condition.
7.244 The Dominican Republic adds that its customs authorities neither require nor check whether
an importer has posted a bond before admitting cigare ttes into the territory. In support of this
assertion, the Dominican Republic has produced evidence to the effect that the firm British American
Tobacco República Dominicana, the sole importer of cigarettes from Honduras had not posted a bond,
nor had it been required by Customs to do so, ye t it had been importing cigarettes from Honduras for
several years.557
7.245 The Dominican Republic thus argues that the bond requirement is an internal measure that
applies equally to imported and domestic cigarettes, rather than a measure "on the importation" of
cigarettes. It recalls the statement from the panel in EC – Asbestos , to the effect that, when the
applied measure leads to the same result for both the imported pro duct and the like domestic product,
it falls within the terms of Note Ad Article III and is therefore subject to Article III:4.
7.246 Finally, the Dominican Republic argues that, even assuming arguendo that the bond
requirement is a measure "on the importation" of cigarettes, Honduras has not established that the
measure prohibits or restricts the importation of cigarettes into the Dominican Republic. To this
effect, the Dominican Republic again recalls the fa ct that the importer of cigarettes from Honduras
has been allowed to import cigarettes into the Do minican Republic and other territories for the past
two years, without having posted the bond. This would demonstrate that the authorities of the
Dominican Republic do not require, either de jure or de facto , the posting of the bond as a pre-
requisite for the admission of cigarettes into the te rritory of the Dominican Republic. The Dominican
Republic concludes that the Panel should find that the bond requirement is not a measure on the
importation of cigarettes a nd is consequently outside the scope of Article XI:1 of the GATT. Should
the Panel find otherwise, the Dominican Republic requests it to rule that the bond requirement is not a
prohibition or restriction on the importation of cigarettes into the Dominican Republic and therefore is
not inconsistent with Article XI:1.
(c) Analysis by the Panel
7.247 According to Article XI:1 of the GATT:
"No prohibitions or restrictions other than duties, taxes or other charges, whether
made effective through quotas, import or export licences or other measures, shall be
instituted or maintained by any contracting party on the importation of any product of
the territory of any other contracting party or on the exportation or sale for export of
any product destined for the territory of any other contracting party."

557 See Certification by the Director General of Customs and Certification by the Directorate General of
Internal Taxes, supra note 120.

7.248 Article XI:1 of the GATT covers prohibitions an d restrictions, other than duties, taxes or
other charges, on the importation or the exportatio n of products. A previous WTO panel recalled
some of the GATT/WTO precedents on Article XI:1 and declared that:
"[T]he text of Article XI:1 is very broad in scope, pr oviding for a general ban on
import or export restrictions or prohibitions 'o ther than duties, taxes or other charges'.
As was noted by the panel in Japan – Trade in Semi-conductors , the wording of
Article XI:1 is comprehensive: it applies 'to all measures instituted or maintained by a
[Member] prohibiting or restricting the impor tation, exportation, or sale for export of
products other than measures that take the form of duties, taxes or other
charges.'[Footnote omitted] The scope of the term 'restriction' is also broad, as seen
in its ordinary meaning, which is 'a limitation on action, a limiting condition or
regulation'."
558
7.249 Although Article XI:1 of the GATT covers pr ohibitions and restrictions imposed on the
importation and exportation of prod ucts, Honduras has clarified that its claim is that the bond
requirement is a restriction on the importation of ci garettes. The Panel will thus seek to determine
whether the bond requirement falls within the scope of Article XI:1 of the GATT, by looking at
whether the measure is a restriction on the importation of cigarettes.
(d) The bond requirement as a restriction on importation
7.250 Honduras bases its argument that the bond requirement is a "restriction" within the meaning
of Article XI:1 of the GATT in the assertion that the measure operates as a pre-condition for the
importation of cigarettes.
7.251 In support of its claim, Honduras has quoted the st atement of a previous panel, to the effect
that:
"The question of whether this form of measure [in the particular case, a trade
balancing condition which did not set an ab solute numerical limit on the amount of
imports that could be made, but limited the value of imports that could be made to the
value of exports that the signatory intende d to make] can appropriately be described
as a restriction on importation turns on the issue of whether Article XI can be
considered to cover situations where products are technically allowed into the market
without an express formal quantitative restri ction, but are only allowed under certain
conditions which make the importation more onerous than if the condition had not
existed, thus generating a disincentive to import."
559
7.252 The Panel agrees with the preceding statement, and recalls the following paragraph of the
same report, in the sense that in order to find whether a particular measure can be described as a
"restriction on importation", it is necessary to iden tify it as a condition that has a limiting effect on
importation itself. In the words of that panel:
"On a plain reading, it is clear that a 'restriction' need not be a blanket prohibition or a
precise numerical limit. Indeed, the term 'restriction' cannot mean merely
'prohibitions' on importation, since Article XI :1 expressly covers both 'prohibition or
restriction'. Furthermore, the Panel considers that the expression ' limiting condition'
used by the India – Quantitative Restrictions panel to define the term 'restriction' and
which this Panel endorses, is helpful in id entifying the scope of the notion in the
context of the facts before it. That phrase suggests the need to identify not merely a

558 Panel Report, India – Quantitative Restrictions, paras. 5.128-5.129.

condition placed on importation, but a condition that is limiting, i.e. that has a
limiting effect. In the context of Article XI, that limiting effect must be on
importation itself."
 560
7.253 From a factual standpoint, the Panel has receive d evidence that for at least two years the
importer of Honduran cigarettes has been able to import into the Dominican Republic from Honduras
and other origins, even without having posted th e bond required by Article 14 of the Decree 79-03.
Indeed, Dominican Republic imports of cigarett es from Honduras have increased significantly during
the last two years, even though the importer had not posted a bond. The Panel does not find evidence
to support Honduras's claim that importation is not allowed into the Dominican Republic unless the
bond requirement is complied with.
7.254 By examining the Dominican Republic regula tions which govern the bond requirement, the
Panel is not convinced that the requirement is a limiting condition on the importation of cigarettes.
7.255 While the domestic regulations have extended to importers the bond requirement – originally
applicable under Article 376 of the Tax Code only to manufacturers of tobacco products –, no
domestic rule establishes that, in the absence of a bond, cigarettes would not be allowed in the
country. If anything, the available evidence points to the contrary, that in practice cigarettes may be
imported even if the importer has not posted a bond. The Dominican Republic has additionally
declared that the failure of an importer to post a bond would lead to the imposition of sanctions for the
non-compliance of formal tax obligations under Article 257 of the Tax Code, but not to the prevention
of imports.
7.256 The Panel notes additionally that the bond requirement is imposed on both domestic
producers and importers of cigarettes. In fact, th e measure is more stringent on domestic producers,
since in their case the bond requirement is an exp licit condition for obtaining a licence. Indeed, under
Article 8 (General provisions) of Decree 79-03, "[a] ny person, company or corporation wishing in the
future to engage in the manufacture or importa tion of alcohol products, or the importation and
manufacture of tobacco products and by-products, sha ll apply to the Directorate-General of Taxes for
authorization to establish that kind of business". While Article 9 (General requirements for installing
wineries and alcohol products a nd tobacco products factories) of Decree 79-03, specifies that "[a]ny
manufacturer of the products specified in the preceding Article must comply with", inter alia, post a
bond "in accordance with Article 14 of these Regula tions", Article 40 (Register and licensing of
importers) has no equivalent obligation for impor ters. Article 35 (Licence for manufacturers of
tobacco products) of Decree 79-03 confirms that the bond is a requisite for domestic manufacturers
wishing to obtain a licence:
"Once the above-mentioned requirements have been fulfilled and the bond referred to
in Article 14 of these Regulations has been posted by the person wishing to engage in
the business of manufacturing tobacco products, the Directorate-General of Internal
Taxes will issue an Official Tobacco Producer Licence. The licence shall be renewed
each year by the producer or manufacturer."
7.257 The Panel notes that, in the case of imported ci garettes, the bond is not enforced either at the
time or at the point of importation. Indeed, unde r Article 14 of the Decree 79-03, the bond is posted
both by importers and local manufacturers with the Directorate General of Internal Taxes, and not
with customs authorities. The Dominican Republic h as informed that, after the bond is posted with
the Directorate General of Internal Taxes, it is then sent to the National Treasury (Tesorería Nacional)
for safekeeping. The Dominican Republic has adde d that it is not the customs authorities, but the
internal tax authorities, who would verify that the bond has been posted.

560 Ibid., para. 7.270.

7.258 Most importantly, the Panel is not persuaded that the bond requirement is a restriction "on the
importation" of cigarettes. Article XI:1 of the GATT does not cover any restriction, but only those
restrictions that are instituted or maintained by any Member "on the importation" (or exportation) of
products. In the expression "on the importation" – r ead in the context of an Article that is entitled
"General Elimination of Quantitative Restrictions" –, the ordinary meaning of the word "on" suggests
that it is a preposition denoting a relation.
561 In that sense, the expres sion "on the importation" would
be akin to "with respect to the importation". Indeed, the panel on India – Autos , considering the
ordinary meaning of the phrase "restriction on importation", reached a similar conclusion. "An
ordinary meaning of the term ' on', relevant to a description of the relationship which should exist
between the measure and the importation of the pro duct, includes 'with respect to', 'in connection,
association or activity with or with regard to'.
562 In the context of Article XI:1, the expression
'restriction… on importation' may thus be appropriately read as meaning a restriction 'with regard to'
or 'in connection with' the importation of the product." 563 Even if, arguendo, the bond requirement
could be considered to be a limiting condition, the Panel still does not find evidence that it is a
condition specifically related to the importation of ci garettes, nor that it is instituted or maintained
"with regard to" or "in connection with" the importation of cigarettes.
7.259 The Panel finds support in its inte rpretation from the text of Note Ad Article III of the GATT.
According to the first paragraph of this Note,
"Any internal tax or other internal charge , or any law, regulation or requirement of
the kind referred to in paragraph 1 which applies to an imported product and to the
like domestic product and is collected or en forced in the case of the imported product
at the time or point of importation, is nevert heless to be regarded as an internal tax or
other internal charge, or a law, regulation or requirement of the kind referred to in
paragraph 1, and is accordingly subject to the provisions of Article III."
7.260 The Panel thus considers that, under Note Ad Article III, even if a measure is collected or
enforced at the time or point of importation, that does not mean it falls outside the scope of Article III,
as long as it applies similarly to the imported product and to the like domestic product. In the present
case, the measure is not even applied at the time or point of importation, which would make it more
clearly fall under Article III.
7.261 With regard to the statement of a previous pane l, to the effect that Article XI of the GATT
applies in cases "where the opportunities for importation itself, i.e. entering the market, are
affected"
564, the Panel considers that the expression "entering the market" was used by that panel as an
expression equivalent to "importation itself". However, there are barriers to entry in a specific market
that do not affect only imports but also domestic supply. In the Panel's view, not every measure
affecting the opportunities for entering the market would be covered by Article XI, but only those
measures that constitute a prohibition or restriction on the importation of products, i.e. those measures
which affect the opportunities for importation itself.
7.262 The fact that the amount of the bond is th e same for domestic producers and importers,
creates an additional reason to doubt that it ma y constitute a restriction on imports. Any added
requirement, particularly if it leads to significant co sts, may constitute a barrier to entry in a specific
market which may affect all possible entrants, no t only importers. However, Article XI:1 of the
GATT does not prohibit all barriers to entry into a ma rket, but only those that constitute prohibitions
or restrictions imposed on the importation or on the exportation of products.

561 The New Shorter Oxford English Dictionary, supra note 52, Vol. II, pp. 1,995-1,996.
562 (Footnote original) Webster's New Encyclopedic Dictionary, 1994 ed.

7.263 Furthermore, the Panel does not consider that a requirement that creates costs which are not
associated with sales (i.e. are decoupled from sales ) would automatically create a disincentive to
increase supply of a specific product. Quite th e contrary, a supplier that has already taken the
decision to enter a market and has incurred a fixed-amount payment would have the incentive to
recover that cost by selling more. So, in principl e, a bond for an amount that is not linked to sales
may be less likely to constitute a restriction on imports. However, a bond for an amount which is tied
to sales (such as seems to be suggested by Honduras) could serve as a disincentive to import. In fact,
as the imports of cigarettes from Honduras have been increasing in the most recent years, the per unit
cost of complying with the bond requirement, has been steadily decreasing. In conclusion, an added
cost that is associated with the volume of sales of imported goods would be more likely to restrict
imports as compared to a cost that is not linked to sales.
7.264 Honduras also argues that the bond requirement falls under Article XI:1 of the GATT,
because, in its opinion, the Dominican Republic acknowledged that the requirement does not affect
the internal sale, offering for sale, or distribu tion of cigarettes and is therefore not subject to
Article III:4. The Panel, however, recalls th at Honduras has made an alternative claim under
Article III:4 of the GATT. Honduras has argued th at, should the Panel consider that the bond
requirement is an internal measure rather than a restriction on importation, it should find that it is
inconsistent with Article III:4 of the GATT, because it modifies the conditions of competition
between imported and domestic cigarettes. As a rebuttal to this specific alternative claim, the
Dominican Republic argues that the bond requirement is outside the scope of Article III:4 because it
does not affect the internal sale, offering for sale, or distribution of cigarettes. The Panel notes that
Honduras itself has argued that parties are allowed to make alternative claims and to raise alternative
defences and that the legal arguments presented by any party in support of a particular claim or
defence cannot, and should not be, in voked against it in the assessment of an alternative claim or
defence. The Panel thus considers that the lega l argument presented by the Dominican Republic that
the bond requirement does not affect the internal sale, offering for sale, or distribution of cigarettes,
should only be analysed in the context of Hond uras's alternative claim under Article III:4 of the
GATT.
7.265 For the preceding reasons, and from the availabl e evidence, the Panel is not persuaded by
Honduras's argument that the bond requirement is rela ted to the opportunities for importation itself of
cigarettes into the Dominican Republic market. Nor is the Panel convinced that the requirement is a
condition for the importation of cigarettes, that is , that importation would not be allowed unless the
bond requirement had been complied with. The Pane l therefore does not consider that there is
evidence that the bond requirement operates as a rest riction on the importation of cigarettes, within
the meaning of Article XI:1 of the GATT.
7.266 In conclusion, the Panel considers that H onduras has failed to establish that the bond
requirement imposed by the Dominican Republic operates as a restriction on the importation of
cigarettes, in a manner inconsistent with Article XI:1 of the GATT 1994.
4. Whether the bond requirement accords less favou rable treatment to imported products
in a manner inconsistent with Article III:4 of the GATT 1994
(a) Arguments of the parties
7.267 Honduras claims that, should the Panel consider that the bond requirement does not fall under
Article XI:1 of the GATT, then it should find that it is inconsistent with Article III:4, because it
accords less favourable treatment to imported cigare ttes than to the like domestic products. In the
opinion of Honduras, the less favourable treatment results from the modification of the conditions of
competition between imported and domestic cigare ttes. The bond requirement creates a disincentive
against importing cigarettes, as compared to buying from domestic producers, for any local buyer who
wishes to purchase them for resale.

7.268 Honduras additionally argues that the bond re quirement also accords less favourable
treatment to importers in the context of the liabilit y and payment for the Selective Consumption Tax.
For both imported and domestic cigarettes, the bon d requirement would be an accessory obligation
related to a principal obligation – the payment of the Selective Consumption Tax. The Selective
Consumption Tax on imported cigarettes is collected in its entirety upon importation. However, the
Selective Consumption Tax on domestic cigarettes may be paid up to the twentieth day of the month
following that in which the sale is made. Therefore, for domestic producers, there is a tax liability the
non-payment of which the bond properly secures. However, for imported cigarettes, since the
Selective Consumption Tax accrues and is immediatel y paid upon importation, there is no similar tax
liability. Furthermore, domestic producers can coll ect the Selective Consumption Tax in advance as
part of the purchase price paid by buyers. Th is accords domestic producers the opportunity to earn
interest income on the Selective Consumption Tax fo r a period of 20-50 days. On the other hand,
importers have to pay the Selectiv e Consumption Tax in advance. Th is entails either financing costs
or opportunity costs on the part of the importers.
7.269 Finally, Honduras claims that the require d bond has been set at a fixed amount of
RD$5million that must be posted by each importer and domestic producer. There is no direct
relationship between the amount required to be guaran teed (i.e. the fixed amount of the bond) and the
actual amount giving rise to the Selective Consumpti on Tax which is dependent upon variable factors
such as monthly volumes of sales and variations in th e retail selling price according to market factors.
The two amounts are not commensurate.
7.270 The Dominican Republic responds that the bond requirement is an internal measure that
applies equally to both imported and domestic products, but is neve rtheless outside the scope of
Article III:4 because it does not affect the "internal sale, offering for sale, purchase, transportation,
distribution or use" of imported cigarettes. Importers of cigarettes are not precluded by the bond
requirement from clearing the cigarettes through customs, selling or offering them for sale,
transporting them, or distributing them within the territory of the Dominican Republic, nor are
consumers in any way precluded by the bond re quirement from buying or using the imported
cigarettes. The Dominican Republic adds that, even assuming that the bond requirement does affect
the internal sale, offering for sale, purchase, transpor tation, distribution, or use of imported cigarettes,
it would not be inconsistent with Article III:4 since it does not accord to imported cigarettes treatment
"less favourable than that accorded to like products of national origin". The Dominican Republic adds
that, even assuming that the bond requirement does affect the internal sale, offering for sale, purchase,
transportation, distribution, or use of imported ci garettes, it would nevertheless not be contrary to
Article III:4 since it does not accord to imported cigarettes treatment "less favourable than that accorded
to like products of national origin", because it is applied equally to domestic and imported cigarettes
and does not modify the conditions of competition in the domestic market to the detriment of imported
products. In its view, Honduras is challenging the timing of the payment of the Selective
Consumption Tax, rather than the bond requirement itself.
(b) Analysis by the Panel
7.271 Under Article III:4 of the GATT:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use..."
7.272 The Appellate Body has stated that:

"For a violation of Article III:4 to be estab lished, three elements must be satisfied:
that the imported and domestic products at is sue are 'like products'; that the measure
at issue is a 'law, regulation, or requirement affecting their internal sale, offering for
sale, purchase, transportation, distribution, or use'; and that the imported products are
accorded 'less favourable' treatment than that accorded to like domestic products..."
565
(c) Like product determination
7.273 As mentioned before, 566 the Dominican Republic has admitted that "[t]here is no
disagreement between the parties that imported and domestic cigarettes are 'like products'. Likeness
of these products is not at issue in this dis pute." The Panel has already assumed that imported
cigarettes and domestic Dominican Republic cigare ttes are like products within the meaning of
Article III:4 of the GATT.
(d) Law, regulation, or requirement affecting the internal sale, offering for sale, purchase,
transportation, distribution, or use
7.274 Honduras does not argue that the bond requirement a ffects the internal sal e, offering for sale,
purchase, transportation, distribution, or use of cigarettes. In fact, under its main claim under
Article XI:1 of the GATT, it argued exactly the opposite, i.e. that the bond requirement does not affect
the internal sale, offering for sale, purchase, trans portation, distribution, or use of cigarettes, and
therefore is not subject to Article III:4.
7.275 Honduras adds, however, that its arguments under Article XI:1 should not qualify in any way
its claim under Article III:4. The statement that the bond requirement does not affect the internal sale,
offering for sale, purchase, transportation, distribut ion, or use of cigarettes, and therefore is not
subject to Article III:4, was only in comment on a point made by a third party that Article III, and not
Article XI, applied to the measure. Honduras has clarified that it presents one set of facts to the Panel
-not two-, upon which it makes alternative claims under Article XI:1 and Article III.4 of the GATT.
In its view, parties are allowed to make alternativ e claims and to raise alternative defences and the
legal arguments presented by any pa rty in support of a particular claim or defence cannot, and should
not be, invoked against it in the assessment of an alternative claim or defence. Thus, the legal
arguments presented by Honduras to justify its claim under Article XI:1 of the GATT should not be
invoked against it in assessing its alternative claim under Article III:4.
7.276 The Dominican Republic argues that, although th e bond requirement is an internal measure
that applies equally to both imported and domestic products, it is neverthele ss outside the scope of
Article III:4 because it does not affect the internal sale, offering for sale, purchase, transportation,
distribution or use of imported cigarettes. Neither of these "specific transactions" covered by
Article III:4 would be affected by the bond requi rement under Article 14 of Decree 79-03. The
Dominican Republic recalls that Honduras acknowledged that fact.
567 In the view of the Dominican
Republic, importers of cigarettes would not be precluded by the bond requirement from clearing
cigarettes through customs, selling or offering them for sale, transporting them, or distributing them
within the territory of the Dominican Republic. Neither would consumers in any way be precluded by
the bond requirement from buying or using the imported cigarettes. As evidence of its argument, the
Dominican Republic recalls that the sole importer of cigarettes from Honduras, British American
Tobacco República Dominicana, imported and sold cigarettes in the Dominican Republic for the past
two years, despite not having posted a bond. The Dominican Republic concludes that, since the bond
requirement is outside the scope of Article III:4, it cannot be contrary to that provision.

565 Appellate Body Report, Korea – Various Measures on Beef, para. 133.
566 See supra Paragraph 7.164.
567 See Second written submission of the Dominican Republic, 10 June 2004, para.34.

7.277 The Panel acknowledges that Honduras has presen ted alternative claims against the bond
requirement and that it has expressly asked that the arguments it has presented under Article XI:1,
should not qualify its alternative claim under Article III: 4. The Panel sees no reason to disregard that
request and will therefore not take into account at this point Honduras's statement that the bond
requirement does not affect the internal sale, offeri ng for sale, purchase, transportation, distribution,
or use of cigarettes, and therefore is not subject to Article III:4.
7.278 As mentioned before, and with respect to wh ether the bond requirement affects the internal
sale, offering for sale, purchase, transportation, distri bution, or use of cigarettes, the Panel notes that,
as stated by the Appellate Body, the ordinary meani ng of the word "affecting" implies a measure that
has "an effect on" and thus indicates a broad scope of application.
568 In light of the broad scope of
application of the expression "affecting", under Article III:4 of the GATT it would not be necessary to
prove that the bond requirement precludes importers from clearing cigarettes through customs, selling
or offering them for sale, transporting them, or dist ributing them within the territory of the Dominican
Republic. Nor would it be necessary to prove th at the bond requirement precludes consumers from
buying or using imported cigarettes. It would be enough to demonstrate that the measure has "an
effect on" the internal sale, offering for sale, purchase, transportation, distribution, or use of cigarettes.
7.279 The Panel notes that, under Article 14 of Decree 79-03 of 4 February 2003, both importers
and local manufacturers of tobacco products shall post a bond with the Directorate General of Internal
Taxes. Under the evidence provided by the Domini can Republic, an importer or a local manufacturer
of tobacco products who did not comply with the bond requirement, or any ot her formal obligation,
would be subject to the application of sanctions su ch as fines. Any person wishing to engage in the
internal sale, offering for sale and purchase of ciga rettes in the domestic market of the Dominican
Republic, as manufacturer or importer, would thus have to comply with the bond requirement or else
run the risk of being the subject of internal sanctions.
7.280 In light of the previous factors, and of the broad scope of application of the expression
"affecting" contained in Article III:4 of the GATT, the Panel considers that the bond requirement can
be considered as an internal regulation that "affects" the internal sale, offering for sale and purchase of
cigarettes in the domestic market of the Dominican Republic within the meaning of Article III:4 of the
GATT.
(e) Less favourable treatment
(i) The disincentive against importing cigarettes
7.281 Honduras argues that the less favourable treat ment results from the modification of the
conditions of competition between imported and dom estic cigarettes. The bond requirement would
adversely modify the incentives for a local buyer w ho wishes to purchase imported cigarettes for sale.
In its opinion, a company that sells cigarettes in the Dominican Republic has two options, either to
buy from a domestic producer or to import. If that company were to purchase from a domestic
producer, it would not have to post a bond. However, if that company were to import cigarettes, it
would have to post a bond and thus incur additiona l costs. Therefore, there would be a built-in
disincentive against importing cigarettes, as compared to buying from domestic producers.
7.282 The Panel is not persuaded by this argumen t, because Honduras is comparing operations at
different commercial levels. According to the ava ilable information, the cigarette market in the
Dominican Republic is dominated by a reduced num ber of suppliers, either domestic producers or
importers. Three firms (two domestic producers and one importer) represented almost 100 per cent of
the local market of cigarettes. Furthermore, the local importer of Honduran cigarettes in the
Dominican Republic, British American Tobacco República Dominicana , is related with the

568 See supra Paragraph 7.169. Appellate Body Report, EC – Bananas III, para. 220.

manufacturer. In the light of that evidence, in the example presented by Honduras, a more correct
description would be that a local company that in tends to sell cigarettes in the Dominican Republic
would have two options, either to buy from a domes tic producer or to buy from the importer. In
neither case would it need to post a bond, since the posting of a bond is only required from
manufacturers and importers. Alternatively, any new entrant in the market to supply cigarettes in the
Dominican Republic, either as producer or as impor ter, would have to post a bond in an equivalent
manner.
7.283 For the reasons expressed above, the Panel is not convinced by Honduras's argument that, for
any local buyer who wishes to purchase cigare ttes for sale, the bond requirement creates a
disincentive against importing cigarettes, as compared to buying them from domestic producers.
(ii) The bond as a guarantee for inexistent tax liabilities
7.284 Honduras also argues that the bond requirement re sults in a less favourable treatment for
imported cigarettes in the context of the liability that the bond would serve to cover. In its view, for
both imported and domestic cigarettes, the bond requir ement is a supplementary obligation related to
the principal obligation which is the payment of the Selective Consumption Tax. However, with
respect to imported cigarettes, the Selective Cons umption Tax is collected in its entirety upon
importation. On the other hand, for domestic cigare ttes, the Selective Consumption Tax may be paid
up to the 20th day of the month following that in which the sale is made. Therefore, for domestic
producers, the bond serves as a security in the event th at the tax obligation is not properly discharged,
while for imported cigarettes, as the importers pay the full amount of the Selective Consumption Tax
upon importation, there is no liability that the bond requirement would serve to secure.
7.285 The Dominican Republic responds that the fact that the importer is required to pay the
Selective Consumption Tax upon importation does not mean that no tax liability can arise after
cigarettes have cleared customs. It could be th e case that the Selective Consumption Tax originally
assessed at the time of importation may have been insufficient to cover the tax liability of the
importer. As a result, the tax for a particular im porter and transaction may have to be adjusted.
Under the Dominican Republic law, its tax authorit ies retain the right to conduct reassessments and
adjust the tax liability of any taxpayer, including importers and domestic producers equally, within
three years after the initial payment of the releva nt tax. The Dominican Republic claims that
instances in which its tax authority has adjusted th e amount of taxes due, after the tax had been paid,
are frequent. The Dominican Republic adds that, although Article 376 of the Tax Code appears to
refer only to the Selective Consumption Tax, in practice its tax authority treats the bond as a
guarantee of compliance with other internal tax obligations incumbent on the domestic producer and
the importer of cigarettes, including the tax on the transfer of goods and services ("ITBIS")
(Articles 335 through 360 of the Dominican Republic Tax Code), and the income tax (Articles 267
through 334 of the Dominican Republic Tax Code).
7.286 The Panel will consider the argument presented by Honduras in the sense that there is no
liability that the bond requirement would serve to secure, as well as the two responses from the
Dominican Republic: (i) that the bond serves as a guarantee of tax liabilities in the event of latter
reassessments and adjustments of the tax liability of taxpayers; and, (ii) that it serves as a guarantee
of compliance with internal tax obligations other than the Selective Consumption Tax.
7.287 In support of its argument that tax liabilities may arise after cigarettes have cleared customs,
since tax authorities retain the right to conduct reassessments and adjust the tax liability of any
taxpayer, the Dominican Republic has referred to Article 21 of its Law 11-92, Dominican Republic
Tax Code, as well as to Article 118 of its Law 3489. Article 21 of the Dominican Republic Tax Code,
Law 11-92, reads as follows:

"Article 21. LIMITATION PERIOD. The following are subject to limitation after a
period of three years:
(a) Actions by the Tax Authority to require sworn statements, question those
made, demand tax payment and carry out ex officio estimates;
(b) Actions for breach of this Code or the tax laws; and
(c) Actions against the Tax Authority for recovery of taxes paid.
PARAGRAPH.- Limitation as provided for in this Article shall run from the date of
expiry of the deadline for submitting a sworn statement for tax payment purposes, not
counting the date of tax payment or that of the submission of the sworn statement
and, in the case of taxes not requiring submission of a sworn statement, from the day
following expiry of the deadline for tax payment, unless otherwise provided."
7.288 Article 118 of the Dominican Republic Law 3489, as modified by the Law 68 of 31
December 1982, states the following:
"Within a period not exceeding two (2) y ears counted from the date of payment
established, customs collection offices may collect any duties and taxes due to the
Tax Authority..."
7.289 In support of its argument, the Dominican Republic has presented a list of taxpayers that have
had their taxes reassessed in the period from Marc h 2003 to April 2004. According to that evidence,
the Dominican Republic conducted 494 reassessments of taxes in that period. The Dominican
Republic has also presented copies of letters from its customs authorities to different importers in
which they are informed that the tax liabilities have been reassessed and that they should make the
corresponding payments. In the list provided by the Dominican Republic, the firm British American
Tobacco República Dominicana , the importer of cigarettes from Honduras, appears as one of the
taxpayers that had their tax liabilities reassessed.
7.290 Honduras responds to this argument, by sta ting that, from the evidence presented by the
Dominican Republic, it appears tax reassessments ha ve been made with respect to unpaid customs
duties and other charges, and not the Selective Co nsumption Tax. Therefore, there would be no
evidence that the reassessments are necessary to cove r shortfalls in the collection of the Selective
Consumption Tax, nor that the bond requirement se cures the payment of the Selective Consumption
Tax after reassessments. Indeed, the reassessment of the tax liabilities of the importer of cigarettes
from Honduras was related to the importation of merc handising material and not of tobacco products.
Honduras also pointed to the fact that many of the taxpayers on the list of reassessments had not
posted bonds.
7.291 As mentioned above, the Dominican Republic furt her argues that its tax authority treats the
bond as a guarantee of compliance with internal tax obligations other than the Selective Consumption
Tax, such as the tax on the transfer of goods and services ("ITBIS") and the income tax. The
Dominican Republic acknowledges that there is no e xplicit provision in its legislation that authorizes
the use of the bond as a guarantee of compliance for internal tax obligations other than the Selective
Consumption Tax. Nevertheless, it declares that, in practice, and in exercise of its broad powers to
ensure the proper and effective enforcement of th e tax laws, the Dominican Republic tax authorities
regard the bond as a guarantee of compliance for inte rnal tax obligations other than the Selective

Consumption Tax. In support of its argument, the Dominican Republic has presented a copy of a
written declaration to that effect from its Director General of Internal Taxes.569
7.292 In view of the preceding elements, the Pane l finds that the evidence available does not
support Honduras's assertion that there is no liability that the bond requirement would serve to secure.
While the importers may pay in full at the moment of importation their obligations under the Selective
Consumption Tax and other applicable taxes, the Dominican Republic has demonstrated that its tax
authorities have the legal powers to reassess and even tually readjust the applicable tax liabilities for a
period of up to three years. If a readjustment o ccurs as a result of a reassessment, then the importer
may be asked to make a new payment. The bond would serve to guarantee this payment, if the
importer does not pay in time. Even assuming arguendo the validity of Hon duras's argument that
there have been no reassessments for the payment of the Selective Consumption Tax on imports of
cigarettes, that does not mean that those reasse ssments could not occur. A bond is a guarantee to
avoid some of the damage that may result in the even t that a particular situation may occur. The fact
that a bond is not used, does not necessarily mean that a bond requirement is unjustified.
7.293 While the Dominican Republic has admitted that there is no explicit legal provision that
authorizes the use of the bond as a guarantee of complia nce for internal tax obligations other than the
Selective Consumption Tax, the Panel finds that there is no reason to question its assertion that, in
practice and in the exercise of its enforcement pow ers, the Dominican Republic tax authorities regard
the bond as a guarantee of compliance for internal tax obligations such as the tax on the transfer of
goods and services ("ITBIS") and the income tax.
7.294 For the reasons expressed above, the Panel is not convinced by Honduras's argument that the
bond requirement results in a less favourable treat ment for imported cigarettes, because for those
cigarettes there is no liability that the bond requirement would serve to secure.
(iii) Fixed amount of the bond
7.295 Finally, Honduras claims that the less favourable treatment for imported cigarettes would also
result from the fact that the required bond has been set at a fixed amount of RD$5million that must be
posted by each importer and domestic producer. In it s opinion, there would be no direct relationship
between the amount required to be guaranteed (i .e. the fixed amount of the bond) and the actual
amount giving rise to the Selective Consumpti on Tax which would be de pendent upon variable
factors such as monthly volumes of sales and varia tions in the retail selling price according to market
factors. The two amounts would not be commensurat e. Honduras suggests that, since two domestic
manufacturers have a higher market share than the importer of Honduran cigarettes, the per unit cost
of the bond (the result of dividing the cost of th e bond by the number of cigarettes sold) would be
higher for imported cigarettes than for domestic cigarettes.
7.296 The Dominican Republic responds that the bond amounts do not have to be linked to the
potential tax liabilities of the producers or the importers , or to any other factors. In its opinion, no
such link would be reasonable, especially since the underlying tax obligations that the bond is
intended to secure are not discriminatory. The Dominican Republic argues that, provided that the
amount and the terms of the bond requirement are non- discriminatory, and in the absence of evidence
that demonstrates that the bond is applied in a discriminatory manner, that bond would not be contrary
to Article III of the GATT.
7.297 The Panel is not convinced by the argument that, in and of itself, the fact that the amount of
the bond is the same for domestic producers and importers, creates less favourable treatment for
imported cigarettes than for the like domestic product s. Honduras has not pres ented evidence to that

569 See Letter from the Director General of Internal Taxes, supra note 39.

effect, other than the assertion that the per unit cost of the bond would be higher for imported than for
domestic cigarettes.
7.298 The Panel recalls that the Appellate Body has declared that:
"The broad and fundamental purpose of Article III is to avoid protectionism in the
application of internal tax and regulatory me asures. … Toward this end, Article III
obliges Members of the WTO to provide equality of competitive conditions for
imported products in relati on to domestic products. … Article III protects
expectations not of any particular trade volume but rather of the equal competitive
relationship between imported and domestic products."
570
7.299 The Panel notes that, under the domestic regulati ons, the required bond must be issued by an
insurance company or banking institution accredited in the Dominican Republic. The effective cost
that the bond has on domestic producers and importe rs is thus the fee charged by the financial
institution that issues the bond. According to the evidence provided by Honduras, in the specific case
of the importer of cigarettes from that country, the annual fee charged by the insurance company that
issued the bond was RD$84,000 (approximately US$1,873 571). When divided by the annual imports
of cigarettes made by that same company, the co st of the bond would be equivalent to RD$0.9 (or
approximately 2 cents of a US dollar) per thousand ciga rettes. That annual value is equivalent to 0.2
per cent of the value of cigarette imports made by the importer in the year 2003. 572 The Panel also
notes that the cost of complying with the bond re quirement has been diminishing for the importing
company in the recent years, since its imports have increased while the bond amount has remained the
same. Had the importer posted a bond in the years 2001 and 2002 for the same co st, the cost of that
bond would have represented 0.64 per cent and 0.41 pe r cent, respectively, of the value of cigarette
imports made by the importer in those two years.
7.300 By definition, any expense that is fixed (i.e. not related to volumes of production) may lead to
different costs per unit among supplier firms. As long as the difference in costs does not alter the
conditions of competition in the relevant market to the detriment of importe d products, that fact in
itself should not be enough to c onclude that the expense creates a less favourable treatment for
imported products.
7.301 In light of the preceding arguments, the Pa nel considers that Honduras has not presented
evidence to support its argument that the different cost per unit generated by complying with the bond
requirement has a detrimental impact on the comp etitive conditions for impor ted products in relation
to domestic products in the Dominican Republic cigarette market.
(iv) Payment of the Selective Consumption Tax
7.302 Honduras also argues that the bond requirement accords less favourable treatment to imported
products as a result of the timing for the payment of the Selective Consumption Tax. Honduras states
that, with respect to imported cigarettes, the Sel ective Consumption Tax is collected in its entirety
upon importation whereas, for domestic cigarettes, the ta x may be paid up to the twentieth day of the
month following that in which the sale is made. Both domestic producers and importers collect the
Selective Consumption Tax from consumers at the tim e of the sale. This would accord to domestic
producers the opportunity to earn interest income on the money they receive as payment of the
Selective Consumption Tax for the period between th e time of the purchase and the time they have to

570 Appellate Body Report, Japan – Alcoholic Beverages II, p.16.
571 Exchange rate between the Domini can Republic Peso and the United States Dollar, as of 31 July
2004.
572 Comments by Honduras on the Replies of the Dominican Republic to question No. 109 addressed

remit that amount to the tax authorities. Importers , on the other hand, would have the added financial
cost or opportunity cost of having to advance the money for payment of the tax.
7.303 The Dominican Republic responds that Honduras is challenging the timing of the payment of
the Selective Consumption Tax, rather than the bond requirement itself. The difference in the timing
would not explain how the bond per se affects the conditions of competition of importers. In the
opinion of the Dominican Republic, the difference in the timing of the payment of the Selective
Consumption Tax is not tied to or contingent on the bond and it is not within the terms of reference of
the Panel. Moreover, the fact that domestic pr oducers pay the Selective Consumption Tax after the
sale of the cigarettes, while importers pay it at the time of importation, would not render the tax
inconsistent with Article III of the GATT, since Note Ad Article III clarifies that Members may
collect or enforce internal taxes or measures in th e case of imported products at the time or point of
importation.
7.304 According to the evidence presented by the par ties, Article 369 of the Dominican Republic
Tax Code provides that "[i]n the case of imported goods, the [Selective Consumption Tax] shall be
assessed and paid concurrently with the corresponding customs duties...". With regard to domestic
products, however, Article 368 of th e Tax Code provides that "In the case of transfers and provision
of services the tax shall be assess ed and paid monthly... For the purposes of these articles, taxpayers
shall submit a sworn statement of transfers and provision of services carried out in the preceding
month... and shall simultaneously pay the tax. The submission of the sworn statement and the
payment of the tax shall be effected within th e time-limit laid down for the assessment and payment
of the tax on the transfer of industrialized goods and services." Paragraph (c ) of Article 353 of the
Tax Code deals with the sworn statements and decl ares that "[t]he statement shall be filed in the
course of the first twenty (20) days of each month, even if there is no tax to pay".
7.305 Since domestic producers can collect the Selective Consumption Tax as of the time of the sale
of the packet of cigarettes, this accords them th e opportunity to earn interest income on the money
they receive as payment of the Selective Consumpti on Tax for the period, if any, between the time of
the purchase and the time they have to remit that am ount to the tax authorities. However, importers
would have to assume the opportunity cost or fina ncial cost of having to advance the money for
payment of the tax.
7.306 The Panel recalls that, in its request for the establishment of the Panel, Honduras described its
claim against the bond requirement in the following manner:
"The Dominican Republic requires importers of cigarettes to post a bond pursuant to
Article 14 of the Regulations. This re quirement and the laws, regulations and
practices implementing this requirement entail costs and administrative burdens
hindering the importation of cigarettes and are therefore in the view of Honduras
inconsistent with Article II:1(a) and (b) a nd Article XI:1 of the GATT, or - if they
were deemed to be internal measures - inc onsistent with Article III:2 and Article III:4
of the GATT."
7.307 Whether imported cigarettes may be accorded less favourable treatment than the like
domestic products due to the difference in the time of payment of the Sel ective Consumption Tax is,
in the opinion of the Panel, a different issue from the bond requirement, although the two may be
tangentially related. Although the bond would serve as a guarantee for the payment of the Selective
Consumption Tax and other liabilities, if there was any challenge against the conditions for payment
of the tax, that challenge would not have to do wi th the bond requirement, but with the rules on the
tax itself. The time of payment of the Selective Consumption Tax is not part of the bond requirement.
7.308
 The claim on the bond requirement is part of the terms of reference of the Panel. There is,
however, nothing in the request for establishment of th e Panel that would lead to the conclusion that

the Panel would be asked to make any finding regarding the difference in timing of the payment of the
Selective Consumption Tax between domestic pr oducers and importers. The Panel therefore
concludes that Honduras's claim regarding the diffe rent costs for domestic producers and importers
arising from the time of payment of the Selective Consumption Tax is not di rectly related with the
bond requirement and it is not within the Panel's terms of reference.
(v) Less favourable treatment
7.309 In order to determine whether the requirement that importers and domestic producers of
cigarettes must post a bond accords less favourable treatment to imported cigarettes than to like
domestic products, the Panel is guided by the statem ent from the Appellate Body in the sense that the
assessment should focus on examining "whether a measure modifies the conditions of competition in
the relevant market to the detriment of imported products".
573
7.310 In this respect, the Panel finds that the bond re quirement is applied in an equal manner, both
formally and in practice, to domestic and imported cigarettes. The Panel considers that Honduras has
not demonstrated how the identical treatment accorded to domestic and imported cigarettes in respect
of the bond requirement modifies the conditions of competition to the detriment of imported products.
7.311 In conclusion, the Panel considers that H onduras has failed to establish that the bond
requirement imposed by the Dominican Republic accords less favourable treatment to imported
cigarettes than that accorded to the like domestic pr oducts, in a manner inconsistent with Article III:4
of the GATT 1994.
5. Whether the bond requirement is justified under Article XX(d) of the GATT 1994
(a) Arguments of the parties
7.312 The Dominican Republic requests that, should the Panel find that the bond requirement is
inconsistent with Article III:4 of the GATT 1994, it should nonetheless find that the measure is
justified by Article XX(d) of the GATT. In the Dominican Republic's opinion, the requirement is a
measure that is necessary to secure complianc e with the Dominican Republic tax laws and
regulations, which are themselves consistent with the GATT. The bond is required to secure the
payment of a tax with respect to only certain products , i.e. alcoholic beverages and cigarettes, because
of the risk of smuggling of these products. The tax stamp would serve as a mark to indicate to
Dominican Republic tax authorities that the applicab le taxes have been collected and would ensure
that cigarettes continue to enter the Dominican Re public through regular and legitimate channels of
commerce, thus preventing smugglers from selling unstamped and undeclared cigarettes in the
domestic market. Moreover, in the Dominican Repub lic's view, the requirement is not applied in a
manner that constitutes either arbitrary or unjus tifiable discrimination between countries where the
same conditions prevail, nor a disguised restricti on on international trade. The Dominican Republic
also argues that there are no reasonable alternatives to the bond requirement available to secure the
same level of compliance with the Selective Consumption Tax for cigarettes.
7.313 Honduras replies to this defence by arguing th at the Dominican Republic has not established
that the bond requirement is justified under Article XX( d) as is its burden, since Article XX(d) is an
affirmative defence. In Honduras's view, the Domi nican Republic has not dem onstrated that the tax
laws and regulations that would be enforced thr ough the requirement are consistent with the GATT,
nor has it demonstrated that the requirement is i ndeed a measure to secure compliance with those tax
laws and regulations. Honduras argues additionally that the bond requirement is not "necessary" to
secure compliance with the tax laws and regulatio ns of the Dominican Republic. The Selective
Consumption Tax is imposed on many products, a nd the bond is only required for tobacco and

573 Appellate Body Report, Korea – Various Measures on Beef, para. 137.

cigarettes. In its opinion, if the bond were necessary to secure compliance with the Selective
Consumption Tax, then presumably, it should be applie d to all products subject to the tax. It adds
that, if all imported products have to pay the Selective Consumption Tax upon importation at the
border, there is no justification why the bond re quirement on imported cigarettes is necessary to
secure compliance with a Selective Consumption Tax that has already been paid.
(b) Article XX(d) of the GATT 1994
7.314 According to paragraph (d) and the chapeau of Article XX of the GATT:
"Subject to the requirement that such me asures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prev ail, or a disguised restriction on
international trade, nothing in this Agre ement shall be construed to prevent the
adoption or enforcement by any contracting party of measures: [...]
(d) necessary to secure compliance with laws or regulations which
are not inconsistent with the provisions of this Agreement, including
those relating to customs enfo rcement, the enforcement of
monopolies operated under paragraph 4 of Article II and
Article XVII, the protection of patents, trade marks and copyrights,
and the prevention of deceptive practices;"
7.315 An analysis under the Article XX(d) defence raised by the Dominican Republic would only
be relevant if the Panel had found that the bond requ irement is inconsistent with Article X:1 of the
GATT 1994 or, alternatively, with Article III:4. Since the Panel has not found the bond requirement
to be inconsistent with either one of those artic les, it does not need to consider the Article XX(d)
defence argued by the Dominican Republic.
6. Conclusion
7.316 For the reasons indicated above, the Panel is unable to accept Honduras's claims under
Article XI:1 of the GATT 1994, and its alternative claims under Article III:4, against the requirement
that importers and domestic producers of cigarettes must post a bond.
G. D
ETERMINATION OF THE TAX BASE FOR THE PURPOSE OF THE APPLICATION OF THE
SELECTIVE CONSUMPTION TAX TO CERTAIN IMPORTED CIGARETTES
1. The measure at issue
7.317 The Dominican Republic levies a Selective C onsumption Tax on certain products, such as
cigarettes. By the date of establishment of the Panel, the Selective Consumption Tax was charged on
cigarettes at a 50 per cent ad valorem rate.
7.318 By the date of establishment of the Panel, under the Dominican Republic legislation, there
were three different rules under which the tax base fo r cigarettes could have been determined by the
authorities, for the purpose of applying the Selectiv e Consumption Tax: (i) Under the rule contained
in Article 367(b) of the Dominican Republic Tax Code , the tax base for domestic cigarettes would be
the retail selling price obtained from average-pri ce surveys conducted by the Dominican Republic
Central Bank, whereas the tax base for imported ciga rettes would be the retail price used for the
nearest similar product on the domestic market, that is to say the closest substitute; (ii) Under
Article 3 of Decree 79-03 (Regulation on the Implemen tation of Section IV of the Tax Code), the tax
base for both domestic and imported cigarettes would be calculated on the basis of the average market
price according to the Central Bank's survey, however for new tobacco products not appearing in the

survey on which the retail sale price was determined , the tax base would be the price of the nearest
like product in the local market; or (iii) Under Article I of General Rule 02-96 issued by the
Directorate General of Internal Taxes of the Do minican Republic, the tax base would be the retail
price, determined by increasing the list price (excl uding cash and trade discounts, grants and the like)
by 20 per cent.
7.319 According to Honduras, in practice, the tax fo r domestic cigarettes was based on the average
retail selling price of each brand, as provided in a survey of the average prices conducted by the
Central Bank of the Dominican Republic whereas, by contrast, the tax base for imported cigarettes
was calculated on the value of the "nearest similar product on the domestic market." Honduras
concludes that this difference in approach resulte d in certain lower-priced imported cigarettes being
taxed at a rate higher than the one which woul d have corresponded according to their actual selling
price and, in consequence, at a rate that was highe r than the rate applied to the like domestic products,
which sold for the same retail selling price.
7.320 To support its claim, Honduras has provided information on the retail selling price of different
brands of cigarettes sold in the Dominican Republic market and the respective level of tax paid by
each brand (during the period 17 March 2003 – 1 August 2003):

Brand

Retail Selling Price
Selective
Consumption Tax
paid
Marlboro (Domestic) RD$ 26.00 RD$ 7.73
Nacional (Domestic) RD$ 24.00 RD$ 7.36
Kent (Domestic) RD$ 22.00 RD$ 6.54
Belmont (Imported) RD$ 20.00 RD$ 6.13
Viceroy (Imported) RD$ 18.00 RD$ 6.54
Líder (Domestic) RD$ 18.00 RD$ 5.34

2. Whether imported cigarettes were taxed in excess of the like domestic products in a
manner inconsistent with Article III:2, first sentence, of the GATT 1994
(a) Arguments of the parties
7.321 Honduras claims that, under the rules in force on the date of establishment of the Panel, the
Dominican Republic determined the tax base for ciga rettes in a manner that resulted in certain lower-
priced imported cigarettes being taxed at a rate higher than the one which would have corresponded
according to their actual selling price.
7.322 Honduras argues that the Dominican Republic ta xed domestic cigarettes based on the average
retail selling price of each brand, as provided in a survey of the average prices conducted by the
Central Bank of the Dominican Republic whereas, by contrast, the tax base for imported cigarettes
was calculated on the value of the "nearest similar product on the domestic market." Honduras
concludes that this difference in approach resulte d in certain lower-priced imported cigarettes being
taxed at a rate higher than corresponded according to their actual selling price and, in consequence, at
a rate that was higher than the rate applied to the like domestic products, which sold for the same
retail selling price.
7.323 Honduras states that its claims in relation to th e determination of the tax base for the purpose
of application of the Selective Consumption Tax are two-fold. On the one hand, Honduras claims that
the Dominican Republic established the tax base for certain imported cigarettes on the basis of what it
determined to be the retail selling price of the "n earest similar product", whereas it established the tax
base for domestic cigarettes on their actual retail selling prices obtained from average-price surveys
conducted by the Central Bank. In this sense, th e claim is directed ag ainst the rules for the

determination of the tax base for cigarettes, cont ained in Article 367(b) of the Dominican Republic
Tax Code. On the other hand, Honduras also cl aims that in practice the Dominican Republic
authorities have taxed lower-priced imported ciga rettes at a rate higher than the one which
corresponded according to their actual selling price, which has meant that certain imported cigarettes
have been taxed at a higher rate than the like domes tic products which were sold for the same retail
selling price as the imported products. This latter clai m is directed to the administration of the tax
laws.
7.324 The Dominican Republic replies that Honduras's cl aims are moot, since they are based on an
outdated version of Article 367 of the Tax Code of the Dominican Republic. Law 3-04, published on
14 January 2004, amended Articles 367 and 375 of the Tax Code and established a specific and
identical tax base and tax rate for the Selective Consumption Tax on imported and domestic cigarettes
– i.e. RD$0.48 per cigarette. Thus, under the curre nt Article 367 of the Tax Code, the retail price of
cigarettes is no longer relevant for determining th e tax base of the Selective Consumption Tax.
Rather, the tax base is now determined on the basis of the number of cigarette packets transferred or
imported. Also, the "nearest similar product in the domestic market" plays no role in the
determination of the tax base. The Panel should thus abstain from making findings or issuing
recommendations to the WTO Dispute Settlement Body, regarding laws and practices of the
Dominican Republic that have been withdraw n because a recommendation in these circumstances
would constitute a legal error and would be devoid of purpose, becau se there is no evidence that the
measures are still in place or have lingering effects, because there is no evidence that the Dominican
Republic will reintroduce the withdrawn measures, and because the measures were revoked before the
Panel began its adjudication process.
7.325 Honduras replies in turn that, when the Panel was established, the provisions that constitute
the basis for Honduras's claims were in force. Th e Panel is competent, and indeed has the legal
obligation, to examine the measures existing as of th at date, since the "matter" before a panel is
determined by its terms of reference. Honduras claims that it has made a prima facie case, which the
Dominican Republic has not rebutted. In its opinion, the Dominican Republic has acknowledged that,
for determining the nearest similar product to imported cigarettes, it used criteri a other than the retail
selling prices. These criteria were not stated in any of the regulations governing the Selective
Consumption Tax.
7.326 The Dominican Republic explains that the reason why imported Viceroy cigarettes were taxed
at a higher rate than domestic Líder cigarettes during 2003, is because its tax authorities determined
that the nearest similar cigarettes to the imported Viceroy in the domestic market were Marlboro, and
not Líder. The Dominican Republic authorities considered that the pricing policies of the importer
could not, by themselves, be relied on to determine the nearest similar product in the domestic market
and therefore used other factors, including the declared customs value of the imported cigarettes. This
determination was based on the customs value officially declared by the importer of Viceroy during
the year 2002 and part of 2003. According to th e declared customs values, the average prices of
Viceroy in the first eight months of 2003 were higher than the average prices for cigarettes of the
brand name Belmont and Kent by 10 per cent and 5.8 per cent, respectively. In the year 2002,
according to the declared customs value of the same importer, the average price of Viceroy cigarettes
was 15.8 per cent and 9.1 per cent higher than the average retail prices for Belmont and Kent,
respectively. The Dominican Republic argues that , given the disparity and inconsistency in the
information provided by the importer, the tax authorities determined that the nearest similar product in
the domestic market for Viceroy cigarettes was Marlboro. In its opinion, the pricing policy for
Viceroy cigarettes constitutes an anti-competitive practice on the part of the importer, which could be
subject to an anti-dumping investigation.
(b) Analysis by the Panel
7.327 Under the first sentence of Article III:2 of the GATT:

"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal taxes
or other internal charges of any kind in ex cess of those applied, di rectly or indirectly,
to like domestic products."
7.328 The Appellate Body has stated that there are two questions which need to be answered to
determine whether there is a violation of Article III:2 of the GATT 1994: (a) whether imported and
domestic products are like products; and (b) whether the imported products are taxed in excess of the
domestic products. If the answers to both questi ons are affirmative, there is a violation of
Article III:2, first sentence.
574
(c) Like product determination
7.329 With respect to the likeness of the product, the Panel is aware that the finding that a product is
alike under Article III:4, does not necessarily make it a like under Article III:2, first sentence. In this
respect, the Panel keeps in mind the statement of the Appellate Body that:
"No one approach to exercising judgemen t will be appropriate for all cases. The
criteria in Border Tax Adjustments should be examined, but there can be no one
precise and absolute definition of what is 'lik e'. The concept of 'likeness' is a relative
one that evokes the image of an accordion. The accordion of 'likeness' stretches and
squeezes in different places as different provisions of the WTO Agreement are
applied. The width of the accordion in an y one of those places must be determined
by the particular provision in which the term 'like' is encountered as well as by the
context and the circumstances that prevail in any given case to which that provision
may apply. We believe that, in Article III:2, first sentence of the GATT 1994, the
accordion of 'likeness' is meant to be narrowly squeezed."
575
7.330 The Panel finds that imported cigarettes can generally be considered as like products to
domestic Dominican Republic cigarettes within the meaning of the first sentence of Article III:2 of the
GATT. Indeed, the available evidence demonstrates that both imported and domestic cigarettes have
similar physical properties; they are made from similar materials; have a similar presentation; they
have the same end-use (i.e. they are smoked by c onsumers); and they are classified under the same
tariff heading 2402.20.00.
7.331 However, for the purpose of the analysis with in the first sentence of Article III:2 of the
GATT, a narrowly construed interpretation of th e likeness requirement, would require the Panel to
additionally consider the fact that, within the ge neral product description, cigarettes are presented to
consumers distinguished by brands. Under the identification of these brands, cigarettes compete
within specific price segments against each other. The distinction between different price segments
may be particularly important for the analysis u nder Article III:2 of the GATT, since the Selective
Consumption Tax was applied on an ad valorem basis, i.e. was related to the price of the product.
7.332 The Dominican Republic has argued that its tax authorities determined that the nearest similar
cigarettes to the imported Viceroy in the domestic market were t hose distinguished with the brand
Marlboro, and not Líder. This argument would be equiva lent to expressing that imported Viceroy
cigarettes were not similar to domestic Líder, but rather to domestic cigarettes Marlboro. The
Dominican Republic justified this determination by ar guing that its custom authorities considered that
the Viceroy cigarettes were similar in quality to domestic higher-priced Marlboro and Kent, and not to
the lower-priced Líder, since the declared customs value of Viceroy cigarettes was higher than the
price of Líder and even of Marlboro and Kent. In the Dominican Republic's opinion, prices of

574 Appellate Body Report, Canada – Periodicals, pp. 22-23.
575 Appellate Body Report, Japan – Alcoholic Beverages II, p. 21.

cigarettes are a function of their quality and therefore the higher-priced Viceroy cigarettes were not
similar to Líder. In the words of the Dominican Republic , "[t]he declared customs value of the
imported cigarettes was... a factor used by the au thorities of the Dominican Republic to compare the
domestic and the imported cigarettes and determin e which was the most similar product to the
imported cigarettes in the domestic market..."576
7.333 The Panel agrees with the Dominican Republic th at quality is an important factor in the
determination of the likeness of products. Howe ver, it does not think that values declared by
importers for customs purposes can be the only factor used in order to determine the quality of a
product. The Dominican Republic admits that the imported Viceroy cigarettes had the same retail
selling price as the domestic Líder cigarettes. The Panel believes that, if prices of a product are to be
considered as a function of their quality, then the actual price of the product in the marketplace should
be in principle more relevant than the value declared in customs.
7.334 The Dominican Republic has argued that the pricing policies of the importer were
"inconsistent and incongruous", but it has not presented any evidence of reasons why the retail selling
price of Viceroy cigarettes should have been disregarded fo r the determination of the likeness of the
product, other than the fact that the price did not ma tch with the value declared in customs. There is
no evidence either to support the Dominican Re public's argument that the pricing policy for Viceroy
cigarettes is an anti-competitive practice on the part of the importer.
7.335 In light of the above, the Panel does not find that the possible discrepancy between the retail
selling price information and the declared customs value for Viceroy cigarettes is per se a factor that
indicates that the retail selling price is irrelevant as a factor to determine the likeness of those
imported cigarettes to the domestic products.
7.336 In conclusion, the Panel finds that imported cigarettes can generally be considered as like
products to domestic Dominican Republic cigarett es within the meaning of the first sentence of
Article III:2 of the GATT. When analysing the ap plication of the Selectiv e Consumption Tax, the
Panel will consider as products "alike" to the impor ted cigarettes, those domestic cigarettes that were
sold at a similar price and, more specifically, will consider that Viceroy cigarettes imported in the
Dominican Republic are alike to domestic Líder cigarettes.
(d) The application of the Selective Consumption Tax to imported cigarettes
7.337 The Panel will begin by considering the Dominican Republic's argument that the amendments
incorporated into the Dominican Republic legislation through Law 3-04 would prevent the Panel from
making findings or issuing recommendations regardi ng the application of the Selective Consumption
Tax to certain imported cigarettes. Only if the Pane l decides to disregard that argument, would it then
move to consider the substantive claims raised by Honduras in th e sense that the Dominican Republic
taxed imported cigarettes in excess of the like dom estic products in a manner inconsistent with
Article III:2, first sentence, of the GATT 1994.
(e) Amendments to the Dominican Republic Tax Code
7.338 The Dominican Republic does not rebut the s ubstance of Honduras's claims regarding the
application of the Selective Consumption Tax to cer tain imported cigarettes. Its main response has
been that those claims are moot, since they are b ased on an outdated version of Article 367 of the Tax
Code of the Dominican Republic.
7.339 From the available evidence, the Panel is aware that, on 14 January 2004, Law 3-04 which
amended Articles 367 and 375 of the Tax Code, was published in the Dominican Republic Official

576 Dominican Republic, Reply to Questions 151-156 from the Panel, 14 July 2004, para. 51.

Gazette (Gaceta Oficial). As a result of the amendments, a specific and identical tax base and tax rate
were established for the Selective Consumption Tax on imported and domestic cigarettes – i.e.
RD$0.48 per cigarette. The Dominican Republic has also indicated that the amendments introduced
by Law 3-04 entered into force on 15 January 2004, the day following the publication of the Law, in
accordance with Article 1 of the Dominican Republic Civil Code.
7.340 The Panel notes that the entry into force of the amendments incorporated to the Dominican
Republic Tax Code occurred after 9 January 2004, date of the establishment of the Panel.
7.341 The Panel believes that the fact that the Dominican Republic Tax Code was modified does not
automatically mean that the Pane l should abstain from analysing Honduras's claims regarding the
application of the Selective Consumption Tax to cer tain imported cigarettes. Indeed, the Panel will
consider whether the amendments incorporated to the measure by the Dominican Republic prevent it
from making findings on Honduras's claims in this regard.
7.342 Some previous panels have refrained from making findings on measures terminated before
the establishment of those panels.
577 In the Argentina – Textiles and Apparel case, the panel declined
to rule on a measure that was "revoked before the Pa nel was established and its term of reference set,
i.e. before the Panel started its adjudication process"578, even though the measure was included in that
panel's terms of reference. The Argentina – Textiles and Apparel panel cited to that effect the
statement of the Appellate Body that the aim of dispute settlement is not:
"to encourage either panels or the Appellate Body to 'make law' by clarifying existing
provisions of the WTO Agreement outside the context of resolving a particular
dispute. A panel need only address those claims which must be addressed in order to
resolve the matter in issue in the dispute'."
579
7.343 In the present case, however, the amendments to the measure did not occur before, but after
the date of the establishment of the Panel (9 Jan uary 2004). Indeed, the Dominican Republic has
informed the Panel that Law 3-04 entered into for ce on 15 January 2004, that is after the terms of
reference of the Panel had been approved by the WTO Dispute Settlement Body. Under those terms
of reference, in the light of its duties contained in Article 11 of the Dispute Settlement Understanding,
and in the absence of an agreement from the part ies to terminate the proceedings as regards this
contested measure, the Panel considers that it would be inappropriate to abstain from making findings
with respect to the application of the Selective Consumption Tax to certain imported cigarettes.
Indeed, several panels have reached a similar conclusion, when examining measures terminated
before or during the panel process.580
7.344 For these reasons, the Panel does not find th at the amendments incorporated by the
Dominican Republic to Articles 367 and 375 of th e Tax Code, through Law 3-04, prevent it from
making findings on Honduras's claims with respect to the application of the Selective Consumption
Tax to certain imported cigarettes.
(f) Determination of the tax base for cigarettes under Dominican Republic legislation
7.345 Since the Panel has decided not to abstain from making findings with respect to the
application of the Selective Consumption Tax, it will now look at Honduras's claims with respect to

577 See, for example, Panel report, US – Gasoline, and Panel Report, Argentina – Textiles and Apparel.
578 Panel report, Argentina – Textiles and Apparel, para. 6.13.
579 Appellate Body Report, US – Wool Shirts and Blouses, p. 19.
 580 See, for example, Panel Report, US – Certain EC Products ; Panel Report, US – Wool Shirts and
Blouses; Panel Report, Indonesia – Autos; Panel Report, Chile – Price Band System; and, Panel Report, Canada
– Wheat Exports and Grain Imports.

the Dominican Republic legislation, before Law 3-04 entered into force, to find whether that
legislation subjected imported cigarettes to a Select ive Consumption Tax in excess of that applied to
like domestic products.
7.346 The Panel recalls that the Appellate Body has established a strict standard for the term "in
excess of" under Article III:2, first sentence:
"The only remaining issue under Article III:2, first sentence, is whether the taxes on
imported products are 'in excess of' those on like domestic products. If so, then the
Member that has imposed the tax is not in compliance with Article III. Even the
smallest amount of 'excess' is too much. 'The prohibition of discriminatory taxes in
Article III:2, first sentence, is not conditional on a 'trade effects test' nor is it qualified
by a de minimis standard.' "
581
7.347 Before Law 3-04, the Selective Consumption Tax on cigarettes in the Dominican Republic
was imposed on an ad valorem basis. In an ad valorem system, the payable tax at any given time is a
function of the tax rate and of the tax base. Honduras has not presented a claim against the rate at
which the Selective Consumption Tax was charge d on cigarettes. Instead, Honduras claims that,
under the rules in force before Law 3-04, the Do minican Republic determined the tax base for
cigarettes in a manner that resulted in certain importe d cigarettes being taxed at a rate higher than the
one that corresponded according to their actual selling price.
7.348 As mentioned
582, under the Dominican Republic legislati on, there were three different rules
under which the tax base for cigarettes could be de termined by the authorities, for the purpose of
applying the Selective Consumption Tax. The gene ral rule was contained in Article 367(b) of the
Dominican Republic Tax Code. Under this rule, th e tax base for domestic cigarettes was the retail
selling price obtained from average-price survey s conducted by the Dominican Republic Central
Bank, whereas the tax base for imported cigarettes was the retail price used for the nearest similar
product on the domestic market, that is to say the cl osest substitute. This rule created two different
methods to calculate the tax base, one applicable to domestic cigarettes and one applicable to
imported cigarettes.
7.349 Decree 79-03 contained the Regulation on the Implementation of Section IV of the
Dominican Republic Tax Code. Under Article 3 of the Decree 79-03, the tax base for both domestic
and imported cigarettes was calculated on the basis of the average market price according to the
Central Bank's survey, however for new tobacco pr oducts not appearing in the survey on which the
retail sale price was determined, the tax base was th e price of the nearest like product in the local
market. As was the case in the rule contained in Article 367(b) of the Dominican Republic Tax Code,
Article 3 of the Decree 79-03 created two different methods to calculate the tax base. However, the
methods were not dependent on whether cigarettes were domestic or imported, but rather on whether
the cigarettes had appeared in the survey on which the retail sale price was determined.
7.350 Finally, General Rule 02-96 issued by the Di rectorate General of Internal Taxes of the
Dominican Republic contains special regulations for the determination of the tax base for the
Selective Consumption Tax on alcohol, beer and tob acco products. According to Article I of General
Rule 02-96, the tax base of tobacco products would be the retail price, determined by increasing the
list price (excluding cash and trade discounts, grants and the like) by 20 per cent. There was only one
method to calculate the tax base of cigarettes a nd no distinction between domestic or imported
products.

581 Appellate Body Report, Japan – Alcoholic Beverages II , p.23. See also, Panel Report, Argentina –
Hides and Leather, para. 11.243.
582 See supra Paragraph 7.318

7.351 As regards the legislation, the Panel finds th at only Article 367(b) of the Dominican Republic
Tax Code created any distinction in the treatment between domestic and imported cigarettes. That
treatment, however, did not lead per se to imported cigarettes being subject to internal taxes in excess
of those applied to like domestic cigarettes. It only meant that, while the tax base for domestic
cigarettes would be the retail selling price obtained from the average-price su rveys, the tax base for
imported cigarettes would be determined on the basis of the retail price for the nearest similar product
(closest substitute) on the domestic market. There is no reason to presume that the determination of
the nearest similar product would lead to imported cigarettes being charged a tax in excess to that
applied to domestic cigarettes.
7.352 Furthermore, the Panel assumes that the rules c ontained in the Dominican Republic Tax Code
would have been interpreted in the light of the implementing regulations, such as those contained in
the Decree 79-03 - Regulation on the Implementation of Section IV of the Dominican Republic Tax
Code and in General Rule 02-96 issued by the Dir ectorate General of Internal Taxes. Under the
regulations implementing the Tax C ode, the tax base would only be determined on the price of the
nearest like product in the local market in the case of new tobacco products not appearing in the
respective survey. Neither these regulations, nor General Rule 02-96, distinguished between imported
and domestic cigarettes. The Dominican Republic h as furthermore declared that the method actually
applied for the determination of the tax base of ci garettes was the one contained in General Rule 02-
96.
7.353 In light of the above, the Panel finds no eviden ce that the Dominican Republic legislation for
the determination of the base for the Selective Consumption Tax, before the entry into force of Law 3-
04, subjected imported cigarettes to internal taxes in excess of those applied to like domestic products.
(g) Determination in practice of the tax base for cigarettes
7.354 The Panel will now turn to the question of whet her, in practice and before Law 3-04 entered
into force, the Dominican Republic authorities have taxed lower-priced importe d cigarettes at a rate
higher than the one which would have corresponded according to their actual selling price, which has
meant that those imported cigarettes have been subject to taxes in excess of those applied to the like
domestic products.
7.355 Honduras argues that the Dominican Republic ta xed domestic cigarettes based on the average
retail selling price of each brand, as provided in a survey of the average prices conducted by the
Central Bank whereas, by contrast, the tax base fo r imported cigarettes was calculated on the value of
the "nearest similar product on the domestic market." Honduras concludes that this difference in
approach resulted in certain lower-priced imported ci garettes being taxed at a rate higher than the one
which would have corresponded according to their actua l selling price and, in consequence, at a rate
that was higher than the rate for the like domes tic products, which sold for the same retail selling
price.
7.356 The Dominican Republic does not dispute the fact that certain imported cigarettes have been
taxed at a rate higher than would have corre sponded according to their selling price and, in
consequence, at a rate that was higher than the rate imposed on the domestic products which sold for
the same retail selling price. The Dominican Repub lic argues, however, that the situation occurred
because its tax authorities considered that the retail selling price information provided by the importer
was not reliable and decided that the nearest si milar cigarettes to the imported ones were from a
domestic brand that sold at a different selling price.
7.357 According to the available evidence, duri ng the year 2003, the retail selling prices for
imported cigarettes under the brand Viceroy and domestic cigarettes under the brand Líder were the

same, i.e. RD$18 per packet. 583 However, these cigarettes were not taxed on the same basis. While
each packet of Viceroy cigarettes paid RD$6.54 in Selective Consumption Tax, a packet of Líder only
paid RD$5.34. That means that, while the actual tax burden for Viceroy cigarettes was 36.33 per cent
of its retail selling price, for Líder it was 29.66 per cent.
7.358 In light of the preceding considerations, the Pane l concludes that there is evidence to indicate
that, during the year 2003, the Dominican Republic authorities imposed the Selective Consumption
Tax on certain imported cigarettes in excess to the ra tes applied on the like domestic products, in a
manner inconsistent with Article III:2, first sentence, of the GATT.
(h) Recommendations regarding the measure found to be inconsistent
7.359 As it has concluded that the Dominican Republic has acted in a manner inconsistent with
Article III:2, first sentence, the Panel will consid er if it should make any recommendations to the
WTO Dispute Settlement Body regarding whether th e Dominican Republic should bring its measures
into conformity with its obligations under the GATT 1994.
7.360 In this regard, the Panel recalls that, as of 14 January 2004, Law 3-04 amended Articles 367
and 375 of the Dominican Republic Tax Code. As a result of the amendments, the ad valorem system
previously in force for the application of the Se lective Consumption Tax was replaced by a specific
and identical tax base and tax rate on imported and domestic cigarettes.
7.361 The measure contested by Honduras, and found by the Panel to be inconsistent with
Article III:2, first sentence of the GATT, relates to the determination of the tax base for imported
cigarettes and was only relevant when the Se lective Consumption Tax was charged on an ad valorem
basis. Indeed, the amendments incorporated by the Dominican Republic in its Tax Code change the
essence of the measure challenged by Honduras. Under the new legislation, the Selective
Consumption Tax on cigarettes is not levied on an ad valorem basis, but on a specific amount
(RD$0.48 per cigarette), without distinguishing between imported a nd domestic cigarettes. The new
law would prevent the situation un der which certain imported cigarett es were taxed at a higher rate
than the like domestic products.
7.362 In conclusion, the Panel clarifies that its findings in relation with the determination of the tax
base for the application of the Selective Consumpti on Tax to certain imported cigarettes refer to the
Dominican Republic Tax Code before it was am ended by Law 3-04 of January 2004. The
amendments enacted through Law 3-04 have changed the essence of the regulations used to determine
the tax base for the Selective Consumption Tax on cigarettes from that of the challenged measure.
The new legislation falls outside of the terms of reference of the Panel.
7.363 Since the measure, as analysed by the Panel, is no longer in force, the Panel does not find it
appropriate to recommend to the WTO Dispute Se ttlement Body that it make any request to the
Dominican Republic regarding this measure.
3. Conclusion
7.364 For the reasons indicated above, the Panel's ove rall conclusion is that, during the year 2003,
the Dominican Republic imposed in practice a Selective Consumption Tax on certain imported
cigarettes in excess of the rates applied to the lik e domestic products, in a ma nner inconsistent with
Article III:2, first sentence, of the GATT 1994.

583 See price information provided by the parties. First written submission of Honduras, 16 March
2004, p. 12. Attestations of the retail selling price for cigarettes with the brand Viceroy and copy of an invoice
for cigarettes with the brand Líder, provided by Honduras as Exhibit HOND-9. Retail selling price by name
brand of cigarettes (2003), provided by the Dominican Republic as Exhibit DR-34.

H. A
DMINISTRATION OF PROVISIONS GOVERNING THE SELECTIVE CONSUMPTION TAX, IN
PARTICULAR WITH RESPECT TO DETERMINATION OF THE "NEAREST SIMILAR PRODUCT ON THE
DOMESTIC MARKET"
1. The conduct at issue
7.365 As explained above, the Dominican Republic le vies a Selective Consumption Tax on certain
products, such as tobacco cigarettes. By the date of establishment of the Panel, and before the
Dominican Republic Tax Code was amended thr ough Law 3-04 of January 2004, the Selective
Consumption Tax was charged on cigarettes at a 50 per cent ad valorem rate.
7.366 Before the amendments to the Tax Code, the Dominican Republic legislation contained three
different rules under which the tax base for cigarett es could have been determined by the authorities,
for the purpose of applying the Selective Consumption Tax: (i) Under the rule contained in
Article 367(b) of the Dominican Republic Tax Code, the tax base for domestic cigarettes would be the
retail selling price obtained from average-price surveys conducted by the Dominican Republic Central
Bank, whereas the tax base for imported cigarettes w ould be the retail price used for the nearest
similar product on the domestic market, that is to say the closest substitute; (ii) Under Article 3 of the
Decree 79-03 (Regulation on the Implementation of Section IV of the Tax Code), the tax base for
both domestic and imported cigarette s would be calculated on the basis of the average market price
according to the Central Bank's survey, however for new tobacco products not appearing in the survey
on which the retail sale price was determined, the tax base would be the price of the nearest like
product in the local market; or (iii) Under Article I of General Rule 02-96 issued by the Directorate
General of Internal Taxes of the Dominican Re public, the tax base would be the retail price,
determined by increasing the list price (excluding cash and trade discounts, grants and the like) by 20
per cent.
7.367 The determination of the nearest similar domes tic product in the Dominican Republic market
was important in order to apply the Selective C onsumption Tax on imported cigarettes. Indeed, the
determination of the "nearest similar product" wa s relevant for the imposition of the Selective
Consumption Tax on imported cigarettes, at least unde r the rules contained in Article 367(b) of the
Dominican Republic Tax Code and in Article 3 of Decree 79-03 (Regulation on the Implementation
of Section IV of the Tax Code).
7.368 However, neither Article 367(b) of the Tax C ode, nor Article 3 of the Regulation 79-03, nor
Article I of the General Rule 02-96, contained an y rules on how the "nearest similar product" with
respect to imported cigarettes would be determined.
7.369 Honduras's claim in this regard is that the Dominican Republic failed to establish and apply
transparent and generally applicable criteria for de termining the value of imported cigarettes and, in
particular, failed to establish and apply such criteri a for the identification of the "nearest similar"
product in the domestic market. The measure at issue is thus an alleged omissive conduct on the part
of the Dominican Republic.
2. Whether the Dominican Republic administered the provisions governing the Selective
Consumption Tax in an unreasonable manner
(a) Arguments of the parties
7.370 Honduras claims that, in the absence of rules, the Dominican Republic authorities had wide
scope to determine the "nearest similar product" for the purpose of applying the Selective
Consumption Tax on imported cigarettes. Ac cording to Honduras, the Dominican Republic
authorities administered the provisions governing the Selective Consumption Tax in a manner that is
not reasonable; in particular, with respect to determination of the "nearest similar product on the

domestic market". Honduras submits that there is no adequate reason for the Dominican Republic to
have disregarded the actual retail selling price of domestic Líder cigarettes when determining the tax
base for imported Viceroy cigarettes. As stated above, both Viceroy and Líder have the same retail
selling price. Honduras concludes that the failure to establish and apply transparent and generally
applicable criteria for determining the value of im ported cigarettes, in particular the failure to
establish and apply such criteria for the identificatio n of the "nearest similar" product in the domestic
market, constitutes an unreasonable administrati on of the provisions governing the Selective
Consumption Tax and is inconsistent with Article X:3(a) of the GATT.
7.371 The Dominican Republic replies that Honduras's claim is moot, since it is based on an
outdated version of Article 367 of the Tax Code of the Dominican Republic. Law 3-04, published on
14 January 2004, amended Articles 367 and 375 of the Tax Code and established a specific and
identical tax base and tax rate for the Selective Consumption Tax on imported and domestic cigarettes
– i.e. RD$0.48 per cigarette. The determination of the "nearest similar product" is no longer relevant
for determining the tax base of the Selective C onsumption Tax. Rather, the tax base is now
determined on the basis of the number of cigarette packets transferred or imported. The Panel should
abstain from making findings or issuing recomme ndations to the WTO Dispute Settlement Body,
regarding laws and practices of the Dominican Re public that have been withdrawn, because a
recommendation in these circumstances would cons titute a legal error and would be devoid of
purpose, because there is no evidence that the measures are still in place or have lingering effects,
because the measures were revoked before the Pane l began its adjudication process and because there
is no evidence that the Dominican Republic will reintroduce the withdrawn measures.
(b) Analysis by the Panel
7.372 Under Article X:3(a) of the GATT 1994:
"Each [Member] shall administer in a uni form, impartial and reasonable manner all
its laws, regulations, decisions and rulings of the kind described in paragraph 1 of this
Article."
7.373 In turn, the "laws, regulations, decisions and rulings" described in paragraph 1 of Article X
are as follows:
"Laws, regulations, judicial decisions and administrative rulings of general
application, made effective by any [Member], pertaining to the classification or the
valuation of products for customs purposes, or to rates of duty, taxes or other charges,
or to requirements, restrictions or prohibitions on imports or exports or on the transfer
of payments therefor, or affecting their sale, distribution, transportation, insurance,
warehousing inspection, exhibition, processing, mixing or other use."
7.374 The Appellate Body has clarified that Article X deals with "the publication and
administration of 'laws, regulations, judicial decisi ons and administrative rulings of general
application', rather than [with] the substantive content of such measures".
584
7.375 In order to analyse the claim presented by Honduras under Article X:3(a) of the GATT, the
Panel would have to determine: (a) whether the provisions governing the Selective Consumption Tax
are part of the "laws, regulations, decisions and ru lings" of the kind described in Article X:1 of the
GATT; and, if so, (b) whether the Dominican Repub lic has not administered those provisions in a
uniform, impartial and reasonable manner, in particul ar with respect to determination of the "nearest
similar product on the domestic market".

584 Appellate Body Report, EC – Poultry, para. 115.

(c) Laws, regulations, decisions and rulings described in Article X:1 of the GATT
7.376 The relevant provisions as regard the claim raised by Honduras are those contained in
Article 367(b) of the Dominican Republic Tax Code, in Article 3 of the Decree 79-03 and in Article I
of General Rule 02-96. Al of these provisions relate to the application of the Selective Consumption
Tax.
7.377 The Panel finds that these provisions can be c onsidered to be covered by the description
contained in Article X:1 of the GATT. They are in deed: (a) laws or regulations, (b) made effective
by the Dominican Republic, and, (c) pertaining to rates of taxes.
(d) Reasonable administration
7.378 Honduras's claim centres on an alleged omissive conduct on the part of the Dominican
Republic, constituted by its failure to comply with a positive obligation, that of administering its laws
and regulations, of the kind described in Article X:1, in a uniform, impartial and reasonable manner.
7.379 The Panel agrees that a Member may act in a manner inconsistent with its obligations under
the covered WTO agreements, not only by adopting a particular positive conduct, but also by failing
to adopt a conduct, i.e. by an omission, when th e relevant rule imposes an obligation to adopt a
specific action.
7.380 The Dominican Republic has admitted that, before the approval of Law 3-04, there were three
different provisions under which the tax base for ci garettes could have been determined, for the
purpose of applying the Selective Consumption Ta x, namely: Article 367(b) of the Tax Code,
Article 3 of the Decree 79-03 and Article I of General Rule 02-96.
585 Each one of these provisions
contained a different methodology for the determination of the tax base.
7.381 Despite the existence of these three different provisions, the Dominican Republic has declared
that, in practice, the methodology used prior to La w 3-04, to determine the tax base for the Selective
Consumption Tax on domestic cigare ttes, followed General Rule 2-96. 586 Under General Rule 2-96,
the tax base should have been, for both imported and domestic cigarettes, the retail price determined
by increasing the list price (excluding cash and trad e discounts, grants and the like) by 20 per cent.
General Rule 2-96 made no distinction between im ported and domestic cigarettes. The Selective
Consumption Tax on both imported a nd domestic cigarettes would be based on their respective retail
selling price. General Rule did not contemplate the possibility of using a "nearest similar product" in
the domestic market, in order to determine the tax base on imported cigarettes.
7.382 However, the available eviden ce and the Dominican Republic's own admission is that its
authorities used a different methodology in order to determine the tax base fo r imported cigarettes.
According to the Dominican Republic, "[t]he amount of the Selective Consum ption Tax per cigarette
packet that was applied to the imported product was e qual to the amount of the tax that applied to the
domestic cigarette".587 The Dominican Republic thus admits that it used a "nearest similar product" in
the domestic market in order to determine the tax base for imported cigarettes. While both
Article 367(b) of the Tax Code and Article 3 of the Decree 79-03 would allow for the use of a
"nearest similar product", the Dominican Republic has not argued that it relied on either of these
provisions. Indeed, the methodologies contained in both Article 367(b) of the Tax Code and Article 3
of the Decree 79-03 were based on average-pri ce surveys conducted by the Dominican Republic
Central Bank. The Dominican Republic has admitted th at it had never issued such surveys, "due to

585 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 97,
para. 121.
586 Ibid., reply to question No. 98, para. 122.
587 Ibid.

the unbridled inflation unleashed by the macroec onomic crisis experienced by the Dominican
Republic in recent years".588
7.383 Under Article X:3(a) of the GATT, Members must administer the provisions described in
Article X:1 "in a uniform, impartial and reasonable manner". Honduras's claim is that the Dominican
Republic administered the provisions governing th e Selective Consumption Tax in an unreasonable
manner. The Panel considers that the obligation u nder Article X:3(a) of the GATT is that Members
administer the provisions covered by that Article in a uniform manner, in an impartial manner, and in
a reasonable manner. These are not cumulative requirements. A member may thus act in a breach of
its obligations under Article X:3(a) of the GATT, if it administers the provisions in an unreasonable
manner, even if there is no evidence that that Me mber has also administered the provisions in a non-
uniform manner or in a partialized manner. The Panel will thus limit its analysis to Honduras's claim,
that is, whether the Dominican Republic administered the provisions in an unreasonable manner.
7.384 The Panel recalls furthermore that the reasonableness required by Article X:3(a) does not
refer to the laws and regulations, but to the administration of those laws and regulations.
7.385 Read in the context of Article X, which is entitled "Publication and Administration of Trade
Regulations", the ordinary meaning of the word "reas onable", refers to notions such as "in accordance
with reason", not irrational or absurd", "proportiona te", "having sound judgement", "sensible", "not
asking for too much", "within the limits of reason, not greatly less or more than might be thought
likely or appropriate", "articulate".
589
7.386 In the present case, the requirement of reasonableness, turns on the question of whether it may
be considered reasonable that the Dominican Rep ublic administered the provisions governing the
Selective Consumption Tax, in particular with r espect to the determination of the tax base for the
application of the tax on cigarettes, and the use in this regard of the "nearest similar product on the
domestic market", in a manner that was not clearly supported by any particular rule in force at the
time.
7.387 By its own admission, 590 it is clear that the Dominican Republic did not clearly support its
determination of the tax base for the applicati on of the Selective Consumption Tax on imported
cigarettes on any one of the three methodologies contained in the legislation in force at the time.
Furthermore, the Dominican Republic authorities disregarded the actual retail selling price of
cigarettes to determine the "nearest similar product on the domestic market". The Dominican
Republic has argued that the decision to disregard the retail selling price was taken based on the value
declared at customs by the importer. In its own words, "[t]he authorities of the Dominican Republic
relied on several factors, including the declared cu stoms value of the imported cigarettes, whenever
there was evidence that the pricing policies of the importer alone could not be relied on to determine
the nearest similar product in the domestic market".
591 However, there is no evidence that the
decision was based on any particular provision of the Dominican Republic law in force at the time.
Indeed, the Dominican Republic legislation does not appear to grant discretion to the authorities to
deviate from the methods described, nor does it gran t discretion to disregard retail selling prices and
to favour customs-declared values. There is fu rthermore no evidence that the Dominican Republic
authorities notified the importers about the allege d discrepancy between the customs value and the
selling price information, nor about the motivation for its decision to disregard retail selling prices.

588 Ibid., reply to question No. 104, para. 129.
589 The New Shorter Oxford English Dictionary, supra note 52, Vol. II, p. 2,496.
590 See Replies of the Dominican Republic to questions addressed by the Panel, reply to question No.
100, para. 124-125.
591 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 103,
para. 128.

7.388 The Panel thus finds that the manner in wh ich the Dominican Republic administered the
provisions governing the Selective Consumption Tax, in particular with respect to the determination
of the tax base for the application of the tax on ciga rettes, and the use in this regard of the "nearest
similar product on the domestic market", was unreas onable. The fact that the Dominican Republic
authorities did not support its decisions regarding the determination of the tax base for imported
cigarettes by resorting to the rules in force at the time and that they decided to disregard retail selling
prices of imported cigarettes, is not "in accord ance with reason", "having sound judgement",
"sensible", "within the limits of reason", nor "articulate".
(e) Recommendations regarding the conduct
7.389 As it has concluded that the Dominican Republic acted in an unreasonable manner, the Panel
will consider if it should make any recommendations to the WTO Dispute Settlement Body regarding
whether the Dominican Republic should bring its conduc t in conformity with its obligations under the
GATT 1994.
7.390 In this regard, the Panel notes that this claim, t oo, is based on the situation that existed in the
Dominican Republic before Law 3-04 amended Artic les 367 and 375 of the Dominican Republic Tax
Code. As a result of the amendments, the ad valorem system previously in force for the application of
the Selective Consumption Tax was replaced by a specific and identical tax base and tax rate on
imported and domestic cigarettes.
7.391 The conduct contested by Honduras relates to the determination of the tax base for imported
cigarettes and was only relevant when the Se lective Consumption Tax was charged on an ad valorem
basis. Indeed, the amendments incorporated by the Dominican Republic in its Tax Code change the
essence of the measure challenged by Honduras under this claim, too. Under the new legislation, the
Selective Consumption Tax on cigarettes is not levied on an ad valorem basis, but on a specific
amount (RD$0.48 per cigarette), without distingui shing between imported a nd domestic cigarettes.
The new law would prevent the situation under whic h the Dominican Republic authorities determined
the tax base for the application of the tax on cigarettes and used a "nearest similar product on the
domestic market".
7.392 In conclusion, the Panel clarifies that its findings in relation with the unreasonable
administration of the provisions governing the Selec tive Consumption Tax refer to the situation that
existed before the Dominican Republic Tax Code was amended by Law 3-04 of January 2004.
7.393 Since the conduct, as analysed by the Panel, no longer persists, the Panel does not find it
appropriate to recommend to the WTO Dispute Se ttlement Body that it make any request to the
Dominican Republic regarding this conduct.
3. Conclusion
7.394 In conclusion, the Panel finds that the Dominican Republic administered the provisions
governing the Selective Consumption Tax, in particul ar with respect to the determination of the tax
base for the application of the tax on cigarettes, an d the use in this regard of the "nearest similar
product on the domestic market", in a manner that was unreasonable and therefore inconsistent with
Article X:3(a) of the GATT 1994.

I. PUBLICATION OF SURVEYS USED TO DETERMINE THE VALUE OF CIGARETTES FOR THE
PURPOSE OF APPLYING THE SELECTIVE CONSUMPTION TAX
1. The conduct at issue
7.395 As explained above 592, under the Dominican Republic legislation, before the Tax Code was
amended through Law 3-04 of January 2004, the base for the application of the Selective
Consumption Tax on cigarettes was to be establishe d through average-price surveys conducted by the
Dominican Republic Central Bank. Indeed, Artic le 367(b) of the Dominican Republic Tax Code
established that the tax base for domestic cigarettes was the retail selling price obtained from average-
price surveys conducted by the Dominican Republic Central Bank, whereas the tax base for imported
cigarettes was the retail price used for the nearest similar product on the domestic market, that is to
say the closest substitute. Both the tax base of domestic and imported cigarettes would thus
ultimately be based on these average-price surveys. Article 3 of Decree 79-03 stated that the tax base
for both domestic and imported cigarettes was to be calculated on the basis of the average market
price according to the Central Bank's survey.
7.396 Honduras's claim in this regard is that the Dominican Republic failed to publish, or make
otherwise available to importers, any of these survey s. The measure at issue is thus an alleged
omissive conduct on the part of the Dominican Republic.
2. Whether the Dominican Republic failed to pu blish, or make otherwise available to
importers, the average-price surveys conduc ted by the Dominican Republic Central
Bank
(a) Arguments of the parties
7.397 Honduras claims that the Dominican Republic faile d to publish, or make otherwise available
to importers, the average-price surveys of ciga rettes conducted by the Do minican Republic Central
Bank. These surveys were to be used to determin e the retail selling price for cigarettes and thus to
determine the tax base for the application of the Se lective Consumption Tax on cigarettes. Honduras
therefore argues that the information contained in th e surveys was of critical importance to traders.
As a result of the failure to publish these surveys, traders were not apprised of the basis upon which
their products would be taxed. Honduras concludes that the failure to publish, or make otherwise
available to importers, the average-price surveys is inconsistent with Article X:1 of the GATT.
7.398 The Dominican Republic replies that Honduras's claim is moot, since it is based on an
outdated version of Article 367 of the Tax Code of the Dominican Republic. Law 3-04, published on
14 January 2004, amended Articles 367 and 375 of the Tax Code and established a specific and
identical tax base and tax rate for the Selective Consumption Tax on imported and domestic cigarettes
– i.e. RD$0.48 per cigarette. The Central Bank average-price surveys of cigarettes are no longer
relevant for determining the tax base of the Selec tive Consumption Tax. Rather, the tax base is now
determined on the basis of the number of cigarette packets transferred or imported. The Dominican
Republic adds that it had never issued such survey s, nor relied on them to determine the tax base on
cigarettes, due to the inflation experienced by the Dominican Republic in recent years.
593 In its
opinion, the Panel should abstain from making fi ndings or issuing recommendations to the WTO
Dispute Settlement Body, regarding the publicatio n of the Central Bank average-price surveys,
because a recommendation in these circ umstances would constitute a le gal error and would be devoid
of purpose.

592 See supra Paragraph 7.318
593 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 104,
para. 129.

(b) Analysis of the Panel
7.399 Under Article X:1 of the GATT 1994:
"Laws, regulations, judicial decisions and administrative rulings of general
application, made effective by any [Member], pertaining to the classification or the
valuation of products for customs purposes, or to rates of duty, taxes or other charges,
or to requirements, restrictions or prohibitions on imports or exports or on the transfer
of payments therefor, or affecting their sale, distribution, transportation, insurance,
warehousing inspection, exhi bition, processing, mixing or other use, shall be
published promptly in such a manner as to enable governments and traders to become
acquainted with them."
7.400 As mentioned before, the Appellate Body has clarified that Article X deals with "the
publication and administration of 'laws, regulations, judicial decisions and administrative rulings of
general application', rather than [with] the substantive content of such measures".
594
7.401 In order to analyse the claim presented by Honduras under Article X:3(a) of the GATT, the
Panel would have to determine: (a) whether the average-price surveys of cigarettes conducted by the
Dominican Republic Central Bank are part of th e "laws, regulations, judicial decisions and
administrative rulings of general application" of th e kind described in Article X:1 of the GATT; and,
if so, (b) whether the Dominican Republic did not promptly publish those surveys in such a manner as
to enable governments and traders to become acquainted with them.
(c) Laws, regulations, judicial decisions and administrative rulings of general application
7.402 Honduras has argued that the Dominican Republic's Central Bank average-price surveys of
cigarettes are part of the regulations or administra tive rulings of general application pertaining to the
determination of the Selective Consumption Tax. Therefore, in its view, the survey is a component of
the legislation on the Selective Consumption Tax, covered by Article X:1 of the GATT.
7.403 The Dominican Republic has responded that the surveys were not a law, a regulation, a
judicial decision, nor an administrative ruling. In its opinion, the surveys are therefore outside of the
scope of Article X of the GATT.
7.404 The Panel considers that the av erage-price surveys of cigare ttes conducted by the Dominican
Republic Central Bank would clearly not be either laws, regulations or judicial decisions. Laws and
regulations are general acts with a legal content issued by state authorities invested with normative
powers. Judicial decisions are pronouncements with the force of res judicata issued by judicial
authorities as a result of a legal process. The Cent ral Bank surveys would not fit in any of those
categories.
7.405 Had the Central Bank average-price surveys been used, under the Dominican Republic
legislation they would have provi ded the authorities with the tax base for the application of the
Selective Consumption Tax on cigarettes. The Pane l thus finds that, while the surveys may have not
been, in themselves, administrative rulings of gene ral application, they would constitute an essential
element of an administrative ruling: the determination of the tax base for cigarettes.
7.406 In other words, the establishment of the tax base for cigarettes, and not the surveys in
themselves, may be considered as an administra tive ruling of general application. Once the
Dominican Republic authorities had determined the ta x base for cigarettes at a specific amount, that
ruling would be applicable for the importation of a ll cigarettes within the description, until a new tax

594 Appellate Body Report, EC – Poultry, para. 115.

base had been set. The Central Bank average-price surveys would be a part of the administrative
ruling. Indeed, an essential part, since under the Dominican Republic legislation, the tax base for
cigarettes would be obtained through the surveys.
7.407 In order to become acquainted with the process of establishing the tax base for the application
of the Selective Consumption Tax on cigarettes, governments and traders would be entitled to obtain
information on the results of the survey, as well as on the methodology used in order to conduct the
survey.
7.408 In conclusion, the Panel finds that, under the Dominican Republic legislation before the Tax
Code was amended through Law 3- 04 of January 2004, the average-price surveys of cigarettes
conducted by the Dominican Republic Central Bank were part of the administrative determination of
the tax base for cigarettes, and as such were covered by the scope of "administrative rulings of general
application" described in Article X:1 of the GATT.
(d) Prompt publication of the Central Bank average-price surveys
7.409 Honduras has claimed that the Dominican Repub lic failed to publish, or otherwise make
available to importers, any of the average-price surv eys of cigarettes. As a result, traders were not
apprised of the basis upon which their products would be taxed.595
7.410 The Dominican Republic admits that the surveys were not published, nor made otherwise
available, since they were never issued, nor relied on in order to determine the tax base on cigarettes.
The Dominican Republic adds that, due to the high levels of inflation experienced in recent years, "the
average retail prices in a survey by the Central Bank would have been an inadequate basis on which to
determine the tax base of the Selective Cons umption Tax, both for imported and domestic
products".596
7.411 Honduras has responded that "[t]he fact that the country was experiencing high levels of
inflation made the survey exercise all the more useful, and its publication necessary to make the
taxpayers acquainted with the conditions under which the Selective Consumption Tax is applied".
597
7.412 There is thus no controversy among the parties that the Central Bank average-price surveys of
cigarettes were not published by the Dominican Republic. Indeed, Honduras has provided evidence
that an importing firm requested the Dominican Republic authorities for a copy of the surveys.598
7.413 The Panel does not contest the Dominican Republic's argument that, in a high inflation
situation, a survey of prices may provide an inade quate basis on which to determine the tax base of
the Selective Consumption Tax. Even assuming th at, however, the Panel notes that the average-price
surveys were mandatorily required by the Dominica n Republic legislation in order to determine the
base for the application of the Selective Consumption Tax to cigarettes.
7.414 The Panel thus considers that, under its Artic le X:1 obligations, the Dominican Republic
should have either published the in formation related to the Central Bank average-price surveys of
cigarettes or, alternatively, publish its decision to not conduct these surveys and to resort to an
alternative method, in such a manner as to enable governments and traders to become acquainted with
the method it would use in order to determine th e tax base for the Selective Consumption Tax on
cigarettes.

595 First written submission of Honduras, 16 March 2004, paras. 30, 40, 108, and 110.
596 Replies of the Dominican Republic to questions addressed by the Panel, reply to question No. 104,
para. 129.
597 Replies of Honduras to questions addressed by the Panel, reply to question No. 134.
598 See information provided by the Dominican Republic as Exhibit HOND-17.

(e) Recommendations regarding the conduct at issue
7.415 As it has concluded that the Dominican Republic failed to publish the information related to
the Central Bank average-price surveys of cigarette s, the Panel will consider if it should make any
recommendations to the WTO Dispute Settlement Body regarding whether the Dominican Republic
should bring its conduct in conformity with its obligations under the GATT 1994.
7.416 In this regard, the Panel notes that this claim is also based on the situation that existed in the
Dominican Republic before Law 3-04 amended Artic les 367 and 375 of the Dominican Republic Tax
Code. As a result of the amendments, the ad valorem system previously in force for the application of
the Selective Consumption Tax was replaced by a specific and identical tax base and tax rate on
imported and domestic cigarettes.
7.417 The conduct contested by Honduras relates to the determination of the tax base for imported
cigarettes and was only relevant when the Se lective Consumption Tax was charged on an ad valorem
basis. Indeed, the amendments incorporated by the Dominican Republic in its Tax Code change the
essence of the measure challenged by Honduras through th is claim, too. Under the new legislation,
the Selective Consumption Tax on cigarettes is not levied on an ad valorem basis, but on a specific
amount (RD$0.48 per cigarette), without distingui shing between imported a nd domestic cigarettes.
The Central Bank average-price surveys of cigarette s would become irrelevant under the new law, as
the means to determine the tax base for the application of the tax on cigarettes.
7.418 In conclusion, the Panel clarifies that its fi ndings in relation with the publication of the
information related to the Central Bank average-price surveys of cigarettes refer to the situation that
existed before the Dominican Republic Tax Code was amended by Law 3-04 of January 2004.
7.419 Since the conduct, as analysed by the Panel, no longer persists, the Panel does not find it
appropriate to recommend to the WTO Dispute Se ttlement Body that it make any request to the
Dominican Republic in this regard.
3. Conclusion
7.420 In conclusion, the Panel finds that the Domini can Republic failed to publish promptly, and in
such a manner as to enable governments and traders to become acquainted with it, the information
related to the Central Bank average-price surveys of cigarettes. This conduct was inconsistent with
the Dominican Republic's obligations under Article X:1 of the GATT 1994.
VIII. CONCLUSIONS AND RECOMMENDATIONS
8.1 The Panel concludes as follows:
(a) The Dominican Republic has recorded its Selective Consumption Tax measure into
its Schedule but it has not established that such measure is in the nature of an "other
duty or charge" within the meaning of Article II:1(b) of the GATT 1994. Therefore,
the recording of this measure cannot be used to justify the consistency of the current
ODC measures (i.e. the transitional surc harge for economic stabilization and the
foreign exchange fee) with the provisions of Article II:1(b) of the GATT 1994;
599

599 See paras. 7.40 and 7.73.

(b) The transitional surcharge for economic stabilization applied by the Dominican
Republic is an "other duty or charge" and such surcharge is inconsistent with the
provisions of Article II:1(b) of the GATT 1994;600
(c) The foreign exchange fee applied by the Do minican Republic is an "other duty or
charge" and such fee is inconsistent with the provisions of Article II:1(b) of the
GATT 1994;601
(d) The inconsistency of the Dominican Repub lic's foreign exchange fee with the
provisions of Article II:1(b) of the GATT 1994 cannot be justified under
Article XV:9(a) of the GATT 1994 because such fee does not constitute an exchange
restriction within the meaning of Article XV:9(a) and the Dominican Republic has
not demonstrated that the fee is "in accordance with" the Articles of Agreement of the
IMF;602
(e) The requirement by the Dominican Republic that a tax stamp be affixed to all
cigarette packets in its territory and under the supervision of the local tax authorities
is inconsistent with Article III:4 of the GATT 1994 and is not justified under
Article XX, paragraph (d), of the GATT;603 and,
(f) Honduras has failed to establish that the requi rement by the Dominican Republic that
importers and domestic producers of cigarettes must post a bond is inconsistent with
Article XI:1 of the GATT 1994 or, alternatively, with Article III:4.604
8.2 The Panel recommends that the Dispute settlem ent Body request the Dominican Republic to
bring these inconsistent measures as listed above into conformity with its obligations under the GATT
1994.
8.3 The Panel additionally concludes that, with relati on to the situation existing at the time of the
establishment of the Panel, and before Law 3-04 entered into force in the Dominican Republic:
(a) Honduras has failed to establish that the Dominican Republic legislation for the
determination of the tax base for the Sel ective Consumption Tax, before the entry
into force of Law 3-04, subjected imported cigarettes to internal taxes in excess of
those applied to like domestic products;605
(b) During the year 2003, the Dominican Republic imposed the Selective Consumption
Tax on certain imported cigarettes in excess of the rates applied to the like domestic
products, in a manner inconsistent with Ar ticle III:2, first sentence, of the GATT
1994;
606
(c) Before Law 3-04 entered in force in January 2004, the Dominican Republic
administered the provisions governing the Selective Consumption Tax, in particular
with respect to the determination of the tax base for the application of the tax on
cigarettes, and the use in this regard of the "nearest similar product on the domestic

600 See paras.7.25, 7.86 and 7.90.
601 See paras. 7.115, 7.121 and 7.122.
602 See paras. 7.145, 7.154 and 7.155.
603 See paras. 7.198, 7.232 and 7.233.
604 See paras. 7.265, 7.266, 7.311 and 7.316.
605 See para 7.353.
606 See paras. 7.358 and 7.364.

market", in a manner that was unreasona ble and therefore inconsistent with
Article X:3(a) of the GATT 1994;
607
(d) Before Law 3-04 entered in force in Janua ry 2004, the Dominican Republic failed to
publish the information related to the Central Bank average-price surveys of
cigarettes, in a manner inconsistent with Article X:1 of the GATT 1994.608
 With relation to the conclusions in the preced ing paragraph, the Panel abstains from making
any recommendations to the Dispute Settlement Body, since the measures are no longer in force.

607 See paras. 7.388 and 7.394.
608 See para. 7.420.

ANNEX A

REQUEST FOR THE ESTABLISHMENT OF A PANEL

9 December 2003

 (03-6517)
 Original: Spanish

Request for the Establishment of a Panel by Honduras

 The following communication, dated 8 December 2003, from the Delegation of Honduras to
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 On 8 October 2003, Honduras requested consu ltations with the Dominican Republic pursuant
to Article 4 of the Understanding on Rules and Pr ocedures Governing the Settlement of Disputes
(DSU) and Article XXII:1 of the General Ag reement on Tariffs and Trade 1994 (the GATT)
concerning certain measures by the Dominican Repub lic affecting the importation and internal sale of
cigarettes. This request was circulated to Members on 13 October 2003 in Document WT/DS302/1,
G/L/645. The Dominican Republic and Honduras held consultations in Geneva on 4 November 2003
with a view to reaching a mutually satisfactory soluti on to this issue. Unfortunately, the consultations
failed to settle the dispute.

 The specific measures at i ssue which are of concern to Honduras are the following:

1. The Dominican Republic applies special rul es, procedures and administrative practices to
determine the value of imported cigarettes for the purpose of applying the Selective Consumption Tax
in accordance with Article 367 of its Tax Code, Article 3 of Decree 79-03 - Regulations Governing
the Application of Title IV of the Tax Code (the Regulations), and Article I of General Rule 02-96. In
certain instances the value of imported cigarettes is c onsidered to be equal to the value of the "nearest
similar" product in the domestic market. Honduras considers that these special rules, procedures and
administrative practices discriminate against imported cigarettes and therefore violate Article III:2 and
Article III:4 of the GATT. Honduras further cons iders that the failure to establish and apply
transparent and generally applicable criteria for determining the value of imported cigarettes, in
particular the failure to establish and apply such cr iteria for the identification of the "nearest similar"
product in the domestic market, cannot be reconciled with the requirements set out in Article X:3(a)
of the GATT.

2. The Dominican Republic does not publish the surveys conducted by the Central Bank that are
to be used according to Article 367 of the Tax Code and Article 3 of the Regul ations to determine the
value of cigarettes for the purpose of applying th e Selective Consumption Tax. Honduras considers
that the failure to publish the surveys is inconsistent with Article X:1 of the GATT.
3. The Dominican Republic accords conditions of competition to imported cigarettes that are
less favourable than those accorded to domestic cigarettes by requiring, pursuant to Article 37 of the
Regulations, Articles 1-3 of Decr ee 130-02 and Article 3 of Law 858 as amended or corrected by
Laws 190 and 368, that stamps be affixed to cigarette packages in the territory of the Dominican
Republic. Honduras considers that this requirement and the related administrative practices violate
Article III:4 of the GATT.
4. The Dominican Republic requires importers of cigarettes to post a bond pursuant to Article 14
of the Regulations. This requirement and the laws, regulations and practices implementing this
requirement entail costs and administrative burdens hindering the importation of cigarettes and are
therefore in the view of Honduras inconsistent with Article II:1(a) and (b) and Article XI:1 of the
GATT, or - if they were deemed to be intern al measures - inconsistent with Article III:2 and
Article III:4 of the GATT.
5. The Dominican Republic levies a transiti onal surcharge for economic stabilization in
accordance with Decrees 646-03 and 693-03, a surcharge which currently amounts to 2 per cent of the
c.i.f. value of the imported goods. Honduras cons iders that the surcharg e constitutes a charge
imposed on or in connection with importation inconsistent with Article II:1(a) and (b) of the GATT.
6. The Dominican Republic levies a foreign exch ange fee in accordance with the Seventeenth
Resolution of the Monetary Board dated 24 January 1991 as amended, inter alia , by the First
Resolution of 27 September 2001, the First Resolutio n of 20 August 2002, and the First Resolution of
22 October 2003. The fee is currently 10 per cent "calculated on the value of the imports". Honduras
considers that this fee constitutes a charge impo sed on or in connection with importation which does
not meet the requirements laid down in Article II:1( a) and (b) of the GATT. Honduras also considers
that the fee constitutes an exchange action frustra ting the intent of the provisions of the GATT and
that it is therefore inconsistent with Article XV:4 of the GATT.
 In view of the above considerations, and in conformity with Articles 4.7 and 6 of the DSU
and Article XXIII:2 of the GATT, Honduras hereby re quests the Dispute Settlement Body to establish
a Panel to examine the matters set forth above.

ANNEX B

WORKING PROCEDURES

 (WT/DS302)

WORKING PROCEDURES FOR THE PANEL

1. In its proceedings the Panel shall follow th e relevant provisions of the Dispute Settlement
Understanding (DSU). In addition, the following working procedures shall apply.
2. The panel shall meet in closed session. The par ties to the dispute, and interested third parties,
shall be present at the meetings only when invited by the Panel to appear before it.
3. The deliberations of the Panel and the documen ts submitted to it shall be kept confidential.
Nothing in the DSU shall preclude a party to a dis pute from disclosing statements of its own positions
to the public. Members shall treat as confidentia l information submitted by another Member to the
Panel which that Member has designated as confidential. Where a party to a dispute submits
confidential information to the Panel, it sha ll also, upon request of a Member, provide a non-
confidential summary of the information contained in its submissions that could be disclosed to the
public.
4. Before the first substantive meeting of the Pa nel with the parties, and in accordance with the
timetable established for the process, the parties to the dispute shall transmit to the Panel written
submissions in which they present the facts of the case and their arguments.
5. At its first substantive meeting with the pa rties, the Panel shall ask the party which has
brought the complaint to present its case. Subseque ntly, at the same meeting, the party against which
the complaint has been brought shall be asked to present its point of view.
6. All third parties which have notified their in terest in the dispute to the Dispute Settlement
Body shall be invited to present their views during a session of the first substantive meeting of the
Panel set aside for that purpose. All such third parties may be present during the entirety of this
session.
7. Formal rebuttals shall be made at a second substantive meeting of the Panel. The party
complained against shall have the right to take the floor first, to be followed by the complaining party.
The parties shall submit, prior to that meeting a nd in accordance with the timetable established for the
process, written rebuttals to the Panel.
8. The Panel may at any time put questions to the parties and ask them for explanations either in
the course of a meeting with the parties or in writi ng. Written replies to questions shall be submitted
in accordance with the timetable es tablished for the process or, if su ch were the case, at the date
decided by the Panel.
9. The parties to the dispute and any third party invited to present its views shall make available
to the Panel and the other party or parties a written ve rsion of their oral statements not later than the
day after the conclusion of the meeting where the oral statement was presented.

10. In the interest of full transparency, the presen tations, rebuttals and statements referred to in
paragraphs 5 to 7 shall be made in the presence of the parties. Moreover, each party's written
submissions, including responses to questions put by the Panel, comments on the descriptive part of
the report and comments on the interim report, shall be made available to the other party or parties.
11. The parties' and third partie s' replies to questions, and the parties' comments on each other's
replies to questions will be attached to the Panel report as annexes.
12. The parties and third parties shall provide th e Panel with an executive summary of the facts
and arguments as presented to the Panel in their wr itten submissions and oral presentations within 10
days following the delivery to the Panel of the written version of the relevant submission. The
executive summaries of the written submissions to be provided by each party should not exceed 10
pages in length each and the execu tive summaries of the oral presenta tions should not exceed 5 pages
in length each. The summary to be provided by each third party shall summarize their written
submission and oral presentation, and should not ex ceed 5 pages in length. The executive summaries
shall not in any way serve as a substitute for the subm issions of the parties in the Panel's examination
of the case. However, the Panel may incorporate the executive summaries provided by the parties and
third parties in the arguments section of its report, subject to any modifications deemed appropriate by
the Panel.
13. A party shall submit any request for a prelimin ary ruling not later than its first submission to
the Panel. If the complaining party requests such a ruling, the respondent shall submit its response to
the request in its first submission. If the respondent requests such a ruling, the complaining party
shall submit its response to the request prior to the fi rst substantive meeting of the Panel, at a time to
be determined by the Panel in light of the request. Exceptions to this procedure may be granted by the
Panel upon a showing of good cause.
14. Parties shall submit all factual evidence to th e Panel no later than during the first substantive
meeting, except with respect to evidence necessary for purposes of rebuttal submissions or answers to
questions. Exceptions to this procedure may be gr anted by the Panel upon a showing of good cause.
In such cases, the other party shall be accorded a period of time for comment, as appropriate.
15. To facilitate the maintenance of the record of the dispute, and to maximize the clarity of
submissions, in particular the references to exhibits submitted by parties, it is suggested that parties
sequentially number their exhibits throughout the c ourse of the dispute. For example, exhibits
submitted by the Dominican Republic could be numbere d DOM-1, DOM-2, etc. If the last exhibit in
connection with the first submission was numbered DOM-5, the first exhibit of the next submission
thus would be numbered DOM-6.
16. The parties to the dispute have the right to determine the composition of their own
delegations. The parties shall have the responsibilit y for all members of their delegations and shall
ensure that all members of the delegation act in accordance with the rules of the DSU and the
Working Procedures of this Panel, particularly in regard to confidentiality of the proceedings.
17. Following issuance of the interim report, the parties shall have the opportunity, in accordance
with the timetable established for the process, to submit written request s to review precise aspects of
the interim report and to request a further meeting with the Panel. Following receipt of any written
requests for review, in cases where no further meeti ng with the Panel is requested, the parties shall
have the opportunity, within a time-period to be specified by the Panel a nd in accordance with the
timetable established for the process, to submit written comments on the other parties' written requests
for review. Such comments shall be strictly limite d to commenting the other parties' written requests
for review.

18. The following procedures, regarding the service of documents, shall apply:
(a) Each party and third party shall serve its submissions directly on all other parties,
including the third parties, and confirm that it has done so at the time it provides its
submission to the Panel.
(b) The parties and the third parties shall de liver their written submissions by 5:30 p.m.,
local Geneva time, on the deadline dates established by the Panel, unless a different
time is set by the Panel.
(c) The parties and third parties shall provide the Panel with 10 paper copies of all their
submissions, including their replies to ques tions, written version of oral statements
and their executive summaries. All these copies shall be filed with Mr. Ferdinand
Ferranco at the WTO Secretariat (Office 3154, Telephone 022 739 5683).
(d) At the time they provide paper copies of their submissions, the parties and third
parties shall also provide the Panel with an electronic copy of all their submissions on
a diskette to be delivered to Mr. Ferdina nd Ferranco or as an e-mail attachment in a
format compatible with that used by the Pa nel to be sent to the Secretariat (e-mail:
DSRegistry@wto.org, with a copy to Mr. Jorge Castro (e-mail:
jorge.castro@wto.org), Mrs. Xuewei Feng (email: xuewei.feng@wto.org), and Mrs.
Tessa Bridgman (tessa.bridgman@wto.org).
(e) Parties and third parties shall provide th e Panel with written versions of their oral
statements by noon, local Geneva time, of the first working day following the date of
the statements.
(f) Each party shall serve the executive summa ries mentioned in paragraph 12 directly
on the other party and confirm to the Secretariat that it has done so. Subparagraphs
(d) and (e) above shall apply to the service of executive summaries.
(g) The Panel will endeavour to provide the parties with an electronic version of the
descriptive part, the interim report and the final report, as well as of other documents
as appropriate. When the Panel transmits to the parties or third parties both paper and
electronic versions of a document, the pa per version shall constitute the official
version for the purposes of the record of the dispute.

ANNEX C

QUESTIONS FROM THE PANEL TO THE IMF

W
ORLD TRADE ORGANIZATION
ORGANISATION MONDIALE DU COMMERCE
ORGANIZACIÓN MUNDIAL DEL COMERCIO

Direct line: (+41 22) 739
Direct fax: (+41 22) 739

Mr. Rodrigo Rato
Managing Director
International Monetary Fund
Washington, DC

 Geneva, 17 May 2004

Dear Mr. Rato,

 I am writing on behalf of the Panel established by the Dispute Settlement Body of the World
Trade Organization on 9 January 2004, at the requ est of Honduras, to examine measures imposed by
the Dominican Republic on the importation and internal sale of cigarettes.

 Pursuant to the terms of Paragraph 8 of the 1996 Agreement between the International
Monetary Fund and the World Trade Organization, the Panel kindly requests the International
Monetary Fund to provide information on how the “ Comisión Cambiaria a las Importaciones ”
(previously called “C omisión de Cambio ” and originally introduced by the Monetary Board of the
Dominican Republic's Central Bank on 24 January 1991) is being implemented by the Dominican
Republic.

 The Panel also requests the Fund to provide its views on whether the “ Comisión Cambiaria a
las Importaciones”, as currently applied by the Dominican Republic, is considered to be an "exchange
control" or "exchange restriction" under the Arti cles of Agreement of the International Monetary
Fund.

 The Panel would be most grateful if the Fund could respond to these requests by no later than
the 31 May 2004, so that any information provided by the Fund may be taken fully into account in our
own proceedings on this matter.

 Thank you for your kind co-operation on this matter.

 Yours sincerely,

 Elbio Rosselli
 Chairman of the Panel

ANNEX D

RESPONSE FROM THE IMF TO THE PANEL

INTERNATIONAL MONETARY FUND
WASHINGTON, D.C. 20431

June 25, 2004

Mr. Elbio Rosselli
World Trade Organization
Centre William Rappard
Rue de Lausanne 154
CH – 1211 Geneva 21
Switzerland

Dear Mr. Rosselli:

I am writing in response to your letter dated May 14, 2004, requesting a response from the Fund under
Paragraph 8 of the Cooperation Agreement between the Fund an the WTO to the questions raise by
the Panel that was established on January 9, 2004 in order to examine measures imposed by the
Dominican Republic on the importation an internal sale of cigarettes.

1. You have asked that the Fund provide information as to how the "Comisión Cambiaria a las
Importaciones" (the "exchange commission") is being implemented by the Dominican Republic.
Based on both our review of the relevant regulations and our consultations with the authorities of the
Dominican Republic, we can advise you as follows:

 (a) The "exchange commission" is levied un der the legal authority of the Banco Central
de la Republica Dominicana (BCRD). Since its introduction in January 1991, the commission has
undergone a number of changes in the way that it is levied. Initially, the commission was payable on
sales of foreign exchange and was calculated as a percentage of the selling rate.

 (b) Since August 2002, however, pursuant to the Agreement between the BCRD and the
Directorate General for Customs (DGC) of August 22, 2002, the commission has been collected in its
entirety by the DGC. Moreover, although the commission is still referred to as an "exchange
commission" (because it is levied on the basis of the legal authority vested in the BCRD to charge a
commission on sales of foreign exchange), the commission in no longer payable on sales of foreign
exchange. Rather, it is payable as a condition for the importation of goods, and the amount of the
commission is now calculated exclusively on the CIF valuation of the imported goods as determined
by the DGC (Article 1 of the Agreement between the BCRD and the DGC). By Notice of Resolution
No. 1 of the Monetary Board of October 22, 2003, the rate of the commission was increased to ten
percent in October 2003.

2. You have also asked whether the excha nge commission, as currently applied by the
Dominican Republic, is considered by the Fund to be an "exchange control" or "exchange restriction"
under the Articles of Agreement of the International Monetary Fund.

As applied since August 2002, the exchange commission is no longer a measure subject to Fund
approval. As noted above, the commission is no longer payable on sales of foreign exchange. It is
payable as a condition for the importation of goods and the amount to be paid is based on the CIF

value of the imported goods (rather than the amount of foreign exchange sold to an importer for the
payment of goods). As such, it does not constitute a multiple currency practice or an exchange
restriction notwithstanding its label or the fact that the commission is charged on the basis of the legal
authority vested in the BCRD to charge an exchange commission on sales of foreign exchange. For
the same reasons, it is not an exchange control measure.

In light of the above, the Fund has determined that the exchange commission is not an exchange
measure. Therefore, the issue of its consistency with the Fund's Articles for purposes of Paragraph 8
of the Cooperation Agreement does not arise.

Very truly yours,

François Gianviti
General Counsel