NATIONAL TREATMENT

NATIONAL TREATMENT – INTERNAL TAXATION (CHAPTER 9)

GATT Article III:2 first sentence:

1. Internal tax or other charge
2. ‘Like products’
3. Imports taxed ‘in excess of’ like domestic products

GATT Article III:2 second sentence:

1. Internal tax or other charge
2. ‘Directly competitive or substitutable’ products
3. Imports and directly competitive or substitutable domestic products not ‘similarly
taxed’ (contains a de minimis exception)
4. Dissimilar taxation is ‘applied so as to afford protection’

There is essentially one obligation on all trading partners: any time a domestic policy impacts
trade, it must be exercised in a non-discriminatory manner, that is, it must address all products
affected in an origin-neutral manner.

Once imported products have paid their ticket entry (in the form of tariffs) into a particular
market, they should be assimilated to domestic products and be subjected to a regulatory
regime identical to that applied to domestic products.

Article III
National Treatment on Internal Taxation and Regulation

1. The contracting parties recognize that internal taxes and other internal charges, and laws,
regulations and requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of products, and internal quantitative regulations
requiring the mixture, processing or use of products in specified amounts or proportions,
should not be applied to imported or domestic products so as to afford protection to
domestic production.

2. [The products of the territory of any contracting 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 excess of those applied, directly or indirectly, to like
domestic products.][Moreover, no contracting party shall otherwise apply internal taxes or
other internal charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.]

Ad Note

A tax conforming to the requirements of the first sentence of paragraph 2 would be

considered to be inconsistent with the provisions of the second sentence only in cases
where competition was involved between, on the one hand, the taxed product and, on the
other hand, a directly competitive or substitutable product which was not similarly taxed.
LEADING CASE: JAPAN – TAXES ON ALCOHOLIC BEVERAGES

Examine the WTO consistency of Japan’s Liquor Tax Law.

Japan’s Liquor Tax Law used two criteria to differentiate the taxation of alcoholic beverages:
(1) the type of alcoholic beverage and (2) within each of the categories, the alcohol strength of
the specific beverage. These criteria applied without distinction to both domestically produced
and imported beverages.

The EC, Canada, and the US claimed that by taxing shochu at a lower rate than other
alcoholic beverages, Japan violated its national treatment commitments under GATT Article
III. A 1987 Panel report, requested by the EC, on an earlier version of the law had found that
it violated Japan’s obligations under GATT Article III by favoring shochu.

The analysis of a claim under GATT Article III:2 involves separate consideration of the first
and second sentences.

Under the first sentence, imported products found to be ‘like’ domestic products must not be
taxed in excess of the taxes applied to those domestic products.

A determination that products are not ‘like’ does not end the inquiry, a violation can still be
found, under the second sentence, if ‘directly competitive and or substitutable products’ are
‘not similarly taxed.’

The first question is whether the products at issue are either ‘like’ or ‘directly competitive or
substitutable’. Once that determination is made, the treatment is examined to see if it complies
with the national treatment standard provided in the relevant sentence.

Panel Report

The Panel noted that vodka an shochu shared most physical characteristics, as the 1987 Panel
Report noted, they are both white/clean spirits, made of similar raw materials, and the end-
uses were virtually identical.

Only vodka could be considered as like products since, apart from commonality of end-uses,
it shared most physical characteristics. The only difference is in the media used for filtration.
Substantial noticeable differences exist between the rest of alcoholic beverages at dispute.
Therefore, the Panel decided to examine whether the rest of alcoholic beverages could qualify
as directly competitive or substitutable products to shochu.
The extent to which two products are competitive in economics is measured by the
responsiveness of the demand for one products to change in the demand for the other product.

Appellate Body Report

The fundamental purpose of Article II is to avoid protectionism in the application of internal

tax and regulatory measures. More specifically, the purpose of Article III ‘is to ensure that
internal measures not be applied to imported domestic products so as to afford protection to
domestic production.’
ARTICLE III:1

This Article ‘contains general principles’ and Article III:2 ‘provides for specific obligations
regarding internal taxes and internal charges.’

Article III:1 articulate a general principle that internal measures should not be applied so as to
afford protection to domestic production.

The purpose of this article is to establish this general principle as guide to understanding and
interpreting the specific obligations contained in Article III:2.

Article III:1 constitutes part of the context of Article III:2 and informs the first sentence and
the second sentence of the latter in different ways.

ARTICLE III:2

 FIRST SENTECE

(A) LIKE PRODUCTS

The definition of like products should be construed narrowly.

 Report of the Working Party on Border Tax Adjustments (1970) sets out basic
approach: the interpretation of the term should be examined on a case-by-case basis.
Allowing a fair assessment in each case of the different elements that constitute
‘similar’ products. Criteria: the product’s end-uses in a given market, consumers’
tastes and habits, which change from country to country, the product’s properties,
nature and quality.

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. In Article III:2, first sentence, the accordion of ‘likeness’ is
meant to be narrowly squeezed.

Tariff classification may be too broad, useful in some very detailed instances as a guidance.

(B) ‘IN EXCESS OF’

Even the smallest amount of ‘excess’ is too much. The prohibitions is not conditional on a
‘trade-effects test’ nor is it qualified by a de minimis standard.

 SECOND SENTENCE

Article III:1 informs Article III:2 through specific reference. Article III:2, second sentence,
and the accompanying Ad Article have equivalent legal status in that both are treaty language
which was negotiated and agreed at the same time. The Ad article clarifies its meaning.

Three separate issues must be established separately to find that a tax measures is inconsistent
with Article III:2, second sentence:
(A) DIRECTLY COMPETITIVE OR SUBSTITUTABLE PRODUCTS
The Panel emphasized that in this case, there is a need to look not only at such matters as
physical characteristics, common end-uses, and tariff classifications, but also at the ‘market
place.’

The decisive criterion in order to determine whether two products are directly competitive or
substitutable is whether they have common end-uses, inter alia, as shown by elasticity of
substitution.

(B) NOT SIMILARLY TAXED

The phrase ‘not similarly taxed’ must not be construed so as to mean the same thing as the
phrase ‘in excess of’ in the first sentence.

It requires a different standard. In other words, there may be an amount of excess taxation that
may well be more of a burden on imported products than on domestic ‘directly 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.

The amount of differential taxation must be more than de minimis to be deemed ‘not similarly
taxed.’

(C) SO AS TO AFFORD PROTECTION

It is not an issue of intent. Not necessary to go through the many reasons legislators and
regulators have. The issue is how the measure in question is applied.

An examination requires a comprehensive and objective analysis of the structure and

application of the measure I question on domestic as compared to imported products.

Although it is true that the aim of a measure may not be easily ascertained, its protective
application can most often be discerned from the design, the architecture, and the revealing
structure of a measure.

OTHER DEVELOPMENTS

 HOW DOES ONE PROVE THAT PRODUCTS ARE ‘DIRECTLY COMPETITIVE OR

SUBSTITUTABLE’?

 WHEN IS A TAX APPLIED ‘SO AS TO AFFORD PROTECTION TO DOMESTIC PRODUCTION’?

 THE LINE BETWEEN TAX AND TARIFF AND WHEN IS A TAX ‘APPLIED, DIRECTLY OR
INDIRECTLY, TO… PRODUCTS? AND SUBJECT TO ‘BORDER TAX ADJUSTMENT’ AND
NATIONAL TREATMENT?