WorldTradeLaw.

net Dispute Settlement Commentary (DSC)

Appellate Body Report

Chile - Taxes on Alcoholic Beverages
(WT/DS87,110/AB/R) / DSR 2000:I, 281
Participants
Appellant: Chile
Appellee: EC
Third Participants: Mexico, U.S.

Appellate Body Division

Feliciano (Presiding Member),
Ehlermann, Lacarte-Mur

Timeline of Dispute
First EC Panel Request (DS87): October 3, 1997
First Panel Established (DS87): November 18, 1997
Second EC Panel Request (DS110): March 9, 1998
Second Panel Established (DS110): March 25, 1998
Panel Composed: July 1, 1998
Interim Report Issued: February 15, 1999
Final Report Circulated: June 15, 1999
Notice of Appeal: September 13, 1999
AB Report Circulated: December 13, 1999
Adoption: January 12, 2000

Table of Contents
BACKGROUND ...........................................................................................................................................................2
SUMMARY OF APPELLATE BODY'S FINDINGS ..................................................................................................4
PROCEDURAL AND SYSTEMIC ISSUES .........................................................................................................................4
DSU Article 12.7 ...................................................................................................................................................4
DSU Articles 3.2 and 19.2.....................................................................................................................................4
SUBSTANTIVE ISSUES .................................................................................................................................................4
GATT Article III:2, second sentence.....................................................................................................................4
COMMENTARY ..........................................................................................................................................................7
GATT Article III:2, second sentence.....................................................................................................................7

Key Findings

Upheld the Panel's finding that Chile's new tax regime for alcoholic beverages is inconsistent with
GATT Article III:2, second sentence (although it modified the Panel's reasoning). Specifically, upheld
the Panel's finding that imported distilled spirits and Chilean pisco are "not similarly taxed" and that this
dissimilar taxation is applied "so as to afford protection" to domestic production.

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BACKGROUND
The measure at issue is the "Additional Tax on Alcoholic Beverages" ("Impuesto Adicional a las
bebidas Alcohlicas," hereafter "ILA"), contained in Chilean Law No. 19,534 of November 13, 1997.
The ILA is an excise tax levied on the sale and importation of alcoholic beverages that is payable by the
seller or, in the case of imports, by the importer. It was promulgated on November 18, 1997, and entered
into force on December 1, 1997.
The ILA establishes a new tax system which will apply as of December 1, 2000 (the "New
Chilean System") and a transitional system which applies from December 1, 1997 until December 1, 2000
(the "Transitional System"). The Transitional System imposes different tax rates depending on whether
the product is classified as "pisco," "whisky" or "other spirits," as follows:
The Transitional System: Applicable tax rates from December 1, 1997 to December 1, 2000
Whisky

Pisco

Other Spirits

Until Nov. 30,

1997*

70 %

25 %

30 %

After Dec. 1,
1997

65 %

25 %

30 %

After Dec. 12,

1998

59 %

25 %

30 %

After Dec. 12,

1999/Until Dec.
1, 2000

53 %

25 %

30 %

*Old Chilean System

The New Chilean System abolishes the distinction between pisco, whisky and "other spirits."
Instead, all distilled spirits are taxed according to a scale based on their degree of alcohol content. As
shown below, all spirits with an alcohol content of 35 or less are taxed at an ad valorem rate of 27
percent. From that base, the rate escalates in increments of 4 percentage points per additional degree of
alcohol, peaking at a rate of 47 percent for all spirits over 39.
The New System: Tax rates applicable after December 1, 2000
Alcohol content
Less than or equal to 35
Less than or equal to 36
Less than or equal to 37
Less than or equal to 38
Less than or equal to 39
Over 39

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ad valorem tax rate

27 %
31 %
35 %
39 %
43 %
47 %

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Chile - Alcohol (AB)

The products at issue in this dispute are all distilled spirits falling within heading 2208 of the
Harmonized System ("HS") nomenclature, including, but not limited to the following: all kinds of pisco
falling within HS 2208; all kinds of whisky falling within HS 2208.30; all kinds of brandy obtained by
distilling grape wine or grape marc and falling within HS 2208.20; all kinds of rum and taffia falling
within HS 2208.40; all kinds of gin and geneva falling within HS 2208.50; all kinds of vodka falling
within HS 2208.60; all kinds of liqueurs falling within HS 2208.70, such as anisettes, curacao, cream
liqueurs, emulsions and bitters; and all kinds of aquavit, korn, fruit brandies (such as plum brandy, cherry
brandy, pear brandy and cider brandy), ouzo and tequila falling within HS 2208.90.
Under Chilean law, the term "pisco" is a protected geographical indication, the use of which is
reserved exclusively for wine distillates produced and bottled in certain regions of Chile. By law, pisco
must have an alcohol content of no less than 30. The four types of pisco, with their corresponding
alcohol content, are:
Pisco corriente or tradicional
Pisco especial
Pisco reservado
Gran pisco

between 30 and 35;

between 35 and 40;
between 40 and 43;
43 or more.

According to the explanations provided by Chile during the consultations, Chile's pisco industry is
currently producing and selling pisco of the following alcohol contents:
Pisco corriente or tradicional
Pisco especial
Pisco reservado
Gran pisco

30, 32, 33
35
40
43, 46 and 50

Pisco corriente or tradicional used to be the largest selling type of pisco. Over the last few years,
however, it has been overtaken by pisco especial, which is now the best selling pisco category. Pisco
reservado and gran pisco, the only two categories with an alcohol content of over 35, account for about
9 % of the pisco market.
With regard to the other spirits at issue, the legally required minimum alcohol strength for these
products in Chile is as follows:
Whisky, rum, tequila, gin
Brandy, cognac, armagnac
Aguardiente, fruit aguardiente, grappa
Fruit liqueurs
Anisettes
Bitters
Cocktails
Other liqueurs

40
38
30
25-34
25-40
25-30
12-16
25-28

(Panel Report, paras. 2.1-29)

The European Communities claimed that both the Transitional System and the New Chilean
System are inconsistent with GATT Article III:2, second sentence. The Panel found that both the

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Transitional System and the New Chilean System are inconsistent with GATT Article III:2, second
sentence.
Chile appealed the Panel's finding with respect to the New Chilean System only, arguing that the
Panel's conclusion was in error, and, furthermore, that the Panel acted inconsistently with DSU Article
12.7 and with DSU Articles 3.2 and 19.2.
SUMMARY OF APPELLATE BODY'S FINDINGS
PROCEDURAL AND SYSTEMIC ISSUES
DSU Article 12.7
Chile argued that the Panel failed to fulfill its obligation under DSU Article 12.7 to provide the
"basic rationale" behind its findings with respect to the "not similarly taxed" element of GATT Article
III:2, second sentence. The Appellate Body rejected this claim, noting that a similar claim was made in
the appellate proceedings in Korea Alcohol. The Appellate Body stated that, as in that case, the Panel
here did "set out" a "basic rationale" for its findings and recommendations on the issue of "not similarly
taxed," as required by DSU Article 12.7. In particular, the Panel identified the legal standard it applied,
examined the relevant facts, and provided reasons for its conclusion that dissimilar taxation existed.
Therefore, the Appellate Body rejected Chile's claim that the Panel failed to "set out" a "basic
rationale" for its findings and recommendations in accordance with DSU Article 12.7. (Paras. 77-78)
DSU Articles 3.2 and 19.2
Chile argued that the Panel's findings on the issues of "not similarly taxed" and "so as to afford
protection" compromise the "security and predictability" of the multilateral trading system, provided for
in DSU Article 3.2, and "add to the rights and obligations of Members" under GATT Article III:2,
second sentence, in contravention of DSU Articles 3.2 and 19.2. The Appellate Body noted that, with
regard to the substantive issues on appeal, it rejected certain of the factors relied upon by the Panel, but
found that the Panel's ultimate legal conclusions were not in error. In these circumstances, the Appellate
Body did not consider that the Panel added to the rights or obligations of WTO Members. Moreover, the
Appellate Body stated, "we have difficulty in envisaging circumstances in which a panel could add to the
rights and obligations of a Member of the WTO if its conclusions reflected a correct interpretation and
application of provisions of the covered agreements." Therefore, the Appellate Body rejected Chile's
appeal under DSU Articles 3.2 and 19.2. (Para. 79)
SUBSTANTIVE ISSUES
GATT Article III:2, second sentence
The Panel had stated that, reading Article III:2, second sentence together with the Ad Article to
this provision, there are three elements that must be considered in order to find a violation of Article III:2,
second sentence:
(1) whether the imported products and the domestic products are
"directly competitive or substitutable";
(2) whether the directly competitive or substitutable imported and
domestic products are "not similarly taxed"; and

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(3) whether the dissimilar taxation of the directly competitive or

substitutable imported domestic products is "applied so as to afford
protection to domestic production."
The Panel found that all three elements had been demonstrated by the European Communities, and
therefore that both aspects of the Chilean measure, the Transitional System and the New Chilean System,
violated this provision. Chile appealed the Panel's findings pursuant to the second and third elements as
applied in the Panel's consideration of the New Chilean System. The Appellate Body considered each of
these issues in turn.
"Not Similarly Taxed"
The Panel had found that the imported and domestic products at issue were "not similarly taxed"
under the New Chilean System, stating that:
The difference in taxation between the top (47%) and bottom (27%)
levels of ad valorem rates of taxation of distilled alcoholic beverages is
clearly more than de minimis and is so by a very large margin. Indeed, it
is obvious that the difference of four percentage points between the
various levels of alcohol content also constitutes a greater than de
minimis level of dissimilar taxation
Chile argued on appeal that the Panel's finding was in error. According to Chile, because alcoholic
beverages having the same alcohol content are taxed at the same ad valorem rate, the products at issue
are, in fact, taxed identically. (Para. 46)
The Appellate Body rejected the Chilean appeal. In reaching this conclusion, the Appellate Body
first recalled its statement in Japan - Alcohol that "to be 'not similarly taxed', the tax burden on imported
products must be heavier than on 'directly competitive or substitutable' domestic products, and that burden
must be more than de minimis in any given case." Assessing the relative tax burden imposed on directly
competitive or substitutable domestic and imported products in this case, the Appellate Body noted that
the New Chilean System applies a minimum tax rate of 27 percent ad valorem to all distilled alcoholic
beverages with an alcoholic content of 35 or less and a maximum rate of 47 percent ad valorem to all
such beverages with an alcohol content of more than 39. Furthermore, it recalled that the Panel had
found, as a factual matter, that "roughly 75% of domestic production will enjoy the lowest rate and
over 95% of all current (and potential) imports will be taxed at the highest rate ." Therefore, the
Appellate Body concluded that a "comprehensive examination" which looks at "all" of the directly
competitive or substitutable domestic and imported products, as opposed to just those having a similar
alcohol content as advocated by Chile, shows that the tax burden on imported products, "most" of which
will be subject to a tax rate of 47 percent, will be heavier than the tax burden on domestic products,
"most" of which will be subject to a tax rate of 27 percent. Based on these facts, the Appellate Body
agreed with the Panel's conclusion that the difference in the level of the tax burden on imported and
domestic products is clearly more than de minimis. (Paras. 49-54)
In reaching this conclusion, the Appellate Body rejected Chile's argument that, because each
category of alcoholic beverages, as defined by alcohol content, is taxed at the same rate, the taxation of
imported and domestic products is similar. The Appellate Body noted that while this was true, the
relevant comparison between imported and domestic products had to be made based on a comparison of
the taxation on all imported and domestic products over the entire range of categories, not simply a
comparison of the products within each category. (Paras. 52-53) On this basis, the Appellate Body

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upheld the Panel's finding that directly competitive or substitutable imported and domestic
products are "not similarly taxed," within the meaning of the Ad Article to Article III:2, second
sentence. (Para. 54)
"Applied so as to Afford Protection"
The Panel had found that the New Chilean System was applied "so as to afford protection,"
thereby meeting the third element of Article III:2, second sentence. In reaching this finding, the Panel set
out five factors which it considered to support its conclusion that the "design, structure and architecture"
of the measure demonstrates that it was "applied so as to afford protection":
(1) the structure of the New Chilean System (with its lowest rate at the
level of alcohol content of the large majority of domestic production and
its highest rate at the level of the overwhelming majority of imports); (2)
the large magnitude of the differentials over a short range of physical
difference (35 versus 39 of alcohol content); (3) the interaction of the
New Chilean System with the Chilean regulation which requires most of
the imports to remain at the highest tax level without losing their generic
name and changing their physical characteristics; (4) the lack of any
connection between the stated objectives and the results of such
measures (recognizing that "good" objectives cannot rescue an otherwise
inconsistent measure); and, (5) the way this new measure fits in a logical
connection with existing and previous systems of de jure discrimination
against imports, .
(Paras. 56-57) Chile appealed the Panel's finding.
In addressing this issue, the Appellate Body first recalled its statement in Japan - Alcohol that in
examining the issue of whether a measure is "applied so as to afford protection," "it is not necessary for a
panel to sort through the many reasons legislators and regulators often have for what they do and weigh
the relative significance of those reasons to establish legislative or regulatory intent." In this regard, the
Appellate Body observed that "[t]he subjective intentions inhabiting the minds of individual legislators or
regulators do not bear upon the inquiry, if only because they are not accessible to treaty interpreters."
However, the Appellate Body then stated that, while these "subjective" intentions are not relevant, "the
statutory purposes or objectives that is, the purpose or objectives of a Member's legislature and
government as a whole to the extent that they are given objective expression in the statute itself" are
pertinent. This objective expression, it explained, can be discerned from the design, the architecture, and
the revealing structure of a measure. (Para. 62)
The Appellate Body then considered the design, the architecture and the structure of the New
Chilean System. The Appellate Body noted that the system taxes all alcoholic beverages with an alcohol
content of 35 or below at a fixed rate of 27 percent ad valorem. Thereafter, the rate of taxation increases
by 4 percentage points for every additional degree of alcohol content, until a maximum rate of 47 percent
ad valorem is reached. This fixed tax rate of 47 percent applies to all beverages with an alcohol content
in excess of 39. (Para. 63)
Furthermore, as found by the Panel, approximately 75 percent of all domestic production has an
alcohol content of 35 or less and is therefore taxed at the lowest rate of 27 percent ad valorem. At the
same time, approximately half of all domestic production has an alcohol content of exactly 35 and is
therefore subject to a tax rate that is located immediately before the steep increase in tax rates from 27
percent ad valorem. In addition, the start of the highest tax bracket, with a rate of 47 percent ad valorem,

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coincides with the point at which most imported beverages are found. The Appellate Body noted that the
magnitude of difference between the two rates is considerable -- the absolute difference of 20 percentage
points between the two rates represents a 74 percent increase in the lowest rate of 27 percent ad valorem.
Accordingly, the Appellate Body said that an examination of the design, architecture and structure of the
New Chilean System "tends to reveal" that the application of dissimilar taxation of directly competitive or
substitutable products will "afford protection to domestic production." (Paras. 64-66)
The Appellate Body then noted that before the Panel, Chile had argued that the New Chilean
System pursues four different objectives: "(1) maintaining revenue collection; (2) eliminating type
distinctions [such] as [those which] were found in Japan and Korea; (3) discouraging alcohol
consumption; and (4) minimizing the potentially regressive aspects of the reform of the tax system." The
Panel had not found any clear relationship between the stated objectives and the tax measure itself, and it
considered the absence of a clear relationship as "evidence confirming the discriminatory design, structure
and architecture of [the Chilean] measure." On appeal, Chile argued that the Panel was "wrong to even
consider the objectives" underlying the New Chilean System. (Paras. 69-70)
In response, the Appellate Body stated that the examination of the design, architecture and
structure of a tax measure is intended to permit identification of a measure's objectives or purposes as
revealed or objectified in the measure itself. Thus, a measure's purposes, objectively manifested in the
design, architecture and structure of the measure, are pertinent to the task of evaluating whether that
measure is applied so as to afford protection to domestic production. Then, stating that it would be
inappropriate to examine whether the tax measure is necessary for achieving its stated objectives or
purposes, the Appellate Body said that "[i]t appears to us that the Panel did no more than try to relate the
observable structural features of the measure with its declared purposes, a task that is unavoidable in
appraising the application of the measure as protective or not of domestic production." (Paras. 71-72)
Finally, the Appellate Body addressed two of the specific factors relied on by the Panel as the
basis for its conclusion: (1) the fact that Chilean law imposes minimum alcohol content requirements on a
range of distilled alcoholic beverages, including most of the beverages imported into Chile; and (2) "the
way this new measure fits in a logical connection with existing and previous systems of de
jure discrimination against imports." The Appellate Body found that these two factors are not relevant to
a finding as to whether a measure has been "applied so as to afford protection." With regard to the first
factor, the Appellate Body noted that this type of regulation is similar to standards in many other markets.
With regard to the second factor, the Appellate Body said that "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, as this would come close to a "presumption of bad faith." (Paras. 73-74)
Although it rejected two of the factors relied on by the Panel, the Appellate Body concluded that
the other factors support the Panel's conclusion that the dissimilar taxation at issue here is applied "so as
to afford protection." Therefore, the Appellate Body upheld the ultimate conclusion of the Panel that
the dissimilar taxation under the New Chilean System is applied "so as to afford protection to
domestic production," and is therefore inconsistent with the requirements of GATT Article III:2,
second sentence. (Para. 76)
COMMENTARY
GATT Article III:2, second sentence
Article III is often said to be, along with Article I, one of the core "non-discrimination" provisions
of the GATT. But what exactly is meant by "discrimination"? Because most people have an intuitive

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understanding of the concept, there is rarely a discussion of its specific elements. However, the approach
chosen is of fundamental importance for the application of this principle.
When discrimination is explicit, that is, when the law specifies better treatment for domestic
goods than for foreign goods, the inquiry is usually straightforward. However, when the law does not
distinguish on its face between foreign and domestic goods, but nonetheless there is an allegation that
foreign goods are treated worse due to certain factual circumstances, the issues are more complex.
Stepping back from the specific provisions of the GATT, there appear to be two elements that can
be used to identify this de facto discrimination: (1) the intent to discriminate (also referred to as
discriminatory "aim" or "purpose"), and (2) the effect of discriminating (also referred to as "differential
impact"). A finding of discrimination could be based on the existence of either one of these two
elements, or on the existence of both elements. We turn first to the issue of intent.
Under the GATT, two panels looked at the "aim" of a measure in judging its consistency with
Article III. Using the so-called "aim-and-effects" test, the U.S. - Malt Beverages and U.S. - Taxes on
Automobiles GATT panels held that discriminatory intent (as well as effect) must be demonstrated in
order to find a violation. In Japan - Alcohol, however, the panel and Appellate Body rejected the use of
"aim" under Article III:2, first sentence. In the same case, though, in the context of Article III:2, second
sentence, the Appellate Body made the following statements. First, it noted that the inquiry under the "so
as to afford protection" element "is not an issue of intent," and that it is "not necessary for a panel to sort
through the many reasons legislators and regulators often have for what they do and weigh the relative
significance of those reasons to establish legislative or regulatory intent." However, the Appellate Body
then said that the "protective application [of a measure] can most often be discerned from the design, the
architecture, and the revealing structure [of the measure]." The emphasis on the "design," "architecture" and
"structure" of the measure appears to indicate that the Appellate Body will not look at the subjective
intentions of the legislators and regulators, but that it will look at the objective intent as evidenced by the
measure itself. (Although in Canada - Periodicals, the Appellate Body did look at statements by
government officials in the context of this provision. See DSC for Canada - Periodicals (AB).)
In Chile - Alcohol, the Appellate Body further clarified its approach to intent in Article III:2,
second sentence under the "so as to afford protection" element. Here, it observed that "[t]he subjective
intentions inhabiting the minds of individual legislators or regulators do not bear upon the inquiry, if only
because they are not accessible to treaty interpreters." However, it then stated that while these
"subjective" intentions are not relevant, "the statutory purposes or objectives that is, the purpose or
objectives of a Member's legislature and government as a whole to the extent that they are given
objective expression in the statute itself" are "intensely pertinent." This objective expression, it explained,
can be discerned from the design, the architecture, and the revealing structure of a measure. Then, noting
that it would be inappropriate to examine whether the tax measure is actually necessary for achieving its
stated objectives or purposes, the Appellate Body said, "[i]t appears to us that the Panel did no more than
try to relate the observable structural features of the measure with its declared purposes, a task that is
unavoidable in appraising the application of the measure as protective or not of domestic production."
Thus, an examination of whether there is a rational relationship between the stated objectives of the
measure and the measure itself appears to be an element in examining the "objective intent" of a measure.
With regard to discriminatory effect, in this case the Appellate Body appears to have taken the
following approach under the "not similarly taxed" element. First, define the universe of "directly
competitive or substitutable products," and break them down into the different tax categories and also into
imported and domestic products. Then, if most foreign products are subject to the higher tax rates, while
most domestic products are subject to the lower tax rates, dissimilar taxation exists. The following chart,
based on the facts of this case, illustrates this approach:

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Tax rate
27%
47%

Chile - Alcohol (AB)

Imports
[A] 5% of imports
[B] 95% of imports

Domestic
[C] 75% of domestic
[D] 25% of domestic

Thus, because most imports fall into the higher tax category, and most domestic products fall into the
lower tax category, a discriminatory effect against imports exists. On this basis, the Appellate Body
found that dissimilar taxation existed.
This approach appears to differ from that used under the same provision in Canada - Periodicals,
where it was stated by the Appellate Body that "dissimilar taxation of even some imported products as
compared to directly competitive or substitutable domestic products is inconsistent with the provisions of
the second sentence of Article III:2." See DSC for Canada - Periodicals (AB). Although the Appellate
Body did not provide very detailed reasoning on this point in that case, it appears that it considered the
overall distribution of products into the different categories irrelevant. Rather, it was only concerned with
whether there were "some" imports that were taxed at a higher rate than "some" domestic products.
As Chile - Alcohol is a more recent case, and since it provides more detailed and developed
reasoning on this point, it is probably safe to say that the discriminatory effect approach will be applied by
the Appellate Body in the future under this provision. Thus, an examination of the "not similarly taxed"
element of Article III:2, second sentence entails a consideration of whether there is a discriminatory effect
against imports. We note, however, that under other provisions of Article III, the situation is less clear. In
particular, the approaches under Article III:4 and Article III:2, first sentence have not been the subject of
a definitive ruling by the Appellate Body. Under these other provisions, some would argue that a
"discriminatory effect" against imported products as a whole is not relevant, as it is the treatment of
individual products that should be considered. For a discussion of this issue under Article III:4, see DSC
for EC - Asbestos (AB). For a discussion of the issue under Article III:2 generally, including Article III:2,
first sentence, see DSC for Japan - Alcohol (AB). In addition, the same issue arises under the nondiscrimination provisions of GATT Article I:1. See DSC for Canada - Autos (AB).
For further reading on these issues, see:
Robert Hudec, "GATT/WTO Constraints on National Regulation: Requiem for an 'Aim and Effects'
Test," 32 International Lawyer 3 (1998).
William J. Davey and Joost Pauwelyn, MFN Unconditionality: A Legal Analysis of the Concept in View
of its Evolution in the GATT/WTO Jurisprudence with Particular Reference to the Issue of "Like
Product," in Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law (Thomas
Cottier and Petros C. Mavroidis, eds.), U. of Michigan Press, at 38-41 (2000).

Last Update: March 23, 2005

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