Select Committee on Scottish Affairs Appendices to the Minutes of Evidence


Memorandum from the European Commission

Covering note to memorandum from the European Commission

  In July 2000 the Committee requested the following information from the European Commission:

    (i)  the European Union mechanism for dealing with difficulties that might arise between EU members and non-EU members of the World Trade Organization.

    (ii)  the excise duty system in the European Union; whether this works to the disadvantage of spirits producers; and, if so, what is being done to rectify the situation.

    (iii)  the current arrangements with regard to export refunds to UK distillers.

    (iv)  what action the European Union is taking to overcome the problems of cross-Channel smuggling and fraud, including diversion fraud and freight smuggling.

  Replies to questions (i), (ii) and (iv) are attached. The reply to question (iii) is provided in the form of a background note.

The Clerk

Scottish Affairs Committee

January 2001

Response from the Directorate-General, Trade, European Commission

 (i)   The European Union mechanism for dealing with difficulties that might arise between EU members and non-EU-members of the World Trade Organisation

  1.  In the framework of its Market Access Strategy, the European Union has adopted a pro-active approach against any measure adopted by third countries which restricts access for European exports. This strategy implies the collection of detailed information on foreign trade barriers (via the Market Access Database available at ( and the full use of all available instruments to tackle them (be it negotiation or litigation).

  2.  When European businesses are faced with WTO-incompatible barriers to trade in foreign markets, they can lodge a complaint under the Trade Barriers Regulation (Regulation (EC) No. 3286/94). The European Commission will then investigate the case within a certain time frame (normally 5 months).

  If the Commission's investigation shows that a barrier does exist contrary to international rules, and that injury or adverse trade effects have been inflicted on a Community industry or company, the Commission opens talks with the government concerned. If no amicable solution proves possible, the Community may then take action at an international level, bringing a case under the WTO dispute settlement procedure.

  3.  Alternatively, businesses may also approach the Commission informally, without lodging a formal TBR complaint. If the Commission concludes that there are indeed grounds for launching a dispute settlement procedure in the WTO, it will do so after having consulted the "133 Committee", a Council committee with trade experts from all the Member States. That committee will look not only at the legal and factual aspects of the case, but also at the broader aspects of the European trade policy.

  4.  The EC has been an active user of the WTO dispute settlement system. Since 1995, it has initiated 55 dispute settlement proceedings against WTO Members, of which 25 led to the establishment of a panels.

  For example, the EC has successfully challenged the discriminatory taxation systems applied by Japan, Korea and Chile on European spirits.

Trade Directorate-General

February 2001

Response from the Directorate—General, Agriculture, European Commission


 (ii)   The excise duty system in the EU; whether this works to the disadvantage of spirits producers; and, if so, what is being done to rectify the situation.

Existing Community legislation

  Existing Community legislation in the field of excise duties[89] fixes minimum rates for alcoholic beverages, above which Member States are free to fix their national rates, taking into account their own policy objectives. It can be said that, largely, the minimum rates merely reflect the situation that existed prior to 1 January 1993. The result is that Member States currently apply widely divergent rates.

  As to the issue of competition between different types of alcoholic drinks, the minimum rates and the rates applied by the Member States do not, generally, ensure an equal level of taxation. Provided that they do not breach the requirements of Article 90 (ex Article 95) of the Treaty and they respect the minimum rates, Member States are free to decide on the extent to which they wish to take into account the issue of competition between different types of alcoholic drinks in setting their national rates. The overall position was succinctly set out in the Explanatory Memorandum to the Commission's first proposal for a Directive on the approximation of rates of excise duty on alcoholic beverages (COM (87) 328 of 10 Nov 1987) para II 3:

    "The jurisprudence of the Court in this field under Article 95 (now Article 90) of the EEC Treaty is helpful and can be broadly paraphrased as laying down that where a Member State cannot be regarded as a producer of a given drink it may not tax that drink in such a way as to protect its closest domestic competitors.

    "On that basis the Court has ruled, inter alia, that Member States which do not produce particular types of spirits may not tax such goods more highly than spirits which they do produce, and that Member States which do not produce wine may not tax it more highly than beer or more highly than fruit wine.

    At the same time, however, the numerous cases under Article 95 of the Treaty demonstrate that there is no abstract requirement to tax similar or competing products equally; provided that Member States do not so arrange their tax systems as to protect national products against imports, they may tax products at such rates as they think fit."

Future Commission initiatives

  Under Article 8 of Directive 92/84/EEC on excise duty rates, the Commission should report to the Council and Parliament on those excise duty rates, with a view to their amendment where appropriate, every two years. The report should take into account "the proper functioning of the internal market, competition between the different categories of alcoholic drinks, the real value of the rates of duty and the wider objectives of the Treaty."

  The Commission's next report on this issue is foreseen in the first half of the year 2001 and may result in a Commission proposal providing for further approximation of the excise duty rates.

  One of the aspects to be taken into account in the report—competition between drinks—is particularly difficult to assess in the absence of the necessary data. To permit the Commission to fulfil its mandate most effectively, therefore, a study has been commissioned on this aspect. This study should be finalised by the end of January 2001.

 (iv)   What action the EU is taking to overcome the problems of cross-Channel smuggling and fraud, including diversion fraud and freight smuggling

  As said under point (ii), existing Community legislation in the field of excise duties fixes minimum rates for alcoholic beverages, above which Member States are free to fix their national rates, taking into account their own policy objectives. The result is that Member States currently apply widely divergent rates, which can lead to increased cross-border purchasing and, indeed, fraud and smuggling.

  In this respect, it is worth noting that the Commission has always recognised that the removal of fiscal frontiers would entail this kind of result, unless action were taken to approximate national rates of excise duty. Accordingly, it originally proposed common rates of excise duty and later—when this approach was rejected by Council—proposed minimum rates of duty, together with target rates towards which national rates were to move over time. The difference between the two rates was set at the maximum that the Commission believed possible before unacceptable problems related to cross-frontier shopping would arise.

  Under the first proposal the fraud and smuggling problems would simply not have arisen, while under the second proposal they would have been kept within limited bounds. At the same time, however, they would have caused immediate upheavals in the markets for the various drinks and in Member States' revenues.

  In any event, the Council was unable even to accept the second proposal and finally adopted—in Directive 92/84/EEC of 19 October 1992—a set of minimum rates for alcoholic drinks which were far lower than those proposed by the Commission, and at the same time deleted from the text all reference to target rates.

  These issues will also be treated in the Commission's forthcoming report referred to under (ii). The Commission does not want to prejudge the conclusions of this report. However, it should be borne in mind that any proposals that the Commission would submit following this report have to be adopted with the unanimous agreement of Council.

  Furthermore, in order to overcome the problems of fraud in the alcohol and tobacco sectors, a High Level Group of Directors General of customs and indirect taxation has produced a report in April 1998, further endorsed by the ECOFIN Council. This report identifies the weaknesses and proposes solutions to tackle fraud, especially as regards the suspension system of excise duty goods, but also for the duty paid circulation of goods. The European Commission (DG TAXUD) is implementing these proposals. The main project consists of computerising the circuit of the Administrative Accompanying Document.

Agriculture Directorate-General

December 2000


Background Note


  Whisky is part of the so-called "non-annex 1 products", ie processed agricultural goods not covered by Annex 1 of the Treaty. Export refunds for the basis products (cereals, milk, sugar, eggs) incorporated into these processed goods compensate the exporting EU processing industry for the difference between EU and world agricultural raw materials prices and thus put it on a "level-playing field" with its competitors in third markets. However, both the budget and the GATT-constraint will prevent them from playing that role as in the past. Available funds will be much lower than the expenditure in the past (which was in the order of 560 to 600 million Euros).

    —  For the budgetary year 1999/2000, the EU budget (as set by the Budget Authority following the Berlin European Council) for non-annex 1 export refunds was limited to 551 Mio Euros.

    —  From the budget year 2001 onwards (starting 16 October 2000), commitments agreed upon by the EU during the Uruguay Round (WTO constraint) will become effective and impose an annual ceiling of 415 Mio Euros.


  To respond to the need for savings, the Commission has proposed a set of measures (Commission's Communication to the Council COM 625/1999 of November 1999). The approach approved by Council in March 2000 regarding the measures to be taken is twofold:

    (a)  It involves measures of savings that eliminate certain "non-annex 1" goods from the list of products eligible for the refunds, or decrease the refund rate for other goods.

    —  Elimination of export refunds for processed goods that are:

      —  eligible for export production refund (ex: modified starch).

      —  considered less sensitive to the agricultural raw material price mainly because there is no agricultural element in their import duty (ex: milk preparations—CN code 21 06 90 92).

      —  using a first processed raw agricultural material not eligible for export refunds when exported as such (ex: fruit yoghurts, as the genuine yoghurt is not eligible for export refunds).

      —  Reduction of exports refunds for cereals used in spirits. Protocol 19 of the UK, Ireland and Denmark Act of Accession states an obligation to facilitate the use of EU cereals in the processing of spirits (ex: whisky). Therefore, the refund for whisky has been reduced rather than abolished. Specifically, its calculation has been adapted to take into account the price differences in cereals between FOB EU and World CIF European-ports price. Mainly due to CAP reform and subsequent EU prices decreases, export refunds for wheat and barley have already been at 0 before the change in the calculation method.

    (b)  While the normal Inward Processing Relief (IPR) would continue to exist, a limited additional facility would be created, thus enabling the processing industry to remain competitive on the world market despite the insufficiency of the available refunds. This additional facility for duty-free import of raw materials would be available without prior examination of economic conditions (which is done in the normal IPR).


  After thorough discussion with Member States and industry, the Regulations concerning the savings measures under (a) have been adopted in the respective Management Committees in July 2000.

  The implementation of the additional facility regarding the IPR will be done through a Council Regulation. The opinion of the European Parliament is not yet given.

Enterprise Directorate-General

December 2000

89   Directive 92/84/EEC of 19 October 1992. Back

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