Korea, by according a preferential tax treatment, through the Liquor Tax Law and the Education Tax Law, to soju vis-a-vis certain alcoholic beverages falling within HS heading 2208, has acted inconsistently with Article III:2 of GATT 1994, therefore nullifying or impairing the benefits accruing to the European Communities under the GATT 1994.
Korea, under its general Liquor Tax Law, imposes a lower tax on the traditional Korean distilled spirit soju than the high taxes it applies to other distilled spirits such as whisky, brandy, vodka, rum, gin and "ad-mixtures". This difference in tax burden is made even more dramatic by the application of an Education Tax.
"To examine, in light of the relevant provisions of the covered agreements cited by the European Communities in document WT/DS75/6 and the United States in document WT/DS84/4, the matter referred to the DSB by the European Communities and the United States in those documents and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".
Chairman: Mr. Åke Lindén
Panelists: Professor Frédéric Jenny
Mr. Carlos da Rocha Paranhos
(a) Soju may be produced from discontinuous distillation of a fermented mash developed from the basic constituents of a starch source, yeast and water.
(b) Soju may be produced from discontinuous distillation as in Paragraph A above, but during the fermentation and production process other ingredients may be added as determined by Presidential decree.
(a) Soju may be produced by diluting neutral spirits with water or by adding thereto those ingredients as determined by Presidential Decree;
(b) Soju may be produced by adding to the products produced in accord with paragraphs A through C immediately above the product of paragraph A, when determined by Presidential Decree, or other grain spirits as determined by Presidential Decree.
(a) Neutral spirits may be produced from the distillation of a fermented mash developed from the basic constituents of a starch source and a sugar source that results in a product that is 85 percent or more alcohol;
(b) Neutral spirits may be produced from the distillation of ingredients containing alcohol, resulting in a product that is 85 percent or more alcohol.
-- Paragraph (A) specifies kaoliang-ju lees as a starch source, and the manufacturing process includes sealing prior to fermenting and distilling; it is designed to address kaoliang-ju, which can be imported from China.
-- Paragraph (B) specifies sugar cane, sugar beet, sugar, and/or molasses as a starch source; it addresses rum.
-- Paragraph (C) specifies "fruits of juniper tree" as an ingredient; it addresses gin.
-- Paragraph (D) specifies filtering of the alcohol; it addresses vodka.
-- Paragraph (E) merely concerns "materials mainly containing starch or sugar produced by fermentation and distillation." It covers tequila and any distilled spirit. Its wording is the same as that used in the first part of the definition of "neutral spirits".6
-- Paragraph (F) addresses mixed distilled drinks (e.g., gin and rum mixed drinks).
|Item||Ad Valorem Tax Rate (%)|
|General distilled liquors (vodka, gin, rum)||80|
|General distilled liquors containing whisky or brandy||100|
|Other liquors: -With 25% or more alcohol -With less than 25% alcohol -Which contain 20% or more whisky or brandy||80 70 100|
|Tax rates applied pursuant to the Education Tax Law|
|Product||As % Liquor Tax|
|General distilled liquors||30|
|General distilled liquors containing whisky or brandy||30|
|Other Liquors: -more than 25% alcohol content||30|
|-less than 25% alcohol content||10|
|-containing whisky or brandy||30|
The Korean market for distilled liquors
The current Korean market for distilled liquors
|(in %)||Whisky liquor tax||Education tax||Defence tax||Combined surtax burden||Combined tax burden|
(i) Korea is in breach of its obligations under GATT Article III:2, first sentence, by applying internal taxes on imported vodka pursuant to the Liquor Tax Law and the Education Tax which are in excess of those applied on soju; and
(ii) Korea is in breach of its obligations under Article III:2, second sentence, by applying higher internal taxes pursuant to the Liquor Tax Law and the Education Tax Law on imported liquors falling within the categories of 'whisky', 'brandy', 'general distilled liquors, 'liqueurs', and 'other liquors' (to the extent that they contain other distilled spirits or liqueurs) than on soju, so as to afford protection to its domestic production of soju.
(i) Korea’s application of internal taxes on vodka that exceed taxes applied to soju is inconsistent with the first sentence of GATT Article III:2; and
(ii) Korea's application of higher internal taxes to imported distilled spirits classified under HS heading 2208 falling within its legal categories of "whisky," "brandy," "general distilled liquors," "liqueurs" and "other liquors" (to the extent that they contain other distilled spirits) afford protection to its domestic production of soju, inconsistent with the second sentence of Article III:2.
(i) it frustrates Korea's right of defense, which is a general principle of due process implicit in the DSU; and
(ii) it violates a clear obligation of the DSU, which is that such a request should 'identify' the specific measures at issue, and 'present the problem clearly', as stipulated in Article 6.
(i) Article 3.3 of the DSU, which provides that the "prompt settlement of disputes is essential to the effective functioning of the WTO";
(ii) Article 3.7 of the DSU, to the extent it calls for a "mutually acceptable" and "positive" solution; and
(iii) Article 4.5 of the DSU, which states that in the course of consultations, Members should attempt to "obtain satisfactory adjustment" of the matter.
[....] Consultations are, however, a matter reserved for the parties. The DSB is not involved; no panel is involved; and the consultations are held in the absence of the Secretariat. In these circumstances, we are not in a position to evaluate the consultation process in order to determine if it functioned in a particular way. While a mutually agreed solution is to be preferred, in some cases it is not possible for the parties to agree upon one. In those cases, it is our view that the function of the panel is only to ascertain that consultations, if required, were in fact held or, at least, requested.
As to the EC argument that consultations must lead to an adequate explanation of the complainants' case, we cannot agree. Consultations are the first step in the dispute settlement process. While one function of the consultations may be to clarify what the case is about, there is nothing in the DSU that provides that a complainant cannot request a panel unless its case is adequately explained in the consultations. The fulfilment of such a requirement would be difficult, if not impossible for the complainant to demonstrate if a respondent chose to claim a lack of understanding of the case, a result which would undermine the automatic nature of the panel establishment under the DSU. The only per-requisite for requesting a panel is that consultations have 'failed to settle a dispute within 60 days of receipt of the request for consultations... Ultimately, the function of providing notice to a respondent of a complainant's claims and arguments is served by the request for the establishment of a panel and by the complainants' submissions to that panel.37
The complainants point out that Korea cannot dispute the fact that consultations were in fact held on three separate occasions between itself and both the United States and the European Communities.
Korea and Japan: differences between their products and markets
Adopted Panel reports are an important part of the GATT acquis. They are often considered by subsequent Panels. They create legitimate expectations among members, and, therefore should be taken into account where they are relevant to any dispute.56
(a) the tax measures are very similar;
(b) the products concerned are the same; and
(c) there is no fundamental difference between the Japanese market and the Korean market.
The European Communities argues that Korea fails to refute any of those similarities.
These [shochu/soju] products have the following common three features: First, they use grains or potatoes as the base material, which is readily available at low cost in this part of the world. Second, they have a relatively low alcoholic strength.... Third, they are consumed directly after distillation. They do not normally undergo further post-distillation processing.59
"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"
(i) whether the taxed imported and domestic products are "like"; and
(ii) whether the taxes applied to the imported products are "in excess of" those applied to the like domestic products.
[m]inor differences in taste, colour and other properties (including different alcohol contents) do not prevent products from qualifying as like products.74
(a)Soju and vodka have virtually the same physical characteristics and, therefore, serve for the same end uses
VodkaDistilled sojuDiluted soju
Raw materials Potatoes, grains Potatoes, grains Neutral spirits
Process Continuous Pot Still Continuous
Distillation distillation distillation Charcoal filtration excluded
Usual bottling strength 37.5-40% ABV 40-45% ABV 20-30% ABV
Appearance Clear Clear Clear
(i) diluted soju is usually bottled at an alcoholic strength of 25 % ABV whereas vodka is sold at 37.5%-40% ABV
(ii) unlike vodka, distilled soju is obtained by non-continuous distillation and cannot be filtered through white birch charcoal, although it can be filtered through any other materials.
(i) all the sampled brands had been fermented from similar carbohydrate sources;
(ii) all of them had been distilled to concentrate alcohols;
(iii) none had been matured in wood post-distillation;
(iv) none contained significant levels of residue;
(v) none had significant levels of obscuration;
(vi) the major volatile congeners were at similar levels in vodka and diluted soju. They are only marginally higher in distilled soju; and
(vii) all contained similar levels of methanol.
(b) The differences between vodka and soju are the same as between vodka and Japanese shochu
"... a difference in the physical characteristics of alcoholic strength of two products did not preclude a finding of likeness especially since alcoholic beverages are often drunk in the diluted form..."76
(c) Korean soju is treated as shochu in Japan
"... the largest producer of shochu is either the Republic of Korea or the People's Republic of China... the liquor tax legislation of the Republic of Korea defines soju in two sub-categories of 'diluted soju', which is equivalent to shochu A, and 'distilled soju', which is equivalent to shochu B, in a manner similar to Japan's definition. Essentially, shochu and soju are identical products77."
Comparison of the tax rates on soju and vodka
Liquor TaxEducation TaxCombined Tax RateDiscrimination Index
(As % of Liquor
Diluted soju 35 % 3.5 % 38.5 % 1.00
Distilled soju 50 % 5 % 55 % 1.43/1.00
Vodka 80 % 24 % 104 % 2.70/1.89
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.
(i) whether the imported products and the domestic products are "directly competitive or substitutable products" which are in competition with each other;
(ii) whether the directly competitive or substitutable imported and domestic products are "not similarly taxed"; and
(iii) whether the dissimilar taxation of the directly competitive or substitutable imported products is "applied... so as to afford protection to domestic production".
(a) Soju and all other distilled spirits and liqueurs have the same basic physical characteristics and are apt for the same end uses
[t]he flexibility in the use of alcoholic drinks and their common characteristics often offered an alternative choice for consumers leading to a competitive relationship. In the view of the Panel there existed - even if not necessarily in respect of all the economic uses to which the product may be put - direct competition or substitutability among the various distilled liquors.88
(i) whisky must be made, at least in part, from sprouted grain;
(ii) whisky has an average alcoholic strength of 37-40% ABV, whereas diluted soju is generally sold at 25%ABV (in contrast, the alcoholic strength of distilled soju is similar to that of whisky); and
(iii) whisky must be aged in wooden casks.
DISTILLED SPIRITS – COMPARISON OF PHYSICAL CHARACTERISTICS AND MANUFACTURING PROCESSES
|Raw Material||Grain||Grapes||Grain; neutral spirits*||Sugar Cane; Molasses||Grain; Potatoes; neutral spirits*||Grain; Potatoes; neutral spirits*||Grain; Potatoes; neutral spirits*|
|% of Alcohol at Distillation||†Less than 95%||†Less than 95%||†At or above 95%||†Less than 95%||At or above 95%||Not less than 85%||Not less than 85%|
|% of Alcohol at Bottling||†Not less than 40%||†Not less than 40%||†Not less than 40%||†Not less than 40%||Not less than 40%||Not less than 20%||Not less than 20%|
|Method of Distillation||Continuous or Pot Still||Continuous or Pot Still||Continuous||Continuous||Continuous||Continuous or Pot Still||Continuous or Pot Still|
|Aged in Wooden Casks||Yes||Yes||Yes/no||Yes/no||No||Yes/no||Yes/no|
|Color||Amber||Amber, Clear1||Clear to Amber||Clear to Amber||Clear2||Clear||Clear to Amber|
|% of Alcohol||37-50||36-50||37-50||37-50||37-50||20-45||20-45|
|Added Flavorings||Variety3||Peach, Blackberry, Cherry, Apricot, Coffee||Spice, Lemon||Spice, Lemon||Currant, Lemon, Orange||Lemon, Honey||Lemon, Variety of Fruit Flavors|
|Body/Taste Intensity||Medium||Medium||Light to Medium||Light to Medium||Light||Light to medium||Light to Medium|
1 Examples of clear brandies include grappa, pisco
2 Addition of flavoring adds color, e.g. red/purple
3US and Canadian regulations permit the addition of flavorings; EU regulations do not
*Vodka, gin, soju and shochu may be produced from neutral spirits, which is an alcoholic spirit distilled at not less than 95% alcohol by volume from any material of agricultural origin.
†Based on U.S. standards of identity (Title 27 Code of Federal Regulations, part 5); EU and other countries allow bottling of brandy at 36% and vodka, gin and rum at 37.5%, Australia allows whisky to be bottled at 37 per cent. Japan maintains no minimum alcohol requirements for these products.
(i) soju can be made and is often made from the same type of cereal grains as whisky, even if they are not sprouted;
(ii) whisky is often served on the rocks or mixed with water or other non-alcoholic beverages and is therefore consumed at a similar strength as diluted soju;
(iii) distilled soju can and is sometimes aged for up to two years in wooden casks. Some brands of diluted premium soju claim to be aged in oak barrels.
(i) all of them are drunk with the same purposes: thirst quenching, socialisation, relaxation, etc.
(ii) all of them may be drunk in similar ways: "straight", diluted with water or other non-alcoholic beverages or mixed with other alcoholic beverages;
(iii) all of them may be consumed before, after or during meals; and
(iv) all of them may be consumed at home or in public places such as restaurants, bars, etc.
(b) Soju and the other distilled spirits and liqueurs are sold in the same sales channels and are promoted and advertised in a similar way
(c) Consumers' demand for soju has been responsive to the changes in the price of whisky
(d) The Dodwell study shows that there is a significant degree of cross-price elasticity between soju and all other distilled spirits and liqueurs
(i) even very small price movements gave raise to significant changes in the preferences of the respondents. For example, if the current representative price of standard soju was increased by just 100 won (10% of the Level 1 price) and the prices for brown liquors remained the same, the share of respondents who would buy brown liquors instead of soju would increase by 8% from 15.2% to 16.4%;
(ii) the respondents were even more sensitive to an equivalent decrease in the price of the brown sprits. For instance, if the price for a bottle of standard Scotch whisky fell from 11,500 won (Level 1) to 10,150 won (Level 2) and the price of standard soju remained unchanged, the share of standard Scotch whisky would increase from 7.4% to 10% (i.e. by 35%);
(iii) the switch is most marked when the price for soju increases and, simultaneously, the prices for brown liquors decline. At current representative prices (Level 1), the share of consumers who prefer brown spirits to soju (including premium soju) is 15.2%. If the price of standard soju was increased by 200 won to Level 3 and, at the same time, the prices for brown liquors fell to Level 3, the share of brown spirits would increase to 28.4%, i.e. by as much as 87%.
Comparison of the tax rates applied to soju
and other distilled spirits and liqueurs
rate (%)tax rate tax rate (%)Index
Diluted soju 35 3.5 38.5 1.00
Distilled Soju 50 5 55 1.43/1.00
Whisky 100 30 130 3.38/2.36
Brandy 100 30 130 3.38/2.36
General distilled spirits 80 24 104 2.70/1.89
- (containing whisky or brandy) 100 30 130 3.38/2.36
Liqueurs 50 5 55 1.43/1.00
-more than 25% alcohol content 80 24 104 2.70/2.36
-less than 25% alcohol content 70 7 77 2.00/1.40
-containing whisky or brandy 100 30 130 3.38/2.36
we believe that an examination in any case of whether dissimilar taxation has been applied so as to afford protection requires a comprehensive and objective analysis of the structure and application of the measure in question on domestic as compared to imported products. We believe it is possible to examine objectively the underlying criteria used in a particular measure, its structure, and its overall application to ascertain whether it is applied in a way that affords protection to domestic products.
Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, architecture and revealing structure of a measure. The very magnitude of the dissimilar taxation in a particular case may be evidence of such protective application,... Most often, there will other factors to be considered as well. In conducting this inquiry, panels should give full consideration to all the relevant facts and all the circumstances in any given case.97
(i) the very magnitude of the tax differentials;
(ii) the lack of rationality of the product categorisation;
(iii) the fact that there are virtually no imports of soju;
(iv) the fact that soju accounts for the vast majority of the Korean production of distilled spirits and liqueurs;
(v) the fact that almost all whisky and brandy, as well as a significant proportion of the liquors falling within the categories of General Distilled Liquors and Liqueurs are imported; and
(vi) the existence of a long history of tax discrimination and protectionism.
(a) The magnitude of the tax differentials
(b) The product categorisation is arbitrary
(c) Domestic soju is "isolated" from imports of soju
"... the combination of customs duties and internal taxation in Japan has the following impact: on the one hand, it makes it difficult for foreign-produced shochu to penetrate the Japanese market and, on the other, it does not guarantee equality of competitive conditions between shochu and the rest of 'white' and 'brown' spirits. Thus, through a combination of high import duties and differentiated internal taxes, Japan manages to 'isolate' domestically produced shochu from foreign competition, be it foreign produced shochu or any other of the mentioned white and brown spirits".101
(d) Soju accounts for the vast majority of the Korean production of distilled spirits and liqueurs
(e)Almost all whisky and brandy sold in Korea is imported
(f)There is a long history of tax discrimination and protectionism
(i) Korea is in breach of its obligations under GATT Article III:2, first sentence, by applying internal taxes on imported vodka pursuant to the Liquor Tax Law and the Education Tax Law which are in excess of those applied on soju; and
(ii) Korea is in breach of its obligations under GATT Article III:2, second sentence, by applying higher internal taxes pursuant to the Liquor Tax Law and the Education Tax Law on imported liquors, classified under HS heading 2208, currently falling within the categories of "whisky", "brandy", "general distilled liquors", "liqueurs" and "other liquors" (to the extent that they contain distilled spirits or liqueurs) than on soju, so as to afford protection to its domestic production of soju.
|Soju: a) standard (or 'diluted') soju b) distilled soju||35% 50%|
|General distilled spirits107||80%|
The purpose of Article III is not to harmonise the internal taxes and regulations of contracting parties, which differ from country to country.109
In Korea's view, tax harmonisation is a sensitive matter even between countries that have achieved a high level of integration, such as the member states of the European Communities.
Members of the WTO are free to pursue their own domestic goals through internal taxation or regulation so long as they do not do so in a way that violates Article III or any of the other commitments they have made in the WTO Agreement.110
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.111
‑ Raw materials - Are products rice‑based, grain‑based, potato‑based, tapioca‑based, etc? Which additives are used? In Korea's view, these elements may influence the taste of the beverage, and the consumer's perception in general.
‑ Production process - Are the alcoholic drinks based on fermentation only, or on distillation? Are they aged, and if so how, before being sold? According to Korea, these are factors that may influence the final appearance and taste of the drink, but also its image in the marketplace. Ageing in wooden casks, for instance, gives a drink an 'artisanal' image, that may make quite a difference to consumers, even though objectively it is debatable whether more industrial production processes (e.g., mere storage in metal containers) result in inferior products.
‑ Physical characteristics - of the finished products. Are the products similar in terms of their appearance, the degree of alcoholic strength?Other notable factors determining whether two products compete revolve around price and end use.
‑ Price - Are the products at issue in the same price range? According to Korea, if prices differ greatly, two seemingly similar products cannot be considered directly competitive. Korea notes that in Japan - Taxes on Alcoholic Beverages II, the complainants argued that Japanese shochu and the imported liquors were in the same price range before tax.117 Korea further notes that Japan does not appear to have contested this. Korea asserts that the price differences in Korea between standard soju and the disputed imported liquors are very considerable.
‑ End uses - Do consumers use these products in the same way? Do they drink a particular drink straight or mixed; with meals, or on other occasions? Korea states that these elements were highlighted in Japan - Taxes on Alcoholic Beverages I.118 Korea argues for instance, that depending on the food they usually eat, consumers will show a preference for different alcoholic drinks during meals. In countries with a spicy food tradition, consumers may favour strong alcohol that cleans the palate, when eating meals. In countries where spicy food is not a tradition, consumers will by definition have a different preference for an alcoholic drink that goes best with their national cuisine.
Standard and premium soju
Choice of respondents
The single choice drink
(i) It is not at all clear whether the sample of Korean consumers used for the analysis was representative.
(ii) The questions posed were, in Korea's view, ambiguous. Korea argues that the question 'which spirit would you choose at this different price?’ for example, might have been interpreted by respondents as asking whether they would change their habit of drinking soju with meals and switch instead to a western‑type spirit; or as the different question of whether, at the hypothetical lower price, they would buy an experimental bottle of a western‑type drink.
(iii) Korea argues that the conclusions drawn from this study by the complainants are fanciful. According to Korea, it does not rebut the common sense presumption that, given the enormous price differences (even before tax) between standard soju and western‑type liquors and their different end uses, no appreciable number of Korean consumers consider them to be substitutes.127
Soju is consumed widely, from the young to the old, and is the most popular traditional drink in Korea. Soju in particular remains unaffected by imported alcoholic drinks. Furthermore Soju, is insulated from economic downturns and maintains a loyal following of steady consumers.128
"The Korean alcohol market is no longer a market protected by the government with market shares contested by local producers. In fact, it is becoming a truly global market where multinational companies convene to compete with one another for the lucrative and promising Korean market".129
(i) that the complainants have confused various products that are called soju.
(ii) Korean soju is a different product from Japanese shochu.
(iii) Korean standard soju is unlike distilled soju. Korea argues that these are different products in terms of inter alia their raw materials, production process, taste, price, place of consumption, end use, and their marketing. Korea also submits that they are subject to different tax rates: 35% for standard soju and 50% for distilled soju.
|(in Korean won, pre‑tax)||1995||1996||1997|
|Standard soju (360 ml)||289.94||305.11||322.46|
|Whisky (360 ml)||3401.27||3582.09||4111.50|
Diluted soju and Brandy/Cognac
Diluted Soju and Vodka
Diluted Soju and Rum
The Korean alcohol market is no longer a market protected by the government with market shares contested by local producers. In fact, it is becoming a truly global market where multinational companies convene to compete with one another for the lucrative and promising Korean market.147
Distilled Soju and Vodka