Under the Japanese tax system at issue in Japan – Alcoholic Beverages II, the internal tax imposed on domestic shochu was the same as that imposed on imported shochu; the higher tax imposed on imported vodka was also imposed on domestic vodka. Identical items (not bearing in mind brand distinctions) were therefore, taxed identically. However, the issue was whether shochu and vodka ought to be considered as ‘like products’.
The Appellate Body addressed the span of the conception of ‘like products’ within the meaning of Article III: 2, 1st sentence. The Appellate Body primarily stated that this notion ought to be interpreted scarcely due to the subsistence of the concept of ‘directly competitive or substitutable products’ utilized in the 2nd sentence of Article III:2.
Consequently, the Appellate Body specifically agreed with the basic approach for determining ‘likeness’ specified in the 1970 Report of the Working Party on Border Tax Adjustments.
In applying the criteria cited in Border Tax Adjustments to the facts of any particular case, and in considering other criteria that may also be relevant in certain cases, panels can only apply their best judgment in determining whether in fact products are “like”. This will always involve an unavoidable element of individual, discretionary judgment.
 DS8: Japan — Taxes on Alcoholic Beverages