Korea’s Taxes on Alcoholic Beverages
[Pick the date]
WTO Korea’s Taxes on Alcoholic
CASE Beverages
Muhammad Farooq AHMAD & Khurram SHAHZAD
Business Law
General Management Program - 2010
Page 0 of 8
Korea’s Taxes on Alcoholic Beverages
Background – Behind the Curtain factors
Statistical data from Korea's Liquor Industry Association indicated that, every Korean
consumed 58.9 bottles of soju; traditional Korean hard liquor, 61.4 bottles of beer, and 1.28
bottles of whisky a year. Statistical data also suggests that with the increase in income of
Korean’s, the consumption of alcoholic drinks has risen. Therefore, on the whole the
consumption of alcoholic beverages in Korea is considerably high and particularly of Soju.
Soju is a distilled beverage native to Korea. Its taste is comparable to vodka. Most brands of
modern soju are made in South Korea. In majority of Korean houses, Soju or like drink is
taken along with the food each day and it is an important component of every day meal.
Another important related factor is distinct Korean psychology where imported brands of
alcoholic beverages are highly admired and Korean people are ready to pay even higher
prices for imported alcoholic beverages; rather, there existed a lot of demand for imported
alcoholic beverages. However, government had imposed additional taxes in the form of
Korean Liquor tax law and education law to muzzle the demand.
Jinro was a famous distiller in South Korea, founded in 1924. It has been one of the world's
leading producers of Soju, accounting for more than half of that beverage's domestic sales.
While arguing against the Korea’s discriminatory treatment towards imported alcoholic
beverages, EU maintained that “those producing the Soju have strong political weight
compared to those importing wines” thus, clearly indicating Government of Korea’s collusion
with producers of Soju. Therefore, it may not be in benefit of producers of Soju and also for
some government circles to allow import of foreign alcoholic beverages, even when
consumers demanded and could have benefited through the good quality products.
Another important point which needs to be mentioned here is that Jinro got sold in 2006
owing to squeezed profitability.
Dispute
On 4 April 1997, the EC requested consultations with Korea in respect of internal taxes
imposed by Korea on Soju and certain other alcoholic beverages pursuant to its Liquor Tax
Law and Education Tax Law. The EC contended that the Korean Liquor Tax Law and
Education Tax Law appear to be inconsistent with Korea’s obligations under Article III: 2 of
GATT 1994. On 23 May 1997, the US requested consultations with Korea in respect of the
same measures complained of by the EC. The US also alleged violations of Article III: 2. On
10 September 1997, the EC and the US requested the establishment of a panel. At its meeting
on 25 September 1997, the DSB deferred the establishment of a panel.
Panel and Appellate Body Proceedings
Further to a second request to establish a panel by the EC and the US, the DSB established a
panel at its meeting on 16 October 1997. Canada and Mexico reserved their third-party rights.
On 26 November 1997, the EC and the US requested the Director-General to determine the
composition of the Panel. On 5 December 1997, the Panel was composed.
Panel Proceedings:
Page 1 of 6
Korea’s Taxes on Alcoholic Beverages
In the panel claimants (plaintiff) maintained that:
US and EU claimed that Korea under its general Liquor tax law, imposes a lower tax on the
traditional Korean distilled spirit Soju and the high taxes on 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.
According to complainants, the basic physical properties of soju and the other categories of
liquors concerned in this dispute are essentially the same. All distilled spirits are concentrated
form of alcohol produced by the process of distillation.
DISPUTE DS75
The complainants argue that having
essentially the same basic physical
properties, Soju and all other distilled Title: Korea — Taxes on Alcoholic Beverages
spirits and liqueurs are objectively
apt to serve the same end use: Korea — Alcoholic
All of them are drunk with the same Short title
Beverages
purposes: thirst quenching,
socialization, relaxation, etc. Complainant: European Communities
Both Soju and other beverages like
whisky may be drunk in similar Respondent: Korea (Republic of)
ways: “straight”, diluted with water Third Parties: Canada; Mexico
like other non-alcoholic beverages or
mixed with other alcoholic Agreements cited: GATT 1994: Art. III:2
beverages.
All of them may be consumed before, Request for Consultations
2 April 1997
after or during meals and may be received:
consumed at home or in public places
such as restaurants, bars etc. Panel Report circulated: 17 September 1998
Additionally, the process of Appellate Body Report
manufacture of both of these 18 January 1999
circulated:
commodities has basic similarities.
Article 21.3(c) Arbitration
Therefore, Soju and all other distilled 4 June 1999
spirits and liquors are objectively Report circulated
“substitutable” and potentially
competitive in the Korean market.
To the panel, on the Contrary, Korea argued that:
Korea maintains a multi-tiered taxation regime on the sale of alcoholic beverages. Under the
Liquor Tax Law of 1949, as amended, Korea creates various categories of distilled spirits, on
which it imposes different ad valorem taxes. Under the Education Tax Law of 1982, as
amended Korea assesses surtax on certain of these sales determined as percentage of
established Liquor tax. Both the liquor tax and the education tax on alcoholic beverages are
imposed at the wholesale level. The tax is payable by the manufacturer of the beverages or, in
the case of imports by the importer. In Korea’s view point, not every difference in rates of tax
amounts to a violation of Article III 2.
Page 2 of 6
Korea’s Taxes on Alcoholic Beverages
Korea is seeking to show that an inexpensive local meal drink such as diluted soju is not in
direct competition with expensive western-type liquors. In the alternative, Korea is seeking to
show why the complainants have not shown that Korea’s tax system meets the other criteria
of Article III 2, assuming that the panel would still find a competitive relationship between
some products.
Korea states, as to their organoleptic qualities, the most important types of whisky – Scotch,
Irish, Bourbon and Canadian have in common a very typical flavour and smell. Furthermore,
Korea argues that at first glance, more can see that diluted soju is a white spirit, transparent
and colourless while whisky is a brown spirit of a translucent golden-brown colour.
Additionally, Korea maintains that soju has an alcoholic strength of 25% by volume, while
the alcoholic strength of whisky is at least 40% by volume. According to Korea, these factors
show that there is no actual competitive relationship between Soju and Whisky and therefore,
removal of tax differential would not create direct competition between those two drinks
either.
As evidence of the increasing availability of western-style liquors, the complainants point to a
recent survey completed by Hankook Research in May 1997 and covering more than 700
sales outlets, which allegedly found the leading brands of whisky were sold in a majority of
outlets within each relevant category. Therefore, there is no artificial control on the supply of
whisky and related beverages in Korea.
Panel Report
The report of the Panel was circulated to Members on 17 September 1998. The Panel found
that:
Soju (both diluted and distilled), is directly competitive and substitutable with the
imported distilled alcoholic beverages that were in issue, namely, whisky, brandy, rum,
gin, vodka, tequila, liqueurs and ad-mixtures.
Korea has taxed the imported products in a dissimilar manner and that the tax differential
was more than de minimise, and is applied so as to afford protection to domestic
production.
Appellate Body Report
GATT Art. III:2, second sentence (national treatment): The Appellate Body upheld the
Panel's conclusion that Korean tax measures at issue were inconsistent with Art. III:2,
second sentence: More specifically, the Appellate Body upheld the Panel's findings that
the products at issue were "directly competitive or substitutable" within the meaning of
Art. III:2, second sentence and that Korea's tax measures on alcoholic beverages were
applied "so as to afford protection" to domestic production within the meaning of Art.
III:2, second sentence.
On the question of the interpretation and application of the term "directly competitive or
substitutable product", the Appellate Body upheld the Panel's approach:
i. the Panel correctly considered evidence of "present direct competition", not the
future evolution of the market, by referring to the potential for the products to
Page 3 of 6
Korea’s Taxes on Alcoholic Beverages
compete in a market free of protection because in a protected market consumer
preferences may have been influenced by that protection;
ii. the Panel was not wrong in looking to the Japanese market for an indication of how
the Korean market may develop without the distortions caused by protection; and
iii. the Panel's approach of grouping the products, which was based in part on a
collective assessment of the products and in part on individual assessment, was not
flawed.
Law Applicable: Art 3 of GATT; Art 17 GATS and Art 3 of TRIPS
Imported and locally produced goods should be treated equally – at least after the foreign
goods have entered the market. Applicable to foreign and domestic services, and to foreign
and local trademarks, copyrights and patents.
Keeping in view the findings the Panel concluded that Korea is in Violation of GATT 1994
Article III 2.
On 20 October 1998, Korea notified its intention to appeal certain issues of law and legal
interpretations developed by the Panel. The report of the Appellate Body was circulated to
Members on 18 January 1999. The Appellate Body upheld the panel’s findings on all points.
The DSB adopted the Panel and Appellate Body Reports on 17 February 1999.
Implementation of Adopted Reports
At the DSB meeting on 19 March 1999, Korea informed the DSB that it was considering
options for implementation of the DSB’s recommendations. On 9 April 1999, the two
complainants separately requested, pursuant to Article 21.3(c) of the DSU, that the
reasonable period of time for Korea to implement the recommendations of the DSB be
determined by arbitration. On 23 April 1999, the three parties to the dispute jointly informed
the DSB that they had agreed on the appointment of an arbitrator for the determination of the
reasonable period of time for implementation, and also that they had agreed that the arbitrator
issue his arbitration award no later than 7 June 1999. On 4 June 1999, the arbitrator
determined the reasonable period of time to be 11 months and two weeks i.e. until 31 January
2000.
At the DSB meeting on 27 January 2000, Korea stated that it considered to have fully
implemented the DSB’s rulings and recommendations by amending its Liquor Tax Law and
the Education Tax Law to impose flat rates of 72% liquor tax and 30% education tax on all
distilled alcoholic beverages on a non-discriminatory basis.
The Other Side of the Picture
Many developing countries experience a rapid growth in alcohol consumption, as they
increasingly become affected by cultural and economical globalization. This will in turn lead
to an increase in alcohol-related problems. One of the research groups states “The evidence
available suggests that among the many factors influencing national levels of alcohol use, a
country’s economic fortunes and level of income are quite important. This implies that as
economic development occurs, in the absence of mitigating influences such as religious
prohibitions, alcohol consumption and resulting problems are likely to climb with rising
incomes. …this is likely to present developing nations with new or greater levels of alcohol-
Page 4 of 6
Korea’s Taxes on Alcoholic Beverages
related problems, and new challenges to develop effective alcohol policies to reduce or
prevent them”.
Point to reflect from a trade perspective, alcohol is a commercial ‘good’, or a service, or an
investment having the right to establish anywhere. The General Agreement on Tariffs and
Trade (GATT), the North American Free Trade Agreement (NAFTA), the ‘single market’ of
the European Union and the new General Agreement on Trade and Services (GATS) have all
been used to challenge the alcohol control policies of treaty members or prospective
members.
Table 1: Related Case Laws
Armenia — Measures
Affecting the
Chile - Alcoholic Japan -Alcoholic
Short title: Importation and Internal
Beverages Beverages II
Sale of Cigarettes and
Alcoholic Beverages
Complainant: European Communities Canada Ukraine
Japan -Alcoholic Beverages
Responde nt: Chile Armenia
II
Third Parties: Canada, Mexico, Peru, USA
GATT 1994: Art. III:1,
Agreements cited: GATT 1994: Art. III: 2 GATT 1994: Art. III: 1, III: 2
III:2, III:4
Request for
Consultations 04-Jun-97 07-Jul-95
received:
The panel found that Chile’s
Transitional System and its
Japanese tax system to be On 8 September 2010,
Panel Report New System for taxation of
inconsistent with GATT Ukraine requested the
circulated: distilled alcoholic beverages
Article III:2 establishment of a panel
was inconsistent with
Article III:2 of GATT 1994.
Appellate Body
13-Dec-99 04-Oct-96
Report circulated:
Article 21.3(c)
Arbitration Report 23-May-00 14 Febraury 1997 20-Jul-10
circulated:
Page 5 of 6
Korea’s Taxes on Alcoholic Beverages
References:
WTO, Disputes settlement report 1999
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
http://www.wto.org/english/news_e/news10_e/tbt_24mar10_e.htm
Thomas Babor et al; “Alcohol – No Ordinary Commodity”
Robin Room et al.;“Alcohol in Developing Societies – A Public Health approach”
Forut: ADD fact Sheet; WTO/GATS, alcohol and development
Page 6 of 6
