Mexico – Tax Measures on Soft Drinks and Other Beverages
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MEXICO – TAX MEASURES ON SOFT DRINKS AND OTHER BEVERAGES (WT/DS308) FIRST SUBMISSION OF THE UNITED STATES OF AMERICA September 30, 2004 TABLE OF CONTENTS Table of Reports Cited ......................................................... iii I. INTRODUCTION .......................................................1 II. PROCEDURAL BACKGROUND ..........................................2 III. FACTUAL BACKGROUND ..............................................3 A. Sweeteners and Soft Drinks and Syrups ................................3 1. Sweeteners .................................................3 (a) HFCS ...............................................3 (b) Sugar ...............................................6 (c) Sweetener Market Share ................................8 2. Soft Drinks and Syrups .......................................9 B. The HFCS Soft Drink Tax ..........................................12 1. The HFCS Soft Drink Tax and Its Operation .....................13 2. Enactment and Amendment of the HFCS Soft Drink Tax ...........18 3. Interpretation of the HFCS Soft Drink Tax .......................20 IV. SUMMARY OF LEGAL ARGUMENT .....................................22 V. LEGAL ARGUMENT ..................................................23 A. The IEPS Is An Internal Tax ........................................23 B. The HFCS Soft Drink Tax and Distribution Tax Are Inconsistent with GATT Article III:2, First Sentence .........................................25 1. Soft Drinks and Syrups Sweetened with HFCS and Soft Drinks and Syrups Sweetened with Cane Sugar Are Like Products ...................25 (a) Physical Characteristics ................................26 (b) End-Uses and Channels of Distribution ....................27 (c) Consumer Preferences .................................30 Classification ..............................................32 2. Soft Drinks and Syrups Sweetened with HFCS Are Taxed in Excess of Soft Drinks and Syrups Sweetened with Cane Sugar ...............32 (a) HFCS Soft Drink Tax .................................33 (b) Distribution Tax ......................................34 C. The IEPS Is Inconsistent with Article III:2, Second Sentence of GATT 1994 ..34 1. The HFCS Soft Drink Tax as Applied to HFCS Is Inconsistent with GATT Article III:2, Second Sentence .................................35 (a) HFCS and Cane Sugar Are Directly Competitive or Substitutable Products ............................................35 (i) Physical Characteristics ..........................36 (ii) End Uses and Consumer Preferences ................39 (iii) Channels of Distribution .........................42 (iv) Tariff Classification .............................43 (v) Price Relationships and Competition in the Marketplace ...................................43 (vi) Summary on Direct Competition and Substitutability ...46 (b) HFCS and Cane Sugar Are Not Similarly Taxed .............47 (c) HFCS Soft Drink Tax Is Applied So As to Afford Protection to Domestic Production ..................................47 2. The HFCS Soft Drink Tax and Distribution Tax as Applied to Soft Drinks and Syrups Is Inconsistent with GATT Article III:2, Second Sentence ..51 (a) Soft Drinks and Syrups Sweetened with Cane Sugar Are Directly Competitive or Substitutable with Soft Drinks and Syrups Sweetened with HFCS .................................51 (b) Soft Drinks and Syrups Sweetened with HFCS and Soft Drinks and Syrups Sweetened with Cane Sugar Are Not Similarly Taxed ..52 (c) The HFCS Soft Drink and Distribution Tax Is Applied So As to Afford Protection to Domestic Production .................53 D. The HFCS Soft Drink Tax, Distribution Tax and Reporting Requirements Applied on the Use of HFCS Are Inconsistent with GATT Article III:4 .............54 1. HFCS and Cane Sugar Are Like Products ........................55 2. IEPS Is a Law Affecting the Use of HFCS .......................55 3. IEPS Accords Less Favorable Treatment to HFCS .................57 IV. CONCLUSION ........................................................58 Table of Exhibits .................................................... after page 59 ii TABLE OF REPORTS CITED SHORT TITLE FULL TITLE AND CITATION Argentina – Hides and Panel Report, Argentina – Measures Affecting the Export of Leather Bovine Hides and Import of Finished Leather, WT/DS155/R and Corr.1, adopted 16 February 2001 Border Tax Adjustments GATT Working Party Report, Border Tax Adjustments, L/3464, (GATT) adopted 2 December 1970 Canada – Autos Panel Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/R, WT/DS142/R, adopted 19 June 2000 Canada – Periodicals Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July 1997 Chile – Alcoholic Panel Report, Chile – Taxes on Alcoholic Beverages, Beverages WT/DS87/R, WT/DS110/R, adopted 12 January 2000 Chile – Alcoholic Appellate Body Report, Chile – Taxes on Alcoholic Beverages, Beverages WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000 EC – Asbestos Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001 EC – Bananas III (US) Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Complaint by the United States, WT/DS27/R/USA, adopted 25 September 1997 EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997 EEC – Parts and GATT Panel Report, EEC – Regulation on Imports of Parts and Components (GATT) Components, L/6657, adopted 16 May 1990, BISD 37S/132 India – Autos Panel Report, India – Measures Affecting the Automotive Sector, WT/DS146/R, WT/DS175/R and Corr.1, adopted 5 April 2002 Indonesia – Autos Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3, and 4, adopted 23 July 1998 iii Italy – Agricultural GATT Panel Report, Italian Discrimination Against Imported Machinery (GATT) Agricultural Machinery, L/833, adopted 23 October 1958, BISD 7S/60 Japan – Alcoholic Panel Report, Japan – Taxes on Alcoholic Beverages, Beverages II WT/DS8/R, WT/DS10/R, WT/DS11/R, adopted 1 November 1996 Japan – Alcoholic Appellate Body Report, Japan – Taxes on Alcoholic Beverages, Beverages II WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996 Korea – Alcoholic Panel Report, Korea – Taxes on Alcoholic Beverages, Beverages WT/DS75/R, WT/DS84/R, adopted 17 February 1999 Korea – Alcoholic Appellate Body Report, Korea – Taxes on Alcoholic Beverages, Beverages WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999 Korea – Various Measures Appellate Body Report, Korea – Measures Affecting Imports of on Beef Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001 Mexico – Corn Syrup Panel Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States, WT/DS132/R and Corr.1, adopted 24 February 2000 Mexico – Corn Syrup Panel Report, Mexico – Anti-Dumping Investigation of High (Article 21.5 – US) Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/RW, adopted 21 November 2001 Mexico – Corn Syrup Appellate Body Report, Mexico – Anti-Dumping Investigation of (Article 21.5 – US) High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001 US – FSC (Article 21.5 - Panel Report, United States – Tax Treatment for "Foreign Sales EC) Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW, adopted 29 January 2002 US – FSC (Article 21.5 - Appellate Body Report, United States – Tax Treatment for EC) "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002 iv US – Malt Beverages GATT Panel Report, United States – Measures Affecting (GATT) Alcoholic and Malt Beverages, DS23/R, adopted 19 June 1992, BISD 39S/206 v I. INTRODUCTION 1. As the name of this dispute suggests, it concerns tax measures on soft drinks and other beverages as well as syrups, concentrates, powders, essences and extracts that can be diluted to produce such beverages (hereinafter collectively referred to as “soft drinks and syrups”). At a more fundamental level, however, this dispute concerns sweeteners and, in particular, Mexico’s discriminatory treatment of high-fructose corn syrup (“HFCS”), a corn-based sweetener produced in the United States. 2. Since January 1, 2002, Mexico has imposed discriminatory tax measures on soft drinks and syrups that favor its domestic cane sugar industry, in violation of its obligations under Article III of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”). These measures have essentially terminated exports of HFCS and damaged exports of HFCS-sweetened soft drinks and syrups from the United States to Mexico. 3. Specifically, in December 2001, the Mexican Congress approved an amendment of the Ley del Impuesto Especial sobre Producción y Servicios (“IEPS”, or Law on the Special Tax on Production and Services) adding a 20 percent tax on soft drinks and syrups that use HFCS or any sweetener other than cane sugar (“HFCS soft drink tax”), as well as a 20 percent tax on the representation, brokerage, agency, consignment and distribution of such products (“distribution