APPENDIX 15
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 (http://mkaccdb.eu.int) 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
CONTRIBUTION TO
ITEMS (II) AND
(IV) OF THE
MEMORANDUM REQUESTED
BY THE
SCOTTISH AFFAIRS
COMMITTEE ON
ISSUES AFFECTING
DISTILLING AND
BREWING
(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
EXPORT REFUNDS FOR NON ANNEX 1 PROCESSED
FOOD PRODUCTS—SPIRITS/WHISKY
Background Note
1. GENERAL BACKGROUND
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.
2. SPECIFIC MEASURES
FOR SAVINGS
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).
3. REGULATORY
IMPLEMENTATION
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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